Product life cycles have been crashing, while product variety has been increasing, making markets harder to predict
Most retailers consider product returns to be a costly but natural consequence of doing business. Consumers will inevitably return unwanted or faulty products. However, over the past few years the levels of retail returns have been increasing dramatically. Research undertaken at Cranfield indicates that the value of retail returns in the United Kingdom is currently running at £6 billion annually, while some estimates in the United States put the value at around $100 billion. With costs spiralling, retailers and manufacturers need to take an integrated and holistic approach to managing the problem.
The reasons for this dramatic growth can be explained by a number of factors. Liberal return policies have often been associated with high returns and although some companies have tried to be more restrictive, for many, it is central to their value proposition and hard to change. Marks & Spencer (a British retailer headquartered in the City of Westminster, London), for example, used to offer a 90 day return policy, but conceded that they needed to reduce it.
They still offer a very generous 35 days. The most significant factor has been the increasing number of channels to market, notably, online sales. Originally, retailers plied their trade through their stores. Customers could see the product before they bought and staff were on hand to provide product information. Internet retailing does not allow this and so customers will often ‘try before they buy’ by ordering a number of items to be delivered. Once the right product has been selected they will return the surplus – often at no cost to themselves. The result means that online retailers can expect return levels as high as 30%.
However, liberal return policies and the changing channels to market do not tell the whole story. In fact, much of the retur
ns problem is the result of poor planning and decision making in the supply chain. To understand the problem we need to look at the revolution that has been taking place in our supply chains. Much of what is sold on the high street today has been outsourced and off-shored to contract manufacturers in low cost economies. This has extended the lead time for supply. In addition, product life cycles have been crashing, while product variety has been increasing, making markets harder to predict. Traditional theory will tell you that in order to provide high service levels in unpredictable markets, over longer lead-times, you need to hold a lot of safety stock. But then, the problem with holding lots of stock with a short shelf life is the risk of obsolescence. The cost of obsolete stock not only includes the costs of reverse logistics, but also the loss in asset value.
Effective management of retail returns certainly calls for a holistic approach, which extends well beyond supply chain operations, and normally requires integration of financial, product design, marketing, commercial and purchasing functions. It may also need to look outside the business at suppliers and customers. In our experience, very few companies know the full cost of reverse logistics.
Therefore, the first thing to establish is the size of the prize and develop a clear business case for change. It is not uncommon to find more staff dedicated to reverse logistics operations than forward logistics, when you take into account staff in call centres, customer service and repair centres.
Most retailers consider product returns to be a costly but natural consequence of doing business. Consumers will inevitably return unwanted or faulty products. However, over the past few years the levels of retail returns have been increasing dramatically. Research undertaken at Cranfield indicates that the value of retail returns in the United Kingdom is currently running at £6 billion annually, while some estimates in the United States put the value at around $100 billion. With costs spiralling, retailers and manufacturers need to take an integrated and holistic approach to managing the problem.
The reasons for this dramatic growth can be explained by a number of factors. Liberal return policies have often been associated with high returns and although some companies have tried to be more restrictive, for many, it is central to their value proposition and hard to change. Marks & Spencer (a British retailer headquartered in the City of Westminster, London), for example, used to offer a 90 day return policy, but conceded that they needed to reduce it.
They still offer a very generous 35 days. The most significant factor has been the increasing number of channels to market, notably, online sales. Originally, retailers plied their trade through their stores. Customers could see the product before they bought and staff were on hand to provide product information. Internet retailing does not allow this and so customers will often ‘try before they buy’ by ordering a number of items to be delivered. Once the right product has been selected they will return the surplus – often at no cost to themselves. The result means that online retailers can expect return levels as high as 30%.
However, liberal return policies and the changing channels to market do not tell the whole story. In fact, much of the retur
ns problem is the result of poor planning and decision making in the supply chain. To understand the problem we need to look at the revolution that has been taking place in our supply chains. Much of what is sold on the high street today has been outsourced and off-shored to contract manufacturers in low cost economies. This has extended the lead time for supply. In addition, product life cycles have been crashing, while product variety has been increasing, making markets harder to predict. Traditional theory will tell you that in order to provide high service levels in unpredictable markets, over longer lead-times, you need to hold a lot of safety stock. But then, the problem with holding lots of stock with a short shelf life is the risk of obsolescence. The cost of obsolete stock not only includes the costs of reverse logistics, but also the loss in asset value.
Effective management of retail returns certainly calls for a holistic approach, which extends well beyond supply chain operations, and normally requires integration of financial, product design, marketing, commercial and purchasing functions. It may also need to look outside the business at suppliers and customers. In our experience, very few companies know the full cost of reverse logistics.
Therefore, the first thing to establish is the size of the prize and develop a clear business case for change. It is not uncommon to find more staff dedicated to reverse logistics operations than forward logistics, when you take into account staff in call centres, customer service and repair centres.
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Source : IIPM Editorial, 2011.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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