Ever wondered what happened to the sweater you bought that turned out to be too small, or the kitchen gadget you got as a gift but didn’t have anything for? Few of us think about where products go after we return them, but together, our unwanted goods have a huge impact on the business and the environment.
Processing the average return cost costs businesses 59% of the item’s original retail price. Every year, American companies spend an estimated $50 billion on product returns. At the same time, those returned goods are responsible for massive landfill waste and 27 million tons of CO2 emissions per year.
Returns are an inevitable part of the modern consumer economy, especially thanks to the growth of online shopping. Based on my experience as a founder of a product returns logistics company and a professor of supply chain management at Arizona State University’s WP Carey School of Business, I believe the returns process as it exists today is unnecessarily wasteful. Of the 3.5 billion returned products shipped between retailers, customers and landfills each year, only 20% is estimated to be beyond repair. Yet nearly £10 billion worth of returned items ends up in landfill anyway.
There is little point in throwing away up to a quarter of returned products, many of which are in salable condition or can be easily repaired. So why do companies turn a blind eye to waste in the returns process?
In general, retailers view the financial and environmental toll of reverse logistics — the process of shipping, processing, and resale or disposal of returned goods — as part of the cost of doing business. Once an item is returned, it is already seen as a loss to the company, and the priority is to get rid of it as quickly and cheaply as possible, even if there is nothing wrong with it. Third-party logistics services handle much of the return and disposal process, putting it out of sight and out of mind for business leaders. Since leadership positions in reverse logistics are not part of most companies’ promotion paths, these executives may know little about how the returns process works.
Companies ignore the returns process at their own risk. In addition to missing out on potential profits, a wasteful returns process has a bad effect on brand image. Retailers such as H&M and Nike have angered customers by incinerating returned and unsold clothing instead of donating or reselling them. Most consumers don’t realize that many of the items they return end up in landfill. But as the demand for sustainable business models grows, it seems only a matter of time before companies with wasteful and environmentally damaging return processes come under scrutiny.
To remain competitive, companies must no longer view profitability and sustainability as at odds. That means they need to think about reverse logistics the same way they would any other aspect of their supply chain, rather than seeing returns as an inevitable loss and outsourcing them to third-party processors. Efficiency should be a priority, and profitability and sustainability should be approached as complementary rather than opposing goals.
To achieve this, companies can make three key changes. First, they need to collect data during the return process. Currently, surprisingly few companies collect comprehensive data about the types of products being returned or why they are returned. My research analyzing a major retailer’s returns process found that 53% of all returns were graded F – meaning they are not economically viable to repair or refurbish – before they’d even been inspected.
Without good data it is impossible to distinguish between a shirt that simply does not fit and a shirt with a large tear in it. Collecting additional data can be as simple as asking customers to explain in detail why they’re returning a product or sharing photos of the problem, rather than allowing them to create a return label without asking any questions. This data can then be used to determine which products can be repaired or resold rather than discarded. If products are beyond salvage, customers may be instructed to throw them away rather than return them. As companies collect data on their returns, they can use artificial intelligence algorithms to further refine the process.
Second, companies can make their products easier to repair. My research shows that products rated B, C, or D (which signify increasing defects or damage levels) are often sent to outside liquidators to be refurbished and resold, and many will find their way to eBay, bulk liquidation sites, or exported to Latin America, Africa or Asia. However, over time, most of these products end up in landfill because they cannot be repaired at a reasonable cost.
The easier and cheaper it is to replace individual components, the more defective products can be saved from the landfill and resold for almost full price. Better data can help companies identify and redesign parts that fail quickly. Sending replacement parts directly to customer’s homes, where applicable, can save transportation and labor costs and make customer’s life easier. As the “right to repair” movement gains momentum, improving the reparability of products can also help companies win over customers and regulators.
Finally, companies need to change the way they measure success when it comes to product returns. Today, most companies see returns as a cost and measure their cost per return, encouraging managers to minimize costs. Sending a product to landfill is almost always cheaper than repairing it, even if a refurbished item can later be resold for a profit. Measuring the percentage of returned products that are resold, or net profit from refurbished products, would signal to large companies that profitability and sustainability are important in the returns process.
Product returns are financially and environmentally costly, but they don’t have to be. Refocusing the way companies approach returns can increase revenues while reducing waste and greenhouse gas emissions. Going forward, companies must approach profitability and sustainability as complementary goals if they want to appeal to a new generation of consumers. With a few thoughtful changes, companies can start building a returns process that’s better for both profits and the planet.
Hitendra Chaturvedi is the author of Sense and Sustainability and a professor at Arizona State University’s WP Carey School of Business, where he teaches supply chain management. He was the founder of GreenDust, a multinational reverse logistics company with clients such as Amazon, Walmart, LG, Samsung, Whirlpool and others.
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