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Returning mail-order goods: analyzing the relationship between the rate of returns and the associated costs

Returning mail-order goods: analyzing the relationship between the rate of returns and the... Logist. Res. (2015) 8:3 DOI 10.1007/s12159-015-0124-5 ORIGINAL PAPER Returning mail-order goods: analyzing the relationship between the rate of returns and the associated costs Bjo ¨ rn Asdecker Received: 15 November 2014 / Accepted: 20 July 2015 / Published online: 31 July 2015 The Author(s) 2015. This article is published with open access at Springerlink.com Abstract Mail-ordering, particularly on the internet, has increasing the likelihood of ordering is the establishment of continually grown in importance over the last few years. liberal return policies. Well-known examples of this strat- This trend is expected to continue with no apparent end in egy are the fashion retailers Zalando (www.zalando.com) sight. Liberal return policies have significantly contributed and Zappos (www.zappos.com), which allow customers to to this development by strengthening trust in both the return merchandise for up to 365 days at no charge. individual retailers and the sales channel in general, but However, returns also entail a variety of direct and indirect they do come at a price. This article is the first to sys- costs. tematically analyze the relation between the rate of returns Direct costs include administrative and processing and the associated costs. A circular model for the sales and costs [2]. Additional expenses occur if the merchandise is returns process reveals a disproportionate relation between received in a deteriorated condition. In these cases, the two, which is further amplified once depreciation is retailers must bear the costs of new packaging, recondi- considered. The model may serve decision-makers as an tioning, value depreciation, and waste disposal. In the easy-to-use tool to systematically evaluate preventive following, these costs are referred to as disposition costs. returns management measures such as avoidance and Returns caused by poor customer experiences, such as gatekeeping. poor fulfillment or product quality, may indirectly harm satisfaction as well as loyalty, weaken the retailer’s rep- Keywords Product returns  Mail-order business  utation, and decrease the customer’s lifetime value [2–4]. Distance selling  Rate of returns  Product return costs Indirect costs represent potential damages to customer relations and are therefore difficult to quantify. These costs are closely related to but should not be confused 1 Introduction with the consumer’s return effort, which is occasionally referred to as ‘‘hassle costs’’ [e.g., 5, 6]. Consumers Mail-ordering has been growing rapidly over the last dec- choose the return option if they perceive the purchase ade [1]. For the most part, this development can be price minus the transaction costs to be larger than the attributed to the increasing acceptance of online shopping. remaining product value after the return period [6, 7]. Obviously, e-tailers have done a good job in reducing the Transaction costs can involve hassles such as compro- risks customers commonly associate with mail-order mising one’s free time and psychological well-being. businesses. One common way of building trust and They can also take the form of restocking fees or excluding shipping costs from reimbursement [5, 8]. Greater hassle increases the perceived transaction costs, & Bjorn Asdecker which, on the one hand, may damage customer satisfac- bjoern.asdecker@uni-bamberg.de tion but, on the other hand, leads to more customers retaining their purchases instead of sending them back [3]. Lehrstuhl fur Betriebswirtschaftslehre insb. Produktion und Consequently, the customer’s hassle costs reduce the Logistik, Otto-Friedrich-Universitat Bamberg, retailer’s direct costs but raise the indirect return costs. Feldkirchenstr. 21, 96052 Bamberg, Germany 123 3 Page 2 of 12 Logist. Res. (2015) 8:3 The expenses a distance seller ultimately must bear depend However, preventive returns management is not free. on the range of available legal options. In the USA, no federal Decision-makers have to wonder whether it is worth it. law governs the issue of product returns. Except for a few state Will the implementation of an online fitting tool, the pro- laws that require retailers to conspicuously disclose the policy duction of high-definition product videos, or faster delivery employed before the transaction is completed [e.g., 9, 10], be worthwhile? To answer these questions, it is crucial to sellers can freely establish their own policy. That is, distance understand the relation between the returns rate and the sellers may refuse returns, charge restocking fees, or not associated expenditures. Little research has been dedicated reimburse shipping rates. In contrast, the European Union to this topic despite its pivotal role for the competitiveness grants consumers comprehensive revocation rights. With a of mail-order businesses. Therefore, this article attempts to few exceptions, consumers may withdraw from their purchase contribute to the following research questions: for any reason within 14 days of the purchase. The seller must • What type of relation exists between the returns rate fully refund the buyer, including any shipping charges paid. and the associated costs? The buyer must bear the costs of returning the goods only if the • What happens once the effects of deterioration because seller disclosed this policy ahead of the transaction. Other- of damages incurred before the return deadline and/or wise, the products are collected and transported at the trader’s during transportation are taken into account? expense [11]. Hence, the possibility of shifting direct costs • What strategic implications does this relation have on from the retailer to the consumer is much more limited in the how to best arrange the returns management? European Union than in the USA. The article is structured as follows. The upcoming section Irrespective of the legal environment, both direct and summarizes the relevant literature on this topic and pro- indirect costs emphasize the need for effective returns vides a deeper understanding of the decision-making con- management. Rogers et al. [12] define returns management text. Next, the typical mail-ordering sales process is as the ‘‘[…] process by which activities associated with modeled in a circular fashion that lends itself to the returns, reverse logistics, gatekeeping, and avoidance are examination of the returned goods’ cost impact. To managed within the firm and across key members of the increase its practical relevance, the basic model is then supply chain.’’ Consequently, returns management is extended with the possibility of deterioration during the composed of the efficient handling and processing of revocation period. In the following, the model results are returns as well as preventive measures to reduce the discussed and strategic recommendations on how to best number of incoming returns [13]. arrange the returns management process are provided. Avoidance involves all proactive measures to eliminate Finally, a conclusion and an outlook on future research are the reasons why goods are returned [12]. This includes given. enhancing product quality, streamlining of the product range, reducing delivery time, providing comprehensive product information, and offering financial incentives that 2 The literature review and background lead to more informed ordering decisions. In contrast, gatekeeping disrupts or prevents orders from entering the Over the last decade, the literature on returns management returns channel [12]. Thus, mail-order businesses provide has increased [13]. To structure the existing work, con- refunds that do not require the item to be returned, increase ceptual, empirical, and analytical contributions are distin- a consumer’s transaction costs, or suspend deliveries. guished, because very few papers deal with product returns Since many retailers consider their return rates and costs in mail-ordering-related domains such as business-to- excessively high, they are interested in ideas and tech- business returns or reverse logistics in other industries will nologies to reduce return rates. Certain publications even also be considered. consider preventive returns management the most critical issue [2, 14, 15]. The success of several technology start- 2.1 Conceptual understanding and empirical ups demonstrates the need for innovative concepts and evidence tools. Examples are Upcload (www.upcload.com) and Sproov (www.sproov.com), both of which offer online Conceptually, Rogers et al. [12] describe a generic returns clothing fitting advisors. Their services may reduce size- management process that enables businesses to efficiently related product returns by 12–60 % [16]. Shoefitr (www. handle returned products and to identify levers that reduce shoefitr.com), which was recently purchased by Amazon the quantity of incoming returns. The strategic subprocess [17], offers similar business intelligence for shoes. This suggests determining returns management goals and strat- application requires the customer’s current model and size egy, developing avoidance, gatekeeping and disposition to calculate the likelihood that the new shoe will fit as well; guidelines, developing a returns network and flow options, it then recommends the best-fitting size. 123 Logist. Res. (2015) 8:3 Page 3 of 12 3 developing credit rules, determining secondary markets, decline with company size; smaller companies deal with and developing a framework of metrics for performance much higher expenses than their larger counterparts. The measurement. On the operational end, return requests are surveyed mail-order businesses claim that the average costs received, routing is determined, returns are received, dis- caused by the deterioration are 13.1 % of the goods’ value position is selected, consumers are credited, returns are [22]. analyzed, and performance is measured. Another process is presented by Stock et al. [18]. This 2.2 Analytical modeling more operational approach is composed of five stages: (1) receive; (2) sort and stage; (3) process; (4) analyze; and (5) Analytical decision-making models that include mer- support. The process begins with returns arriving at the chandise returns and their associated costs represent the processing site, which is usually a centralized warehouse or vast majority of relevant publications. Two categories distribution center. Next, the sort and stage activity pre- can be distinguished: inventory planning and product pares the efficient processing of incoming items. Thus, it is recovery models. Fleischmann et al. [23]present an reasonable to identify and separate different product cate- (s,Q)-inventory model with returns. The researchers’ gories (e.g., fashion and consumer electronics) as they are conclusion is ‘‘[…] that the return-flow has rather little likely to involve different processing. At the third stage, impact on the optimized expected average costs unless returns are transported to a processing station where the return ratio is close to one, resulting in high on-hand qualified personnel open each item and separate the inventory’’ [23]. Vlachos/Dekker [24] solve single-pe- accompanying paperwork, which is often sent to customer riod newsvendor problems considering resalable product service. Customers may be refunded at this stage if pre- returns that arrive before the end of the selling season. payments have been made. The fourth step