Returns in the Supply Chain: Completing the Circular Lifecycle of Inventory

Try this on for size: In 2017, there were $351 billion worth of returns in the United States retail market. Putting this figure in perspective, were that dollar value the revenue of a retailer, it would be the second largest behind Walmart (Walmart is at $363 billion, with the second-place retailer, Kroger, at $110 billion in revenue). Returns have always been a part of retail, but are often not viewed as a priority. Retailers and brands can no longer look at this part of their supply chain as an afterthought; rather, they need to determine how they can leverage this inventory strategically. Returns represent working inventory that, when properly utilized, have value within the supply chain — both for the physical asset and, perhaps more importantly, the financial aspect.

The returns channel is the last step in the inventory life cycle — i.e., the supply chain operations reference (SCOR) model. This crucial framework encompasses the following steps: plan, source, make, deliver, return and enable. The returns aspect is one that has been ignored for too long, and is a function retailers and brands must begin to focus on. Returns represent inventory that continues to grow, due in large part to the rise of e-commerce coupled with more lax return policies. Combine that with the amount of revenue this represents — both the accounts payable owed back to the consumer, as well as the handling costs associated with accepting returns — and the returns portion of supply chains can either act as an anchor or offer a subtle catalyst for these retailers.

So how should retailers and brands handle returns within their supply chains?

Use Returns to Reduce Both Physical and Financial Friction

As mentioned above, returns represent a growing amount of inventory. However, it's inventory that retailers don't necessarily plan for and, in turn, it doesn't always get reallocated in a way that makes sense for the business. It's time for retailers to begin intelligently leveraging this inventory to address other demands from consumers. For example, consumer A just initiated a return process, meanwhile consumer B is on the website looking at that same product. Rather than having a return go to the store or distribution center, handled, re-slotted and then re-entered into the sales channel — incurring additional financial cost at each step — a system should exist that allows the product to be “returned” from consumer A to B. This would reduce friction of the supply chain, accelerate the flow of inventory, and eliminate the associated financial costs with returns handling.

Better Handling of Returns Means Better Sustainability

In 2016, the average American threw away close to 81 pounds of clothing, which translated to 26 billion pounds of textiles ending up in landfills. It's likely many of these discarded items are in various states of repair, but certainly some of them could be saved — especially those items that sat in the back of the closet unused because they were not the right style, color or fit. Might this be an opportunity for retailers and brands to help the environment by encouraging inventory to come back to the supply chain rather than ending in a landfill? Brands like Levi’s and Madewell offer a discount toward a new item when consumers bring in used clothing, regardless of the brand. These initiatives not only encourage consumers to recycle inventory — really another form of returns — that would otherwise be discarded, but also give incentives to buy more products from these brands. Think of this approach as an alternative method to dealing with the physical aspect of returns.

The Returns Business is One Step Away From New ‘Ownerless’ Models

A concept that's quickly becoming reality is the notion of ownership — or lack thereof. We've gone from owning cars to renting by the hour with services like Zipcar. Or just paying for the ride via Didi Chuxing, Uber or Lyft. Rental services such as Rent the Runway are challenging the notion of having a closet full of owned clothing. The line between owning a product and owning an experience has blurred. A growing number of brands and retailers are starting to add similar offerings. Home Depot and Nike are integrating services that allow consumers to rent tools and equipment or subscribe to a sneaker service for a growing child. These are examples of how returns and the reverse logistics aspect of supply chains, when taken on as a strategic asset, can open new business opportunities. These new models open new avenues for increased financial flows for retailers.

Returns and reverse logistics used to be seen as the red-headed stepchild of supply chain. Today, brands and retailers must look at this as part of their business through a different, more strategic lens. If they can master this part of the inventory life cycle, they can unlock new revenue opportunities, get ahead of the curve when it comes to sustainability, and enhance their customer responsiveness. The gauntlet has been thrown, but not thrown away, rather back into the supply chain.

Guy Courtin is vice president, industry and solution strategy at Infor Retail, a provider of cloud-based software for retailers.