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Several months ago ValueVision Media’s ShopNBC realized it needed to overhaul its merchandise returns program. Senior management wanted to improve employee productivity at its customer service center as well. To accomplish these objectives, the company implemented a new returns program which entailed e-mailing returned merchandise authorization numbers (RMAs) to customers. Customers take the RMA number along with the item to be returned to a drop-off location in their area. A label is printed at the drop-off location based on the RMA information, eliminating the need to send a return label with every shipment. This innovative process reduced the time and cost of issuing paper labels for processing returns.

ShopNBC applied this new approach to a subset of returns—only items that needed to be repaired, replaced, or resized because of a packing or shipping error—and realized a savings of about $50,000 a year by removing the label printing and distribution from customer service. Even better, it heard from satisfied customers that they liked the ease of the returns process. Starting early next year, ShopNBC will make expedited processing of all returned merchandise a key component of Red Carpet Care, an 8-month-old, corporate-wide customer service, satisfaction, and retention initiative.

With access to new shipping information that pinpoints precisely when merchandise in need of repair or exchange will be delivered back to the warehouse, customer service representatives are able to better anticipate customers’ returns questions and issue shoppers faster credits and refunds. “Our customers who shop with us on TV and the Web can’t see and feel the merchandise like they can in a store,” says Howard Fox, ShopNBC’s senior vice president of operations and customer service. “An easier return process helps differentiate us from the competition and keeps our shoppers satisfied and coming back for more.”

Returns: A Costly Channel

Taking charge of the returns process became a priority because ShopNBC, like most Web merchants, found it was spending too much time opening return packages, then deciding if the item should be restocked, marked for liquidation, or sent to another department for repair. Now that the TV and Internet retailer has a new system, ShopNBC expects a multiple return on its investment, including cutting three to five days off its return process and eventually realizing a cost savings of $200,000 annually.

ShopNBC is not alone in trying to untie the returns knot that can snarl operations. “Processing returns is a huge business and very costly in some retailing segments, such as electronics, where the selling season is very short and a personal computer can lose 40% of its value very quickly if it’s just sitting around,” says Joseph Blackburn, James A. Speyer professor of operations management at the Owen Graduate School of Management at Vanderbilt University. “CEOs are paying a lot more attention to returns costs, especially now that retailers are in the holiday shopping and January return season.”

Today, retailers and catalogers are sophisticated at managing programs and using technology that ensures shelves—whether in stores or in warehouses—are abundantly stocked and that orders are delivered in a timely and cost effective manner. But many are less sophisticated in the reverse process, where they can achieve greater cost efficiencies and sales by streamlining returns. “Processing inbound packages can be two to three times more expensive than shipping out the original merchandise,” says Patti Freeman Evans, retailing analyst with Jupiter Research. “If a company has an ineffective returns program, it can have drastic implications on financials. Taking steps to deal more effectively with those costs will have a positive ripple effect.”

Some high-volume electronics manufacturers and retailers, for example, spend as much as $200 million per year processing the return of personal computers, printers and other large items, says Blackburn. Expenses in processing the return of just one electronics item, for instance, include the return shipping fee, customer service calls, credit card processing, storage, inspecting, ensuring the product is still operational, and sorting and processing packages, Blackburn says.

Additional costs occur if the retailer has to forward an item to a manufacturer, wholesaler or other channel partner for repair. Timing is also critical; putting returned merchandise back into inventory for resale can take as long as 60 days. That’s money lost. Consumer electronics products sitting on a shelf lose about 1% of their value each week. Some fashion apparel can lose up to 50% of its value during peak selling seasons, Blackburn says. “The numbers can add up,” he notes. “A lot of potential business is lost by not paying closer attention to expediting the returns process.”

Don’t Risk the Brand

But returns represent a greater loss to Web and catalog retailers than simply lost sales and processing costs of returned items. For one thing, an inefficient and shifting returns process can hurt a retailer’s market presence in many respects, beginning with the front-line troops—the customer service department—who must deal with shoppers. “An ineffective returns program can put the customer service group in a very difficult position if there are inconsistencies,” Evans of Jupiter says. “It can also undermine brand trust and perception because consumers don’t have a good experience when they need to return a product.”