involves They assume that products can only be resold once per examining each return thoroughly and determining the selling period. However, in practice, products may be appropriate disposition option. Finally, the redistribution of returned and reused several times within a season. repackaged, repaired, and refurbished products must be Mostard/Teunter [25] eliminate this assumption by using supported. As the authors observe, all of these activities a net demand approach. In addition, Mostard et al. [26] incur significant direct costs [18]. show that incomplete information regarding the demand Norek [19] adds that disposition costs depend heavily on distribution does not thwart a successful application. the chosen recovery option because of different cost Chen/Bell [27] simultaneously examine profit-maxi- structures and required depreciation. According to that mizing pricing and order quantity planning. Their article study, at least five asset recovery options exist. These are is basedonastudyby Andersonetal. [8] that claims that listed in descending order of revenue return as follows: (1) the probability of a return increases with a rise in the sale sell as new; (2) repair or repackage and resell as new; (3) price. They solve this problem for single- and multi- repair or repackage and resell as used; (4) resell at a lower periodic cases by assuming in the latter case that returns value to a salvage house; and (5) sell by the pound to a in period t will be sold in the following period t þ 1[27]. salvage house. Blackburn et al. [20] note that products with Despite integrating returns, all of these models rather short sales cycles are threatened with additional costs optimize decision-making in the forward supply chain through slow processing. The researchers refer to this as than in the backward supply chain. Product returns are the ‘‘marginal value of time.’’ In these cases, it may be viewed as a parameter that depends on the quantity sold economical to choose faster transportation and decentral- in previous periods, not as a decision variable. There- ized processing to minimize the time a product remains in fore, the existing models may not help to evaluate pre- the reverse pipeline to compensate for the value loss over ventive returns management measures as examined in time. this paper. Empirically, some authors measure the costs of returned The second category of mathematical models pursues goods. Stock et al. [18] estimate return expenditures at the optimal product recovery strategy by improving $30–35 per item for American mail-ordering. In Europe, acquisition, remanufacturing, and salvaging decisions [e.g., shorter distances lead to lower transportation charges, 28–30]. These contributions consider the quantity of pro- which explain a slightly smaller financial impact. A study duct returns as a decision variable. Hence, these contribu- by IBI Research estimates the costs for processing, tions are extremely useful to obtain the most from returns. administrative work, and disposition at 20 € per return in However, particularly in mail-ordering, a major proportion the German mail-order market [21]. Asdecker/Weigel [22] of returns may be prevented or avoided before they actually provide a more detailed appraisal. A survey of 303 German occur, which would be the best option for many distance mail-order businesses showed average processing and sellers. As Johnson [14] summarizes, ‘‘[t]he best return is administrative costs of 7.93 € per return. The unit costs no return.’’ 123 3 Page 4 of 12 Logist. Res. (2015) 8:3 Item is returned yes Item is offered Order Delivery Revocation? for sale no Item is sold Fig. 1 Linear rendering of the sales process for an item Table 1 Calculation of costs Rate of returns b 0 % 20 % 50 % 100 % and contribution margin while considering returns for n = 20 Expenditures subject to b: b ðÞ p  c þ r ($) 0 12.50 31.25 62.50 orders in accordance with Total costs: d þ b ðÞ p  c þ r ($) 27.50 40.00 58.75 90.00 Speights/Hilinski [31] Contribution margin: CM ðÞ b ($) 12.50 0 -18.75 -50.00 order Sum of contribution margins: n  CM ðÞ b ($) 250 0 -375 -1000 order A cost-benefit analysis of preventive returns manage- 15.41 %). If returned rates are reduced to 5 %, then the ment measures requires an understanding of the relation costs associated to returned and processed units is in the between the rate of returns and the associated costs. This order £ 6835.90.’’ type of examination has only been attempted in two articles The statements in both Speights/Hilinski [31] and Mon- [31, 32] that share one commonality: They view the order dragon et al. [32] suggest a linear relation between the rate of and the return as an isolated, onetime process that ends returns and the associated costs. However, this assumption is with the decision to either retain or return the goods premature for two reasons. First, the authors’ deliberations (Fig. 1). are based on singular, limited planning periods, which limit Accordingly, the vendor must bear the cost of returned the cost impact in an undue manner. In fact, every returned goods r (restocking cost) in addition to the distribution item needs to be sold again and then can be sent back yet costs d, which consist of the customer acquisition costs as again [26]. Consequently, the cost impact does not end with well as the packaging and shipping costs if paid by the the planning period under consideration, but with the final retailer. If the customer wants to keep the goods, the sale. Second, the possibility of deterioration during the company will realize the sales price p minus the purchase revocation period is excluded, which equates to a decline in price c and the necessary distribution costs d. Conse- value from a sales perspective. quently, the contribution margin CM of an order in relation A linear understanding of the sales process may be to the rate of returns b is calculated as follows: sufficient to successfully determine the contribution margin for a planning period such as in Speights/Hilinski [31]. For CM ðÞ b ¼ðÞ 1  bðÞ p  c  d b ðÞ r þ d order returns management tasks that go beyond that, the existing ¼ p  c  d  b ðÞ p  c þ r : ð1Þ understanding of the process is insufficient for the reasons An application of this formula is shown by Speights/ noted above. Therefore, this article, in contrast to prior Hilinski [31] in a typical example. The authors assign the publications, examines the issue by means of a circular parameter values p ¼ $100, c ¼ $60, d ¼ $27:50, r ¼ flow as described in the following section. $22:50 and assume four scenarios, each encompassing 20 To summarize the literature review, there are several orders (refer to Table 1). Accordingly, a business with a conceptual, empirical, and analytical essays regarding the rate of returns of 0 % generates a contribution margin of costs of returns. Existing publications provide insights into $250, which becomes negative as soon as b crosses the the returns management process and provide an idea of 20 % threshold. If none of the customers retain their what returns actually cost. Analytical models build on these ordered items (b ¼ 100 %), the company loses $1000. observations and improve decision-making with regard to Mondragon et al. [32] focus entirely on the variable inventory planning as well as selecting the best recovery expenses instead of the contribution margins. In the option. However, there remains a research gap concerning framework of a mobile communications company case the evaluation of preventive returns management activities. study, they report the following expected cost savings, This publication’s goal is a better understanding of the cost which resulted from a reduction in the rate of returns [32]: impact of merchandise returns in mail-ordering to establish ‘‘For the […] device the cost associated to returned and a basis for a cost-benefit analysis. It is intended to objectify processed units is in the order of £ 20,700 (a return rate of decisions concerning preventive measures and builds on a 123 Logist. Res. (2015) 8:3 Page 5 of 12 3 simple analytical model to determine the number of nec- 3.2 Determining the number of necessary returns essary orders and returns until the final sale, with and until the final sale without the possibility of product deterioration. Although mathematically savvy readers may argue that some of the Since the buyer by definition does not return the goods with following appears trivial, it should be noted that practi- the final order, one can easily determine the average tioners often neglect and shy away from complex models. number of necessary return processes NRðÞ b : Practitioners seek comprehensible and applicable tools and 1 1 1  b NRðÞ b ¼ NOðÞ b  1 ¼  1 ¼ solutions, which this article delivers. 1  b 1  b 1  b ¼ : ð4Þ 1  b 3 Basic model of a circular sales process Table 2 shows the quantity of necessary transactions in and examination of returned goods’ cost impact relation to b. With the rate of returns set at 50 %, the seller must turn the article over to two customers and process one The circular model does not end with the revocation if the return. In contrast, setting b at 70 % leads to 3.33 sales and consumer’s expectations are not met. Instead, the item is 2.33 returns processes on average. transported back to the seller, where it is received, processed, and stored. Subsequently, the goods are made available for 3.3 Relation between the rate of returns sale again. The higher the rate of returns b, the more times an and the associated costs to determine item must process through the cycle, shown in Fig. 2. the important decision-making parameters Therefore, the total costs determined by b are depended on the number of times an article is ordered as well as the The resulting costs until an item is sold CðÞ b depend on number of returns until its final sale. To assure a high level of NOðÞ b and NRðÞ b as well as the expense rates d and r: comparability between both models, it will be assumed that each order is composed of a single item. 1 b CðÞ b ¼ NOðÞ b  d þ NRðÞ b  r ¼  d þ  r 1  b 1  b d þ b  r 3.1 Determining the number of necessary order ¼ : placements until the final sale 1  b ð5Þ The probability of a single necessary order until the final Setting the parameter values to d ¼ $27:50 and sale isðÞ 1  b , b ðÞ 1  b for two, b ðÞ 1  b for three, r ¼ $22:50, in accordance with the Speights/Hilinski [31] N1 and b ðÞ 1  b for N transactions. It follows implicitly example, creates the cost curve shown in Fig. 3. that the average number of necessary orders NOðÞ b is: The figure visualizes the disproportionate increase in 1 1 1 X X X costs that coincides with an increase in the rate of returns b. n1 n n NOðÞ b ¼ n  b ðÞ 1  b¼ 1 þ b ¼ b : The linear relation suggested in Speights/Hilinski [31]or n¼1 n¼1 n¼0 Mondragon et al. [32] becomes untenable. ð2Þ An item’s contribution margin CM ðÞ b may now be article 1 n b is a convergent geometric series with the calculated by subtracting the costs incurred until the item is n¼0 individual term a ¼ b and the common ratio sold CðÞ b from the trade margin p  c: nþ1 a b nþ1 q ¼ ¼ n ¼ b, for which we need to determine the d þ b  r a b CM ðÞ b ¼ p  c  : ð6Þ article sum by observing the limit: 1  b 1 i X X Comparing Eq. (1)with(6) illustrates the differ- a 1 n n NOðÞ b ¼ b ¼ lim b ¼ ¼ : ð3Þ ences in contribution margins on the order and article i!1 1  q 1  b n¼0 n¼0 Processing Receipt Return transport Storage yes Item is offered Item is Order Delivery Revocation? no for sale sold Fig. 2 Circular rendering of the sales process 123 3 Page 6 of 12 Logist. Res. (2015) 