While returns can increase inventory carrying costs, returns data can be used to improve inventory management while reducing expenses.
Behind every successful retail business is a well-oiled inventory management system. The correct amount of materials and products are always ordered, they’re properly received and stored, orders are efficiently packaged and shipped, and everything is meticulously tracked. Unfortunately, from high-profile brands with large inventories to small start-up companies with minimal inventory, this perfect scenario rarely occurs.
Whether it’s from inventory distortion (out-of-stock and overstock)—which rose from $ 1.1 trillion in 2015 to $1.8 trillion in 2020 according to IHL Group—or simply poor management strategies, even the smallest inefficiencies can quickly cut into a business’s bottom line.
While returns can initially increase inventory carrying costs and reduce profits, returns data provides invaluable insights that help create targeted solutions and lead to inventory management savings.
The Impact of Returns on Inventory-Carrying Costs
Carrying costs are one of the biggest challenges when it comes to inventory management and returns can make it even more complex. While it varies by both the size and industry of the business, holding costs usually total 20-30% of the total inventory value in the best of times. When products or brands have high return rates, however, those costs can skyrocket.
A single returned item can require additional labor, impact warehouse utilities, returned inventory can take up valuable warehouse space, etc. Additionally, returned items increase risk-holding costs since returned items can depreciate, become obsolete, etc.
While some returns are allowable—such as those from consumers who simply don’t like a product—minimizing returns is an essential part of improving inventory management. And analyzing returns data is the first step.
Returns Data Helps Reduce Inventory Management Expenses
Returns data can be used to improve inventory management in a variety of ways:
1. Returns data can help forecast the inventory required to meet demand.
Accurate inventory forecasting ensures that a business will have enough products to meet demand without having to hold excess inventory. While keeping less inventory on hand can reduce risk-holding and warehousing costs, it can also increase the likelihood of stock-outs. Returns data, however, can provide insights that improve the accuracy of inventory forecasting since, in many cases, returned merchandise can go back into inventory.
2. Returns data can be used to optimize warehouse space.
When products aren’t performing well, they can take up valuable warehouse space that would be better utilized by stronger-performing products. Returns data can not only identify poor performers but it can also be used to identify categories that are likely to perform well and should receive more warehouse space.
3. Returns data can be used to help negotiate terms with suppliers.
When negotiating terms with suppliers that incentivize good returns performance, returns analytics are invaluable. It can help avoid unfavorable deals which lead to the retailer bearing a large share of the cost of returns (such as a large quantity of unsellable merchandise).
4. Returns data helps retailers collaborate with suppliers on product improvements.
By identifying the driving factors behind returns, retailers can work with suppliers to improve products as well as improve product specifications, packaging, instructions, web copy, etc. As this will lead to greater sales for both the supplier and the retailer (as well as more efficient use of warehouse space), this is a win-win scenario for both parties.
5. Returns data can improve warehouse staff management.
Accurate forecasts of sales and return volumes will allow businesses to set appropriate staffing levels. That means minimal staff when products are predicted to move slowly and additional staff when appropriate. Overall, the costs associated with labor will be used more efficiently.
Returnalyze Builds Targeted Inventory Management Solutions
The Returnalyze Intelligent Dashboard provides the detailed information necessary to identify returns issues that can add costs to your inventory management. In order to identify targeted solutions, however, that data must be expertly analyzed.
That’s why a partnership with Returnalyze also comes with step-by-step guidance from our expert data analysts. We’ll work with you to leverage returns data in order to identify issues, opportunities, and develop targeted solutions for inventory management savings.