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Reverse supply chains and sustainability - making the business case for retail returns

Neil Raden Profile picture for user Neil Raden January 20, 2023
Summary:
The amount of waste involved in retail returns is staggering, yet it doesn't have to be that way. Sustainable retail returns can be a viable part of the circular economy - early adopters are proving why.

Circular economy - hand holding grass sustainability loop with choice of globes © BsWei - shutterstock
(© BsWei - shutterstock)

Reverse supply chains, in simple terms, involve the backward movement of goods through the supply chain. Returns management in the retail industry raises issues of sustainability, particularly the fashion industry, which represents an essential part of our economies, with a value of more than $1.7 trillion in 2022 and employing over 430 million people worldwide. 

Out of the global workforce of 3.4 billion people, approximately 430 million work in fashion, clothing, and textile production. The industry's growth was noticed by a report from McKinsey in 2016:  While people bought 60% more garments in 2014 than in 2000, they only kept the clothes for half as long

Returned inventory creates 9.6 billion pounds of landfill waste each year. It emits more than 27 million metric tons of carbon dioxide — the equivalent of a year's worth of driving for 5.9 million cars, according to a study by returns-management company Optoro. Apparel is a category notorious for high return rates. Last year, 12.2% of apparel products were returned, second only to auto parts (19.4%). According to the EPA, there's an estimated 11.3 million tons of textile waste in the US.

“The more we return, the more there is a possibility that clothing is not getting back on the shelves,” Whitney Cathcart, co-founder and CCO of virtual try-on company 3DLook, told Retail Brew. “If it doesn’t sell at the discounter, it winds up in the landfill.” 

A few startling facts from the National Retail Foundation and Appriss Retail, reported by CNBC

  • Retail returns jumped to an average of 16.6% in 2021 versus 10.6% in 2020, adding up to more than $761 billion of merchandise that retailers expect will return to stores and warehouses.
  • In 2022, NRF reported that $816 billion was returned, about 16%   of total retail spending in the US, $4.95 trillion.
  •  Unwanted purchases return to retailers' stores and warehouses and become a headache for companies that must decide whether they can resell those items, get them written off by the manufacturer, or take the loss. 
  • For every $1 billion in sales, the average retailer incurs $165 million in merchandise returns. 
  • In e-commerce alone, there were $213 billion of returns of $1.3 trillion in sales in 2022.

Reverse Supply Chains for Commercial Returns

 Reverse supply chain platforms perform five processes:

 ▪ Product acquisition—obtaining the used product from the user;

▪ Reverse logistics—transporting the products to a facility for inspecting, sorting, and disposition;

▪ Inspection and disposition—assessing the condition of the return and making the most profitable decision for reuse;

▪ Remanufacturing (or refurbishing—we use the terms remanufacturing and refurbishment interchangeably)—returning the product to original specifications;

▪ Marketing—creating secondary markets for the recovered products.

Advantages and disadvantages of reverse supply chains

When done correctly, reverse supply chains (a.k.a reverse logistics) improve customer satisfaction, reduce waste, create new revenue streams, save administrative costs, repairs, tech support, quality assurance, marketing, and disposal costs. Customer satisfaction can be boosted by providing free shipping for returned items, giving customers a full refund and not requiring sending back the original packaging. Offering economy shipping can reduce transportation costs, but some returns must be disposed of immediately, specifically those due to a safety recall and returns that contain confidential information require removal and deletion before disposal or recycling.

For organizations trying to reduce carbon emissions and waste, only some things that come back are ready for disposal. Some items must be disposed of properly, but many come back intact. Reusing these items keeps them out of landfill for longer. Recycling certain items, like electronics, has less of an environmental impact. Manufacturers can reduce the number of new materials they need by using green strategies in the reverse supply chain (see IKEA description below). Doing so makes it easier for them to follow government mandates and environmental regulations.

There are some challenges in a reverse supply chain. The flow of return orders can be complicated by multiple business partners and points of origin to get products back where they need to go. It is often challenging for manufacturers to keep track of the information between different parts of the company and to track orders. There is an active digital applications industry for complex situations that are very time-constrained, high volume and employ advanced analytical, scheduling and optimization capabilities.

Transitioning to circularity impacts everything we do - take the IKEA example:

IKEA is transforming into a circular business. They assessed more than 9,500 products to determine how well existing products in the IKEA offering fulfill circular product design principles:

“This is a huge change that impacts every aspect of what we do: from how we meet customers to which products and services we develop.”

To reach their ambitious goals, they set product development roadmaps outlining actions required to ensure all products are circular by 2030. In FY21, the average fulfillment rate was 76%, and the lowest-performing product rate was 36% (FY20: 28.6%), on track for the the 2030 goal:

The processes that help extend product and material life are reuse, refurbishment, remanufacturing, and recycling – the four circular loops. They will be enabled through a number of scalable solutions that we are testing and developing together with partners throughout our value chain, including our customers.

Offering circular ways to enable customers to prolong the lifespans of IKEA products, including refurbishment, buy-back activities, and providing more than 18 million spare parts already has impressive results:

  • 4.68 million of carbon emissions were prevented by reducing transportation and increasing efficiency in the reverse sup[ply chain.
  • 3.21 million pounds of waste diverted from landfill by giving retailers solutions to manage and resell inventory in the most efficient way
  • Their technology, on average, helped their retail clients keep 96% of returned and excess inventory out of a landfill.

A new (limited) twist: Amazon's Returnless Refund Policy?

Amazon’s policy, Amazon’s policy, “Refund without return,” a.k.a. “return-less resolution,” allows a buyer to receive a (partial or full) refund for a purchased item without returning the item. When requesting this special refund, sellers may issue a refund or replace the product with a new one from within the Seller Central returns dashboard. By offering returnless refunds, Amazon allows sellers to eliminate the labor to handle the inbound and outbound returns, running their stores more efficiently while ensuring Amazon projects its vision (to be) a customer-centric company.

Amazon manages the program with predefined constraints and rules. There are limits and checks in place to spot abuse and fraud. For example, there is a limit to the aggregate sum of refunds a buyer can claim: 10% of their total purchases. Of course, returnless refunds are optional for sellers. They can select the products eligible for returnless returns if they choose.

A final thought: if a buyer receives a full refund, the item may end up in a landfill anyway.

My take

The term “reverse supply chains" is a sub-subject of supply chain software and probably doesn’t, from an application point-of-view, need to be treated as separate. Complete supply chain solutions should be incorporated into the full stack of reverse supply chain offerings.

Optoro is frequently mentioned in the media as a leading solution provider. Its mention here is not an endorsement. Optoro describes its technology as "an end-to-end solution that automates the entire returns process and ensures a product is put back on the shelf at full price, sent to resale, wholesale, or even donated to charity, depending on its condition. Optoro’s clients include Ikea, American Eagle, and Best Buy.”

Previously regarded as an unwelcome cost of doing business, there is significant value in product returns. Poorly handled return streams and increasing returns volumes can quickly erode profits significantly, and their time sensitivity is central to designing their reverse supply chains. And finally, companies can gain visibility for their sustainability efforts and enhance customer satisfaction.

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