8:3 Table 2 Expected number of Rate of returns b 0 % 20 % 50 % 60 % 70 % 80 % 90 % necessary transactions until the final sale of an item NOðÞ b 1 1.25 2 2.5 3.33 5 10 NRðÞ b 0 0.25 1 1.5 2.33 4 9 NOðÞ b þ NRðÞ b 1 1.5 3 4 5.66 9 19 Fig. 3 Visualization of the 400 € returns rate’s cost impact Distribution and return costs up to the item's final sale 350 € regarding the underlying model in the circular model (linear/circular) 300 € Costs per order based on the linear understanding of the sales process found in Speights/Hilinski (2005) 250 € 200 € 150 € 100 € 50 € 0 € 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % Rate of returns (β) dþðÞ bþDbr level. The spread results from the revocation rights 1ðÞ bþDb that may be used not only once but multiple times DCOST % ¼  1: ð9Þ dþbr until an order finally converts into a sale. On average, 1b this process requires NOðÞ b transactions. Therefore, the Since certain measures influence not only the cost sit- relation between the two contribution margins is as uation but also the revenue situation, company represen- follows: tatives will particularly want two additional questions answered that pertain to preventive returns management: CM ðÞ b ¼ NOðÞ b  CM ðÞ b ¼  CM ðÞ b : article order order 1  b • What is the minimum increase required in orders/sales ð7Þ to justify a rise in the rate of returns from b to b It should be noted that Eqs. (1), (6), and (7) describe two (b\b )? overlapping effects. On the one hand, the order-based view • To what extent may orders/sales decline to ensure that a 0 0 underestimates the expenditures subject to the return rate reduction in the rate of returns from b to b (b [ b ) when multiple forward and reverse handling is necessary. leads to a positive overall effect? On the other hand, the circular sales process represents The first question is relevant to decision-makers who are additional chances to sell the product, which is why the considering liberalizing their returns policy, which com- absolute values of article-based margins are higher than the monly accompanies a rise in the rate of returns [33]. The order-based ones. second question mirrors a situation in which managers will Additionally, it is useful to determine the b value max soon roll out new measures that will simultaneously reduce required to achieve a positive contribution margin for the the rate of returns while upsetting certain customer groups. business; in other terms, CM ðÞ b [ 0: article Common examples of this are not enclosing a returns p  c  d voucher, tightening the returns policy, or introducing a b \ : ð8Þ max p  c þ r restocking fee. To answer these questions, the contribution margins achieved with the different scenarios need to be set Before investing in preventive activities, managers have in relation to each other. In terms of the percentage change a reasonable desire to quantify the expected cost effect. If for orders DORD % and sales DSALE %, this means: they are able to assess the impact on the returns rate Db, the CM ðÞ b percentage change in costs related to merchandise returns order DORD % ¼  1; ð10Þ CM ðÞ b DCOST % is determined as: order 123 Logist. Res. (2015) 8:3 Page 7 of 12 3 CM ðÞ b article DSALE % ¼  1: ð11Þ Consequently, expenditures subject to the product CM ðÞ b article returns rate would decline by 11.36 %. The necessary investments should not exceed the expected savings. Other The two effects are interconnected and basically repre- measures, such as aggressively promoting the free returns sent two sides of the same coin. Developing (7) shows that: options, may influence both costs and revenues. On the one 1  b DSALE % ¼ðÞ DORD % þ 1  1: ð12Þ hand, this would generate more impulse purchases by 1  b lowering reservations regarding ordering. On the other hand, impulse purchases have been known to be returned at a higher rate than usual [34]. In our example, an increase of 3.4 Application of the model in a numerical example 5 % points to b ¼ 55 % is predicted. The new article and order contribution margins are: This chapter ends with an example demonstrating the applicability of the developed formulas. The object of d þ b  r CM ðÞ b ¼ p  c article observation is a fashion mail-order retailer. The following 1  b parameter values apply to the examined item: p ¼ 89¤, 12¤ þ 0:55  8¤ ¼ 89¤  29¤ c ¼ 29¤, d ¼ 12¤, r ¼ 8 ¤. The rate of returns is set to 1  0:55 b ¼ 50 %, a realistic value in the fashion industry [25]. ¼ 23:55¤; Under these assumed values, the company attains an 0 0 CM ðÞ b ¼ p  c  d  b ðÞ p  c þ r order average unit contribution margin of: ¼ 89¤  29¤  12¤  0:55 ðÞ 89¤  29¤ þ 8¤ d þ b  r ¼ 10:60¤: CM ðÞ b ¼ p  c article 1  b 12¤ þ 0:5  8¤ Before adopting such a proposal, the expected effect on ¼ 89¤  29¤  ¼ 28¤: 1  0:5 earnings must be contrasted with the expected effect on Consequently, the product’s retail price floor that breaks costs. even with all else remaining equal is 89¤  28¤ ¼ 61¤. CM ðÞ b 28¤ article DSALE % ¼  1 ¼  1 ¼ 0:1887 Switching to the order perspective, the contribution margin CM ðÞ b 23:55¤ article equals: ¼ 18:87 %; CM ðÞ b ¼ðÞ 1  b CM ðÞ b ¼ðÞ 1  0:5 28¤ order article CM ðÞ b 14¤ order ¼ 14¤: DORD % ¼  1 ¼  1 ¼ 0:3208 CM ðÞ b 10:60¤ order In addition, b signifies the maximum return rate with ¼ 32:08 %: max a positive value contribution: In our example, sales must increase by at least 18.87 % p  c  d and orders by at least 32.08 % to balance the added costs. b \ max p  c þ r If this appears realistic, the proposal should be adopted. 89¤  29¤  12¤ b \ max 89¤  29¤ þ 8¤ b \0:7059 4 Extending the basic model with the possibility max of deterioration b \70:59 %: max This means that the contribution margin slips into the Until now, this paper has focused on the fundamental red as soon as the rate of returns crosses the threshold of connection between the rate of returns and the associated roughly 70 %. costs. A more realistic portrayal of the sales and return When assessing the effectiveness of preventive mea- process needs to integrate deterioration, either through sures, such as improving the instruction manual or adding usage or during the transportation processes. Therefore, illustrations, an assumption of the expected effect on the businesses evaluate the item’s condition and assign a dis- returns rate is required. A decrease by 5 % points, that is position option. Referring to Norek [19], the model is Db ¼0:05, leads to: extended to consider the most important salvaging options, dþðÞ b þ Dbr 12þðÞ 0:5  0:058 that is, (a) sell as new, (b) repair or repackage and resell as 1ðÞ bþDb 1ðÞ 0:5  0:05 DCOST % ¼  1 ¼  1 new, and (c) write off and replace the product with a new dþbr 12 þ 0:58 10:5 1b one after either selling the return to a salvage house or 28:36 disposing of it (refer to Fig. 4). Therefore, it is necessary to ¼  1 ¼0:1136 ¼11:36 %: 32 distinguish between A-, B-, and C-returns. 123 3 Page 8 of 12 Logist. Res. (2015) 8:3 Re-Conditioning B-return p(B) A-return Processing Condion? Receipt p(A) C-return p(C) Write-off/ Storage Return transport replacement yes Item is offered Order Delivery Revocaon? no Item is sold for sale Fig. 4 Circular rendering of the sales process while considering the item condition A-returns are considered to be in a flawless state and can Hence, the unit contribution margin changes to: be resold immediately, which is why merely the base CM ðÞ b ¼ p  c article expense rate r is incurred. B-returns require minor work before they can be resold (i.e., changing of the packaging or d þ b ðÞ r þ pBðÞ e þ pCðÞðÞ c  m minor repairs), leading to additional processing expenses e. 1  b C-returns cannot be reconditioned for sale on the primary ð15Þ market. In this case, the seller must write off the purchase The formula for the maximum return rate that generates price c. Should the vendor be able to sell the goods to a a positive contribution margin b is adapted to: salvage house, this figure will be reduced by the received max compensation m. However, should the seller be forced to p  c  d b \ : ð16Þ max bear waste disposal costs, m will be assigned a negative p  c þ r þ pBðÞ e þpCðÞðÞ c  m value. Table 3 summarizes the decision-making process. A final adjustment is required for the percentage change in costs: 4.1 Model adjustment to consider different item dþðÞ bþDbðÞ rþpBðÞeþpCðÞðÞ cm conditions 1ðÞ bþDb DCOST % ¼  1: ð17Þ dþbðÞ rþpBðÞeþpCðÞðÞ cm 1b Based on this information, the order contribution margin can be calculated in consideration of the heterogeneous The equations for DORD % and DSALE % remain valid. item conditions. Building on the base model introduced in the previous section, damages e as well as c  m will be additionally considered with their likelihood of occurrence 4.2 Integrating different item conditions pBðÞ and pCðÞ, respectively. Adjusting Eq. (1) leads to: in the numerical example CM ðÞ b ¼ðÞ 1  bðÞ p  c  d order Building on the numerical example introduced in b ðÞ r þ d þ pBðÞ e þ pCðÞðÞ c  m Sect. 3.4, the set parameter values remain valid. How- ¼ p  c  d  b ðÞ p  c þ r þpBðÞ e þ pCðÞðÞ c  m : ever, now, only 90 % of the returns are in a resalable ð13Þ condition. Seven percent show minor damages that can Accordingly, the cost factors affected by the rate of returns be corrected. This involves average processing costs of must be adjusted. Since damages in relation topBðÞ andpCðÞ 6 €. Three percent of the returns are sold to a salvage could occur during each return process, it follows that: house that pays 5 € for each return. This leaves us with pAðÞ¼ 0:9, pBðÞ¼ 0:07, pCðÞ¼ 0:03, e ¼ 6¤,and CðÞ b ¼ NOðÞ b  d þ NRðÞ b  r þ NRðÞ b pBðÞ e m ¼ 5¤. þ NRðÞ b  pCðÞðÞ c  m ð14Þ By additionally considering the item condition, the d þ b ðÞ r þ pBðÞ e þ pCðÞðÞ c  m unit contribution equals 26.86 € instead of the previous ¼ : 1  b 28 €: 123 Logist. Res. (2015) 8:3 Page 9 of 12 3 Table 3 Possible item conditions and their economic consequences Disposition option Description Probabilities pAðÞþ pBðÞþpCðÞ¼ 1 Additional cost A-return Indistinguishable from new goods pAðÞ – B-return Goods with minor damage pBðÞ e C-return Goods that are no longer sellable pCðÞ c  m d þ b ðÞ r þpBðÞ e þpCðÞðÞ c  m d þ b ðÞ r þ pBðÞ e þ pCðÞðÞ c  m CM ðÞ b ¼ p  c  CM ðÞ b ¼ p  c article article 1  b 1  b ¼ 89¤  29¤ ¼ 89¤  29¤ 12¤ þ 0:55 ðÞ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ 12¤ þ 0:5 ðÞ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ 1  0:55 1  0:5 ¼ 22:16¤; ¼ 26:86¤: 0 0 CM ðÞ b ¼ p  c  d  b ðÞ p  c þ r þ pBðÞ e þ pCðÞðÞ c  m order Hence, deterioration reduces the possible price floor at ¼ 89¤  29¤  12¤  0:55 which the product breaks even. The order contribution ðÞ 89¤  29¤ þ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ margin diminishes from 14 € to 13.43 €: ¼ 9:97¤: CM ðÞ b ¼ðÞ 1  b CM ðÞ b ¼ðÞ 1  0:5 26:86¤ order article Once again, the expected effect on earnings must be ¼ 13:43¤: compared with the expected effect on costs. CM ðÞ b 26:86¤ article Similarly, the maximum rate of returns with a positive DSALE % ¼  1 ¼  1 ¼ 0:2121 CM ðÞ b 22:16¤ contribution margin declines to: article ¼ 21:21 %; p  c  d b \ max CM ðÞ b 13:43¤ order p  c þ r þpBðÞ e þ pCðÞðÞ c  m DORD % ¼  1 ¼  1 ¼ 0:3466 CM ðÞ b 9:97¤ order 89¤  29¤  12¤ b \ max ¼ 34:66 %: 89¤  29¤ þ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ b \0:6942 max The possibility of deterioration leads to additional costs b \69:42 %: max that require more orders and sales to be compensated, making it less likely to have an overall positive impact. Referring to the preventive tasks of returns manage- Adapting this case shows that once deterioration in the ment, the