Study: Reverse logistics still a puzzle for omnichannel retailers
The promise of hassle-free returns may keep customers happy, but our latest survey suggests that omnichannel players are still struggling to find the right balance between cost and service.
Ben Ames has spent 20 years as a journalist since starting out as a daily newspaper reporter in Pennsylvania in 1995. From 1999 forward, he has focused on business and technology reporting for a number of trade journals, beginning when he joined Design News and Modern Materials Handling magazines. Ames is author of the trail guide "Hiking Massachusetts" and is a graduate of the Columbia School of Journalism.
Today's consumers love the convenience of online shopping, but it often takes them a few attempts to find the perfect fit. Retailers have a solution for that. To ensure a "frictionless" online shopping experience, they promise hassle-free returns. Shoes too small? Return them. Pants too long? Return them. Sweater too tight? Return it.
And return they do. Today's shoppers do not hesitate to send back items that don't meet their expectations—whether it's a question of fit, quality, damage during shipping, or a host of other reasons. By all accounts, the e-commerce returns rate today runs well into the double digits, with some estimates putting it at 30, 40, or even 50 percent.
All this creates big headaches for retailers. That's partly due to the way they're set up. The sophisticated automated systems they've designed for processing high volumes of outgoing orders typically don't run as well when shifted into reverse. And inefficient processes are just the half of it. There's also the added labor, time-consuming worker training, the need to discount inventory, and additional handling and shipping fees.
To get a better understanding of how companies are meeting the challenges of reverse logistics in omnichannel commerce, DC Velocity and ARC Advisory Group, a Dedham, Mass.-based technology research firm, teamed up to conduct our fifth annual survey on retail fulfillment practices. (See sidebar for more on our study.) Respondents answered 35 questions on their companies' approach to meeting current challenges in omnichannel commerce and their plans for the future. Included in those questions were eight that centered specifically on respondents' returns practices. This article will concentrate largely on the findings from that section of the survey.
PAIN WITHOUT GAIN?
Conventional wisdom says that while "going omnichannel" helps keep customers happy, it's a notoriously tough way to make a profit. Retailers are well aware of that. When we asked respondents why they participated in omnichannel commerce, the top three reasons were to increase sales (63 percent), increase market share (57 percent), and improve customer loyalty (47 percent). Coming in a distant fourth was to increase margins. (See Exhibit 1.)
And the cost of returns only adds to the pain. When shoppers return merchandise, a complex, labor-intensive process is set in motion. At the very least, someone has to collect, evaluate, and sort the returns, deciding whether each item should be put back on the retail shelf; returned to a DC for cleaning, refurbishing, and/or repackaging; sold to a clearance reseller; or recycled. The process requires time, training, and money—three resources that are in short supply in any retail organization.
As for who actually performs the work, that varies from retailer to retailer. Our study found that the majority (64 percent) of respondents have opted for the DIY approach, processing returns themselves using in-house labor. But not all of them choose to go it alone. A sizeable percentage (40 percent) said they contracted with a third-party logistics service provider (3PL). Still others said they arranged for returned items to be sent directly to the manufacturer or a clearance reseller. (See Exhibit 2.)
Despite the considerable expense involved, retailers are disinclined to pass those costs on to customers. When survey-takers were asked what types of fees they collected to recover supply chain costs, the top two responses were fees for expedited delivery (55 percent) and fees for delivery in general (41 percent). Far fewer were willing to take this route for returns: Less than a third (30 percent) said they charged customers for returns shipment, and only 20 percent charged fees for returns processing. (See Exhibit 3.)
That raises the question of how all this affects profitability. As it turns out, many respondents had only limited insight into the matter. When asked about their ability to track returns-related costs, far less than half (42 percent) of respondents said they were able to measure the full financial impact of returns. Another 32 percent said they had only a general idea of that impact, while 27 percent admitted that they could only guess at the financial impact of returns or could not measure it at all. (See Exhibit 4.)
ASSEMBLING THE OMNICHANNEL MOSAIC
As for why many retailers struggle with the economics of returns management, part of the explanation may lie in the complexity of the omnichannel model itself. To begin with, "omnichannel" means different things to different players, with each individual retailer offering a different mix of service options. For instance, when survey respondents were asked what omnichannel capabilities they supported, the answers ranged from "order at store, fulfill from warehouse" to "order at one store, fulfill from another store." (See Exhibit 5.)