There also are other operational effects. “Logistics will have a hard time handling the returns if they don’t have a cohesive strategy and operational flow and even IT would be impacted if they have to keep changing systems in order to accommodate a changing policy and operation,” Evans says.

Apart from the operational considerations are bigger-picture concerns, such as a Jupiter Research consumer poll that found that 17% of online shoppers had purchased an item in a store versus on the Web only because they expected the returns process for items bought online to be problematic.

Nonetheless, 44 million U.S. households regularly use the Internet to shop, reports Forrester Research Inc.—57% greater than the 28 million just five years ago—and it’s clear that consumers see the Web as a retail channel that is as important as bricks-and-mortar stores and catalogs. And it’s equally clear that they expect the same kind of service—even when it comes to returns.

Taking back what customers don’t want certainly isn’t a new experience for interactive merchants and catalogers. Customers shopping on the Internet make selections based on product images and descriptions. Online retailers balance providing enough information against providing too much information, and so, despite enlarged images and carefully worded copy, shoppers still don’t know exactly what they’ve bought until the package arrives. Some high-end apparel merchants routinely take back more than 40% of certain items they sell. And electronics retailers experience a return rate on certain personal computers and hand-held devices of 15-20%.

Ensuring a Quality Customer Experience

Unlike the early days of online retailing, though, merchants today realize not only that customers will return purchases but also that a smooth returns procedure equates to enhanced customer service. As a result, many online retailers have created liberal returns policies. Ritz Interactive Inc., an Irvine, Calif.-based online retailer of digital cameras and fishing and boating equipment, for instance, allows customers to return merchandise for any reason within 30 days, 10 for digital cameras.

Ritz makes its returns policy apparent on its Web sites, posting return and exchange policies on help pages of its 19 shopping sites; stresses the no-strings-attached nature of the policy; and views easy returns as a competitive advantage. “Retailers in our Internet space offer similar products so we can have a competitive difference by enhancing the customer service experience with an easy-to-understand and easy-to-execute return policy,” says Fred Lerner, Ritz CEO. “The beautiful pictures customers see on their monitors while ordering may not fit their expectations when they finally have the item in their possession, so we make it clear that we will take our merchandise back even if the customer has no reason other than they just didn’t want it.”

Returns are expensive to begin with. And liberal returns policies can make them more expensive, starting with the direct costs of processing returns and disposing of the merchandise all the way through lost opportunity costs if trendy merchandise is languishing in the reverse logistics chain and degradation of the customer relationship if the returns process does not go well.

One way of reducing costs is to prevent returned items from entering the reverse logistics flow at all. “If you are in retail, you are going to deal with returns, but it’s expensive and labor-intensive to have a worker open the box, find out what’s in there and return the inspected item to the shelf or mark it for liquidation,” says Ron Kelly, senior director of site merchandising for online pharmacy, health and beauty retailer Drugstore.com Inc. “It’s a competitive advantage if we can do things to reduce or eliminate some returns.”

Drugstore.com, which ships more than 700,000 products each month and processes about 7,000 returns, tells customers not to return items if it`s 30 days past the original date of delivery or the package has been opened.

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Streamline the Flow

But no matter how much retailers are willing to issue refunds without getting a product back, there will still be returns and retailers must search for ways to expedite those. One of the first steps a retailer can take is to streamline the flow by allowing only authorized returns back into the organization. By requiring a customer to obtain a return authorization code, a merchant can control the flow and minimize the risk of unauthorized returns. Return authorization can also save a sale because customer service representatives can suggest an exchange or product upgrade.

Usually, a retailer does not know what’s coming back, when it’s coming back, who’s returning it, and what resolution the customer wants. That creates inefficiencies in the entire process—from staffing warehouses for returns processing to creating delays in issuing refunds or replacing the merchandise. “Returns impact many parts of the organization, and if there are steps we can take to increase efficiency we will,” Kelly says.