possibility of deterioration enhances the effect of item’s condition is considered, the disproportionate avoiding and preventing return shipments. A decline of b increase in costs is further amplified. by 5 % points to 45 % would reduce expenditures subject to the returns rate by 13.67 %: 5 Implications of model results dþðÞ bþDbðÞ rþpBðÞeþpCðÞðÞ cm 1ðÞ bþDb DCOST % ¼  1 dþbðÞ rþpBðÞeþpCðÞðÞ cm The presented model leads to a range of theoretical and 1b practical implications. Theoretically, it analyzes the rela- 12þðÞ 0:50:05ðÞ 8þ0:076¤þ0:03ðÞ 29¤5¤ 1ðÞ 0:50:05 tion between the rate of returns and the costs of returning ¼  1 12þ0:5ðÞ 8þ0:076¤þ0:03ðÞ 29¤5¤ goods, which is critical for the success of mail-order 10:5 businesses. In contrast to previous publications, the sales 28:61 ¼  1 ¼0:1367 ¼13:67 %: process has been rendered in a circular manner. The model 33:14 shows that the costs associated with a rise in the rate of The increase compared to the previously determined returns do not increase linearly, as the results of Speights/ 11.36 % justifies higher investments in preventive mea- Hilinski [31] or Mondragon et al. [32] imply. Although sures. Beyond that the impact of a free returns promotion their order-based approach is well suited to determining the needs to be tested under the new conditions. Increasing the contribution margin for a single period, it obscures the real rate of returns to b ¼ 55 % results in an article and an disproportionate relation. This effect is further amplified by order contribution margin of: deterioration, either through usage within the revocation 123 3 Page 10 of 12 Logist. Res. (2015) 8:3 period or through damages incurred during the logistics following justification [36]: ‘‘[…] a careful review of this processes. account and related ones shows you’ve requested refunds Hence, the article contribution margin differs from the and replacements on a majority of your orders for a variety order contribution margin and decreases more lopsidedly of reasons. In the normal course of business, we expect as the rate of returns rises. Acknowledging this difference there may be occasional problems. However, the rate at is vital for accurately predicting an item’s potential for which such problems have occurred on your account is success, determining its retail price and price floor as well extraordinary, and it cannot continue. Your Amazon.com as evaluating the implementation of preventive measures. account has been closed, and you will no longer be able to Therefore, this publication complements the existing range shop in our store.’’ Since Amazon is known as an extre- of analytical models, which primarily improved decision- mely data-driven enterprise, it can be assumed that the pros making concerning inventory management and product and cons were thoroughly weighed prior to this decision recovery [23–30]. In contrast, this paper objectifies deci- and that the expected reduction in costs tipped the scales in sions regarding the prevention and avoidance of returns favor of the suspension of deliveries. before they actually occur. Another takeaway is that the possibility of deterioration Moreover, the developed circular model shows that the amplifies the aforementioned effects. Therefore, distance product returns should not be viewed as isolated from the sellers should work on smart solutions that increase the forward-directed flow of materials. The more often a pro- proportion of A- or B-returns, which may be resold as new duct is returned, the more times it has to be ordered and after minor rework, to minimize value depreciation. Such shipped, leading to additional distribution costs. an approach can be observed at Amazon. Amazon coop- This finding leads to practical implications. To maxi- erates with manufacturers to box products in so-called mize profits, it is necessary to coordinate the returns Amazon Certified Frustration-Free Packaging [37]. The management process with traditional corporate functions, packaging benefits consumers because it is easy to open particularly with marketing/sales and logistics. Manage- and causes less waste. However, it is also advantageous for ment must ensure that function-specific goals and activities Amazon since damaged packaging can be easily replaced, targeting the success of the business are in harmony. which reduces the quantity of unsellable C-returns. It is understandable that from a marketing perspective, one would want to design the returns process to be as simple and as accommodating as possible. However, 6 Conclusions and further research market and sales success does not inherently lead to busi- ness success. Conversely, excessive focus on costs should This paper introduced a circular model for the sales and also be critically scrutinized because the pursued measures returns process in a mail-order context. Geometric series potentially impede additional turnover. Therefore, busi- have been used to describe the relation between the rate of nesses should target a balanced approach that integrates returns and related costs. The advantage of this basic model both sides of the same coin: that is, focusing on customer is that even less mathematically savvy practitioners can satisfaction without losing sight of cost-effectiveness. This easily apply it and improve their decision-making by requires an integrative stance and is closely related to the replacing gut feelings with facts. decision on which preventive measures to adopt. Both Referringto the threeresearchquestions posed inthe avoidance and gatekeeping reduce the number of returns to beginning, the major lesson learned from this article is be processed. that preventive actions play a pivotal role in successfully The German fashion retailer Bonprix, for example, adds running a mail-order business. The evaluation of such 3 € of store credit to a customer’s account for orders that activities requires (1) estimates regarding a measure’s are not returned [35]. According to the model results, the effect on the likelihood of ordering and returning, (2) likelihood that these types of avoidance investments will information about an article’s trade margin, and (3) data permanently improve operating results increases with the on the distribution and return costs. The findings suggest rate of returns. Gatekeeping measures are less popular in that distance sellers with high return rates are very likely business practice because sellers fear the negative influence to benefit from avoidance and gatekeeping. Such busi- these may have on customer satisfaction and the generated nesses should also reflect upon tightening their returns turnover. Nonetheless, the use of these measures should not policies. In contrast, vendors with low return rates should be categorically excluded from the realm of possibilities. It critically review preventive options. Moreover, because is essential to verify whether the reduction in costs asso- of the described disproportionate relation, the latter ciated with the diminished rate of returns can sufficiently vendors are often better off loosening their policies, compensate for the decline in orders. Only recently, making product returns easier and more convenient for Amazon decided to close several accounts, providing the customers. 123 Logist. Res. (2015) 8:3 Page 11 of 12 3 Beyond this preventive perspective, the model may also References be regarded as a plea to constantly improve merchandise 1. BEVH (2014) Aktuelle Zahlen zum Interaktiven Handel. http:// returns handling as it has a direct impact on administrative, www.bevh.org/markt-statistik/zahlen-fakten/. Accessed 31 Oct processing, and disposition costs. The lower these costs, the less steeply will the cost function subject to the returns 2. O’Neill S, Chu J (2001) Online returns management strategies. rate rise. Therefore, mail-order businesses are strongly IBM Global Service eStrategy Report 3. Mollenkopf DA, Rabinovic E, Laseter TM, Boyer KK (2007) recommended to seize every opportunity to streamline Managing internet product returns: a focus on effective service internal processes, negotiate lower shipping charges, and operations. Decis Sci 38:215–239 improve the product recovery rate. An optimal returns 4. Petersen JA, Kumar V (2009) Are product returns a necessary management strategy embraces both preventive measures evil? Antecedents and consequences. J Mark 73:35–51 5. Shulman JD, Coughlan AT, Savaskan RC (2009) Optimal and the efficient handling of inevitable returns. restocking fees and information provision in an integrated Finally, this work should stimulate further research. To demand–supply model of product returns. Manuf Serv Oper deduce conclusions concerning the success potential of the Manag 11:577–594 preventive returns management, it is necessary to investigate 6. Davis S, Gerstner E, Hagerty M (1998) Return policies and the optimal level of ‘‘Hassle’’. J Econ Bus 50:445–460 the specific impact of avoidance and gatekeeping measures. 7. Davis S, Gerstner E, Hagerty M (1995) Money back guarantees in It remains unclear, for example, to what degree the rate of retailing: matching products to consumer tastes. J Retail 71:7–22 returns is reduced if a business implements same-day 8. Anderson ET, Hansen K, Simester D (2009) The option value of delivery instead of a two- to three-day delivery time. To returns: theory and empirical evidence. Mark Sci 28:405–423 9. State of California Department of Justice (2015) Refund policies. answer these types of questions, in-depth case studies are http://oag.ca.gov/consumers/general/refund_policies. Accessed necessary. From an analytical perspective, model extensions 15 Apr 2015 provide the opportunity to investigate follow-up problems. 10. The Office of the Revisor of Statutes (2015) Retail sales of This includes the evaluation of disposition strategies other consumer goods; refunds. https://www.revisor.leg.state.mn.us/ statutes/?id=325F.80&year=2014. Accessed 15 Apr 2015 than those included, such as redistributing returns through 11. European Union (2015) Returning unwanted goods. http://europa. stationary trade (i.e., Tchibo Outlets). Another idea would be eu/youreurope/citizens/shopping/shopping-abroad/returning- a model extension that distinguishes costs per item, per unwanted-goods/index_en.htm. Accessed 22 Apr 2015 order, and per customer and relates to well-known schemes ´ 12. Rogers DS, Lambert DM, Croxton KL, Garcıa-Dastugue SJ (2002) The returns management process. Int J Log Manag such as activity-based costing. 13:1–18 In closing, we again take on the previously depicted 13. Asdecker B (2011) Retourenmanagement—Eine Literatur- positive development that mail-ordering has experienced. In recherche. In: Sucky E, Asdecker B, Dobhan A, Haas S, Wiese J the past, market players were able to win over a significant (eds) Logistikmanagement—Herausforderungen, Chancen und Lo¨sungen Band II, University of Bamberg Press, Bamberg, sales volume that had once belonged to the stationary trade. pp 421–461 Currently, there appears to be no solid arguments for why this 14. Johnson JR (2005) Waging war on returns. DC Veloc 3:25–28 development will be reversed. The positive picture is tar- 15. Stock JR, Mulki JP (2009) Product returns processing: an nished by the fact that consumer-friendly return policies examination of practices of manufacturers, wholesalers/distribu- tors, and retailers. J Bus Log 30:33–62 have led to an increase in the rate of returns, a trend that is 16. Sproov (2015) sproov’s size recommender—the B2B solution for expected to continue [21]. This article can be viewed as a your high return rates. http://www.sproov.com/. Accessed 10 Apr general plea not to lose sight of the return costs while addressing future growth. Only then can survival and com- 17. Lunden I (2015) Amazon quietly acquired Shoefitr to improve how it sells footware online. http://techcrunch.com/2015/04/10/ petitiveness be permanently guaranteed. A forceful imple- amazon-quietly-acquired-shoefitr-to-improve-how-it-sells-foot mentation of the analytical decision-making aids developed wear-online/. Accessed 14 Apr 2015 in this article will contribute to the affected retailers’ ability 18. Stock JR, Speh T, Shear H (2006) Managing product returns for to achieve profitable growth in a sustainable manner. competitive advantage. MIT Sloan Manag Rev 48:57–62 19. Norek CD (2003) Throwing it into reverse. DC Veloc 1:54–58 20. Blackburn JD, Guide VDR Jr, Souza GC, Van Wassenhove LN Acknowledgments The author would like to thank the two (2004) Reverse supply chains for commercial returns. Calif anonymous reviewers for their helpful and constructive comments Manag Rev 46:6–22 that contributed to improving the final version of the paper. 