Returns Costs Increase Due to Congestion and Constraints in Supply Chains

By Cathy Roberson, Reverse Logistics Association

November 11, 2021

Raise your hand if you’ve ever ordered two pair of shoes in different sizes knowing full well that you were going to return one of the pairs. Maybe it’s a dress, pants or shirt, regardless, most of us have done this thanks to the ease of online ordering and relaxed returns policies.

What happens to those returned items depends on the business. Through a process, known as disposition, workers determine if a returned item can be resold, sent to a liquidator, recycled or repurposed, repaired, donated to a charitable organization or sent to the dreaded landfield.

Speaking of landfields, interesting tidbit I learned last week while moderating a Post & Parcel Live! session on sustainability - did you know that 25% of fashion returns end up in landfields? That is according to the folks at ReBOUND. Fashion is the second most polluted industry, representing 10% of global emissions.

Moving on…

Disposition can be a slow process and it’s not cheap considering the number of workers that may need to be hired and, depending on the industry, whether or not the worker needs to be certfied to properly handle/dispose/repair a returned item.

There’s been a number of technology solutions to enter the market to help speed up and lower the cost of processing returns. In addition, there’s been a number of outsourced solutions from 3PLs and other solution providers.

Contract logistics provider, GXO Logistics, for example, noted at its Investor Day in July that its reverse logistics revenue grew at a CAGR 15.8% between 2018 and 2020, $389 million to $522 million.

In its recent third-quarter earnings for the period ending Sept 30, 2021, GXO’s reverse logistics revenue increased by 21% year-over-year (no revenue amount was provided).

During its third-quarter earnings call, GXO’s CFO Baris Oran told analysts, “We are seeing an increased demand for solutions that tackle direct-to-consumer ecommerce fulfillments, energy optimization, fastest speed to market, and ability to reuse returned products.”

Indeed, handling/reusing returned products is increasing as noted in the Reverse Logistics Association’s (RLA) recent survey. During the third-quarter, 45% of survey respondents noted the number of returns increased while a combined 46% said that returns either stayed the same or did not increase during the quarter.

Wait a minute. What’s going on here?

Blame it on the overall problems that supply chains are currently experiencing. Respondents are facing a challenging market including higher material and transportation costs as ports remain congested and transportation capacity is tight regardless of mode. One respondent noted a decline in sales in components as a reason why there was a decline in returns.

Not surprising, 56% of survey respondents said that the cost of returns increased during the third-quarter according to RLA’s survey. Several comments highlighted increasing costs in transportation and labor as well as warehouse space. According to one respondent, “returns take up a lot of increasingly expensive warehouse space and transportation costs are going up.”

Fourth-quarter expectations are for more returns and higher costs. However, one survey respondent commented, “Supply chain challenges will likely keep holiday sales below expectations, which will also impact potential returns.”

In terms of costs, over half of survey respondents expect the costs of returns to increase in the fourth-quarter. “Products are taking a long time to hit the shelves giving shoppers time to look around,” according to one respondent. Another respondent noted, “I see no letup in the fuel price and carrier charges will not be going down any time soon.”

Tony Sciarrotta, Executive Director for RLA describes reverse logistics as the “dark side” of the supply chain.

Many companies do not even know how many returns they receive or even what their costs of handling returns are.

There are also those companies that will tell you, when you try to return an item that was purchased online, to just keep it and they’ll process a refund. This is often because the cost to ship the item back to a returns facility combined with the cost of disposition outweighs the cost of the returned item. But, by doing this, the company is writing off this returned item as a loss. Not a good thing to do.

Before a company can come up with a solution, they need to understand how many returns they have and the costs associated with them. As a starting place, I highly recommend reading the article, Finance is from Mars and Reverse Logistics is from Venus, a RLA article I recently edited. In the article, there is a link to a Returns Saving Calculator. Access to both requires joining the RLA community (free btw).

Interested in learning more about the RLA? Let me know. If you’re interested in the RLA Returns Index Survey, check out the Resource tab, Industry Research, of the RLA website.

Cathy has over 20 years within the supply chain market including eleven years with UPS where she spent most of her time on competitive and market analysis for the Supply Chain Solutions subsidiary. After UPS, Cathy spent several years with various supply chain consulting firms focusing on market research before starting her own supply chain market research firm, Logistics Trends & Insights. Prior to UPS, Cathy worked at an e-commerce consulting start-up and at several libraries as a reference librarian. Cathy also writes for Air Cargo World magazine and other publications and is a frequent speaker at various supply chain conferences.