One way that retailers can expedite the process is by consolidating returns before they reach the warehouse. Consolidation can take several forms. One is to include with each order a pre-printed label with bar-coded product information. Customers send their packages to a consolidation service that acts as a processing agent for the retailer, opening the package, alerting the retailer to the return, then consolidating packages until there is a sufficient number to send back to the retailer or to the appropriate disposition destination.

Another approach to consolidation, such as FedEx Consolidated Return ServiceSM, allows customers to return merchandise just as they do to a store by leveraging their retail network. In addition, merchants and consumers can track the progress of their package as it makes its way through the shipping channel back to the merchant’s distribution center.

Here’s how the program works: The customer brings in a return item and returned merchandise authorization number to a FedEx drop-off point. The customer gives the item along with the RMA to the clerk, who enters the RMA into the FedEx Web-based return system. The clerk checks to make sure the RMA presented by the customer matches the same authorization information provided by the retailer. The clerk completes the return transaction, generating a printed shipping label and customer receipt with tracking information. Next the return is wrapped in a plastic polybag and placed into a consolidated box along with other items to be returned to retailers. Larger or more time-sensitive return items such as a personal computer monitor are handled according to a similar process, but shipped directly to a location designated by the retailer by FedEx Ground.

Today many Internet merchants deal with piecemeal returns that require extra time and labor to process once they’re returned to the warehouse. But the FedEx Consolidated Return Service expedites the return process in several ways. With FedEx, there is no need for a retailer to sort and process returns at a centralized facility. That’s because FedEx Ground handles this task at its returns sorting hub. At the hub, consolidated packages (totes) are opened and the polybags are sorted and boxed for the merchant according to their final shipping destination. A bar-coded label and shipping manifest are generated at the time the package leaves the FedEx hub , enabling dock workers to know exactly what’s in the boxes they are about to open and whether the return merchandise is earmarked for restocking, repairing or liquidation.

The Ripple Effect: Enterprise-wide Benefits

With a consolidated returns program in place, merchants can benefit on several levels. An easy and convenient method of returning items minimizes customer frustration and reduces unnecessary package handling and transportation charges. Having prior knowledge of pre-sorted returns also helps retailers reduce processing time. There’s even a financial payback—the flat fee pricing schedule can help reduce customer return charges or provide an opportunity for an added revenue stream.

Expedited returns will translate into a $50,000 a year savings just in postage and returns labor for merchandise in need of repair or exchange at ShopNBC, which is implementing FedEx Consolidated Return Service, Fox says. ShopNBC receives up to 150 returns a day for repair or replacement merchandise. It used to process them by having the customer service rep print and mail a label to the customer. Now reps e-mail a return authorization code to the customer, along with instructions to take the package to a FedEx drop-off point and a list of locations close to the customer’s home. Once it rolls out the service to all returns, it expects to save another $150,000 a year in better warehouse labor scheduling, Fox says. ShopNBC’s fulfillment centers in Eden Prairie, Minn., and Bowling Green Ky., process 1,000 to 3,000 returns a day. “A big issue for us is speed,” he says. “This simplifies the returns process by giving us advanced notice of inbound returns and reduces the workload by identifying the order and customer.”

Consolidating the returns process is paying off for ShopNBC in a number of ways. Advance information on the volume and nature of returns coming back into the distribution center each business day is helping ShopNBC better manage its warehouse personnel. If, for instance, the volume of returns coming in the next day is lighter than normal, distribution center managers can reallocate staff in advance to other duties such as picking and packing outbound orders or restocking shelves.

Knowing precisely what’s being returned and when it will arrive also helps ShopNBC expedite refunds and exchanges, enhancing customer satisfaction by letting customers know when a credit will be posted to their account. When a package is returned, the RMA information is scanned into ShopNBC’s customer service computer system, which then generates an instant e-mail notifying the customer that the return has been received. Once the returned merchandise has been processed and the information reconciled internally, the ShopNBC computer system generates another e-mail informing the customer of the status and amount of the refund. “The payoff for us is less first-time and follow-up calls to the customer service center from shoppers wanting to know about their refund,” Fox says. “Depending upon the season, up to 18% of our daily call volume is answering questions about returns. FedEx Consolidated Return Service and our instant e-mail notification system are reducing that number.”