21. ibi Research (2013) Retourenmanagement im online-handel— Das Beste draus machen. Regensburg Open Access This article is distributed under the terms of the 22. Asdecker B, Weigel A (2013) Der Missbrauch des Widerrufs- Creative Commons Attribution 4.0 International License (http://crea rechts aus Sicht des deutschen Onlinehandels. eStrategy Mag tivecommons.org/licenses/by/4.0/), which permits unrestricted use, 13:8–11 distribution, and reproduction in any medium, provided you give 23. Fleischmann M, Kuik R, Dekker R (2002) Controlling invento- appropriate credit to the original author(s) and the source, provide a ries with stochastic item returns: a basic model. Eur J Oper Res link to the Creative Commons license, and indicate if changes were 138:63–78 made. 123 3 Page 12 of 12 Logist. Res. (2015) 8:3 24. 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Johnson MR, McCarthy IP (2014) Product recovery decisions within the context of extended producer responsibility. J Eng Technol Manag 34:9–28 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Logistics Research Springer Journals

Returning mail-order goods: analyzing the relationship between the rate of returns and the associated costs

Asdecker, Björn
Logistics Research , Volume 8 (1) – Jul 31, 2015
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Springer Journals
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Copyright © 2015 by The Author(s)
Subject
Engineering; Engineering Economics, Organization, Logistics, Marketing; Logistics; Industrial and Production Engineering; Simulation and Modeling; Operation Research/Decision Theory
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1865-035X
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1865-0368
DOI
10.1007/s12159-015-0124-5
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Abstract

Logist. Res. (2015) 8:3 DOI 10.1007/s12159-015-0124-5 ORIGINAL PAPER Returning mail-order goods: analyzing the relationship between the rate of returns and the associated costs Bjo ¨ rn Asdecker Received: 15 November 2014 / Accepted: 20 July 2015 / Published online: 31 July 2015 The Author(s) 2015. This article is published with open access at Springerlink.com Abstract Mail-ordering, particularly on the internet, has increasing the likelihood of ordering is the establishment of continually grown in importance over the last few years. liberal return policies. Well-known examples of this strat- This trend is expected to continue with no apparent end in egy are the fashion retailers Zalando (www.zalando.com) sight. Liberal return policies have significantly contributed and Zappos (www.zappos.com), which allow customers to to this development by strengthening trust in both the return merchandise for up to 365 days at no charge. individual retailers and the sales channel in general, but However, returns also entail a variety of direct and indirect they do come at a price. This article is the first to sys- costs. tematically analyze the relation between the rate of returns Direct costs include administrative and processing and the associated costs. A circular model for the sales and costs [2]. Additional expenses occur if the merchandise is returns process reveals a disproportionate relation between received in a deteriorated condition. In these cases, the two, which is further amplified once depreciation is retailers must bear the costs of new packaging, recondi- considered. The model may serve decision-makers as an tioning, value depreciation, and waste disposal. In the easy-to-use tool to systematically evaluate preventive following, these costs are referred to as disposition costs. returns management measures such as avoidance and Returns caused by poor customer experiences, such as gatekeeping. poor fulfillment or product quality, may indirectly harm satisfaction as well as loyalty, weaken the retailer’s rep- Keywords Product returns  Mail-order business  utation, and decrease the customer’s lifetime value [2–4]. Distance selling  Rate of returns  Product return costs Indirect costs represent potential damages to customer relations and are therefore difficult to quantify. These costs are closely related to but should not be confused 1 Introduction with the consumer’s return effort, which is occasionally referred to as ‘‘hassle costs’’ [e.g., 5, 6]. Consumers Mail-ordering has been growing rapidly over the last dec- choose the return option if they perceive the purchase ade [1]. For the most part, this development can be price minus the transaction costs to be larger than the attributed to the increasing acceptance of online shopping. remaining product value after the return period [6, 7]. Obviously, e-tailers have done a good job in reducing the Transaction costs can involve hassles such as compro- risks customers commonly associate with mail-order mising one’s free time and psychological well-being. businesses. One common way of building trust and They can also take the form of restocking fees or excluding shipping costs from reimbursement [5, 8]. Greater hassle increases the perceived transaction costs, & Bjorn Asdecker which, on the one hand, may damage customer satisfac- bjoern.asdecker@uni-bamberg.de tion but, on the other hand, leads to more customers retaining their purchases instead of sending them back [3]. Lehrstuhl fur Betriebswirtschaftslehre insb. Produktion und Consequently, the customer’s hassle costs reduce the Logistik, Otto-Friedrich-Universitat Bamberg, retailer’s direct costs but raise the indirect return costs. Feldkirchenstr. 21, 96052 Bamberg, Germany 123 3 Page 2 of 12 Logist. Res. (2015) 8:3 The expenses a distance seller ultimately must bear depend However, preventive returns management is not free. on the range of available legal options. In the USA, no federal Decision-makers have to wonder whether it is worth it. law governs the issue of product returns. Except for a few state Will the implementation of an online fitting tool, the pro- laws that require retailers to conspicuously disclose the policy duction of high-definition product videos, or faster delivery employed before the transaction is completed [e.g., 9, 10], be worthwhile? To answer these questions, it is crucial to sellers can freely establish their own policy. That is, distance understand the relation between the returns rate and the sellers may refuse returns, charge restocking fees, or not associated expenditures. Little research has been dedicated reimburse shipping rates. In contrast, the European Union to this topic despite its pivotal role for the competitiveness grants consumers comprehensive revocation rights. With a of mail-order businesses. Therefore, this article attempts to few exceptions, consumers may withdraw from their purchase contribute to the following research questions: for any reason within 14 days of the purchase. The seller must • What type of relation exists between the returns rate fully refund the buyer, including any shipping charges paid. and the associated costs? The buyer must bear the costs of returning the goods only if the • What happens once the effects of deterioration because seller disclosed this policy ahead of the transaction. Other- of damages incurred before the return deadline and/or wise, the products are collected and transported at the trader’s during transportation are taken into account? expense [11]. Hence, the possibility of shifting direct costs • What strategic implications does this relation have on from the retailer to the consumer is much more limited in the how to best arrange the returns management? European Union than in the USA. The article is structured as follows. The upcoming section Irrespective of the legal environment, both direct and summarizes the relevant literature on this topic and pro- indirect costs emphasize the need for effective returns vides a deeper understanding of the decision-making con- management. Rogers et al. [12] define returns management text. Next, the typical mail-ordering sales process is as the ‘‘[…] process by which activities associated with modeled in a circular fashion that lends itself to the returns, reverse logistics, gatekeeping, and avoidance are examination of the returned goods’ cost impact. To managed within the firm and across key members of the increase its practical relevance, the basic model is then supply chain.’’ Consequently, returns management is extended with the possibility of deterioration during the composed of the efficient handling and processing of revocation period. In the following, the model results are returns as well as preventive measures to reduce the discussed and strategic recommendations on how to best number of incoming returns [13]. arrange the returns management process are provided. Avoidance involves all proactive measures to eliminate Finally, a conclusion and an outlook on future research are the reasons why goods are returned [12]. This includes given. enhancing product quality, streamlining of the product range, reducing delivery time, providing comprehensive product information, and offering financial incentives that 2 The literature review and background lead to more informed ordering decisions. In contrast, gatekeeping disrupts or prevents orders from entering the Over the last decade, the literature on returns management returns channel [12]. Thus, mail-order businesses provide has increased [13]. To structure the existing work, con- refunds that do not require the item to be returned, increase ceptual, empirical, and analytical contributions are distin- a consumer’s transaction costs, or suspend deliveries. guished, because very few papers deal with product returns Since many retailers consider their return rates and costs in mail-ordering-related domains such as business-to- excessively high, they are interested in ideas and tech- business returns or reverse logistics in other industries will nologies to reduce return rates. Certain publications even also be considered. consider preventive returns management the most critical issue [2, 14, 15]. The success of several technology start- 2.1 Conceptual understanding and empirical ups demonstrates the need for innovative concepts and evidence tools. Examples are Upcload (www.upcload.com) and Sproov (www.sproov.com), both of which offer online Conceptually, Rogers et al. [12] describe a generic returns clothing fitting advisors. Their services may reduce size- management process that enables businesses to efficiently related product returns by 12–60 % [16]. Shoefitr (www. handle returned products