Retailers cite reverse supply chain woes, online returns as major hurdle

Moving toward various format (omnichannel) to market, sell and distribute goods, retailers across North America cite online returns as the biggest hurdle they face in transforming their supply chains, according to a recent survey of by HRC Advisory.

The survey found online returns can run as high as 30% and "be quite expensive," according to Farla Efros, president of HRC Advisory. 

“Today’s consumer is driven by an ‘I want it now’ mentality, yet many retailers are still struggling to deliver,” Efros added.

Eight in 10 of the retailer supply chain experts in the survey noted as a major issue the high cost of online returns to a store, particularly when the item is not carried in that store. When returned to a fulfillment center or supplier, retailers incur incremental freight costs, the possibility of shipping-related product damage, as well as a lost opportunity for a replacement sale in-store, HRC noted.

HRC said all the retailers surveyed agreed that fully integrating inventory and fulfillment between the online and physical store channels would help overall omnichannel logistical challenges.

INFRASTRUCTURE NEEDS
However, the study found stores were held back by outdated systems and infrastructure. Specifically, the survey noted:
• About half (52%) admitted that they do not have the systems in place to provide the required visibility to inventory in each store;

• Only 35% had online capabilities such as vendor drop ship, or order in-store and deliver to the customer;

• More than half (55%) of the retailers continue to have dedicated fulfillment facilities for    each channel. Only 25% of these retailers are launching initiatives to combine these;

• Only half of the retailers are able to ensure fulfillment from the closest location when
an item is available in multiple locations and distribution centers;

• Only 53% of retailers are currently able to present customers with accurate inventory information and to fulfill the entire order at the time of online purchase.

Supply chain expert Annibal Sodero, professor at the University of Arkansas, said it’s no surprise retailers are struggling with return logistics issues for online purchases, especially those who have lagged behind in merging inventory systems in brick and mortar and e-commerce.

FORWARD PROGRESS
He said retailers have been eager to offer more products online as they seek to build online sales that many have lost in recent years to Amazon and other pure online players like Zappos, Ebay and now Jet.com.

Sodero said retailers like Wal-Mart have also come a long way in trying to merge their two inventory systems, which is no easy feat. The biggest problem facing retailers like Macy’s or Target is that their online inventories don’t match up with the store inventories. It’s the same thing at Wal-Mart. 

Wal-Mart carries more than 8 million items online, and a typical supercenter might have 200,000 items. However Wal-Mart has allowed its online customers to return many of the items sold on its website to its stores for credit. That does not apply to electronics, products shipped directly to the customer from a vendor, and third party marketplaces. 

Sodero said when a consumer returns an item purchased online to a store, many times the store may not be equipped to handle it. They might not have the UPC code, if they don’t carry the item in stock. He said most retailers will tell you at the time of purchase if an item can not be returned to the store.

TIGHTER RETURNS
“Victoria’s Secret recently began to restrict their online returns back to stores. They have made it more difficult because the stores were simply not equipped for the return logistics,” Sodero said. 

This is a problem for some retailers in the eyes of consumers that may have liked and used that option. 

“Tightening up returns policies may help margins but will backfire in attracting new, or keeping existing, customers. This is an area that is difficult to roll back once the customer is accustomed to free shipping and free returns,” said Mohamed Amer, vice president of Global Consumer Industries for SAP.

“Reverse logistics has been a perennial stepchild. It really starts with having full visibility of your inventory and status. It also requires that your distribution centers are designed to handle the flow of more than one channel. The store also needs to become an integral element of the supply chain (receive and send goods) and not only an end point,” he added.

DONE RIGHT
Sodero said retailers must factor reverse logistics into the operational costs from the beginning.

“Take Zappos for instance. They know they will get a lot of returns which is normal for shoe and clothing companies. Zappos has a very liberal return policy (365-days to return the merchandise for any reason in its original condition). They built the return costs directly into their business model,” Sodero said.

Sodero added that Zappos rarely wins on price, but service has become their calling card. They offer free shipping, and free returns, which allows consumers to buy more freely knowing they can always return the product without a hassle. 

“Amazon has figured it out as well. They don’t have stores, but their supply chain is very efficient running both ways,” Sodero said. “If you buy some products from Amazon that are defective, they will not require that you send it back. They will simply send you a new product. This saves them money because anytime a product has to be handled or shipped back there is cost. It is also way more expensive to send back a single item as  opposed to a bulk order like those being return from stores.”

CANNIBAL EFFECT 
Cannibalization of in-store sales also was a concern cited by a majority of the retailer supply chain experts in the HRC study. That comes a no surprise given that more consumers are shopping online. The retailers said their major compliant with the cannibalization was that the online stores don’t have profitable business models given the cost of delivery and returns of online orders. 

Sodero said Home Depot and Nordstrom are two retailers that appear to get it right in brick and mortar and online. He said the retailers are operating as true omnichannel in terms of the inventories online and in-stores. He said they have built loyal customer bases online and in-store which is paying off in overall sales growth.

“Wal-Mart also gets a lot of credit for their efforts to bridge the two businesses. It’s just when you are big as Wal-Mart it’s a huge undertaking with substantial investment, which they are making,” he said.

Sodero said retailers have no choice but to invest in e-commerce capabilities and that must also consider returns and their elevated cost structure. 

“Consumers are demanding it. The retailers that do the best job in delivering hassle-free service, stay competitive on price and offer relevant products will come out ahead,” he added.

THIRD PARTY OPPORTUNITY
Keith Anderson, vice president of Strategy & Insight Profitero, said customer policies around online returns are likely to evolve, with more retailers encouraging shoppers to return online orders through the most efficient channels. He said internal policies (like how inventory and labor are allocated) also require updating.

“Just as retailers are beginning to embrace outside platforms for delivery, I see potential for third-party reverse logistics too,” Anderson said.

Sodero agreed that there is opportunity for third-party logistics firms and reverse logistics players to provide solutions for retailers citing the product handling concerns. He said this is not going away. A separate study by Synchrony Financial found that 41% of consumers who shop online   demand hassle-free returns, no return time limit, no need for a receipt and free postage on returns.