One of the main factors of Supply Chain Management is logistics. The companies are today looking for the best practices to optimize their logistics to gain a low-cost structure efficiently. In the past few years, the concept of Reverse Logistics has become increasingly important. The definition proposed by Dowlatshahi  seems very relevant.
In simple terms, reverse logistics is the systematic process of flow of raw material, process inventory, finished goods, and any information from the point of consumption back to the point of origin. It can be to recapture the value or create new value or simply for the disposal process. This is a new concept that has now started to redefine the operations of any company. Companies have started to realize the importance of shifting their focus from the traditional forward supply chain channel to optimize costs and gain higher customer satisfaction.
In today’s world, reverse logistics has become extremely important. According to research, customers return $650 billion worth of goods each year globally . The requirement for online returns is three times more than brick and mortar returns. With the onset of e- commerce, the requirement for effective reverse logistics has become a crucial component
in determining the life of a business. To understand the reasons for returns, return types are distinguished in 5 categories:
Channel for Reverse Logistics
Reverse logistics has become increasingly important today, as a majority of the transactions take online. As per the statistics, e-commerce (online purchases from brick-and-mortar retailers as well as web-only online retailers) has seen a surge. In 2018, approximately 1.8 Billion people purchased goods online globally. In the US, e-retail sales were 2.8 trillion USD and are expected to rise to 4.8 billion USD by 2021. With the increasing trend of purchasing online, all B2C companies have a pressing requirement to have an effective logistics management system in place. Of online shoppers, 89% claim that return policies determine where they shop . The cost involved with the return deliveries only (not including the cost of the product returned) was 479 billion USD in the USA in 2019. The growing cost that is getting associated with handling business adds to the unique challenges faced by reverse logistics. Maintaining reverse logistics through the traditional forward challenges can hence increase cost and add to complexities.
Businesses these days are also today focusing on expansion by acquisitions, diversifying their product lines, or increasing sales in different geographies. This growth strategy means increased complexity in operations, but this also means that higher volumes of returns. Instead of considering the returns in negatively light, a business can extract benefits from this by seeking out the reasons for returns and hence try to gain a competitive edge.
A dedicated channel for reverse logistics will help maintain revenue and would help in easy tracking of costs incurred in returning a product. There are further two options to manage reverse logistics:
Since all the industries are moving online and have a digital footprint, it is necessary to understand how reverse logistics impacts the e-Commerce sector. In 2020, global retail e- commerce sales worldwide accounted for USD 3,535 billion, and the figure is expected to grow at a CAGR of 20%. Changing consumer behaviours and “online-only” business modelshave resulted in a return rate through an online channel three times the return rate at a brick- and-mortar store.
(Source- https://www.statista.com/statistics/534123/e-commerce-share-of-retail-sales-worldwide/. The global rate has been calculated by taking US trends only)
If we try to analyse the return trends in USA, the returns would be equal to USD 577 billion by 2023, which with return rate of 9.63%. The amount of merchandise returned in 2023 is almost 1.5x of the amount in 2012.
After analysing the sales trends, let us try and explore the reasons of returns.
From the above graph it can be seen that 80% of the times an item is returned when it arrives damaged/broken. If the company can spend on better packaging and delivery, it can save returns. Also, 64.2% of the times the product is returned because it does not match the description. This might be a result of wrong delivery or wrong product being packaged for a location. If the process can be automated based on RFIDs and the product passes through multiple checks to ensure the correct product is being sent to the location, this category returns can be saved.
Why should the retailers be even thinking about returns?
Firstly, returns have now become one of the greatest supply challenges for companies today, a reverse logistics strategy is critical in maintaining healthy inventory management practices and regulating operating expenses. Secondly, understanding the dynamic consumer behaviour is extremely important in comprehending their purchasing behaviour and increasing customer satisfaction. Meaningful insights can be gained from each return and help to improve sales in the future.
The Way Ahead
Let us now look at various factors that should be kept in mind while considering a reverse logistics strategy:
Supplier Collaboration: There should be a proper agreement between merchants, suppliers and sellers on the ownership of the returned product will be shared. This would help in better estimating the total cost of the supplier agreement. Accountability and responsibility-sharing will lead to seamless function and help in reducing risk at any particular level.
Return Policies: As pointed out earlier in the report, 89% of online shoppers decide their place of purchase based on return policy. To gain a competitive advantage, a company’s return policies must be customer-centric. Time is also a crucial factor here. The return time depends on the industry that the company is operating. In the apparel industry, the return period is very less. Most customers prefer free return delivery; however, it is not a standard practice. A customer-centric policy which keeps the customer at the centre while aligning with the company’s resources and capabilities will serve you the best.
Return Options: Instead of looking returns as failed sale, the company should see it as an opportunity, a second chance, to engage with the customer again. Based on the research, 96% of consumers would shop again with a retailer based on a good return experience . 55% of customers ages 21-29 years prefer in-store returns, and 48% agree that online returns are a hassle . This can mean that people want their money/credit back immediately instead of waiting for 10-14 days for the bank process to happen for a return.