and to identify levers that reduce shoefitr.com), which was recently purchased by Amazon the quantity of incoming returns. The strategic subprocess [17], offers similar business intelligence for shoes. This suggests determining returns management goals and strat- application requires the customer’s current model and size egy, developing avoidance, gatekeeping and disposition to calculate the likelihood that the new shoe will fit as well; guidelines, developing a returns network and flow options, it then recommends the best-fitting size. 123 Logist. Res. (2015) 8:3 Page 3 of 12 3 developing credit rules, determining secondary markets, decline with company size; smaller companies deal with and developing a framework of metrics for performance much higher expenses than their larger counterparts. The measurement. On the operational end, return requests are surveyed mail-order businesses claim that the average costs received, routing is determined, returns are received, dis- caused by the deterioration are 13.1 % of the goods’ value position is selected, consumers are credited, returns are [22]. analyzed, and performance is measured. Another process is presented by Stock et al. [18]. This 2.2 Analytical modeling more operational approach is composed of five stages: (1) receive; (2) sort and stage; (3) process; (4) analyze; and (5) Analytical decision-making models that include mer- support. The process begins with returns arriving at the chandise returns and their associated costs represent the processing site, which is usually a centralized warehouse or vast majority of relevant publications. Two categories distribution center. Next, the sort and stage activity pre- can be distinguished: inventory planning and product pares the efficient processing of incoming items. Thus, it is recovery models. Fleischmann et al. [23]present an reasonable to identify and separate different product cate- (s,Q)-inventory model with returns. The researchers’ gories (e.g., fashion and consumer electronics) as they are conclusion is ‘‘[…] that the return-flow has rather little likely to involve different processing. At the third stage, impact on the optimized expected average costs unless returns are transported to a processing station where the return ratio is close to one, resulting in high on-hand qualified personnel open each item and separate the inventory’’ [23]. Vlachos/Dekker [24] solve single-pe- accompanying paperwork, which is often sent to customer riod newsvendor problems considering resalable product service. Customers may be refunded at this stage if pre- returns that arrive before the end of the selling season. payments have been made. The fourth step involves They assume that products can only be resold once per examining each return thoroughly and determining the selling period. However, in practice, products may be appropriate disposition option. Finally, the redistribution of returned and reused several times within a season. repackaged, repaired, and refurbished products must be Mostard/Teunter [25] eliminate this assumption by using supported. As the authors observe, all of these activities a net demand approach. In addition, Mostard et al. [26] incur significant direct costs [18]. show that incomplete information regarding the demand Norek [19] adds that disposition costs depend heavily on distribution does not thwart a successful application. the chosen recovery option because of different cost Chen/Bell [27] simultaneously examine profit-maxi- structures and required depreciation. According to that mizing pricing and order quantity planning. Their article study, at least five asset recovery options exist. These are is basedonastudyby Andersonetal. [8] that claims that listed in descending order of revenue return as follows: (1) the probability of a return increases with a rise in the sale sell as new; (2) repair or repackage and resell as new; (3) price. They solve this problem for single- and multi- repair or repackage and resell as used; (4) resell at a lower periodic cases by assuming in the latter case that returns value to a salvage house; and (5) sell by the pound to a in period t will be sold in the following period t þ 1[27]. salvage house. Blackburn et al. [20] note that products with Despite integrating returns, all of these models rather short sales cycles are threatened with additional costs optimize decision-making in the forward supply chain through slow processing. The researchers refer to this as than in the backward supply chain. Product returns are the ‘‘marginal value of time.’’ In these cases, it may be viewed as a parameter that depends on the quantity sold economical to choose faster transportation and decentral- in previous periods, not as a decision variable. There- ized processing to minimize the time a product remains in fore, the existing models may not help to evaluate pre- the reverse pipeline to compensate for the value loss over ventive returns management measures as examined in time. this paper. Empirically, some authors measure the costs of returned The second category of mathematical models pursues goods. Stock et al. [18] estimate return expenditures at the optimal product recovery strategy by improving $30–35 per item for American mail-ordering. In Europe, acquisition, remanufacturing, and salvaging decisions [e.g., shorter distances lead to lower transportation charges, 28–30]. These contributions consider the quantity of pro- which explain a slightly smaller financial impact. A study duct returns as a decision variable. Hence, these contribu- by IBI Research estimates the costs for processing, tions are extremely useful to obtain the most from returns. administrative work, and disposition at 20 € per return in However, particularly in mail-ordering, a major proportion the German mail-order market [21]. Asdecker/Weigel [22] of returns may be prevented or avoided before they actually provide a more detailed appraisal. A survey of 303 German occur, which would be the best option for many distance mail-order businesses showed average processing and sellers. As Johnson [14] summarizes, ‘‘[t]he best return is administrative costs of 7.93 € per return. The unit costs no return.’’ 123 3 Page 4 of 12 Logist. Res. (2015) 8:3 Item is returned yes Item is offered Order Delivery Revocation? for sale no Item is sold Fig. 1 Linear rendering of the sales process for an item Table 1 Calculation of costs Rate of returns b 0 % 20 % 50 % 100 % and contribution margin while considering returns for n = 20 Expenditures subject to b: b ðÞ p  c þ r ($) 0 12.50 31.25 62.50 orders in accordance with Total costs: d þ b ðÞ p  c þ r ($) 27.50 40.00 58.75 90.00 Speights/Hilinski [31] Contribution margin: CM ðÞ b ($) 12.50 0 -18.75 -50.00 order Sum of contribution margins: n  CM ðÞ b ($) 250 0 -375 -1000 order A cost-benefit analysis of preventive returns manage- 15.41 %). If returned rates are reduced to 5 %, then the ment measures requires an understanding of the relation costs associated to returned and processed units is in the between the rate of returns and the associated costs. This order £ 6835.90.’’ type of examination has only been attempted in two articles The statements in both Speights/Hilinski [31] and Mon- [31, 32] that share one commonality: They view the order dragon et al. [32] suggest a linear relation between the rate of and the return as an isolated, onetime process that ends returns and the associated costs. However, this assumption is with the decision to either retain or return the goods premature for two reasons. First, the authors’ deliberations (Fig. 1). are based on singular, limited planning periods, which limit Accordingly, the vendor must bear the cost of returned the cost impact in an undue manner. In fact, every returned goods r (restocking cost) in addition to the distribution item needs to be sold again and then can be sent back yet costs d, which consist of the customer acquisition costs as again [26]. Consequently, the cost impact does not end with well as the packaging and shipping costs if paid by the the planning period under consideration, but with the final retailer. If the customer wants to keep the goods, the sale. Second, the possibility of deterioration during the company will realize the sales price p minus the purchase revocation period is excluded, which equates to a decline in price c and the necessary distribution costs d. Conse- value from a sales perspective. quently, the contribution margin CM of an order in relation A linear understanding of the sales process may be to the rate of returns b is calculated as follows: sufficient to successfully determine the contribution margin for a planning period such as in Speights/Hilinski [31]. For CM ðÞ b ¼ðÞ 1  bðÞ p  c  d b ðÞ r þ d order returns management tasks that go beyond that, the existing ¼ p  c  d  b ðÞ p  c þ r : ð1Þ understanding of the process is insufficient for the reasons An application of this formula is shown by Speights/ noted above. Therefore, this article, in contrast to prior Hilinski [31] in a typical example. The authors assign the publications, examines the issue by means of a circular parameter values p ¼ $100, c ¼ $60, d ¼ $27:50, r ¼ flow as described in the following section. $22:50 and assume four scenarios, each encompassing 20 To summarize the literature review, there are several orders (refer to Table 1). Accordingly, a business with a conceptual, empirical, and analytical essays regarding the rate of returns of 0 % generates a contribution margin of costs of returns. Existing publications provide insights into $250, which becomes negative as soon as b crosses the the returns management process and provide an idea of 20 % threshold. If none of the customers retain their what returns actually cost. Analytical models build on these ordered items (b ¼ 100 %), the company loses $1000. observations and improve decision-making with regard to Mondragon et al. [32] focus entirely on the variable inventory planning as well as selecting the best recovery expenses instead of the contribution margins. In the option. However, there remains a research gap concerning framework of a mobile communications company case the evaluation of preventive returns management activities. study, they report the following expected cost savings, This publication’s goal is a better understanding of the cost which resulted from a reduction in the rate of returns [32]: impact of merchandise returns in mail-ordering to establish ‘‘For the […] device the cost associated to returned and a basis for a cost-benefit analysis. It is intended to objectify processed units is in the order of £ 20,700 (a return rate of decisions concerning preventive measures and builds on a 123 Logist. Res. (2015) 8:3 Page 5 of 12 3 simple analytical model to determine the number of nec- 3.2 Determining the number of necessary returns essary orders and returns until the final sale, with and until the final sale without the possibility of product deterioration. Although mathematically savvy readers may argue that some of the Since the buyer by definition does not return the goods with following appears trivial, it should be noted that practi- the final order, one can easily determine the average tioners often neglect and shy away from complex models. number of necessary return processes NRðÞ b : Practitioners seek comprehensible and applicable tools and 1 1 1  b NRðÞ b ¼ NOðÞ b  1 ¼  1 ¼ solutions, which this article delivers. 