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.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.