Three things every CFO should know about reverse logistics
Baris Oran, CFO | August 17, 2022
Online sales have been growing rapidly since the market emerged in the mid-1990s. In 2020, at the onset of the Covid pandemic, the growth of ecommerce began accelerating because many of the traditional in‑person avenues of commerce were cut off.
The growth in returns — purchases returned by consumers — followed a similar trajectory.
In the early years of ecommerce, returns were regarded as a nuisance. Returns were a disposal problem and a barely noticeable drag on margins.
Today, the story is different. For example, Happy Returns estimates that ecommerce, which is taking a growing slice of all retail sales, experiences average return rates of 40% of all purchases. Before joining GXO, I worked in retail, so I know first-hand that returns are a major pain point. Businesses eat the costs of repackaging, shipping, receiving and refunding. Consumers bear the frustration of a failed product experience, repackaging and shipping an item and waiting for a refund. Ecommerce businesses can’t meet consumers’ growing demand for low prices at the same time they’re effectively discarding two of every five products sold. And consumers won’t tolerate a poor returns experience.
The solution is reverse logistics. Reverse logistics is the term for handling returns — receiving, processing and issuing credits for them and then either returning them to inventory, donating them or discarding them. Reverse logistics can help companies lower their costs, improve their customer satisfaction and achieve their ESG goals. If your business has returns, it needs reverse logistics.
Handling returns in‑house isn’t easy or inexpensive. According to Optoro, it requires an average of 20% more employees and warehouse space than handling outbound, cuts up to a third from margins and, in the U.S. alone, produces 5 billion tons of landfill waste each year.
What are returns costing your business in added labor, warehouse space, systems, transportation and waste? The Reverse Logistics Association has created a spreadsheet you can use to generate an estimate specific to your business. But according to our own case studies, companies that are unable to deal effectively with returns can incur very significant costs — about a 5% drag on sales or a 10% reduction to profit margins.
You can minimize those costs and maximize your assets by outsourcing reverse logistics to an experienced third-party logistics provider. My company’s work with a global sportswear and athletic equipment powerhouse is a prime example. We designed and implemented a system that can process millions of returned purchases each year. Our customer can operate with lower inventory because returns are processed faster, and processing returns faster means high-margin, high-value products spend less time out of circulation with their value eroding.
In addition to improving throughput and generating cost savings, outsourcing reverse logistics will allow you to focus your resources and expertise on the things that you excel at.
Raise customer satisfaction
Throughout the pandemic, consumer expectations have risen steadily. Consumers want two-day or one-day or even same-day shipping, they want order accuracy and they want an easy return process, all while paying low prices.
For returns, ecommerce businesses have to confront the “carrot” and “stick” of rising consumer expectations:
- The carrot: 97% of consumers would purchase goods from a retailer again after a positive returns experience (CBRE).
- The stick: 84% of online shoppers would not shop with a retailer again after a bad returns experience (Klarna).
By speeding the picking and packing of orders, improving accuracy and optimizing the return process, a reverse logistics provider can help businesses meet consumers’ rising expectations for receiving purchases and their credits for returns faster. In some cases where we’ve accelerated the returns process, we’ve seen a 25% boost to our customers’ net promoter scores.
Tackle ESG goals
At least two statistics from CNBC on global ecommerce are eye-opening: About 35% of all online purchases are returned, and about one-quarter of those are sent to landfills.
This creates an enormous burden on our waste stream. More than that, sending these returns to landfills represents approximately 8% of all carbon emissions from ecommerce companies’ supply chains, according to the same study from CNBC.
A good reverse logistics program can reduce these impacts. By rethinking reverse logistics, my own company is able to help get products back out to consumers, minimize waste and reduce Greenhouse Gas emissions. Recall the numbers above (35% of purchases returned; 25% of those sent to landfills), and then consider that when GXO manages reverse logistics, data from our customers show that 96% of returned items are resold, about 3% go to charities and less than 1% are recycled.
Reverse course with reverse logistics
Although the rate of growth in ecommerce has slowed recently, though probably only temporarily, most analysts predict strong overall growth for at least the next several years. eMarketer, for example, projects double-digit sales growth for ecommerce through 2025, raising its share of all retail sales to approximately 25%.
The rise in sales almost certainly will be followed by a commensurate increase in returns. For companies without a good reverse logistics process, the growth in returns will have a significant negative impact on costs, customer satisfaction and ESG performance.
I’m the Chief Financial Officer of a company that offers industry-leading reverse logistics solutions. But if I were the CFO of an ecommerce company, I’d be seeking a partnership with a leading reverse logistics provider. That partnership would be the most expeditious and cost-effective relief from my expanding returns pain point.