Industrywide, 25% of customers who return merchandise call to check status of the return. Tracking capabilities provided by the shipper can virtually eliminate the 11% of customers who make more than one call to check status.

Planning for Returns

The phenomenon of Internet time—change happens at a faster pace on the Internet than in the rest of the world—still holds. But even though part of the online buying process happens on the Internet, fulfillment and returns happen in the real world. And so change will be harder to implement there. But forward-looking executives are studying their options and concluding that the sooner they get to a streamlined returns process, the better they’ll be able to compete. “Processing returns shouldn’t be a big guessing game, but for many companies that’s what’s happening because they don’t know what’s coming back and when,” says Robert Segal, analyst with e-commerce market researchers and strategists Frank Lynn & Associates. “Retailers can save labor costs and better utilize distribution centers’ employees if redundant steps are taken out of the process and advance shipping information is used to help expedite the process.”

For now, ShopNBC is among the first wave of merchants innovating its returns process through FedEx Consolidated Return Service. And the benefits to the retailer’s overall operation are multiple. Fox says customers are happier because they are getting their refunds and exchanges processed faster. And less paper correspondence and more detailed information on returns coming back to the distribution center is helping ShopNBC better manage its full-time and part-time workers.

And given that high-volume merchants such as ShopNBC can generate savings of potentially hundreds of thousands of dollars per year, Evans of Jupiter Research says other Web retailers will begin making changes to their own return policies and programs. “The results can be dramatic if change is brought about,” she says. “Returns don’t just impact the customer but have vendor, supplier, and other internal implications as well,”

For additional information on FedEx Consolidated Return Service or other returns services, call 1-888-RETURN3. Information may also be found online at http://www.retail.fedex.com/07

Nine Steps to Streamlined Returns

To reduce costs and streamline the returns process, Internet retailers must base their strategy on an enterprise-wide initiative. The action steps spelled out here offer some insight on the issues and challenges merchants should keep in mind as they begin the process.

1. Better returns management begins with the right team. Give the team leader responsibility for ranking priorities and making decisions. Incorporate a diverse group from senior management, customer service, distribution, information technology, marketing, and finance. The team’s mission is to assess how the company can more efficiently process returns, identify a course of action and present a plan to the CEO or CFO.
2. Save time and money. Reduce returns processing time and minimize excessive handling and shipping charges by routing returns directly to their final disposition location.
3. Competitive shipping pricing makes a difference. Consider reduced flat fees versus variable pricing, which can cause confusion and alienate customers.
4. Incentives help. Consider offering free returns on some merchandise to generate loyalty and repeat business. Free returns may also be a reward for valued customers.
5. Don’t make merchandise returns complicated. A simple, clear and direct returns policy can set you apart from the competition.
6. Gain visibility into what’s coming back and when. Unopened piecemeal returns piled up in a warehouse require extra steps to process and put seasonal or obsolescent merchandise at risk. An effective return system should allow you to monitor return inventory from the point of drop-off to final disposition, enabling distribution staff to know in advance what’s being delivered each business day.
7. Treat returns as part of a closed-loop distribution process. Pay the same attention to managing returns inventory as outbound distribution to generate substantial savings.
8. Know the reasons for delays. Analyze the process and points in the returns channel that result in excessive reverse cycle times.
9. Make returns an asset. Instead of treating returns as a liability, consider strategies that turn returned merchandise into new sales and cost-savings opportunities. For instance, there is no need to order additional merchandise to fill new orders if the retailer knows that unopened and perfectly good items sent in for an exchange will be back in inventory within a few days. Many customers are also willing to pay for convenience and a hassle-free return, creating an opportunity for using returns as an additional revenue stream.