One of the major obstacles to achieving excellence in retailing is handling returned merchandise.
But it is more than just giving the customer a credit or refund. Returns processing and management is an opportunity to improve customer service and manage cost as well as increase revenue and customer lifetime value.
Retailers face several challenges when dealing with returns processing, including:
Inadequate policies and procedures. It is imperative to have a specific plan when processing returns. Procedures relating to issuing a credit to the customer should be simple and straightforward, but that is only where the process begins. The next step is to deal with the physical product.
Since you cannot handle a returned polo shirt the same way you handle a returned motorized scooter, you need to have product-specific procedures — especially relating to product inspection. Your merchandise buyers must develop specific written descriptions for the four merchandise categories: what can be resold; what must be refurbished before resale as first quality merchandise; what must be sold as seconds; and what must be destroyed.
As the SKU count grows, the complexity of handling returns in the warehouse grows with it. Incoming returns lack the organization of existing merchandise, thus creating disorder and disorganization. It is common to see space in a warehouse consumed by pallets and gaylords where returned merchandise is being sorted for eventual disposition. This is an unavoidable aspect of returns handling, and you must simply plan for it and dedicate the necessary space.
Cost of processing returns. The cost is a direct result of the strategy you select for addressing the challenges of returns processing. Consider the following options:
· Dedicate a small space and small staff to returns processing. This would keep fixed and variable costs low but likely would harm customer service in case of an unexpected increase in returns.
· Maintain a larger space and staff for returns processing. If your return volume varies, you risk increasing both the fixed and variable costs because of the inefficient use of space and staff when return activity is low. However, this approach tends to maximize the responsiveness of customer service.
· Outsource the returns process. Some companies specialize in returns processing, almost to the exclusion of other processes, while others include returns processing as part of a broader range of fulfillment-oriented services, allowing the retailer to benefit from the full integration of the sale-to-return cycle.
Lack of appropriate forecasting and information management. Forecasting volumes can be an impossible task. The use of the appropriate software tool that captures all relevant information about your customers and your products is a part of developing the proper forecasting. This information will help develop policies and procedures that increase returns efficiencies and reduce associated costs. As is often the case, information is the key to excellence in returns management. Information about the customers who are returning merchandise will let you minimize fraud by monitoring addresses, purchasing/returning patterns and other indicators. This information also might be used to identify customer segments that might be poor targets for selected products or categories of merchandise.
Information about the products being returned can be used to monitor manufacturing quality and product specifications. This same information can be used to execute a diversified strategy to maximize revenue from the sale of returned merchandise.
Incomplete disposition policies. Disposition is a complex component of returns handling and should be afforded the proper amount of attention to ensure that the maximum value of the item is achieved for the retailer. Some companies sell off all returns to liquidators — a simple solution. Most companies want to segregate returns so they can at least resell the first quality merchandise. Often, multichannel retailers send refurbished returns to outlet stores or other discount environments. The most recent development is resale of returned or used merchandise in an online auction.
Traditional liquidation channels may provide retailers with 10 percent to 20 percent of the retail value of the liquidated merchandise. Online auctions or online sale of used merchandise has produced as much as 75 percent of the original retail value of returned merchandise, with some items selling at or above the suggested retail price.
The wide disparity in revenue based on disposition policies underscores the importance of not simply seeking the simplest disposition strategy, but rather thinking through all of the considerations, including the potential erosion to your brand.