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The Rising Impact of Reverse Logistics on E-Commerce

By Elliot M. Kass

Small and midsize enterprises (SMEs) looking to grow their e-commerce revenues often run up against the challenges of reverse logistics.

The term “reverse logistics” refers to the return process, which—especially if it involves cross-border transactions—can get quite complex. Product returns are unavoidable for virtually any online retailer or supplier and providing a quick and efficient way to return and exchange purchased goods is an important way to please customers and win repeat business.

 

What is Reverse Logistics in E-Commerce?

 

“Functional and efficient e-commerce reverse logistics is imperative for businesses to be able to retain customers,” explains APS Fulfillment, a real-time inventory management solutions provider. “Loyal consumers have a much higher value than one-time customers, so it’s important to keep them coming back—having a hassle-free return process is one way to do this. Individuals will be more likely to choose your company versus competitors when you offer the safety net of being able to return products without too much of a fuss.”1

 

“Merchants will need to pay close attention to building return policies that are customer friendly,” agrees Paul Bates, vice president of the Information Products Group for BizRate.com. “Online buyers tell us every day that the key to winning their loyalty is the level and quality of customer support.”2

 

BizRate finds that:

 

  • Eighty-nine percent of online buyers say return policies influence their decision to shop with an e-retailer.
  • Nearly two-thirds of e-commerce shoppers also say they want to be able to return the products that they purchase by mail and exchange them for another item.
  • Restrictions on returns—such as the inability to receive credit on a credit or debit card or an overly brief time period for making the return—can drive potential customers away.

Among the main e-commerce logistics challenges for SMEs and others is that consumers return products for any number of reasons, including such commonplace occurrences as damaged, malfunctioning, and miss-delivered goods, or simply a change of heart on the part of the customer. Much of this activity is driven by industry competition. A report from the professional services and advisory firm KPMG finds that as many as 91 percent of returns are a direct result of retailers' efforts to attract new customers through offering “free” returns on unwanted purchases.3

 

Returns Are Soaring Along with Costs

 

But while reverse logistics volumes used to be insignificant for most retailers and manufacturers, product return volume has soared more recently. In the U.S., alone, the National Retail Federation and software solutions provider Appriss Retail put the value of merchandise returns at $369 billion—or roughly 10 percent of total sales.4

 

This makes high return rates the Achilles heel of e-commerce, where as many as one in three items bought online are intentionally purchased for comparison and testing purposes and then returned, according to the KPMG report. For apparel purchases the rate is even higher.

 

While the growth of e-commerce has yielded substantial growth for online retailers and manufacturers, margins have eroded as merchants struggle to contain the costs associated with product returns. Most industries face very high costs to process returns, since items typically need to be assessed for faults and damages, then repackaged and distributed to a location where they can be resold or reworked. For retailers alone, this is a $1.75 trillion industry expense.

 

Inefficient reverse logistics also means greater working capital expenses for retailers and manufacturers. As inventory becomes tied up in returns stockpiles, the overall cost becomes far more than just the direct costs of a poorly managed return process. And although many supply chains have been optimized to ensure that product deliveries meet customer expectations, few to none of these efforts have focused on return supply chain flows.

 

“For many organizations,” states KPMG, “reverse logistics may well be the biggest operational challenge that they face during the 21st century.”

 

Cross-Border Impact of Reverse Logistics

 

Cross-border transactions further complicate the picture. According to International Post Corporation’s (IPC’s) 2017 e-commerce shopper survey, a “simple and reliable returns process” and “free returns” ranked as the second and third most important delivery elements for cross-border shoppers—bested only by “clear information about delivery charges before purchase.”5 And the problem is growing. While 6 percent of those surveyed reported returning merchandise from cross-border transactions in 2017, that percentage rose to 8 percent in IPC’s 2018 survey.6

 

“Any e-commerce retailer shipping internationally who [fails to provide] accurate shipping and transaction costs at the point of purchase will experience lost sales,” notes Johannes Panzer, head of industry strategy for e-commerce at the Descartes Systems Group, a provider of logistics software.7

 

The online check-out process for goods to be delivered outside their customs territory should use the Harmonised Item Description and Coding System, an international system for classifying goods for customs purposes. This, Panzer writes, will allow online merchants to provide full and accurate shipping costs to their customers.

 

The same system, Panzer adds, should be adapted for reverse logistics, including the establishment of local distribution hubs for important international markets. “[There are] instances,” he writes, “of U.S. companies setting up a U.K. hub to fulfil European orders only to provide a U.S. returns address, creating a massive and untenable overhead for the business.”

The

Takeaway:

The impact of reverse logistics has become a major operational challenge for e-commerce businesses of all sizes. An inefficient returns process erodes profit margins and undermines customer satisfaction, while an efficient process helps attract new buyers and builds customer loyalty. Although the issues surrounding returns can be quite complex—especially as they relate to cross-border transactions—resolving them can provide a major boost to many online businesses.

Elliot M. Kass - The Author

The Author

Elliot M. Kass

Elliot Kass is a journalist who has covered global business and technology from New York, London, and San Francisco for more than 30 years.

Sources

1. “What is Reverse Logistics and Why is it Important in e-Commerce?” APS Fulfillment, Inc.; https://www.apsfulfillment.com/e-commerce-fulfillment/what-is-reverse-logistics-and-why-is-it-important-in-e-commerce/
2. “How to Set Up an E-Commerce Reverse Logistics Framework Strategy for the Industrial Space as Proven by the Retail World,” Cerasis; https://cerasis.com/e-commerce-reverse-logistics/
3. Future-proof your reverse logistics, KPMG; https://home.kpmg/content/dam/kpmg/id/pdf/2017/08/id-future-proof-reverse-logistics-2august.pdf
4. 2018 Consumer Returns in the Retail Industry, Appriss Retail; https://appriss.com/retail/wp-content/uploads/sites/4/2018/12/AR3018_2018-Customer-Returns-in-the-Retail-Industry_Digital.pdf
5. Cross-Border E-Commerce Shopper Survey 2017, International Post Corporation; https://www.posti.com/globalassets/news/2018-attachments/online-shopper-survey-2017-ipc.pdf
6. Cross-Border E-Commerce Shopper Survey 2018, International Post Corporation; https://www.ipc.be/services/markets-and-regulations/cross-border-shopper-survey
7. “How to make international ecommerce transparent,” HGV UK; https://www.hgvuk.com/how-to-make-international-ecommerce-transparent/

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