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Returns management, also known as reverse logistics, was once considered an afterthought. However, in the age of e-commerce, the concept is fast becoming a crucial element to retail enterprises. Retail businesses should improve the returns management logistical pipeline to reduce inefficiency costs and improve customer satisfaction.

As a result of widespread online shopping, the volume of returned products a warehouse must sort through has grown considerably. This leads to a number of hidden costs (sometimes hard to track in balance sheets) with a huge potential impact on your company’s bottom line. Although essential toward maintaining customer satisfaction, it is often a complicated and expensive affair. 

Today, the rise of e-commerce means that businesses can no longer afford to neglect returns operations and the hidden costs they entail. Reverse logistics have become even more complicated due to having no physical location for customers to return them to. Ensuring efficient returns operations is critical not only to maintaining positive relationships with customers but also effectively manage the costs of returns.

Figures from multiple sources position us against a phenomenon that should not be underestimated:

  • Customers return around 20% of online purchases
  • More than 70% of returns are caused by subjective dissatisfaction with the order (size, style, etc. 
  • Returns due to product defects are not very high. So, many times, there is no problem with just putting the returned item back into circulation in the warehouse.

What are the Hidden Costs of Returns Management?

Reverse logistics or returns management is the set of tasks involved in the recovery of a product that left a warehouse and is ultimately returning to it. It includes activities such as transport, repair, recycling of containers and packaging, disposal of obsolete or defective items, storage and preparation for resale. Obviously, all this brings with it a series of costs:

Hidden Cost #1: Labor

The process of returning a product involves keeping communication with the customer open: you must agree on the collection place and date, verify the reasons for the return, certify that it has taken place, manage any refunds, etc. This leads to a significant time and resource expenditure by your customer service staff.

Specific costs in this category are:

  • Customer relations labor costs: manually deciphering return policies on a one-off basis; excessive customer attrition rates due to poor returns experiences.
  • Customer service labor costs: determining applicable warranty policies and service contracts; identifying which credit rules are in place.
  • Financial reconciliation labor costs: issuing credits, and determining inventory reporting. Also, companies incur charges if a returned product is not covered by warranty.
  • Sales labor costs: revenue recognition, margin protection, account management, return rate forecasts.
  • Traffic and shipping labor costs: managing carriers, damage incurred in transit, one-off shipments, tracking—or attempting to track—returned items.
  • Receiving and warehousing labor costs: facility and labor planning with little or no information costs overtime pay, or is manifested in poor returns processing service levels.

Hidden Cost #2: Transport Costs

The transport costs not only include the transport from the collection point to the warehouse, but also the trips to and from the repair center (if necessary) and the movements to recycle, reuse or dispose of the shipment’s original packaging.

Hidden Cost #3: Return Costs

Accepting, registering and placing a returned product in the warehouse generate the return costs linked to:

  • The receipt of the goods, including checking their condition.
  • The coordination of the departments involved, if there is a complaint to be handled.
  • The allocation of warehouse space for the returned product.

Hidden Cost #4: Inability to Forecast Accurately

Detailed historical information about returns may be trapped in local Excel spreadsheets and static databases. Sales staff is often asked to provide forecasts for reserves, but they can see across the various stations and links in the supply chain to make those predictions accurate. Operations are unable to accurately predict whether additional (temporary) resources are needed to process a large influx of returns. They may be paying overtime to ensure internal cycle times are met, or upstaff too far in advance and have to send employees home early, if they have no returns to process.

Hidden Cost #5: Credit Reconciliation

Large customers often calculate their own credits – and take a debit on next payment, which is a very labor-intensive problem to resolve in the accounting office. And that’s not the only reconciliation problem. Here’s another in a list that goes on and on: Return requests are approved, but not valued or matched against receipts. This prevents accurate accruals, claims recoupment and effective vendor management. Manually processing this information is a method made obsolete 30 years ago. It can be automated and integrated; the cost eliminated.

Hidden Cost #6: Poor Response Time and Brand Toxicity

Manual return request processing and validation cause delays in approving or rejecting return requests. This frustrates customers and communicates a lack of concern, which tarnishes your brand; so do delays in validation and discrepancies caught after receiving materials. Customers expect you to stand by your products during the entire lifecycle.

Hidden Cost #7: Repair Costs

When a product has been damaged, you need to assess the cost of fixing it and get it market-ready as opposed to disposing of it and wasting your investment in the product. If you go with the first option, this will incur repair costs, which can also be attributed to returns management. There is also the possibility of salvaging usable parts and storing them for future repairs.

Cutting Costs and Improving Efficiency in Returns Management

Controlling all these hidden costs is possible through the deployment of an efficient returns management mechanism. Warehouse management software is a very powerful ally in organizing reverse logistics operations.

  • Measuring Effectiveness

An efficient returns system is determined by three measures: speed, visibility, and control. Ensuring that the deliveries are delivered on time would not only meet the growing demands of customers but shorten the amount of time involved in processing return material operations (RMAs). Increasing the visibility of each product being returned is crucial to identifying the product being returned to the customer returning it. Finally, maintaining effective this complex operation is critical to minimizing errors and ensuring quality control and regulatory compliance.

  • Technology Tools

Applying digital solutions can play a critical role not only in getting a better picture of the state of the inbound returns system but also effectively track and control the flow of items. Technology solutions can be used to improve all three measures of returns management efficiency. Artificial intelligence systems can help streamline the process of identifying fraudulent returns, which can retailers prevent losses and mitigate store shrinkage.

  • Efficiency

An efficient returns system also improves the effectiveness of value recovery. Speedy inbound returns can reduce the time involved in repairing damaged items or salvaging its raw materials for other purposes. Increasing efficiency can also be used to control of reusable assets such as containers throughout the shipping process.

The FLEX Logistics Team is Here to Help!

How do you find this waste in logistics operations or any aspect of your business?  The easiest way is to simply go to areas of concern and just observe.  Bring a pad and pencil along with a list of the types of wastes.  See how many of the wastes you can identify then develop an action plan for resolution. To take an even deeper dive, develop a process flow map that identifies value added and non-value added steps in a process. Try to eliminate as many of the non-value added steps as possible. 

Our team understands the importance of getting your products to the market. That is why we aim to understand your business and build lasting relationships with you and your team. ​Whether you are looking to add a new warehouse to your existing operations, growing and need to increase your distribution efforts, or starting a new company, FLEX has the solutions to meet your supply chain needs.

Contact us today to discuss your current and future warehousing and logistics needs.  We will work together with you to understand your requirements and develop a solution that will set you up for future success.

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