Sales Returns – Can Better Management Unlock Value?

Every time a brand raises a purchase order on its suppliers it is taking a call on the saleability of the design/model. Most of those decisions are taken with less than perfect information about evolving consumer preferences and the second order impact of the competition on these preferences. As such it is inevitable that at the end of the season or product sale life cycle there will be unsold inventory at the retail outlets. When you add this to returns from the customer driven by liberal return policies, return logistics can add up to a significant proportion of forward logistics. The problem gets even more complicated in design driven sectors like apparel & lifestyle where returns can range from as low as 10% to as high as 35-40% of overall sales.

In our experience returns percentage has been continuously increasing over last few years primarily driven by following factors:

  1. 1. Shorter Retail Shelf LifeLargely a result of changing fashion trends and rapid development of technology
  2. 2. Increased Competition: Increasing competition from domestic as well as international brands
  3. 3. E-Commerce: E-commerce has set new paradigms in ease of returns and increasing pressure of high street to match the service levels

    The increasing returns and inability to handle them efficiently put serious strains on business profitability because of the following:

  • Working Capital: Depending on efficiency of the supply chain, sales returns can add up over a period and form up to 60% of inventory and working capital
  • Ageing/Obsolescence: Inability to take a timely call on grading and liquidation of the returns lead to higher losses on account of obsolescence or ageing of the inventory
  • Reconciliation: Delayed reconciliation limits ability to debit bad/short inventory to stores

Traditionally, for most companies, sales teams are aligned to pursue growth by pushing fresh inventory through the distribution channels and operations teams are under constant pressure to respond to the sales pressure making returns often the more neglected part of finished goods distribution supply chain.

    Return inventory has some unique features which make it nearly impossible to handle return inventory in the same operations flow as fresh inventory. These include:

  • Different Grades: Not all material received is good inventory. Received items might be fully reusable, reusable with some minor value addition, salvaged as parts or to be liquidated.
  • Jumbled Inventory: Inventory received from stores is not properly segregated by batches, seasons or invoices making scanning and reconciliation a major challenge. This is further complicated by bad quality, overstuffed boxes, missing bar codes and missing labels.
  • 100% QC Requirements: Given the state of received inventory, 100% QC and grading is required. Many organisations are not adequately equipped to handle this.
  • Refurbishment: Post QC activities could range from basic packing change all the way to full refurbishment or service

    This needs dedicated work space, trained manpower and specialised process. In the absence of this returns inventory keeps piling up to astronomical levels. In addition, technology systems need to be able to handle the returns efficiently. Some of the system capabilities required include:

  • Invoice Reconciliation: Ability to input invoice data in multiple formats (including customer EAN numbers) to automate reconciliation process
  • Inventory Grading: After QC, grade inventory into custom grades like, New; Refurbished, Seconds, Damaged, etc.
  • Differential Pricing: Ability to differentially price grades
  • Dedicated Sales Channels: Ability to expose inventory to different sales channels and customers based on the grades

    An effectively managed returns supply chain can yield following benefits:

  • Faster and accurate automated reconciliations
  • Improved inventory turnover
  • Reduced handling by eliminating need to transport to refurbishment locations
  • Real time inventory visibility on both online and offline sales channels removing need for one extra picking, transportation and inward

    We have set up a dedicated returns management center for a client and some of the benefits delivered include:

  • Improved Realisation:
    • Quick turnaround of received returns has led to ~10% increase in dispatches to the stores over same period
    • Additional sales of INR 2 lakh per day generated from online exposure of inventory previously lying idle. This is expected to go up as more channels are brought under the fold
  • Release of Working Capital:
    • Quicker sales resulting in upto 3 months of working capital

The combined benefit of the above has led to a value generation of INR 70 per piece received at the returns warehouse. So, essentially the center pays for itself and then some!

For clients with smaller needs, the same benefits can be derived from our multi-client centers as some of our clients are doing.

Do reach out to us if your supply chain is also struggling with the returns and returns are beginning to elbow out the fresh inventory in your warehouses.