Product returns are the bane of retailers. Now, with the dizzying success of the internet as a consumer sales channel, the issue has taken on an even greater sense of urgency. Under pressure from demanding customers and increasingly impatient investors, e-tailers are realizing that their very survival may hinge on what happens to goods after they're sold.
They will need more than enlightenment to solve the problem. To understand how most distribution centers operate, think of those spikes in the ground that stop cars from backing up. In a typical distribution center, "all the arrows are pointed out," says Peter B. Rector, senior vice president of Pittsburgh, Pa.-based Genco Distribution System. Most facilities weren't designed to handle product coming back from the customer - let alone decide whether an item ought to be reshelved, repaired, discarded or returned to the vendor.

Toss in the internet, and things get even more complex. The technology provides consumers with a wealth of product information, but it's no magic bullet for the age-old problem of managing returns. E-tailers, many of whom have given little thought to logistics at all, are faced with more demanding customers and little experience in keeping them happy. "One- hundred-percent customer satisfaction is a prerequisite for success," says Bob Austrian, a software analyst with Banc of America Securities in San Francisco.

At the same time, internet sales are generating higher returns volumes than ever before. According to Forrester Research, total online U.S. retail sales reached $20.2bn in 1999. That number is expected to top $44.7bn in 2000, and $73.9bn in 2001.

The National Retail Federation estimates the average return rate for online retail sales at 5.6 percent, although it varies by category and time of year. Twelve percent of the $5bn of goods sold online during the two-month 1999 Christmas season was returned, reports Bizrate.com. But even the lower number means well over $2bn of returns last year.

How an e-tailer deals with the issue may determine the success of its business, especially as the faltering U.S. economy takes its toll on once-vibrant dotcoms. Chris Newton, senior analyst of supply-chain strategies with AMR Research in Boston, says sellers must learn to cope with higher volumes of returns at lower cost. He likens the internet to the traditional catalog business, which has a relatively high rate of returns because customers can't touch the product or try it on before buying.

Moreover, the internet's very convenience - at least on the front end - tempts buyers to take more chances with their purchases. "It's not a big deal to throw a couple more things into a box," says Austrian.

Unhappy Customers
Intentionally or not, many e-tailers have made the returns process a difficult one. Having enjoyed the convenience of ordering from home, customers grumble about having to obtain authorization numbers or stand in line at the post office to return unwanted items.
Such regimes are becoming less and less tenable. "At the customer end, it's a make or break proposition," says Newton. "If they feel frustrated by that process, they won't buy from that e-tailer again."

In terms of experience and infrastructure, pure e-tailers are at a disadvantage to brick-and-mortar retailers with internet sales channels. The latter have a long history of coping with returns, as well as physical stores to which customers can return product. They have worked hard to recover the cost of returns through better information, physical facilities and improved vendor relations.

Forward-thinking merchants like Wal-Mart view returns as the last bastion of margin enhancement and competitive advantage. But pure e-tailers, focused on customer acquisition and outbound fulfillment, "haven't adopted the discipline of their offline brothers and sisters," says Rector.

"It's amazing to us that more dotcoms haven't grabbed onto this as a bottom-line impact," he adds.

For all the talk of the ease of doing business over the internet, the old way of selling has the edge on convenience when it comes to returns. Knowing they can return product to a store, customers tend to be more comfortable buying from web sites managed by brick-and-mortar operations, says Newton. Frequently they will check out the site's policy on returns before doing business with an online merchant. Some make liberal use of the policy, ordering multiple colors or sizes of a garment, then returning unwanted items after trying them on.

A survey last year by Jupiter Research found that ease of returns had become a top priority of the consumer. Some 95 percent of those surveyed said they would rather return product purchased over the internet to a store. Forty-three percent said they would always use that option if it were available.

E-tailers have at least one advantage over stores - they tend to do a better job of screening returns, says Dale S. Rogers, professor of supply-chain management at the University of Nevada. High-tech online merchants such as Gateway Computer and Dell Computer keep their return rates low through customer-service troubleshooters. Often these "gatekeepers" can fix problems over the phone, online or via e-mail. Solutions might range from ferreting out a programming glitch to plugging the unit into the wall. In addition, e-tailers are hoping to catch up with their brick-and-mortar competition by partnering with chains such as Mail Boxes Etc. to accept returned packages.

