Returns Management: Here They Come Again!

3. Remember that early detection pays dividends. Monitor returns weekly to identify specific problems as soon as possible. This is particularly important for new products. The earlier you become aware of a problem, whether it's quality, size/fit, packaging, creative presentation, etc., the sooner you can take corrective action and minimize future returns.

4. Get more value from nonsalable return items. It's disappointing to get a return and lose a sale, but it's even worse when the return is nonusable and you have to write off the inventory value. Make every effort to recover value from these types of returns.

Consider cleaning, pressing and repairing items that can be reclaimed as first quality, assuming the cost value is materially greater than the cost of repair. It's often worth adding $5 in repair fees to a $20 cost item. The incremental cost of making an item resalable will deliver far better gross margin than simply discarding that item.

Arrange with your supplier to provide you with surplus packaging materials for those product returns that simply need to be put in new, undamaged packaging. Make your suppliers responsible for product returns due to packaging issues. Negotiate a returns allowance with them so they reimburse you for the cost of those returns.

5. Proactively consider returns with inventory purchases. Returned inventory lowers sales and reduces profits. Most of that's unavoidable. However, the timing and reusability of product returns can also impact sales and profits as they relate to order fulfillment and inventory turnover. These factors add an extra dimension to your already complex inventory planning.

Consider the following example: You have customer demand for 1,000 units over a three-month period. With a 20 percent return rate, you anticipate 800 units of net sales, but some of the returns arrive too late to fulfill customer orders. So which is the better approach for your business: Purchase 1,000 units to fulfill all demand (thus accepting 200 units of overstock), or purchase 800 units to avoid overstocks but miss sales (and displease customers) when returns don't arrive in time to fulfill demand?

As with all inventory planning, the answer varies depending on the individual product and requires a case-by-case decision. Profile your products and adjust target inventories to cover the differences in your weekly demand and return curves. Identify the products for which you intend to fulfill 100 percent of demand (knowingly buying overstock to cover anticipated returns) and those for which you'll purchase below demand forecast (and accept lost sales) to avoid overstocks.

A couple other factors to address in your inventory analysis include the following:

• Plan for both "total" and "reusable" returns by product. Remember that some of your returns can't be resold, so your inventory purchases must take that into account.
• Create two separate curves in your weekly inventory planning to identify the timing of returns: one, a standard demand forecast that anticipates ordering activity and two, a return curve for reusable items timed at two weeks to four weeks following order shipment. This second curve allows you to factor returns into your purchasing as well as treat them as anticipated receipts.

6. Consider returns in setting pricing and product assortments. Different product types have different return rates. Soft goods, for example, have notoriously high return rates — typically 10 percent to 20 percent in footwear and menswear, 20 percent to 30 percent in women's basic apparel, and well above 30 percent in women's fashion apparel — while hard goods can be 5 percent or less.

Products also vary based on their reusability once returned. For instance, you may have little chance of turning around and reselling personalized goods or intimate apparel, yet virtually your entire stock of leather belts might be able to be resold.

While you can't eliminate returns, you can at least compensate for them. In product categories with significant return rates, make sure your initial markup is high enough to deliver acceptable profit after the full cost of returns (including processing costs and write-off of nonusable returns) is considered.

7. Take control; be happy. Product returns are unavoidable for retail businesses, but that's not to say that you don't have any control over them. With a few adjustments in your operations and inventory planning, product returns can provide an opportunity to strengthen overall sales and profits, improve cash flow, and make more of your customers happy.

Joe Palzkill is the vice president of sales and business development at Direct Tech, a company which helps retailers drive profitability, increase demand and optimize inventory investment. Joe can be reached at jpalzkill@direct-tech.com.