Returns Management: Here They Come Again!

Returned goods are an issue for retailers throughout the year, but they can really cause headaches in the aftermath of the holiday sales peak. You can set your calendar by it: customers who, for some reason, aren't satisfied with the gifts they've received or the purchases they've made will begin returning those items en masse even before the first quarter is over.

For your operations staff, it will seem like they didn't even have a chance to take a breath before jumping straight from the frying pan into the fire.

"Returns season" generally peaks in the weeks following the holidays. When it really gets going, you'll no doubt notice some extra strain on your customer service and warehouse operations. And as you create your month- and year-end reports, you'll see how much these product returns affect your bottom line.

While it may be too late to implement significant changes in your internal returns management processes for the current quarter, now is the perfect time to conduct a post-mortem assessment of your current processes and identify improvements that can be made for the coming year. Here are a few key themes to consider:

1. Take care of your customer. Whatever your company's return policy, handle the customer's request for exchange or refund promptly and pleasantly. Years ago, all-star direct retailers such as L.L.Bean and Lands’ End set a high standard for the acceptance and processing of product returns. Their people-first approach endeared customers to them for a generation.

Newer companies like Amazon.com and Zappos have since raised the bar even higher. These well-run businesses create trust, in part, through their return policies that make sense for all.

When a customer returns an item to you, it's one of the key contact moments you have with them; they'll remember how it was handled. Take care of them at this key moment and they'll almost certainly shop with you again.

During your returns peak, don't allow any backlog in physical handling of returns to affect the customer. First deal with the customer, then deal with the physical return.

2. Listen to your customer. There's valuable information to be gained from returns. You must understand the motivations behind returns in any effort to try and reduce them. You'll find that it pays to document the reason for every return. You can then quantify and share this information with other departments within the company — suppliers too — to take corrective action.

Oft-cited reasons for returned products include "damaged," "poor quality," "doesn't fit," "item not as expected" and "changed mind." While you can't prevent a customer's change of heart, communication with packers and shippers, product developers, and vendors can minimize damaged product and ensure a consistent fit within your product lines. With rigorous enforcement over time, customers will respond by returning fewer items.

Furthermore, working with creative resources can enhance the accuracy of product photos and descriptions in your marketing sales channels. Whenever and wherever possible, target your marketing message to match your customer's perspective. Something as simple as showing front, back and side images of a product directly reduces returns.

Lastly, take another look at your "Returns By Reason" form. Don't simply list 10 reasons in random or alphabetical order, as the customer will likely select the first item on the list. Make it easy for them to understand by listing categories of reasons for returns (e.g., quality, damage, fit, etc.) to choose from so it's clear to all what prompted the return.

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.