Another complicating factor is the number of players involved. In an omnichannel world, by definition, transactions aren't confined to a single conduit. Where once a retailer might have required that items bought in a store be returned to that same location, the field is wide open today. For instance, nearly half of respondents (45 percent) now allow customers to return merchandise bought in a store to a DC or processing center. As the number of players grows, so does the likelihood of complications.
These challenges are hardly unique to reverse logistics. Retailers struggle with the same difficulties in the order fulfillment end of their operations. To get a fuller picture of how they're dealing with the online shopping piece of the omnichannel puzzle, the survey also asked respondents a few questions about their fulfillment practices and strategies.
As for how retailers currently fulfill e-commerce orders, the results indicated that the industry has yet to settle on a standard approach. While the largest share of respondents, 60 percent, fill orders through a traditional DC that also handles e-commerce orders, that was by no means universal practice. Another 37 percent said items were shipped directly from the manufacturer or supplier, 32 percent said orders were filled from a store, and 25 percent used a Web-only DC.
Digging a little deeper into store-based fulfillment practices, the survey asked respondents how they handled e-commerce orders fulfilled through a brick-and-mortar store. Responses included picking orders at the store and holding them for customer pickup (65 percent), picking orders and shipping them from the store (also 65 percent), and shipping orders from the DC to the store for customer pickup (45 percent). As for where they pick store orders, 78 percent said they selected items from store shelves, and 50 percent from the stockroom. (Survey participants were allowed to select multiple responses.)
Regardless of how those orders are picked, statistics suggest that a significant percentage of them will be returned. What that means for retailers is clear: Returns management is fast becoming a high-stakes endeavor—and how they handle it could dictate whether they thrive or merely survive in the brave new world of omnichannel.
ABOUT THE STUDY
This year's omnichannel study was conducted by ARC Advisory Group in conjunction with DC Velocity. ARC analyst Chris Cunnane oversaw the research and compiled the results.
The study explored the details of DC operations that support omnichannel initiatives as well as how companies are handling the challenge of reverse logistics and returns. The findings reported here are based on 142 responses. Respondents included logistics professionals from a variety of industry verticals, who submitted answers during July and August 2017.
As for the demographic breakdown, the majority (56 percent) of respondents sold goods through a combination of direct and indirect sales channels. Another 31 percent sold merchandise through direct retail only, and the remaining 13 percent through indirect sales channels only.
A report containing a more detailed examination of the omnichannel survey results is available from ARC for a fee. Get information on the report.
For the past seven years, third-party service provider ODW Logistics has provided logistics support for the Pelotonia Ride Weekend, a campaign to raise funds for cancer research at The Ohio State University’s Comprehensive Cancer Center–Arthur G. James Cancer Hospital and Richard J. Solove Research Institute. As in the past, ODW provided inventory management services and transportation for the riders’ bicycles at this year’s event. In all, some 7,000 riders and 3,000 volunteers participated in the ride weekend.
Photo courtesy of Dematic
For the past four years, automated solutions provider Dematic has helped support students pursuing careers in the STEM (science, technology, engineering, and mathematics) fields with its FIRST Scholarship program, conducted in partnership with the corporate nonprofit FIRST (For Inspiration and Recognition of Science and Technology). This year’s scholarship recipients include Aman Amjad of Brookfield, Wisconsin, and Lily Hoopes of Bonney Lake, Washington, who were each awarded $5,000 to support their post-secondary education. Dematic also awarded $1,000 scholarships to another 10 students.
Motive, an artificial intelligence (AI)-powered integrated operations platform, has launched an initiative with PGA Tour pro Jason Day to support the Navy SEAL Foundation (NSF). For every birdie Day makes on tour, Motive will make a contribution to the NSF, which provides support for warriors, veterans, and their families. Fans can contribute to the mission by purchasing a Jason Day Tour Edition hat at https://malbongolf.com/products/m-9189-blk-wht-black-motive-rope-hat.
MTS Logistics Inc., a New York-based freight forwarding and logistics company, raised more than $120,000 for autism awareness and acceptance at its 14th annual Bike Tour with MTS for Autism. All proceeds from the June event were donated to New Jersey-based nonprofit Spectrum Works, which provides job training and opportunities for young adults with autism.
