Reverse Logistics: The Hidden Cost of E-Commerce

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June 9, 2016

reverse logisticsWith increasing online and mobile commerce, returns, and the amount of capital spent on reverse logistics strategies, are an unmistakable and a potentially growing friction point in the supply chain.

A fall 2015 report from the National Retail Federation cites that 49 percent of retailers offer free return shipping. Earlier this year, a Sedlak Management Consultant blog cited a Gartner Inc. survey that revealed 59 percent of retailers allow consumers to return products via any buying channel and 82 percent of respondents expect to add the option to return via any channel in the next year.

How companies handle returns has a meaningful impact on the warehouse & distribution real estate market. From the need for dedicated returns processing space, to restocking, or the need to outsource some or all of this capacity to a third party, reverse logistics brings a unique set of opportunities and risks to the industrial real estate sector.

Some variables for companies to consider:

  • Managing returns in-house: How are they processed, from where (a store or dedicated logistics facility, or a portion of one) – and are returned goods re-stocked into existing inventory? How will this impact future space needs and facility utilization?
  • Outsourcing the returns process: For many companies, using a third party logistics provider (3PL) to handle returns provides flexibility within the supply chain, mitigates costs and helps capitalize on external efficiencies. From the industrial real estate perspective the outsourcing of the returns process does not eliminate the need for space, it just shifts it to a different occupier. Outsourcing reverse logistics could provide a future boost to space demands from 3PL’s that offer these services.
  • The costs of shipping returns: How companies bear the costs of returns (free or with a re-stocking fee), the frequency, the impact on valuable customer loyalty, and the final destination of a returned product is a complex supply chain issue and varies by retailer. Companies must consider how online purchases that are returned to a physical store are accounted for. If the costs of re-stocking or re-selling returns is too high, is a wholesaler or liquidator eventually a potential option to unload returned or unwanted inventory?

According to the National Retail Federation, merchandise returns in the United States were valued at $260.5 billion in 2015, roughly 8 percent of total sales. It has been reported that one-third of all products purchased online are returned, the numbers are even higher in apparel. This will continue to exert cost pressures on sellers if e-commerce continues to grow by double digits.

Further growth in e-commerce is inevitable, and as a result, growth in returns. The need for logistics space to facilitate returns and reverse logistics is expected to increase as well. As competitiveness in the global omnichannel marketplace grows, companies that create efficiencies for returns in their end-to-end supply chain and leverage their physical distribution network to help reduce costs will benefit the most.

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