Returns can cut deep into the margins of retailer, wholesaler and CP companies. Estimates are that they make up 25% in clothes and 12% in electronics (as a proportion of sales), according to iForce. The necessary move into the omnichannel seems to increase the number of returns even more, as consumers get increasingly used to shop and return online. For some online shops returns seem to be part of the business model, fashion online stores e.g. have to manage 20-40% return rates. Reselling returns may help to reduce the losses but as reselling prices vary largely between 10% to 25% for fashion and 60% for electronics, handling of returns is any case a logistics and cost intensive business.
Returns are part of a bigger problem
But returns are only part of a complex retail problem: a research study by IHL Group/OrderDynamics estimated the volume of overstocks, out-of-stocks and returns worldwide at an impressive $ 1.7 trn for 2014, with nearly 40% or roughly $600 million coming from returns alone. The inefficiencies in the inventory process are mainly due to poor internal processes, handling problems by staff, data disconnects and supplier issues, according to the same report. With that much at stake, retailers, wholesalers and CP companies already have enough reasons to start improving their supply-chains and order and demand processes. However, following the old efficiency patterns might result in significant short term gains but it might be a too short jump for best-class businesses.
A Resource Problem Ahead
Inventory issues could be tackled on a grander scale, if companies view them as part of a bigger resource problem they need to solve anyway. Driven by an increasing number of product variants, shortening product lifecycles and a new and demanding middle class, companies have to face an increasingly competitive environment. To keep up with the increasing demand and the resulting need for raw materials, the global economy would need to roughly double the supply of resources such as water, energy, food, metals and others by 2030. It is doubtful that this can be done but even then, this high demand will increase the pressure on resources resulting in a high volatility of commodities. We can already observe rising commodity process and if some resources are not already critical in your business, they will become a critical business factor very soon.
Saving precious and costly raw materials in the sales process will be as important as to optimize resources in the design and production process. We estimate that the global resource potential between 2015 and 2030 sums up to $33 trillion (see chart). If we take the roughly $600 billion of returns in 2014 for global trade from above and estimate – using data from WTO and UNEP – that approximately $100 bn of those returns are food returns – and largely lost – and $500 are returns from other goods with reselling rates between 10-25%, then the loss on non-food returns alone would sum up to roughly $400 bn annually. Put into a future perspective, this loss would equal nearly 20% of our global resource potential between 2015 and 2030. This clearly shows that returns alone have a huge potential not only for retailers, wholesaler and CP companies but for a more sustainable economy overall.
A Problem Solution
We think that the following initial steps are an efficient and proven way forward, to not only improve return savings but to adopt to a resource competitive world in addition.
Three Initial Steps to Improve Inventory Efficiency and Optimize Resources:
- By fully digitizing the assets, companies can close any gaps between back-end and front-end and simplify order fulfillment as well as asset and supply management. Overstocks, out-of-stocks and returns can be limited to a minimum and managed faster and more efficient
- CP companies and retailers with their own product lines should build a product-related resource repository to identify high volatility and cost intensive materials. Closely managing and designing out those materials will reduce the risks of dependencies, shortages and price spikes in their products.
- By extending the resource repository along the supply-chain and simplify the sharing knowledge and data in a network of partners, companies can improve their product stewardship. This way they can act more quickly to problems, manage returns and resell faster and improve their resource and waste management
Managing inventory processes should be embedded in a broader approach to significantly optimize the use of resources and improve the competitiveness of retailers, wholesaler and CP companies.
This article first appeared on SAP Digitalist