Top 5 challenges of reverse logistics

Managing returns has turned into a full-time job for any company that sells products. Where most goods used to be returned, inspected and processed at a company’s physical location, those returns are now coming back through any number of different channels. The UPS Store, Whole Foods, USPS mail and store returns are just some of the ways companies are now “taking back” unwanted orders.

The reverse flow of orders is increasing. According to the National Retail Federation (NRF), retailers alone took back $743 billion in merchandise last year, when the total return rate was 14.5%. Online orders are returned more frequently, with 17.6% of orders coming back (versus 10% for brick-and-mortar returns).

These are eye-opening statistics at a time when global e-commerce sales are expected to hit $6.3 trillion in 2024—up from $5.8 trillion last year. The trajectory is expected to continue and reach nearly $8 trillion by 2027. Return fraud is also becoming a bigger problem, with NRF reporting that there was $101 billion in overall losses due to fraud in 2023. For every $100 in returned merchandise, retailers lose $13.70 to return fraud.

Jason Gryszkowiec, senior managing director and partner at St. Onge Company, says returns management is especially challenging for companies that have largely focused on their forward logistics processes.

“We find that many companies lack a clear strategy and business model for their returns process as a whole,” Gryszkowiec says. “It’s something that they’ve kind of ‘bolted onto’ their other operations without really looking holistically to ensure that the entire program is purposeful and well-designed.”

Pushing through the roadblocks

E-commerce may have ushered in an era of convenience for customers, but it also put new pressures on companies that didn’t come into it with robust returns management processes in place.

With return rates and fraud both rising, here are five challenge areas that organizations are facing right now—and some expert advice on how to work through these roadblocks.

1. Not factoring in the whole picture.

The actual value of the returned merchandise is often the biggest concern for companies that take back nearly 18% of the orders they ship out the door. The labor, shipping, storage and other costs are usually left out, but they can contribute to substantial losses if not factored into the equation.

To avoid this trap, Gryszkowiec tells companies to assess all of the costs involved with the return—right down to how the process itself is impacting the customer experience.

“Learn where all of costs are within the system and then use that information to identify areas of improvement,” Gryszkowiec says. “Start with the network flows and shipping costs to see if any improvements can be made, then look inside of the four walls at the actual operational processes that receive, process and get returns back into inventory.”

Because most returns management processes were put in place and grown organically over time, taking a step back and conducting self-assessment can be pretty revealing.

For example, an otherwise streamlined receiving process may be throttled by “very lumpy inbound volume,” says Gryszkowiec, that can be evened out with a better thought-out transportation strategy. He also suggests putting a process in place for measuring returns management performance and using data to tweak your strategy as needed. Finally, make sure the entire system aligns with broader business objectives, and that it’s not just working in its own vacuum.

2. Staying laser focused on forward logistics.

Getting orders out the warehouse or DC door quickly and efficiently is a core mission for most companies, but the reverse supply chain also has to be factored into the equation. This is an area where many companies fall short.

“Forward networks are usually highly developed, but most organizations are still trying to figure out reverse logistics,” says Bill Thayer, founder and CEO at Fillogic.

“There’s been an increase in return volume,” Thayer continues, “but the networks to support it aren’t sufficient for getting the inventory back quickly enough, reducing fraud, and then ensuring that the returned merchandise doesn’t come back damaged and shop-worn.”

Even as returns rates climbed to new heights during the global pandemic, very few companies put money and effort into building out their reverse logistics processes. Some have put point solutions in place, but many of those applications don’t integrate with a company’s existing warehouse or transportation management system. These are failed approaches in a world where the typical consumer places an order assuming they’ll just return what they don’t want and/or use.

3. Viewing returns as an afterthought.

When returns were mostly received and processed by brick-and-mortar locations, gathering, restocking and/or discarding those items didn’t take too much of an effort. Now that returns and the problems that come along with them (namely, fraud) are front-and-center in the e-commerce world, companies can no longer afford to view them as an afterthought. And yet the process itself remains highly fragmented and, in many cases, ownerless.

Credit the seasonality of warehousing and distribution with creating some of the ownership issues. “Warehouse labor tends to be seasonal with a lot of turnover, which means companies have to train and retrain on the returns management process,” says Chuck Fuerst, chief commercial officer at ReverseLogix. “It’s no secret that returns are ugly and take time to process; many companies still look at them as a cost of doing business.”

One way to work through the ugliness of returns is by putting someone in charge of them. That individual can champion decisions, monitor progress and make suggestions that help the company get better control over the reverse supply chain.

“Instead of e-commerce owning a piece of the returns process and the warehouse owning another piece,” Fuerst says, “find someone who can look at it holistically and say, ‘Hey, this isn’t a great experience for our customer, and it’s also costing our business a lot of money.’”

4. Leaving packaging and transport up to chance.

The significant upticks in transportation and logistics costs over the past few years have forced companies to rethink their reverse supply chains. “It’s just too expensive to be running half-empty trucks down the road,” says Mike Hachtman, CEO at 48forty. “Profit margins have also gotten tighter for a lot of industries, so any value you can extract from these [returned] items is important, too.”

The problem is that many companies—retailers in particular—are more concerned with what’s happening at the front of the store, and not the back. Transport packaging, for example, tends to get lost in the shuffle when it comes to returns. Yet Hachtman says this is an area where organizations can either win or lose the battle to maintain profit margins on their orders.

He tells companies to factor in all of the cardboard, bubble wrap, shrink wrap, labor and even the pallets used to transport goods back to home base. And don’t forget to maximize your transportation cube on those return trips, particularly when moving a high volume of low-volume orders. “Make sure you’re picking up as much stuff as possible from any individual location,” says Hachtman.

5. Not taking a “circular” approach to returns processing.

The linear product consumption model (i.e., creation to disposal) is gradually being replaced by a more circular approach centered on reducing waste and keeping products for as long as possible. It also means treating returns not as liabilities but as potential resources. The e-commerce boom has amplified the need for circularity, with returns potentially generating a lot of waste and logistical challenges.

By focusing on the reuse, repair and/or recycling of returned goods, organizations can recover costs, reduce environmental impacts and enhance their brand reputations. This obviously requires a bit more effort on the company’s part, but the payoffs can be substantial.

One step in the right direction is to put returns collection and processing closer to the end customer, effectively cutting down on the amount of transportation and “touches” required to get those goods back into the pipeline (or, recycled, donated or repaired).

Implementing a circular returns strategy takes careful planning and investment. However, the long-term benefits can make it a worthwhile endeavor. One way to do it is by offloading these responsibilities to a third-party logistics (3PL) provider that’s focused on re-commerce and recycling.

“Everyone wants to get returns out of their own ecosystems right now,” Thayer says. “The right logistics partner can take it off your plate while also sticking to a more ‘circular’ approach to a growing problem that all companies are dealing with right now.”