Planning for Inventory Returns

Retailers are in the midst of the holiday peak. While the sales peak ends at Christmas for most, the inventory returns peak is yet to come. This annual phenomenon invariably creates waves, especially if you sell products with typically high return rates (e.g., footwear and apparel).

Consider that a return rate of 20 percent for a retailer with top-line demand of $50 million means $10 million in returned sales. Then take the reduction in gross margin dollars and add the cost of processing the returns. It’s clear that returns can strongly impact a retailer's bottom line.

Thus it’s incumbent upon merchants and inventory planners to try to reduce returns … or at least plan around them as best they can. Here are four areas to key on:

1. Understand the causes of returns and fix them wherever possible. To reduce returns you must understand the reasons behind them. If you’re not already doing so, put processes in place to record the reason for every return. With analysis you can take corrective action, such as improving marketing communications so both art and copy clearly communicate the product to consumers. Make sure your sizing is rigorously consistent across all product lines and communicated clearly and often.

2. Factor returns into your product assortment planning. While you can’t eliminate returns, you can at least compensate for them. If you’re able to shift your product mix to increase demand in those categories with lower return rates, you'll achieve higher total net sales. It’s that simple.

3. Consider returns in your inventory planning to optimize fulfillment and cash flow. Returned inventory lowers sales and reduces profits. The timing and management of returns can also impact fiscal sales and profit as they relate to order fulfillment and inventory turnover. To optimize inventory and maximize fulfillment and cash flow, inventory planners need to apply the following best practices:

• Plan for both “total” and “reusable” returns by product. Understand by category and product which returns can’t be resold, as products vary widely in their reusability rates.
• Include timing of returns in your weekly inventory planning. Create two curves: one, a weekly demand curve detailing expected order patterns and, two, a return curve, typically timed at two weeks to four weeks post customer order shipment. Together these curves will allow you to factor returns into your buying decisions, essentially as anticipated receipts in your inventory planning system.
• Adjust your target inventory levels to accommodate those timing differences. Profile all your products into two groups: those for which you aim to fulfill 100 percent of demand, buying extra inventory to cover demand while you wait for return, and those you’re willing to purchase below demand forecast and accept a degree of lost sales to avoid the resulting overstocks.

Yes, customer returns are unavoidable in retailing. But by understanding the underlying causes and better managing the areas you can control, it's possible to leverage returns to increase overall sales and profits, improve cash flow, and make more customers happy.