Buy online and return in store is the best method for return as it will be a win-win for both retailers and customers. For the customer it means immediate credit will be available, while for companies it is an opportunity to make more sales while the customer is in the store.
Logistics Processes: Any return that is in transit is a loss for the company, longer the item is not available for sale higher the loss in the value of the product. A faster operational speed will be beneficial for both the company and the customer. Faster operations will also help in having higher customer satisfaction which will result in re- purchase from the same customer. Companies should focus on the below main areas to build a robust operations system to save time and money.
Merchandise Disposition: After getting a return, the product can be seldom soled at the full price. The value of the product goes down when the customer is in possession of the good and sometimes due to packaging/merchandise condition. The company should determine if it should reinvest their time and money to bring back the product to its full price or just dispose it. Most of the times the merchandise can be repacked to sell again, however the refurbishing takes time and has costs. In order to minimise the loss of value while the product is with the customer, there should be some additional norms and standards for return process.
Return Analytics: The reverse logistics is a source a lot of data. If a centralised database is created for reverse logistics, it can be used to analyse the reasons of returns. The data can help in a lot of managerial decision making in determining which products will fetch high sales with low return rates. The data on geographies and number of returns can also help in optimising the routes and help in saving time and cost. The predictive analysis techniques can help ensure performance and quality and forming an efficient supply chain strategy for a company.
Impact of Coronavirus – COVID19
The whole world today is hit with the COVID-19 pandemic. The economy of all the countries has taken a bad hit due to this. Businesses have started shrinking. This outbreak has an effect throughout the global supply chain. The consumption of all non-essential items has started plummeting. Demand of goods has taken a hit. The supply side is also affected, but when there is no demand, supply of products would not matter (unless it is an essential product). This lowering of demand would lead to huge inventory pile-ups for any company.
Reducing demand from customers will lead to a multiplier effect at various levels in the supply chain. At each level the reduction in demand sparks a bigger decline at the supplier side. While unknown challenges are still cropping up, the companies dealing only reverse logistics might go out of business. Since there are no orders, there are bound to be no returns. Reverse logistics as a part of a bigger enterprise might suffer from the supply chain impacts in any business. As such there is not going to be any additional adverse effects.
Inventory management, cost reduction and effective utilisation of all the resources will be the main challenges of any company. Reduction in production capacity will limit the profit of the company. Small and new companies are expected to have the highest impact.
Given the current situation, only the sales figures in grocery and health industry are going up. Rest of the industry will see a downward trend. In the short run, the sales of e-commerce are going to decline. Until the situation stabilises, almost the entire world will face a lockdown like situation which will hamper the economy. As a result, people will not have enough money and the mentality would be to save more. This would adversely affect the e-commerce revenue and the above-mentioned graphs might see downfall in the sales revenue and hence the return rates might also decrease.
In the long run, as per the predictions, social distancing will become a norm once the situation stabilises. If this happens, more and more people will start ordering online and the e- commerce sector will boom. The returns will also see a rise, hence return logistics will become even more important at that time.
There are some positives also. This situation will give time for all the companies to rethink their supply chain logistics. There is also an opportunity to shift to technology if not already done. For companies this is the best time to make significant changes to their strategies and have a holistic strategy for such disruptions in future. This will also help companies to localise their manufacturing their transportation. This is the time to maximise the cash flows rather than just profits.
The landscape is definitely going to change post this pandemic, for the good or bad that we will have to wait and watch.
Using the traditional forward channel to manage returns as a low priority in the existing value chain is not a good idea. Customers are now shifting their expectations to a more holistic shopping experience; companies should now work on network consolidations and utilise cross-channel return strategies. Integration of return strategy with the existing supply chain can increase the value and generate better customer satisfaction.
Following a strategy which focusses on technology will be helpful in gaining advantage over competitors. With data centralisation, consumer behaviours can be gauged and meaningful insights can help in improving sales.
Lastly, proper planning and effective management of resources is the key at the current times of pandemic. With so much uncertainty, it is best to plan ahead for the future and be prepared to strike back in full force the situation becomes normal again.
Dowlatshahi , Developing a theory of reverse logistics”.Interfaces, 30 (3), pp. 143-155, 2000, https://www.bain.com/insights/reverse-logistics-infographic/, https://www.statista.com/topics/871/online-shopping/, https://www.bain.com/insights/reverse-logistics-infographic/, https://www.statista.com/study/48655/reverse-logistics/, The State of Returns: What Today’s Customers Expect, Page 4, Narvar Consumer Report 2018, https://see.narvar.com/rs/249-TEC-877/images/ Consumer-Report-Returns-2018-4.3.pdf, Heather Lohmann, June 13, 2017, Bracketing: For Online Returns, the Bedroom Is the New Fitting Room, https://corp.narvar.com/blog/the-bedroom-is-the-new-fitting-room/.
Report by- Ms Vedika, IIM Nagpur