Acing the returns flow: How to balance costs and value in the last-mile of returned goods?

In our last-mile blog series, we explore trends and developments and explain the crucial elements that businesses encounter in shaping their last mile. This fourth blog of the series focuses on the reverse last-mile logistics. We explain the main challenges of companies that are dealing with the ever-increasing amount of returns and describe the levers to offer the right service to their customers, whilst keeping return costs low.

The challenging world of returns

Today, retailers are faced with a difficult trade-off between meeting consumer expectations and maintaining their profitability. Returns have been a long-time challenge for retailers, especially in e-commerce where return rates are significantly higher compared to brick-and-mortar return rates. The clothing industry stands out here, where the percentage of online orders returned can mount up to 50%. Even though costs for returns represent approximately 26% of the total delivery costs, many retailers choose to offer free returns and subsequently deal with the transport costs themselves. As a result, they incur additional costs for administrating, controlling, handling, repackaging, and even disposing the returned item. We see several levers that help companies balance the mentioned trade-off between reducing costs and increasing value. But how can a company influence these levers for an optimal outcome?

Offering the right policy

The most evident challenge/solution lies in reducing the overall return rate. Currently an average of 13% of online orders is returned. Improving product information quality online, attaching large labels to clothes, or even using AI techniques for clothes fitting are possible solutions for this. Unfortunately, this will not eliminate all returns, leading to companies having to determine an optimal return policy, which is always a trade-off between costs and customer loyalty. For example, focusing too much on cost reduction may lead to an unattractive return policy for customers, which could withhold them from ordering, leading to missed revenue. Easier said than done, it is important to know what your customers value in terms of return policy. Important aspects for customer retention are for example: the level of complexity and ambiguity of the policy itself, possibilities for returning items (e.g. home pick-up, drop-off points, store drop-off), and costs. On the other hand, focusing solely on endlessly facilitating customers in returning their purchases can increase sales in the short-term, but it might lead to a higher return percentage with associated costs in the long-term. As competition is fierce, it is key to offer such a return policy which keeps customers satisfied while maintaining return costs at an acceptable level. For this, carefully considering the benefits and concerns of offering an either lenient or strict policy as well as being aware of the offer of competitors is of extreme importance.

Transportation method of the return

Optimizing costs related to returns transport does not stand alone and should preferably be regarded in relation to fulfilment. Some retailers opt to fully outsource their return handling to 3PL-players, to not deal with the return hassle and focus more on their core business. Examples include distributors offering the collection of returns as a service or Dutch online grocery store Picnic, which picks up consumer returns for DHL and Wehkamp on their delivery routes, or Belgian clothing store JBC launching an application to crowdsource the delivery of returns to commuters that receive vouchers in exchange. The other possibility for retailers is to optimize their own internal transportation and fulfilment processes. Even here, there are trade-offs involved: reducing transport costs per return may have a negative impact on fulfilment costs and vice versa. The optimization of this process is especially challenging when it comes to returns that are outliers to the regular returns flow (broken products, seasonal products – which could be obsolete after (long handling of) return, etc.). This illustrates the necessity for optimizing the end-to-end return process instead of the individual functional processes.

Value creation from returns

Although returns are often experienced as negative, they do not always have to be disadvantageous. Gathering feedback on return reasons provides useful insights into potential improvements in your information provision, packaging, logistics, etc. Regarding the last mile, it could for instance occur that the product is damaged during transportation. Having relevant data regarding this can help improve the transportation. Besides that, return data can be leveraged in determining an improved strategic return policy and ensure loyal customers. An example of this is Wehkamp, that resells returned items at a lower price on their website, including detailed information on the product’s condition.

Balance, balance, balance

Knowing your customer well helps you in defining the right policy to encourage the customer to keep coming back, but also keep the return rate at an acceptable level. On the logistics side, it is important to reduce the impact of returns on cost, by preparing the return fulfilment process better or to outsource returns to a specialized 3PL. Concluding, the key is to find the right balance between retaining customers and the cost impact of returns.

In the next episode of our last-mile series, we will look at platformization. In the meantime, we would love to hear your views on last-mile returns and how to deal with the trade-off between costs and customer satisfaction. Contact us at: maurice.uiterweerd@capgemini.com or wendy.coster@capgemini.com

This blog is written in collaboration with Maurice Uiterweerd, Tom Snijders, Chloë Smid, Anna Sotiriadis, Emily Rouwendal and Elisa Vlaanderen.