How Reverse Logistics are Turning E-commerce Green

Innovation | Bogdan Tindeche |
29 November 2022

How would you rate the market prospects of a company that throws hundreds of thousands of new, top-condition items into a furnace every week? You probably wouldn’t give them long before the liquidators move in.

Yet the largest retail brands incinerate masses of usable stock each day. 5.8 billion lbs each year are consigned to landfills. Anyone remotely environmentally-minded will recoil in horror at the scale of this waste.

The culprit isn’t an outbreak of latent pyromania among chief executives. Rather, it’s the vast quantities of items that modern customers purchase and then return. The process of handling these returns backwards across the supply chain, from the consumer to the manufacturer, is known as reverse logistics.

WHAT ARE REVERSE LOGISTICS?

As an umbrella term, reverse logistics cover all points in the backwards flow of goods, from the end customer to the starting point. These include repair, refurbishment, reuse, recycling, storage, warranty management, haulage and more.

This complex chain of events is largely invisible to the consumer. But any e-commerce retailer will recognise it as a major headache.

Customers often assume that when they send back a new item, it will end up on the shelf from which it started, ready to be sold on to the next customer. This is seldom the case.

Despite the name, reverse logistics are rarely a mirror image of the original delivery process. Items may be handled by different companies and end up in very different destinations. Some may be auctioned off or simply disposed of.

THE RETURNS PROBLEM IN NUMBERS

As e-commerce has grown and grown, so too has the sheer volume of goods being returned.

Online shoppers are two to three times more likely to return goods than those who buy in-store. E-commerce has grown as a share of global retail from 15% in 2019 to 22% today. Between early 2020 and January 2021, UPS reported that the number of returned goods in the US increased by 23% - a startlingly close corresponding rise.

Let's put these numbers into perspective. It's predicted that the number of units returned in 2022 will be four times the size of all e-commerce sales in 2008.

Estimates of the total overall return rate for e-commerce range between 20% and 30% of sales. In the US, clothing, footwear and consumer electronics account for 41% of these returns.

As customers have grown accustomed to returning goods, a whole industry of its own has shot up to cater to them. By 2028, the reverse logistics market is projected to reach a value of $958.3 billion. This network of startups provides a spectrum of services from warehousing, robotics and recycling.

WHAT ARE THE DOWNSIDES FOR BUSINESSES?

The boom in returns is certainly lucrative for those companies set up to facilitate it. But for retailers, it’s a different story.

Firstly, handling returns is expensive. Having already paid a premium for the last mile of the outward delivery journey, they must pay it over again for the first mile of the reverse process. Contracts need signing with logistics companies and warehouses to shepherd goods backwards. Employees must be paid to assess items for potential damage. Clothes will need dry cleaning. In some cases, you’ll have to call in waste management services.

These costs mount to wipe 59% off the average purchase's profits. The cumulative effect? Returns now eat up a third of retailers’ revenues. In the earlier days of e-commerce, this may have been a manageable tradeoff to overcome people’s anxieties about buying online. But with digital retail now normalised, something will have to give.

WHAT ARE THE WIDER DOWNSIDES?

The returns economy carries a distressingly large environmental toll. With most profits erased, retailers are often inclined to write off and dispose of the returned item, regardless of whether it’s usable or not.

In some cases, this might be through auctions. But much of the time, these items go straight to the landfill or the incinerator. What a waste, right?

Even the methods used to mitigate the return problem can have an environmental cost. To prevent damage, many retailers ensconce their objects in mountains of packaging. This takes precious resources to manufacture and is swiftly discarded by the consumer.

HOW RETAILERS CAN PREVENT RETURNS

It would be better for businesses and society at large if fewer items were returned in the first place. Yet customers will increasingly reject businesses that don’t offer lenient returns policies.

How can businesses keep a competitive edge while dissuading consumers from sending things back?

A stingy returns policy is a non-starter; people will simply not buy from you. It's reasonable to take a stricter line against fraudulent practices like wardrobing – ordering a piece of clothing to wear once and then return. But going any further will hamper your sales.

A more legitimate customer practice is bracketing. The customer will order the same clothing item in several different sizes. They try them all on to find the one that fits, and send the rest back.

This is a deeply frustrating phenomenon for retailers. But it’s one that can be mitigated through closer attention to onsite listings.

A primary reason for bracketing is wildly inconsistent sizing across different outlets. A shopper might fit a size 10 in one store, but a size 13 in another (and a size 8 in another). Many e-commerce retailers have responded by adding more detailed size charts. Others have taken a bolder step. Virtual fitting rooms use AR and VR technologies to show customers exactly how items would look on their bodies. For better or worse, the ‘flattering’ mirror may be a thing of the past.

The key to reducing returns is to fill your product pages with as much information about each product as possible. Multi-angle photo carousels, FAQ drop-downs and third-party reviews are all tools in a webmaster's arsenal. The golden rule is making sure that what the customer sees really is what they get.

HOW RETAILERS CAN IMPROVE THE RETURNS PROCESS

While anything that prevents a return is a positive, the genie is not going back in the bottle. Return culture is here to stay, but that doesn’t mean that its negative effects are insurmountable.

There are some basic policies that can make the returns process easier. Retailers with a physical presence can encourage customers to buy online and return in store (BORIS). This bridges the strait between buyer and seller without any further logistical expense. Instant return credits make this shoppers’ favoured return method.

Pure-play e-commerce sellers can provide customers with online return labels and packaging. This self-serve route liberates customers from the need to liaise with customer service. Retailers are spared the cost of a pick-up courier and can precisely track the onward progress of their goods.

DEVELOPING A CIRCULAR ECONOMY WITH REVERSE LOGISTICS

The reverse logistics industry can play a major role in the transition towards a ‘circular economy’.

In our ‘linear’ economic norm, businesses turn raw materials into objects and market them to consumers, who use and discard them.

In contrast, the circular economy is a closed loop. Existing goods at the end of their lifetimes are recycled and refashioned into new products. When new raw materials are added, they are reincorporated into the same self-regenerating supply chain.

In the words of its proponents, the circular economy ‘decouples economic activity from the consumption of finite resources’.

Manufacturers, retailers, logistics companies and the end consumer all have their own roles to play here. Product designers should keep the reverse logistics process in mind, using recycled (and recyclable) materials and packaging. Warehouse automation tools can sort and direct items towards refurbishment, recycling or inventory. It's becoming easier than ever to make landfill a last resort.

The average person is already more than willing to recycle. Businesses can build on this by incentivising customers to get items repaired, rather than replaced. Clothing brands like Nudie Jeans already offer free repairs on their products, even for those who bought them second-hand.

Circular mindsets also present growth opportunities for companies specialising in upcycling old products. Your old chest of drawers is just waiting to be given a new and delightful lease of life.

MAKE YOUR SUPPLY FLOWS SUSTAINABLE

At Endava, our consultants have decades of experience helping businesses transform their operations.

Want to take the waste out of your supply chains? Our consultants are passionate about driving change through solving tricky problems. Get in touch to set them their next challenge.

Bogdan Tindeche

DELIVERY PARTNER, TRANSPORT & LOGISTICS

Bogdan supports Endava’s clients to achieve their business objectives by mobilising teams to leverage our technology and industry experience. Over the last eight of his 20+ years in technology delivery, he has helped Endava’s clients in the logistics industry to be faster, better and more sustainable. When unplugged from delivering IT stuff, he is a passionate skipper, competing in Romanian local regattas in his J80 or sailing with family in Greece.