Returns Management: Happy Returns!

Returned goods are the hangover retailers endure following their blistering holiday sales runs. Customers dissatisfied with gifts they've received or purchases they've made will begin returning those items to retailers in droves as the sales surge winds down.

You're probably experiencing this annual phenomenon right now, as "return season" tends to peak in the weeks following the holidays. If so, you're seeing firsthand how the sheer volume of activity strains your customer service and warehouse operations. As you wrap up month- and year-end financial reports, you'll also see the impact that product returns have on your bottom line.

To illustrate, let's imagine a business with $100 million in top-line demand or gross sales. If that business experiences a return rate of 20 percent on its products sold (a fairly common percentage for apparel retailers), that means $20 million is going back out the door due to returns, resulting in $80 million in net sales. Add in the additional cost of processing all those returns, and it's clear that profits are going to take quite a hit.

By now, most merchandisers and inventory planners recognize the need to account for returns in their assortment planning, both throughout the year and particularly in preparation for the holiday peak and its aftermath. The question most struggle with: How? In particular, my sympathies go out to inventory planners. If you consider returns as a product supplier, it's your single largest supplier, but you have absolutely no control over the delivery quantity or timing. And yet you're still responsible for having the right amount of inventory on hand. Easier said than done.

Let's look at some of the factors at work here as well strategies you can implement to gain control of this crucial aspect of inventory planning. The examples are intentionally simplistic, as the idea here is to understand the principles and institute best practices in your inventory planning.

1. Know thy products. 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.

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.

Industrywide, returns seem to peak approximately two weeks to four weeks following the sale of an item. This is good to know with respect to seasonal offerings. Knowing the likely return rate, reusability rate and timing of return for each product type can help you maximize the accuracy of your financial forecasts and inventory scheduling up front.

2. Listen to your customers. 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. Doing so allows you to quantify and share this information with other departments within your business — and with vendors if necessary — to take corrective action.