Yet returns remain a challenge for everyone. For all their years of experience, retailers have done a generally poor job of managing the process, even for store sales, says Newton. They continue to struggle with quality control and the routing of product to its appropriate destination.

With the internet in the mix, the problem threatens to get worse. "With higher volumes," Newton says, "you need to evaluate higher options."

The Third-Party Way
For many online sellers, the solution lies in outsourcing. As capital becomes harder to secure, e-tailers might be stretched so thin that they have no choice but to hire a third-party with deep experience in handling returns. They can't afford a crash course in that single aspect of logistics, crucial though it might be. Even old-line retailers are looking to outsiders to establish large returns centers with efficiencies of scale, rather than addressing the problem on a store-by-store basis.

Complicating the returns process are the numerous options for which a merchandiser must be prepared. Depending on the industry and condition of an item, it might be returned to the vendor for credit, dispatched to a repair specialist, repaired or repackaged on site for return to store shelves, discarded, or resold on the global market.

Third-parties are expected to perform all of those services, especially the last one. "We are the largest seller of as-is goods on the planet," claims Genco's Rector. "We move hundreds of millions of dollars of goods a year."

Genco operates returns centers for the bluelight.com internet arm of Kmart Stores, among other customers. Buyers can return product either by mail or to any of Kmart's thousands of retail locations, says Rector. With some 12 million square feet of distribution space in the U.S. and Canada, Genco relies on barcoding and radio-frequency technology to track and control the flow of returns.

The company entered the business of managing returns in the early 1990s, prompted by customers who were tired of bearing the financial burden. "We watched as stuff got crushed and put into compactors," says Rector. "We realized that, if it was properly managed, there could be some cost recovery."

Genco developed in-house software based on Oracle Corp.'s platform. From the start, the system was highly configurable, a necessity in the exceptions-driven returns process. At the same time, Genco set up a series of dedicated returns facilities, to which it funneled product from stores on a weekly basis.

When the internet emerged as a major channel for consumer sales, the company launched a new business arm dubbed, naturally, eGenco. Rector says e-tailing presents fresh challenges for sellers. Instead of trucking pallets from stores into processing centers, vendors must move single packages from residences into handling facilities designed expressly for that purpose.

At the core of the system is the need to satisfy the customer, who is probably unhappy about having to return product in the first place. Rector calls the experience a potential "black hole" in which goods or credit for the purchase vanish mysteriously for an unspecified period of time. To prevent that from happening, Genco allows customers to download returns labels on the internet, provides status reports proactively, and can even help to diagnose product defects, in some cases eliminating the need for a return.

A third-party versed in returns management must possess at least some expertise in assembly and repair. Genco performs "plug-and-play" testing of electronic items, as well as more sophisticated services. For a shipment of electric scooters, it fixed faulty switches on the speed control mechanism. For a voice-activated computer program, it separated out the good components, switched out the earphone and mouthpieces, repackaged the product and sold it on the secondary market.

One of Genco's newer customers is San Francisco-based Levi Strauss & Co. John W. Serlin, director of operations services, says the maker of casual clothing decided that returns were not one of its core competencies. "We wanted to move it to people with better systems," he says.

Levi Strauss, which has traveled a rocky financial road in recent years, knew it had to improve the flow of goods in both directions, and head off adversarial relations with retailers. That called for better and fresher shipment information, the assignment of proper credit for returns, and the quick resolution of problems. An initial stab at re-engineering the process from within quickly shifted to an outsourcing strategy. But Levi Strauss continues to keep tight control over product quality, Serlin says.

Seeking Multiple Solutions
Other vendors have taken varying approaches to the problem of returns, some offering point solutions and others building the capability into a broader package. Boston-headquartered Yantra addresses "the customer experience from beginning to end," claims Mark Simmonds, director of product marketing. Its goal is to boost customer satisfaction while making the process as efficient as possible for retailers.

Yantra's PureEcommerce product consists both of a platform for managing customer orders and a web-based portal for linking the retailer with its network of suppliers. The multi-step software package allows the consumer to initiate a return via the internet or telephone, then receive an authorization number and directions as to where the item should be shipped or returned by hand. Simultaneously, the system informs the supplier that a return is on the way, then provides status reports on its transit.

Among Yantra's most recent customers is Corbis Corp., the Bellevue, Wash.-based provider of stock photos and graphic images. Its purchase of PureEcommerce coincided with a relaunching of the company's web site as a single source of images both for consumers and graphic professionals, says Communications Manager Marc Osborn.