1  b 1  b 1  b ¼ : ð4Þ 1  b 3 Basic model of a circular sales process Table 2 shows the quantity of necessary transactions in and examination of returned goods’ cost impact relation to b. With the rate of returns set at 50 %, the seller must turn the article over to two customers and process one The circular model does not end with the revocation if the return. In contrast, setting b at 70 % leads to 3.33 sales and consumer’s expectations are not met. Instead, the item is 2.33 returns processes on average. transported back to the seller, where it is received, processed, and stored. Subsequently, the goods are made available for 3.3 Relation between the rate of returns sale again. The higher the rate of returns b, the more times an and the associated costs to determine item must process through the cycle, shown in Fig. 2. the important decision-making parameters Therefore, the total costs determined by b are depended on the number of times an article is ordered as well as the The resulting costs until an item is sold CðÞ b depend on number of returns until its final sale. To assure a high level of NOðÞ b and NRðÞ b as well as the expense rates d and r: comparability between both models, it will be assumed that each order is composed of a single item. 1 b CðÞ b ¼ NOðÞ b  d þ NRðÞ b  r ¼  d þ  r 1  b 1  b d þ b  r 3.1 Determining the number of necessary order ¼ : placements until the final sale 1  b ð5Þ The probability of a single necessary order until the final Setting the parameter values to d ¼ $27:50 and sale isðÞ 1  b , b ðÞ 1  b for two, b ðÞ 1  b for three, r ¼ $22:50, in accordance with the Speights/Hilinski [31] N1 and b ðÞ 1  b for N transactions. It follows implicitly example, creates the cost curve shown in Fig. 3. that the average number of necessary orders NOðÞ b is: The figure visualizes the disproportionate increase in 1 1 1 X X X costs that coincides with an increase in the rate of returns b. n1 n n NOðÞ b ¼ n  b ðÞ 1  b¼ 1 þ b ¼ b : The linear relation suggested in Speights/Hilinski [31]or n¼1 n¼1 n¼0 Mondragon et al. [32] becomes untenable. ð2Þ An item’s contribution margin CM ðÞ b may now be article 1 n b is a convergent geometric series with the calculated by subtracting the costs incurred until the item is n¼0 individual term a ¼ b and the common ratio sold CðÞ b from the trade margin p  c: nþ1 a b nþ1 q ¼ ¼ n ¼ b, for which we need to determine the d þ b  r a b CM ðÞ b ¼ p  c  : ð6Þ article sum by observing the limit: 1  b 1 i X X Comparing Eq. (1)with(6) illustrates the differ- a 1 n n NOðÞ b ¼ b ¼ lim b ¼ ¼ : ð3Þ ences in contribution margins on the order and article i!1 1  q 1  b n¼0 n¼0 Processing Receipt Return transport Storage yes Item is offered Item is Order Delivery Revocation? no for sale sold Fig. 2 Circular rendering of the sales process 123 3 Page 6 of 12 Logist. Res. (2015) 8:3 Table 2 Expected number of Rate of returns b 0 % 20 % 50 % 60 % 70 % 80 % 90 % necessary transactions until the final sale of an item NOðÞ b 1 1.25 2 2.5 3.33 5 10 NRðÞ b 0 0.25 1 1.5 2.33 4 9 NOðÞ b þ NRðÞ b 1 1.5 3 4 5.66 9 19 Fig. 3 Visualization of the 400 € returns rate’s cost impact Distribution and return costs up to the item's final sale 350 € regarding the underlying model in the circular model (linear/circular) 300 € Costs per order based on the linear understanding of the sales process found in Speights/Hilinski (2005) 250 € 200 € 150 € 100 € 50 € 0 € 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 % Rate of returns (β) dþðÞ bþDbr level. The spread results from the revocation rights 1ðÞ bþDb that may be used not only once but multiple times DCOST % ¼  1: ð9Þ dþbr until an order finally converts into a sale. On average, 1b this process requires NOðÞ b transactions. Therefore, the Since certain measures influence not only the cost sit- relation between the two contribution margins is as uation but also the revenue situation, company represen- follows: tatives will particularly want two additional questions answered that pertain to preventive returns management: CM ðÞ b ¼ NOðÞ b  CM ðÞ b ¼  CM ðÞ b : article order order 1  b • What is the minimum increase required in orders/sales ð7Þ to justify a rise in the rate of returns from b to b It should be noted that Eqs. (1), (6), and (7) describe two (b\b )? overlapping effects. On the one hand, the order-based view • To what extent may orders/sales decline to ensure that a 0 0 underestimates the expenditures subject to the return rate reduction in the rate of returns from b to b (b [ b ) when multiple forward and reverse handling is necessary. leads to a positive overall effect? On the other hand, the circular sales process represents The first question is relevant to decision-makers who are additional chances to sell the product, which is why the considering liberalizing their returns policy, which com- absolute values of article-based margins are higher than the monly accompanies a rise in the rate of returns [33]. The order-based ones. second question mirrors a situation in which managers will Additionally, it is useful to determine the b value max soon roll out new measures that will simultaneously reduce required to achieve a positive contribution margin for the the rate of returns while upsetting certain customer groups. business; in other terms, CM ðÞ b [ 0: article Common examples of this are not enclosing a returns p  c  d voucher, tightening the returns policy, or introducing a b \ : ð8Þ max p  c þ r restocking fee. To answer these questions, the contribution margins achieved with the different scenarios need to be set Before investing in preventive activities, managers have in relation to each other. In terms of the percentage change a reasonable desire to quantify the expected cost effect. If for orders DORD % and sales DSALE %, this means: they are able to assess the impact on the returns rate Db, the CM ðÞ b percentage change in costs related to merchandise returns order DORD % ¼  1; ð10Þ CM ðÞ b DCOST % is determined as: order 123 Logist. Res. (2015) 8:3 Page 7 of 12 3 CM ðÞ b article DSALE % ¼  1: ð11Þ Consequently, expenditures subject to the product CM ðÞ b article returns rate would decline by 11.36 %. The necessary investments should not exceed the expected savings. Other The two effects are interconnected and basically repre- measures, such as aggressively promoting the free returns sent two sides of the same coin. Developing (7) shows that: options, may influence both costs and revenues. On the one 1  b DSALE % ¼ðÞ DORD % þ 1  1: ð12Þ hand, this would generate more impulse purchases by 1  b lowering reservations regarding ordering. On the other hand, impulse purchases have been known to be returned at a higher rate than usual [34]. In our example, an increase of 3.4 Application of the model in a numerical example 5 % points to b ¼ 55 % is predicted. The new article and order contribution margins are: This chapter ends with an example demonstrating the applicability of the developed formulas. The object of d þ b  r CM ðÞ b ¼ p  c article observation is a fashion mail-order retailer. The following 1  b parameter values apply to the examined item: p ¼ 89¤, 12¤ þ 0:55  8¤ ¼ 89¤  29¤ c ¼ 29¤, d ¼ 12¤, r ¼ 8 ¤. The rate of returns is set to 1  0:55 b ¼ 50 %, a realistic value in the fashion industry [25]. ¼ 23:55¤; Under these assumed values, the company attains an 0 0 CM ðÞ b ¼ p  c  d  b ðÞ p  c þ r order average unit contribution margin of: ¼ 89¤  29¤  12¤  0:55 ðÞ 89¤  29¤ þ 8¤ d þ b  r ¼ 10:60¤: CM ðÞ b ¼ p  c article 1  b 12¤ þ 0:5  8¤ Before adopting such a proposal, the expected effect on ¼ 89¤  29¤  ¼ 28¤: 1  0:5 earnings must be contrasted with the expected effect on Consequently, the product’s retail price floor that breaks costs. even with all else remaining equal is 89¤  28¤ ¼ 61¤. CM ðÞ b 28¤ article DSALE % ¼  1 ¼  1 ¼ 0:1887 Switching to the order perspective, the contribution margin CM ðÞ b 23:55¤ article equals: ¼ 18:87 %; CM ðÞ b ¼ðÞ 1  b CM ðÞ b ¼ðÞ 1  0:5 28¤ order article CM ðÞ b 14¤ order ¼ 14¤: DORD % ¼  1 ¼  1 ¼ 0:3208 CM ðÞ b 10:60¤ order In addition, b signifies the maximum return rate with ¼ 32:08 %: max a positive value contribution: In our example, sales must increase by at least 18.87 % p  c  d and orders by at least 32.08 % to balance the added costs. b \ max p  c þ r If this appears realistic, the proposal should be adopted. 89¤  29¤  12¤ b \ max 89¤  29¤ þ 8¤ b \0:7059 4 Extending the basic model with the possibility max of deterioration b \70:59 %: max This means that the contribution margin slips into the Until now, this paper has focused on the fundamental red as soon as the rate of returns crosses the threshold of connection between the rate of returns and the associated roughly 70 %. costs. A more realistic portrayal of the sales and return When assessing the effectiveness of preventive mea- process needs to integrate deterioration, either through sures, such as improving the instruction manual or adding usage or during the transportation processes. Therefore, illustrations, an assumption of the expected effect on the businesses evaluate the item’s condition and assign a dis- returns rate is required. A decrease by 5 % points, that is position option. Referring to Norek [19], the model is Db ¼0:05, leads to: extended to consider the most important salvaging options, dþðÞ b þ Dbr 12þðÞ 0:5  0:058 that is, (a) sell as new, (b) repair or repackage and resell as 1ðÞ bþDb 1ðÞ 0:5  0:05 DCOST % ¼  1 ¼  1 new, and (c) write off and replace the product with a new dþbr 12 þ 0:58 10:5 1b one after either selling the return to a salvage house or 28:36 disposing of it (refer to Fig. 4). Therefore, it is necessary to ¼  1 ¼0:1136 ¼11:36 %: 32 distinguish between A-, B-, and C-returns. 123 3 Page 8 of 12 Logist. Res. (2015) 8:3 Re-Conditioning B-return p(B) A-return Processing Condion? Receipt p(A) C-return p(C) Write-off/ Storage Return transport replacement yes Item is offered Order Delivery Revocaon? no Item is sold for sale Fig. 4 Circular rendering of the sales process while considering the item condition A-returns are considered to be in a flawless state and can Hence, the unit contribution margin changes to: be resold immediately, which is why merely the base CM ðÞ b ¼ p  c article expense rate r is incurred. B-returns require minor work before they can be resold (i.e., changing of the packaging or d þ b ðÞ r þ pBðÞ e þ pCðÞðÞ c  m minor repairs), leading to additional processing expenses e. 1  b C-returns cannot be reconditioned for sale on the primary ð15Þ market. In this case, the seller must write off the purchase The formula for the maximum return rate that generates price c. Should the vendor be able to sell the goods to a a positive contribution margin b is adapted to: salvage house, this figure will be reduced by the received max compensation m. However, should the seller be forced to p  c  d b \ : ð16Þ max bear waste disposal costs, m will be assigned a negative p  c þ r þ pBðÞ e þpCðÞðÞ c  m value. Table 3 summarizes the decision-making process. A final adjustment is required for the percentage change in costs: 4.1 Model adjustment to consider different item dþðÞ bþDbðÞ rþpBðÞeþpCðÞðÞ cm conditions 1ðÞ bþDb DCOST % ¼  1: ð17Þ dþbðÞ rþpBðÞeþpCðÞðÞ cm 1b Based on this information, the order contribution margin can be calculated in consideration of the heterogeneous The equations for DORD % and DSALE % remain valid. item conditions. Building on the base model introduced in the previous section, damages e as well as c  m will be additionally considered with their likelihood of occurrence 4.2 Integrating different item conditions pBðÞ and pCðÞ, respectively. Adjusting Eq. (1) leads to: in the numerical example CM ðÞ b ¼ðÞ 1  bðÞ p  c  d order Building on the numerical example introduced in b ðÞ r þ d þ pBðÞ e þ pCðÞðÞ c  m Sect. 3.4, the set parameter values remain valid. How- ¼ p  c  d  b ðÞ p  c þ r þpBðÞ e þ pCðÞðÞ c  m : ever, now, only 90 % of the returns are in a resalable ð13Þ condition. Seven percent show minor damages that can Accordingly, the cost factors affected by the rate of returns be corrected. This involves average processing costs of must be adjusted. Since damages in relation topBðÞ andpCðÞ 6 €. Three percent of the returns are sold to a salvage could occur during each return process, it follows that: house that pays 5 € for each return. This leaves us with pAðÞ¼ 0:9, pBðÞ¼ 0:07, pCðÞ¼ 0:03, e ¼ 6¤,and CðÞ b ¼ NOðÞ b  d þ NRðÞ b  r þ NRðÞ b pBðÞ e m ¼ 5¤. þ NRðÞ b  pCðÞðÞ c  m ð14Þ By additionally considering the item condition, the d þ b ðÞ r þ pBðÞ e þ pCðÞðÞ c  m unit contribution equals 26.86 € instead of the previous ¼ : 1  b 28 €: 123 Logist. Res. (2015) 8:3 Page 9 of 12 3 Table 3 Possible item conditions and their economic consequences Disposition option Description Probabilities pAðÞþ pBðÞþpCðÞ¼ 1 Additional cost A-return Indistinguishable from new goods pAðÞ – B-return Goods with minor damage pBðÞ e C-return Goods that are no longer sellable pCðÞ c  m d þ b ðÞ r þpBðÞ e þpCðÞðÞ c  m d þ b ðÞ r þ pBðÞ e þ pCðÞðÞ c  m CM ðÞ b ¼ p  c  CM ðÞ b ¼ p  c article article 1  b 1  b ¼ 89¤  29¤ ¼ 89¤  29¤ 12¤ þ 0:55 ðÞ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ 12¤ þ 0:5 ðÞ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ 1  0:55 1  0:5 ¼ 22:16¤; ¼ 26:86¤: 0 0 CM ðÞ b ¼ p  c  d  b ðÞ p  c þ r þ pBðÞ e þ pCðÞðÞ c  m order Hence, deterioration reduces the possible price floor at ¼ 89¤  29¤  12¤  0:55 which the product breaks even. The order contribution ðÞ 89¤  29¤ þ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ margin diminishes from 14 € to 13.43 €: ¼ 9:97¤: CM ðÞ b ¼ðÞ 1  b CM ðÞ b ¼ðÞ 1  0:5 26:86¤ order article Once again, the expected effect on earnings must be ¼ 13:43¤: compared with the expected effect on costs. CM ðÞ b 26:86¤ article Similarly, the maximum rate of returns with a positive DSALE % ¼  1 ¼  1 ¼ 0:2121 CM ðÞ b 22:16¤ contribution margin declines to: article ¼ 21:21 %; p  c  d b \ max CM ðÞ b 13:43¤ order p  c þ r þpBðÞ e þ pCðÞðÞ c  m DORD % ¼  1 ¼  1 ¼ 0:3466 CM ðÞ b 9:97¤ order 89¤  29¤  12¤ b \ max ¼ 34:66 %: 89¤  29¤ þ 8¤ þ 0:07  6¤ þ 0:03 ðÞ 29¤  5¤ b \0:6942 max The possibility of deterioration leads to additional costs b \69:42 %: max that require more orders and sales to be compensated, making it less likely to have an overall positive impact. Referring to the preventive tasks of returns manage- Adapting this case shows that once deterioration in the ment, the possibility of deterioration enhances the effect of item’s condition is considered, the disproportionate avoiding and preventing return shipments. A decline of b increase in costs is further amplified. by 5 % points to 45 % would reduce expenditures subject to the returns rate by 13.67 %: 5 Implications of model results dþðÞ bþDbðÞ rþpBðÞeþpCðÞðÞ cm 1ðÞ bþDb DCOST % ¼  1 dþbðÞ rþpBðÞeþpCðÞðÞ cm The presented model leads to a range of theoretical and 1b practical implications. Theoretically, it analyzes the rela- 12þðÞ 0:50:05ðÞ 8þ0:076¤þ0:03ðÞ 29¤5¤ 1ðÞ 0:50:05 tion between the rate of returns and the costs of returning ¼  1 12þ0:5ðÞ 8þ0:076¤þ0:03ðÞ 29¤5¤ goods, which is critical for the success of mail-order 10:5 businesses. In contrast to previous publications, the sales 28:61 ¼  1 ¼0:1367 ¼13:67 %: process has been rendered in a circular manner. The model 33:14 shows that the costs associated with a rise in the rate of The increase compared to the previously determined returns do not increase linearly, as the results of Speights/ 11.36 % justifies higher investments in preventive mea- Hilinski [31] or Mondragon et al. [32] imply. Although sures. Beyond that the impact of a free returns promotion their order-based approach is well suited to determining the needs to be tested under the new conditions. Increasing the contribution margin for a single period, it obscures the real rate of returns to b ¼ 55 % results in an article and an disproportionate relation. This effect is further amplified by order contribution margin of: deterioration, either through usage within the revocation 123 3 Page 10 of 12 Logist. Res. (2015) 8:3 period or through damages incurred during the logistics following justification [36]: ‘‘[…] a careful review of this processes. account and related ones shows you’ve requested refunds Hence, the article contribution margin differs from the and replacements on a majority of your orders for a variety order contribution margin and decreases more lopsidedly of reasons. In the normal course of business, we expect as the rate of returns rises. Acknowledging this difference there may be occasional problems. However, the rate at is vital for accurately predicting an item’s potential for which such problems have occurred on your account is success, determining its retail price and price floor as well extraordinary, and it cannot continue. Your Amazon.com as evaluating the implementation of preventive measures. account has been closed, and you will no longer be able to Therefore, this publication complements the existing range shop in our store.’’ Since Amazon is known as an extre- of analytical models, which primarily improved decision- mely data-driven enterprise, it can be assumed that the pros making concerning inventory management and product and cons were thoroughly weighed prior to this decision recovery [23–30]. In contrast, this paper objectifies deci- and that the expected reduction in costs tipped the scales in sions regarding the prevention and avoidance of returns favor of the suspension of deliveries. before they actually occur. Another takeaway is that the possibility of deterioration Moreover, the developed circular model shows that the amplifies the aforementioned effects. Therefore, distance product returns should not be viewed as isolated from the sellers should work on smart solutions that increase the forward-directed flow of materials. The more often a pro- proportion of A- or B-returns, which may be resold as new duct is returned, the more times it has to be ordered and after minor rework, to minimize value depreciation. Such shipped, leading to additional distribution costs. an approach can be observed at Amazon. Amazon coop- This finding leads to practical implications. To maxi- erates with manufacturers to box products in so-called mize profits, it is necessary to coordinate the returns Amazon Certified Frustration-Free Packaging [37]. The management process with traditional corporate functions, packaging benefits consumers because it is easy to open particularly with marketing/sales and logistics. Manage- and causes less waste. However, it is also advantageous for ment must ensure that function-specific goals and activities Amazon since damaged packaging can be easily replaced, targeting the success of the business are in harmony. which reduces the quantity of unsellable C-returns. It is understandable that from a marketing perspective, one would want to design the returns process to be as simple and as accommodating as possible. However, 6 Conclusions and further research market and sales success does not inherently lead to busi- ness success. Conversely, excessive focus on costs should This paper introduced a circular model for the sales and also be critically scrutinized because the pursued measures returns process in a mail-order context. Geometric series potentially impede additional turnover. Therefore, busi- have been used to describe the relation between the rate of nesses should target a balanced approach that integrates returns and related costs. The advantage of this basic model both sides of the same coin: that is, focusing on customer is that even less mathematically savvy practitioners can satisfaction without losing sight of cost-effectiveness. This easily apply it and improve their decision-making by requires an integrative stance and is closely related to the replacing gut feelings with facts. decision on which preventive measures to adopt. Both Referringto the threeresearchquestions posed inthe avoidance and gatekeeping reduce the number of returns to beginning, the major lesson learned from this article is be processed. that preventive actions play a pivotal role in successfully The German fashion retailer Bonprix, for example, adds running a mail-order business. The evaluation of such 3 € of store credit to a customer’s account for orders that activities requires (1) estimates regarding a measure’s are not returned [35]. According to the model results, the effect on the likelihood of ordering and returning, (2) likelihood that these types of avoidance investments will information about an article’s trade margin, and (3) data permanently improve operating results increases with the on the distribution and return costs. The findings suggest rate of returns. Gatekeeping measures are less popular in that distance sellers with high return rates are very likely business practice because sellers fear the negative influence to benefit from avoidance and gatekeeping. Such busi- these may have on customer satisfaction and the generated nesses should also reflect upon tightening their returns turnover. Nonetheless, the use of these measures should not policies. In contrast, vendors with low return rates should be categorically excluded from the realm of possibilities. It critically review preventive options. Moreover, because is essential to verify whether the reduction in costs asso- of the described disproportionate relation, the latter ciated with the diminished rate of returns can sufficiently vendors are often better off loosening their policies, compensate for the decline in orders. Only recently, making product returns easier and more convenient for Amazon decided to close several accounts, providing the customers. 123 Logist. Res. (2015) 8:3 Page 11 of 12 3 Beyond this preventive perspective, the model may also References be regarded as a plea to constantly improve merchandise 1. BEVH (2014) Aktuelle Zahlen zum Interaktiven Handel. http:// returns handling as it has a direct impact on administrative, www.bevh.org/markt-statistik/zahlen-fakten/. Accessed 31 Oct processing, and disposition costs. The lower these costs, the less steeply will the cost function subject to the returns 2. O’Neill S, Chu J (2001) Online returns management strategies. rate rise. Therefore, mail-order businesses are strongly IBM Global Service eStrategy Report 3. Mollenkopf DA, Rabinovic E, Laseter TM, Boyer KK (2007) recommended to seize every opportunity to streamline Managing internet product returns: a focus on effective service internal processes, negotiate lower shipping charges, and operations. Decis Sci 38:215–239 improve the product recovery rate. An optimal returns 4. Petersen JA, Kumar V (2009) Are product returns a necessary management strategy embraces both preventive measures evil? Antecedents and consequences. J Mark 73:35–51 5. Shulman JD, Coughlan AT, Savaskan RC (2009) Optimal and the efficient handling of inevitable returns. restocking fees and information provision in an integrated Finally, this work should stimulate further research. To demand–supply model of product returns. Manuf Serv Oper deduce conclusions concerning the success potential of the Manag 11:577–594 preventive returns management, it is necessary to investigate 6. 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Logistics Research – Springer Journals

Published: Jul 31, 2015

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