Returns can cut deep into the margins of retailers, wholesalers, and consumer products (CP) companies. According to iForce estimates, they make up 25% in clothes and 12% in electronics (as a proportion of sales). The necessary move into the omnichannel seems to further increase returns, as consumers get increasingly used to online shopping and returning.
For some online shops, returns seem to be part of the business model. Fashion stores, for example, manage 20-40% return rates. Reselling returns may help to reduce these losses, but as reselling prices vary largely — between 10% and 25% for fashion and 60% for electronics — handling returns is logistically complicated and cost-intensive part of business.
Part of a bigger problem
But returns are only part of a complex retail problem. A research study by IHL Group and OrderDynamics estimated the volume of overstocks, out-of-stocks, and returns worldwide at an impressive $ 1.7 trillion for 2014, with nearly 40% (roughly $600 billion) 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, while following the old efficiency patterns might result in significant short-term gains, it might be too short a jump for best-class businesses.
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 life cycles, and a new and demanding middle class, companies need 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.
This is unlikely to happen, but even if it did, such high demand would increase the pressure on resources, resulting in high volatility of commodities. We can already observe rising commodity process, and if some resources were not already critical to your business, they would quickly become so.
Saving precious and costly raw materials in the sales process will be as important as optimizing resources in the design and production process. We estimate that the global resource potential between 2015 and 2030 totals 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 billion of those returns are food returns and are largely lost — and $500 billion 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 billion 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, wholesalers, and CP companies, but for a more sustainable economy overall.
Three steps to improve inventory efficiency and optimize resources
We see the following initial steps as an efficient and proven way to improve return savings as well as adapt to an increasingly resource-competitive world.
- 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 more efficiently.
- 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 simplifying the sharing knowledge and data in a network of partners, companies can improve their product stewardship. They can also 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, wholesalers, and CP companies.
How can simplification help boost your business’s bottom line? See Business Simplification 2015: The Unmet Strategic Imperative.