Lessons in logistics
Written by Hannah Prevett
Reverse logistics presents retailers with a huge opportunity for savings and improvement and yet, as Hannah Prevett finds, it is often a grey area.
As credit-crunched retailers look to squeeze every penny from their bottomline, business processes are coming under increasing scrutiny. If not handled correctly, the grey area of reverse logistics is extremely costly to retailers in the UK, but also presents retailers with a huge opportunity for savings and improvements. A 2008 study by the Cranfield School of Management estimated that about £7.88 billion worth of goods were returned during 2007. If just two or three per cent of these returns could be avoided or handled more efficiently, the impact on profit margins would be huge.
In a study of nearly 200 manufacturers and service providers conducted by Aberdeen Research at the end of last year, 74 per cent of firms indicated that the effective management of the reverse service supply chain was either "extremely" or "very" important to their organisation's operational and financial performance. This is representative of a marked increase from 61 per cent in a study conducted only one year earlier, reflecting the increasing importance of reverse logistics to retailers and the market place in general. And the current financial climate has only served to underline this: nearly 60 per cent of respondents indicated that due to the current volatile economic conditions, this level of importance is actually increasing.
However, the challenge is not a small one. To deploy the business processes at a level that allows quick, efficient and cost-effective collection and return of merchandise is no minor task. Customers demand a fast turnaround - they want to be able to return the product and receive their replacement or refund as quickly as possible and it is in the retailer's best interests to get the product back in the supply chain to resell it in as timely a manner as possible. By following returns management best practices, retailers can achieve a returns process that keeps both the finance director and the customer smiling.
A grey area
"Dealing with returns certainly is a grey area," says Tom Boardman, chief technical officer and co-founder at online retailer Firebox.com. "It's a grey area as to whether the product really is faulty, whether it really did get damaged in the post, whether it really is in a condition that it can be resold: it's all grey." Luckily for Boardman, Firebox.com escapes relatively unscathed when it comes to returns and reverse logistics. "While returns are a problem for everyone, it's not too bad for us because our returns rate is pretty low." Although not all sectors are so lucky, he recognises. "Clothing retailers have it much worse," he admits. That said, he says that they are better placed to accept the dent to their bottom ine. "I think clothes retailers have very good margins so they can stomach that kind of loss but we wouldn't be able to absorb the same rates."
And the problem is only set to get worse with clothing e-tailers especially likely to feel the pinch during straightened times, according to logistic company iForce's CEO, Mark Hewitt. "One of the biggest areas of online retail growth this year will be the clothing sector," he begins. "The quest for value and convenience is leading many shoppers to buy clothes online, where the customer will often buy numerous sizes with the intention of returning those they do not want." This, in turn, will lead to increased pressure on the retailer's logistics supply chain. "This calls for not only a sophisticated e-fulfilment service, but also returns processing system that can take the unwanted goods and reprocess the returned goods back into stock or other routes of dispersal."
However, there is more to reverse logistics than returns. Overstocking is a common problem among retailers and can result in a surplus of a product line which will need to be either sold at a discount or destroyed, which, given escalating landfill costs, can prove pricey. Julian Mosquera, senior partner at LCP Consulting, says that often companies are at a loss what to do with stock that they end up sending it to landfill. "There is a very large catalogue retailer sitting on mountains of inventory they don't know what to do with because they don't have the internal business processes to deal with it," he confides. "As a result, they are quite happy to send a mixed pallet to landfill because it's a cheaper option, despite the fact they may not even know what's in that pallet."
For e-tailers such as Firebox, overstocking needn't cause too much of a headache. Depending on the type of product, the gadget site will often negotiate with the supplier to take some of the stock back to its premises on the condition that they purchase something else. Alternatively, the item will remain on the website until all of the inventory is cleared. "It's not like a normal shop where you really need the shelf space to sell something else, so you can just leave it on the site until eventually it sells." Another option, as the Firebox team have discovered, is to sell surplus or damaged stock on eBay. But, as Boardman points out, this process is time-consuming and means stock is only sold for a fraction of its cost price. "It's a headache," he admits.
Some companies, especially those with the volume of inventory dealt with by large High Street retailers, find their logistics processes run more smoothly when handled by an external company. Home Delivery Network, iForce and others will aid retailers with reverse logistics and in particular, handle returns and save the company valuable cash. A returns processing solution can offer retailers more control and visibility over their supply chain. The benefits of this are threefold, as Hewitt explains. "The retailer gains value from the asset, the retailer does not have to spend time and resources on developing theirs tills and, finally, by virtue of managing the returns process proactively - the retailer can improve the percentage of these first two factors by ensuring the asset is not sitting on a warehouse floor losing value.