The Importance of Reverse Logistics: Reducing Costs and Improving Sustainability
The Importance of Reverse Logistics: Reducing Costs and Improving Sustainability
What is Reverse Logistics?
Reverse logistics is the sequence of activities required to move a product from the point of consumption back to the point of origin for returns, repairs, remanufacture or recycling. It is also key to creating a sustainable cycle that maximises value recovery and minimises waste. In e-commerce, where returns can be as high as 30%, an efficient reverse logistics strategy is not just a nice-to-have, it is a critical component of customer satisfaction and operational efficiency.The Pandemic, Brexit and their ongoing impact on reverse logistics
The Pandemic undeniably accelerated the shift to online shopping, resulting in a surge of e-commerce sales and inevitably, returns. Retailers were forced to quickly, re-evaluate their reverse logistics frameworks to handle increased volumes while maintaining customer satisfaction. The pandemic also highlighted the importance of supply chain resilience as disruptions lead to significant delays, increased costs and, ultimately, customer dissatisfaction.
Operating an e-commerce business in a post-Brexit trade environment has caught many retailers out. We have seen retailers regularly paying double customs duty and import VAT charges on returned goods which directly erodes their profit margins. Border compliance when moving so many individual parcels is also a challenge leading to difficulties in operating customs duty reliefs using their customs brokers and fast parcel operators.
What are the logistics challenges facing e-commerce retailers?
Consumer Behaviour and Expectations:
Consumers expect a seamless shopping experience which includes easy product returns. A clear, hassle-free return policy has become a standard that can significantly improve customer loyalty. In fact, studies show that over 60% of online shoppers review a retailer's return policy before making a purchase, and that a negative returns experience can deter future purchases.
Unfortunately for retailers, consumers are also becoming increasingly comfortable with exploiting companies' return policies. Behaviours that are costing businesses include 'bracketing', purchasing clothing in multiple sizes or colourways with the intention of returning at least one of the items, and 'wardrobing', buying an item to wear or use once and then return. Returns fraud, such as lying about the reason for a return to get free postage, or even a full refund, has also increased in recent years. These practices eat into the margins of e-commerce traders who have already incurred costs through picking, packing and shipping orders.
Customer Service & Communication in reverse logistics
Even in the digital age, the role of customer service teams is still pivotal to the customer experience. AI chatbots and automated ‘help’ tools designed to answer frequently asked questions are increasingly common as the first line of contact for customers. These tools can be highly effective at providing immediate responses to common queries. Unfortunately, they can also be a source of frustration for customers who have a non-standard question or simply want to interact with a human.
Reaching a human representative can require navigating through a maze of automated questions and option. While this is designed to reduce the workload of service teams, it is frustrating for customers.
Clear communication is the cornerstone of an effective returns strategy. It should provide customers with straightforward, easy-to-understand instructions that help make the returns process frictionless. A high level of transparency enhances the customer experience and streamlines the returns process by reducing errors.
Warehouse workload impact
For distribution centres and warehouses, returns are an operational headache and often one of the least efficient and most costly tasks in the entire operation, in terms of throughput and cost per unit. Each returned item will likely undergo inspection, refurbishment, repackaging, and restocking. These tasks are labour-intensive and entail incur significant costs. Efficient management of this workload is essential to maintain profitability in an industry where margins are typically low.
Packaging
Packaging is a key, but often overlooked, part of the returns process and can be the reason that a return is required in the first place. Retailers must balance cost, convenience and increasingly sustainability.
If a product is well packed, then it is less likely to be damaged in transit and require a return. Also, if a return is required, encouraging customers to reuse original packaging not only cuts costs but also aligns with the eco-conscious values of growing numbers of consumers.
How can e-commerce meet the demands of consumers?
Third party Logistics (3PL)
Some businesses collaborate with 3PL providers to refine their returns process. Outsourcing, part or all of, the reverse logistics process can be an effective way to reduce costs, optimise warehouse space and free up internal teams to focus on their core roles.
Technological Advancements in Reverse Logistics:
The role of technology is ever increasing in all aspects of supply chain management and the complexities of managing returns and reverse logistics is no different. Data analytics are providing deep insights into return patterns. This intelligence enables companies to refine their returns policies and spot customers who might be exploiting loopholes.
Analytics also enable businesses to proactively tackle issues affecting customers and enhance product quality. Innovations such as AI and automation, including ‘chatbots’, are streamlining processes from initiating returns to restocking or recycling products. These technological advances not only enhance efficiency but also promote a more sustainable reverse logistics.
Enhanced data recording and reporting can increase customs border compliance and unlock potential saving opportunities to avoid double duty costs when reimporting returned goods across a border. Many 3PL’s are marketing their software as enabling the operation of returned goods relief for customs purposes, so if your returns are reimported into a country from which they were originally distributed having a system and clear data trails that support the correct submission of custom declaration avoiding double duty hits is key.
Lockers & drop off point
Return drop points and lockers, which are becoming increasingly popular for customers are another example of businesses adapting to modern consumer requirements. Companies like Vinted are leading the way with their locker return model that allows customers to return items at their convenience without the need to interact with staff or adhere to store hours. This hassle-free approach not only simplifies the process for the customer but also streamlines the handling of returns for retailers. By using technology and strategic partnerships, these businesses are creating a seamless ecosystem that caters to the on-the-go lifestyle of consumers.
Charging for returns and other ways to challenge customer behaviour?
More retailers are introducing charges for customers who send back unwanted items in a bold attempt to manage the high costs associated with returns and change customer behaviour. For instance, fashion retailer Zara, who in 2022 implemented a small fee, subtracted from the refund value, for returns made through third-party drop-off points such as the Post Office.
This may seem counterintuitive in a consumer-driven market; however, feedback suggests that it could lead to more mindful purchasing, reduce the volume of returns and the associated costs. It is a delicate balance, but when implemented thoughtfully these charges can help retailers manage the reverse logistics burden without significantly deterring customers.
Best Practices for E-commerce Reverse Logistics
For e-commerce businesses looking to improve their reverse logistics, transparency is key. Clear communication about return policies and procedures can prevent customer frustration. Developing the right policies that balance customer satisfaction with profitability and cannot be easily exploited is challenging.
However, data analytics can provide the insights needed to make these decisions and effectively reduce the overall rate of returns. Technology can also identify trends and areas for improvement. Finally, by investing in better materials and manufacturing processes, businesses can reduce the number of returns and repairs.
The Future of Reverse Logistics in E-commerce:
As consumer expectations become more sophisticated, the future of reverse logistics will be shaped by the need for efficiency.
Sustainability will also be at the forefront, with businesses exploring eco-friendly packaging and green initiatives to minimise the environmental impact of returns. As the e-commerce sector continues to grow, businesses must prioritise their reverse logistics strategies to meet and exceed consumer demands, drive sustainability and tax efficiency to maintain a competitive edge.
How BDO can help
We apply the practical experience and knowledge gained from working in industry and developing successful returns operations with optimised tax efficiency to help clients improve their bottom line. We have designed, configured, integrated, implemented warehouse and transport operations to deliver value-adding, tax efficient, agile operations in every market sector.
Have you got a question? Need some professional advice? Contact Martin Hodgkins for more information and to discuss how we can help you with your reverse logistics.