The system allowed Corbis to automate the processing of both returns and cancellations of orders, most of which are fulfilled through downloading over the internet. Previously, says Osborn, Corbis processed all returns manually through its customer-service department, a slow and painstaking process.

The challenge of managing product flow goes beyond the issue of returns, according to Randy Kluck, vice president of product development with Scottsdale, Ariz.-based JDA Software Group Inc. Customers shopping over the internet "should be able to find, pay for, pick up, ship and return [product] anywhere," he says.

JDA's roots are in enterprise resource planning (ERP) software for brick-and mortar operations. In early 1998, it branched out into multiple order-management systems via the internet. Kluck says e-tailers, armed with a wealth of information, have the advantage of knowing who their customers are. That may point sellers in the direction of better service, although the mere possession of data is just the beginning of satisfying customer preferences for product, delivery, and method of payment.

JDA addresses the complexity of the returns process by allowing for a variety of steps based on product type and e-tailer preference. The use of soft coding creates a configurable system without causing problems when it comes time to upgrade the software, Kluck says. Underlying process controls remain static, so that data can be transferred into new files without disruption.

Brick-and-mortar retailers tend to have more complex returns processes because their policies are highly variable, often changing from store to store, says Kluck. But e-tailers, like catalog merchants, are coping with much higher volumes-up to 30 percent greater than physical stores.

Returns Online Inc., headquartered on Mercer Island, Wash., opened for business in April of last year. Its co-founder and chairman, Shannon Hauser, comes from the pharmaceutical industry, where he developed a standardized returns methodology for that sector. Returns Online is now out to streamline the process for all returns, on which merchants spend an estimated $35bn a year, according to the company. The cost of processing a return can be two to three times that of an outbound shipment, says Christy Adkinson, vice president of marketing.

Even so, returns "have been relegated to the garbage area of the operations business," Adkinson says. The company hopes to correct that oversight through a combination of software and third-party physical facilities. Its first national returns center, located just outside Atlanta, was recently completed.

At the center, employees will assess the condition of returned merchandise and put it through an automated sorting process. As of late December, the fledgling company had yet to secure any business, although it was negotiating with retailers, e-tailers and dual-channel merchandisers. Targeted industries were those with historically high levels of returns, such as electronics and apparel.

Also new to the returns business is a software provider, ReturnCentral Inc., with headquarters in Pittsburgh, Pa. It was founded by two brothers, one of whom had specialized in reverse logistics with Ryder Logistics, in response to a request by a large consumer electronics producer for an efficient system of processing returns.

Alyssa Ilov, ReturnCentral's vice president of marketing, says the biggest problem in handling returns for e-tailers today is "getting them fast enough to get value out of the product." Her company is focusing on products with high value and short life cycles, including toys, electronics and sporting goods. In each case, delays in getting items back to the warehouse or vendor can render them unsuitable for resale.

ReturnCentral acts as an application service provider (ASP), selling software in a hosted fashion and minimizing its client's investment in pricey information technology. The product allows retailers to apply a variety of returns rules down to the SKU level, Ilov says.

Not a provider of physical services, ReturnCentral is talking to third-parties that could operate returns processing centers in conjunction with its software. It is also considering partnerships with returns specialists that lack front-end capability for initiating and processing orders. AMR's Newton says the winning vendors in that area will be those that can integrate software with physical handling on a third-party basis.

Returns are just one part of the service offering of Retek, the Australian-born software vendor. It came to life in 1986 with a merchandising application, and has since added a warehouse management system, trade and merchandise management, demand forecasting, multi- level distribution and other elements of business IT infrastructure. It also hosts various applications on the business-to-business trade exchange known as retail.com. Retek introduced its returns functionality at the end of June.

Tim Prieve, vice president of global logistics with Retek, believes pure e-tailers are at a "huge disadvantage" to retailers when it comes to the convenience of returning product. Regardless of where they purchased an item, he says, most consumers would rather exchange it at a store. "It's the day and age of instant gratification."

Technology can help to close the gap. Two-dimensional barcodes on returned packages will soon be replaced by radio frequency identification (RFID) tags, which can capture far more data, Prieve says. That should speed up the returns process considerably. But e-tailers also must figure out how to achieve visibility of returns at the earliest possible moment, so they can determine where each item must go.

"It all comes down to returns not being treated as an afterthought," says Prieve. "It's a holistic approach, from start to finish."