E-commerce growth forces firms to think more and more about vital supply chain trend: Reverse logistics, the process of dealing with returns

One-click online orders and one-day deliveries have made e-commerce one of most demanding trends in logistics.

It could also be one of the most profitable. There’s only one problem. …

Shoes can be one size too small.

And shoes are just one of the many e-commerce products that have to reverse course on the supply chain on a regular basis. Anytime online orders are booming — as they have been during the pandemic’s lockdown — it’s worth keeping in mind that the trend goes both ways.

Every additional e-commerce product going out the doors of warehouses has the potential to end up right back where it came from. That means one thing: There’s a segment of the industry, what’s referred to as reverse logistics, that has to keep up with the growth of online shopping.

Michael Rofman. (Mazars USA)

Michael Rofman, leader of the New Jersey Transportation and Logistics Group at Mazars USA, said the sector is doing a lot of that growing right now.

“The fact that e-commerce has accelerating growth targets and is exceeding them this year indicates that it’s only natural for reverse logistics to continue a similar trend,” he said. “Retailers need to expect a minimum of 20% of online purchases to be returns. And that can creep upwards in today’s e-commerce environment.”

Various projections and logistics industry reports put that number as high as 30% before the pandemic, with even higher totals during the approaching holiday season.

The National Retail Federation, the world’s largest retail trade association, reported that more than half of shoppers return holiday items within a month after receiving them, and about 80% did those returns and exchanges in stores — likely a less-popular option during what some health officials predict will be a fall and winter menaced by COVID-19 cases.

Rofman said the logistics industry is already contending with a likelihood of more stockouts like those that stripped shelves when news of the pandemic first went viral. A lot of the industry’s focus has had to remain on ensuring the path from the warehouse to consumers is ready for a shopping event like Black Friday.

“We have one client running an e-commerce fulfillment center that has retailers telling them that the early holiday shopping season needs to start now, because they’re already predicting stockouts when the normal holiday shopping season starts,” he said. “They’re already at peaks right now.”

During, but especially after the holidays, Rofman expects the unprecedented use of e-commerce options by consumers will lead to an unprecedented level of reverse logistics activity.

With the pandemic keeping a lot of shoppers sequestered indoors, the e-commerce component of the logistics sector has already grown by a least a third nationally, according to a new report by supply chain consultancy Armstrong & Associates.

That report also highlighted that the cost of logistics is rising — a big reason being that e-commerce merchandise is returned up to three times more frequently than products purchased in store. Returns that cost nothing for consumers are the norm, so the cost of reverse logistics has had to be priced completely into the sales side of an e-commerce transaction.

Mike McGuinness. (File photo)

Even with the prevalence of e-commerce returns, most supply chains are still physically designed for moving products out — not in. But Mike McGuinness, CEO of the New Jersey chapter of NAIOP, the Commercial Real Estate Development Association, said that’s having to change over time.

“There’s so many more e-commerce transitions happening now, and so many more returns,” he said. “It’s a big, big consideration for any company now involved in e-commerce. And they often do have to figure that one out still. How do we take returns? Where do they go?”

Counterintuitive as it may seem, sometimes new products are simply disposed of at the end of their path back to a retailer, Rofman said.

“There’s product that comes back to facilities that doesn’t make sense to rework and reprocess, because it’s a low-dollar item,” he said. “In those cases, the handling, reprocessing and packaging would cost more than the actual reselling price would be.”

Other times, products are reused in other ways at their final destination. Some manufacturers also encourage customers to send back materials that can be recycled or reused. That’s all part of reverse logistics, too.

There’s an entire organization, the Reverse Logistics Association, now dedicated to promoting the best practices for logistics companies trying to figure out what to do with returns. A lot of the advice they offer comes down to technology.

“You’ll never eliminate returns, so you just have to be able to minimize the effect of them on the supply chain,” Rofman said. “That requires technology. You have to do a root-cause analysis to figure out why products are being returned and look at trends in the data to figure out how to better prepare for a product being returned.”

Monitoring returns with technology can help retailers decide what exact repairs or processing a product might need when it’s in their hands again, and whether it’s worth scrapping the product. It can also tell retailers where along the supply chain it is.

Not every retailer has reverse logistics experts working for them or these data-driven tools at the ready. But, given that one shoe size and another is all that it might take to determine profit margins, Rofman expects more of them to in the future.

“A lot of people get information and data, but still don’t know how to utilize it,” he said. “I think technology is really critical in allowing businesses to make the right decisions and make the right impact on reverse logistics. This is more important than ever, because this is a supply chain all on its own.”