Returns Management: Happy Returns!

Oft-cited reasons for returned products are "damaged," "doesn't fit," "item not as expected" and "changed mind." While there's not much you can do to prevent a customer's change of heart, communication with packing and shipping, product developers, and vendors can minimize damage and help ensure a consistent fit within your product lines. With rigorous enforcement over time, customers will respond by returning fewer items.

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

3. Adjust your overall inventory planning to actively account for returns. While you can't eliminate returns, you can at least compensate for them. If you shift your product mix to favor those with lower return rates, you'll achieve higher net sales. Obviously you shouldn't change your overall product positioning, but you can be smart about paying attention to details.

Again, using the 20 percent returns benchmark, the chart shown below shows how increasing demand within a lower return rate category will lower the total return rate, helping to improve overall net sales (and therefore, profits). Example one is the status quo; example two illustrates how a simple reduction in the return rate provides a significant boost in net sales.

4. Plan for returns to optimize fulfillment and cash flow. Returned inventory lowers sales and reduces profits. As noted, 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 demand planning.

Consider the following example: You have demand for 1,000 units over a three-month period. With a 20 percent return rate, you have 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 perhaps displease customers) when returns don't arrive in time to fulfill demand? The answer typically lies somewhere between the two.

No one said managing returns is easy. However, you can limit the financial impact of product returns with a few simple adjustments to your inventory planning. Follow these three steps:

• Plan for both "total" and "reusable" returns by product. Remember that some of your returns can't be resold.
• 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.
• 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 (buying overstock to cover anticipated returns) and those for which you'll purchase below demand forecast (and accept lost sales) to avoid the resulting overstock.

Customer 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 inventory planning, returns can provide an opportunity to strengthen overall sales and profits, improve cash flow, and make more customers happy.

Joe Palzkill is the vice president of sales and business development at Direct Tech, a multichannel marketing consulting firm. Joe can be reached at jpalzkill@direct-tech.com.