The logistics process automation provider Vanderlande has agreed to acquire Siemens Logistics for $325 million, saying its specialty in providing value-added baggage and cargo handling and digital solutions for airport operations will complement Netherlands-based Vanderlande’s business in the warehousing, airports, and parcel sectors.
According to Vanderlande, the global logistics landscape is undergoing significant change, with increasing demand for efficient, automated systems. Vanderlande, which has a strong presence in airport logistics, said it recognizes the evolving trends in the sector and sees tremendous potential for sustained growth. With passenger travel on the rise and airports investing heavily in modernization, the long-term market outlook for airport automation is highly positive.
To meet that growing demand, the proposed transaction will significantly enhance customer value by providing accelerated access to advanced technologies, improving global presence for better local service, and creating further customer value through synergies in technology development, Vanderlande said.
In a statement, Nuremberg, Germany-based Siemens Logistics said that merging with Vanderlande would “have no operational impact on ongoing or new projects,” but that it would offer its current customers and employees significant development and value-add potential.
"As a distinguished provider of solutions for airport logistics, Siemens Logistics enjoys a first-class reputation in the baggage and air-cargo handling areas. Together with Vanderlande and our committed global teams, we look forward to bringing fresh impetus to the airport industry and to supporting our customers' business with future-oriented technologies," Michael Schneider, CEO of Siemens Logistics, said in a release.
I recently came across a report showing that 86% of CEOs around the world see resiliency problems in their supply chains, and that business leaders are spending more time than ever tackling supply chain-related challenges. Initially I was surprised, thinking that the lessons learned from the Covid-19 pandemic surely prepared industry leaders for just about anything, helping to bake risk and resiliency planning into corporate strategies for companies of all sizes.
But then I thought about the growing number of issues that can affect supply chains today—more frequent severe weather events, accelerating cybersecurity threats, and the tangle of emerging demands and regulations around decarbonization, to name just a few. The level of potential problems seems to be increasing at lightning speed, making it difficult, if not impossible, to plan for every imaginable scenario.
What is it Mike Tyson said? Everyone has a plan until they get punched in the mouth.
It has never been more important to be able to pivot and adjust to challenges that can throw you off your game. The report I referenced—the “2024 Supply Chain Barometer” from procurement, supply chain, and sustainability consulting firm Proxima—makes the case for just that. The company surveyed 3,000 CEOs from the United Kingdom, Europe, and the United States and found that the growing complexities in global supply chains necessitate a laser-sharp focus on this area of the business. One example: Rightshoring, which is the process of moving business operations to the best location, means companies are redesigning and reconfiguring their supply chains like never before. The study found that large numbers of CEOs are grappling with the various subsets of rightshoring: 44% said they are planning to or have already undertaken onshoring, for instance; 41% said they are planning to or have undertaken nearshoring; 41% said they are planning to or have undertaken friendshoring; and 35% said they are planning to or have undertaken offshoring.
But that’s not all. CEOs are also struggling to deal with the rise of artificial intelligence (AI) and its application to business processes, the potential for abuse and labor rights issues in their supply chains, and a growing number of barriers to their companies’ decarbonization efforts. For instance:
Nearly all of those surveyed (99%) said they are either using or considering the use of AI in their supply chains, with 82% saying they are planning new initiatives this year;
More than 60% said they are concerned about the potential for human or labor rights issues in their supply chains;
And virtually all (99%) said they face barriers to decarbonization, with 30% pointing to the complexity of the work required as the biggest barrier.
Those are big issues to contend with, so it’s no surprise that 96% of the CEOs Proxima surveyed said they are dedicating equal (41%) or more time (55%) to supply chain issues this year than last year. And changing economic conditions are adding to the complexity, according to the report.
“As inflation fell throughout last year, there were glimmers of markets stabilizing,” the authors wrote. “The reality, though, has been that global market dynamics are shifting. With no clear-set position for them to land in, CEOs must continue to navigate their organizations through an ever-changing landscape. Just 4% of CEOs foresee the amount of time spent on supply chain-related topics decreasing in the year ahead.”
Simon Geale, executive vice president and chief procurement officer at Proxima, added some perspective.
“It’s fair to say that the complexities of global supply chains continue to have CEOs around the world scratching their heads,” he wrote. “The results of this year’s Barometer show that business leaders are spending more and more time tackling supply chain challenges, reflecting the multiple challenges to address.”
