The Impact of Reverse Logistics vs. Returns Reduction for Retailers

February 3, 2021 Ivy Davis

Retailers have just concluded a profitable 2020 holiday season. Despite the toll that COVID-19 has taken on brick and mortar businesses, holiday sales actually rose by 3% this year. This growth, sustained by the surge in online shopping, helped the retail industry stifle low sales expectations and prove that “the American consumer is highly resilient,” according to senior adviser Steve Sadove of Mastercard.

Reverse logistics and product returns, which were often treated as afterthoughts in the past, have become timely topics in early 2021 regarding the supply chain. DiCentral recently sat down with Navjit Bhasin, the CEO of Newmine, an applied AI technology company, to discuss the product return process after a holiday with record-setting e-commerce revenue.

Newmine and DiCentral share a mutual focus on technology-based supply chain solutions. Both companies work with AI and automation processes to streamline visibility into complex supply chain data, detect potential issues, and help members address them efficiently. With many brands now adopting an omnichannel strategy and launching e-commerce platforms, there are a large number of untested participants in the supply chain who are new to the notion of managing returns from e-commerce purchases.

As an expert in returns management and reduction, Bhasin shares that “E-commerce is where the return rates are significantly higher than in brick and mortar. In today’s world, and at least for the next six months, brick and mortar will continue to have lower volume in terms of traffic and revenue.” Escalating e-commerce transactions and diminishing brick-and-mortar sales will mean more returns, which will lead to an enormous financial impact on reverse logistics and revenue.

What is Reverse Logistics?

 “When you say reverse logistics, we as retailers typically think of it as the process of moving the merchandise back from a customer to either the seller or manufacturer to be resold or disposed of. It is a component within the product returns umbrella,” Bhasin explains.

This umbrella encompasses at least four unique stages in the product return process that make up the full returns management ecosystem. Companies within this ecosystem are generally responsible for one of the facets but rely on partners in the reverse supply chain to handle the rest.

4 Facets of the Returns Management Ecosystem

1.  Customer Experience: These players interact with or optimize the customer experience during the product return process.

2.  Reverse Logistics: Similar to traditional logistics, but in reverse. These vendors physically move the product back from the customer to the company.

3.  Returns Disposition: These companies help recover value from returned products through existing or new value chains (liquidation channels, secondary markets, etc.)

4.  Returns Reduction: Companies like Newmine fit in here. Specialists work to enhance retailer and brand profitability by rooting out the cause of returns and providing prescriptive actions to prevent them from happening in the first place.

The difference between the first three facets and returns reduction experts, like Newmine, is simple: whereas the other three actually benefit from the continued existence of product returns, returns reduction is all about eliminating this major cost center.

How Do Returns Impact Your Brand?

The financial impact of reverse logistics can be tremendous. Most retailers don’t maintain figures on how much returns (and associated reverse logistics costs) impact their businesses’ bottom line. In fact, less than one-third of retailers actually quantify the full cost of returns. Unaccounted-for costs can spell disaster for revenue levels, such as the surge in e-commerce holiday returns.

Navjit Bhasin laments that up until recently, retailers have assumed that the product return process is simply “the cost of doing business.” He explains that much of the returns ecosystem is actually incentivized to continue encouraging returns while competing to help brands optimize that process.  “Nobody has been proactive in going after reducing returns,” Bhasin says, “The business model of companies like UPS and FEDEX is built on the notion that the more returns that they process, the more money they make, so it’s not in their best interest to help reduce returns, even though it’s a big profit sink for the manufacturer.”

returns management has more than just an economic impact on your brand. There are also emotional and environmental effects. “Even though they are returns related,” Bhasin says, “all three of those impact retailer or brand performance.” 

You can get a better idea of the potential total impact that reducing costly returns could have for your brand with this Return Reduction Calculator, hosted by Newmine.

The Value of Returns Reduction AI

The fourth facet of the product returns ecosystem, Returns Reduction, is on the rise. Companies like Newmine have created sophisticated AI-powered technologies like Chief Returns Officer® to take a preventative approach by analyzing returns data and prescribing solutions that will reduce returns. This unique focus on data-driven, targeted returns reduction initiatives has already helped some of the industry’s biggest brands to transform their customer experience and enhance profitability.

Bhasin describes Newmine’s AI-based solution this way: 

“We gather the relevant data from all over, which could be their transactional system, their product reviews, social media, or call center data, and we look at it extremely laser-focused through a returns lens. We create predictive models very early on in the selling season so that as transactions and returns start trickling in, our predictive models kick in and forecast that a particular product is going to have a higher degree of returns because of specific root causes.”

Studies suggest that retailers actually have control over 65% or more of all returns. An improved focus on those products’ transaction data can significantly reduce reliance on the expensive reverse logistics supply chain. 

Mind Your Metrics

Newmine uses a proprietary index called Keep Score, which is similar to how a credit score functions within the financial industry, to calculate the rate at which customers are keeping their products. This serves to get a handle on the real value of each product, supplier, and customer. Keep Score aggregates ratings across five dimensions: Vendor, Customer, Product, Category, and Location.

Bhasin emphasizes that monitoring this data can answer many critical questions, such as:

  1. Which vendor’s products am I carrying?
  2. Did I change vendors for that particular style this year, and how is that performing?
  3. Is this the right product to the right customer that I’m selling?
  4. Where are anomalies coming from?
  5. Was the item delivered damaged?
  6. Did the marketing team educate the customer appropriately when they were selling the product on the website? Did the image match the item listing?

Because so many touch points happen in the retail environment, returns can be influenced by any of these factors (or many others). It’s essential to have robust returns management data and automation to hone in on the biggest culprits.

Talking with Bhasin, it became clear that there was a strong correlation between Newmine’s focus and the supply chain solutions leveraged at DiCentral.  For example, DiCentral provides a technology called DiMetrics that assists clients in identifying “supply chain exceptions,” not unlike the anomaly detection service offered by Newmine. 

Big data is only useful when it’s accurate. Retailers and brands can keep their data clean by automating their supply chain and utilizing tools that streamline or integrate data through APIs and EDI processes. The combination of automation and AI makes it much easier to detect and reduce errors in those transactions.

Reduction Is Achievable

Bhasin hopes to spread the word that returns reduction is possible. “Apple launched the iPhone as a smartphone,” he muses in comparison. “The concept of the smartphone didn’t exist. Nobody knew about this concept—what was a smartphone? That’s where I believe we are. We need to get in front of the market and educate them that this is possible.”

The challenge is that any major retailer or brand—think Macy’s, IKEA, or Wayfair—may have thousands of active styles or SKUs at any given point in time.  In theory, it’s possible for humans to check the same data handled by an AI tool manually, but in practice, it’s humanly impossible to chase all of those data issues at such a large scale without the help of technology. “Rather than deploying data scientists or analysts to do it,” Bhasin says, “our software brings it right to their inbox. For instance, it could tell them, ‘for this particular yellow dress, you need to take this specific action because it will end up being a major return cost.’ ”

DiCentral can also assist companies in tracking vast numbers of SKUs and inventory to create an endless aisle for consumers. DiMetrics (DiCentral’s Business Rules and Exception Management Tool) identifies and quarantines potential business rule violations, issuing alerts so companies can find a solution before any costly disruptions in the supply chain can take effect.

Only through today’s leading automation and AI solutions from companies like Newmine and DiCentral can such an enormous level of returns management analysis be made achievable, efficient, and actionable.

For further insights into returns management, reverse logistics, and returns reduction, download the full webinar with Navjit Bhasin. In it, you’ll discover more avenues for improving your returns management process and how to reduce returns in e-commerce with the help of AI.

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