In a previous post, consultant Fernando Chalréo addressed the issue of reverse logistics and costs associated with returns. He brought important data: at the end of 2022 in the US, for purchases made through the online channel, the volume of returns reached 18%, an index that in 2020 was only 11%. To deal with these growing volumes of returns, managers will increasingly need to invest and structure the reverse logistics of their companies. In this context, this post aims to address some of the main challenges that companies in the Fashion sector face when discussing the subject of reverse logistics.
Figure 1 – Return Packages Source: website blog www.smartturn.com
Although e-commerce still represents a modest portion of the volume sold in the Fashion sector – according to data from NiesenIQ Ebit, the online channel represented 4% of the GMV sold in 2022 – the volume of returns increases when we add the physical channel, that is, the stores that consumers visit in the streets or malls. In order to supply the points of sale in the physical channel, the industry has, in general, well-structured logistics: a company in the fashion segment that is an ILOS partner revealed that its lead time in the distribution of products to retailers it is around 9 days. As for the return flow, this lead time goes up to 25 days. For the fashion sector this is critical, as with ever shorter portfolio change cycles, a lead time a return period of almost 1 month can make it unfeasible to return the item to the shelves, which would allow a new sale to another customer, making the returned products obsolete. To understand why this long lead time return, we need to discuss some aspects about transport and storage operations.
In transport, there are some points that explain the difficulties of operating the reverse. One of them is related to the TMS systems used by fashion companies, which are often inefficient in routing distribution along with return collections, which hinders transport optimization. In addition, the activities of distribution and return collection are very different: the reverse requires couriers, for example, to check invoices with returned products, an activity for which they are not usually trained. And this fiscal aspect generates a relevant impact on the return operation: for 15% of the volume of returns from this fashion company that is an ILOS partner, there are problems with invoices that make it difficult, or even prevent, the processing of returned packages.
In storage, reverse challenges are also notable: companies need to create dedicated spaces for receiving return packages, increasing the cost of space. In addition, it is necessary to create a specific process to separate the packages, distinguishing those whose reason for return was commercial, that is, the consumer just did not like the piece and, therefore, it could be made available to be sold again, from those packages that have a defect in the product. In these cases, it is still necessary to separate the parts manufactured in-house from those produced by third parties. Outsourced companies still need to be separated by supplier, so that the return can be made to each manufacturer. And in some cases, the high number of suppliers can generate even greater complexity in the return processes.
As can be seen, transport and storage operations have their challenges to operate in reverse. And it is very common for companies, in general, to use logistics operators to carry out these activities. The selection of LOs should consider, among many aspects, the average volumes of returns, the cost and the level of service offered. There are logistics operators, for example, that offer both services (distribution and reverse), with an additional fee for the collection service. It is also possible to contract exclusive carriers to carry out reverse logistics, however, depending on the volumes, the transport will be very fractionated, which further increases the cost of the operation. And if the solution to reduce transport costs is to wait for the consolidation of shipments of return products, the consequence will be an increase in storage costs, in addition to an increase in lead time from reverse.
With the continuous growth of e-commerce and the facilities created so that consumers can return their products – which are no longer limited to sending them by Post Office – it will be increasingly important for companies to structure their operations and their contracts with logistics operators well. It is necessary to carefully evaluate all aspects of the operation itself, the volumes returned and the desired SLAs. Companies will also need to define good indicators, have adequate technology and tax processes and always count on the support and direction of the company's senior executives.
Henry Alvarenga
He has been working in consultancy for 7 years, with experience in more than 20 Demand Planning and S&OP projects, Logistics Network Design, Logistics Master Plan, Inventory Policies, Operations Strategy and Market Intelligence