Perhaps the extra focus on supply chain issues will help organizations improve their ability to roll with the punches and overcome resiliency challenges in the year ahead. Only time will tell.
Investing in artificial intelligence (AI) is a top priority for supply chain leaders as they develop their organization’s technology roadmap, according to data from research and consulting firm Gartner.
AI—including machine learning—and Generative AI (GenAI) ranked as the top two priorities for digital supply chain investments globally among more than 400 supply chain leaders surveyed earlier this year. But key differences apply regionally and by job responsibility, according to the research.
Twenty percent of the survey’s respondents said they are prioritizing investments in traditional AI—which analyzes data, identifies patterns, and makes predictions. Virtual assistants like Siri and Alexa are common examples. Slightly less (17%) said they are prioritizing investments in GenAI, which takes the process a step further by learning patterns and using them to generate text, images, and so forth. OpenAI’s ChatGPT is the most common example.
Despite that overall focus, AI lagged as a priority in Western Europe, where connected industry objectives remain paramount, according to Gartner. The survey also found that business-led roles are much less enthusiastic than their IT counterparts when it comes to prioritizing the technology.
“While enthusiasm for both traditional AI and GenAI remain high on an absolute level within supply chain, the prioritization varies greatly between different roles, geographies, and industries,” Michael Dominy, VP analyst in Gartner’s Supply Chain practice, said in a statement announcing the survey results. “European respondents were more likely to prioritize technologies that align with Industry 4.0 objectives, such as smart manufacturing. In addition to region differences, certain industries prioritize specific use cases, such as robotics or machine learning, which are currently viewed as more pragmatic investments than GenAI.”
The survey also found that:
Twenty-six percent of North American respondents identified AI, including machine learning, as their top priority, compared to 14% of Western Europeans.
Fourteen percent of Western European respondents identified robots in manufacturing as their top choice compared to just 1% of North American respondents.
Geographical variances generally correlated with industry-specific priorities; regions with a higher proportion of manufacturing respondents were less likely to select AI or GenAI as a top digital priority.
Digging deeper into job responsibilities, just 12% of respondents with business-focused roles indicated GenAI as a top priority, compared to 28% of IT roles. The data may indicate that GenAI use cases are perceived as less tangible and directly tied to core supply chain processes, according to Gartner.
“Business-led roles are traditionally more comfortable with prioritizing established technologies, and the survey data suggests that these business-led roles still question whether GenAI can deliver an adequate return on investment,” said Dominy. “However, multiple industries including retail, industrial manufacturers and high-tech manufacturers have already made GenAI their top investment priority.”
Regardless of the elected administration, the future likely holds significant changes for trade, taxes, and regulatory compliance. As a result, it’s crucial that U.S. businesses avoid making decisions contingent on election outcomes, and instead focus on resilience, agility, and growth, according to California-based Propel, which provides a product value management (PVM) platform for manufacturing, medical device, and consumer electronics industries.
“Now is not the time to wait for the dust to settle,” Ross Meyercord, CEO of Propel, said in a release. “Companies should approach this election cycle as an opportunity to thrive in the face of constant change by proactively investing in technology and talent that keeps them nimble. Businesses always need to be prepared for changing tariffs, taxes, or geopolitical tensions that lead to unexpected interruptions – that’s just the new normal.”
In Propel’s analysis, a Trump administration would bring a continuation of corporate tax cuts intended to bolster American manufacturing. However, Trump’s suggestion for spiraling tariffs may benefit certain industries, but would drive up costs for businesses reliant on global supply chains.
In contrast, a Harris administration would likely continue the current push for regulatory reforms that support sectors like AI, digital assets, and manufacturing while protecting consumer rights. Harris would also likely prioritize strategic investments in new technologies and provide tax incentives to promote growth in underserved areas.
And regardless of the new administration, the real challenge will come from a potentially divided Congress, which could impact everything from trade negotiations to tax policies, Propel said.
“The election outcome is less material for businesses,” Meyercord said. “What is important is quickly adapting to shifting policies or disruptions that address ‘what if’ scenarios and having the ability to pivot your strategy. A responsive manufacturing sector will have a significant impact on the broader economy, driving growth and favorably influencing GDP. One thing is clear: the only certainty is change.”