Planning for Inventory Returns

Retailers are in the midst of the holiday peak. While the sales peak ends at Christmas for most, the inventory returns peak is yet to come. This annual phenomenon invariably creates waves, especially if you sell products with typically high return rates (e.g., footwear and apparel).

Consider that a return rate of 20 percent for a retailer with top-line demand of $50 million means $10 million in returned sales. Then take the reduction in gross margin dollars and add the cost of processing the returns. It’s clear that returns can strongly impact a retailer's bottom line.

Thus it’s incumbent upon merchants and inventory planners to try to reduce returns … or at least plan around them as best they can. Here are four areas to key on:

1. Understand the causes of returns and fix them wherever possible. To reduce returns you must understand the reasons behind them. If you’re not already doing so, put processes in place to record the reason for every return. With analysis you can take corrective action, such as improving marketing communications so both art and copy clearly communicate the product to consumers. Make sure your sizing is rigorously consistent across all product lines and communicated clearly and often.

2. Factor returns into your product assortment planning. While you can’t eliminate returns, you can at least compensate for them. If you’re able to shift your product mix to increase demand in those categories with lower return rates, you'll achieve higher total net sales. It’s that simple.

3. Consider returns in your inventory planning to optimize fulfillment and cash flow. Returned inventory lowers sales and reduces profits. The timing and management of returns can also impact fiscal sales and profit as they relate to order fulfillment and inventory turnover. To optimize inventory and maximize fulfillment and cash flow, inventory planners need to apply the following best practices: