Written by Nick Inzeo 

Key takeaways:

  • The cost of product returns is very high for brands and retailers. In 2020, the cost of product returns was, on average, 10.6% of total sales.
  • Product returns that are caused by operational inefficiencies can be controlled by improving processes and strategies.
  • According to the 1-10-100 rule, the cost of preventing quality defects is lower than the cost of correcting defects, which in turn is cheaper than the cost of letting defects reach your customers.
  • As a brand or retailer, you should aim to eliminate product defects as far upstream in the production process as possible by taking advantage of pre-production meetings, optimizing quality checks, and minimizing risk of poor quality.

The Problem: Hidden Costs of Returns for Retailers

Unfortunately, consumers often return products because of quality issues that go unresolved throughout the production process. This is especially common in clothing and shoe retail, causing high-profit losses across multiple areas.

On top of losing the sale itself when the customer returns a defective product, your company will then have to shoulder the numerous costs of processing the return. Then comes the laborious and costly job of tracing back to where the problem started. Additionally, your brand will lose face if you’re processing a high return volume—a loss which, while difficult to quantify, will noticeably impact future sales.

To give you a better idea of the total expenses that product returns can add up to, consider the fact that US retailers lost $428 billion in returns in 2020 alone.

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Additionally, the majority of these returns and losses (12.2%) fell under the apparel retail category.

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ECommerce-specific expenses can be even higher.

Costly returns have also piled up in the eCommerce category of apparel retail. Most eCommerce companies have greatly expanded their reach during the pandemic, thanks to the increased demand for product delivery. Regrettably, this jacks up the costs of product returns because the expenses associated with processing returns have gone up—it’s a lot pricier to deal with shipping costs, on top of the existing profit losses.

Out of the $565 billion in online sales in the US during 2020, (approximately 14% of US retail sales), $102 billion (18.1% on average) in profits were lost due to product returns.

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80.2% of those returns were a result of the item reaching the customer damaged or broken, likely as a result of preventable defects.

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A simple breakdown of return costs:

When a customer returns something, it sets off a whole chain of processing events—and each link incurs additional costs. On average, processing an online return can cost $10-$20 dollars. This cost can be broken down into packaging and fuel expenses alongside handling expenses.

Shipping and handling expenses shouldn’t be underestimated: Each time a worker touches a product on its way through the return process represents an added labor cost. Products also lose value the longer they sit, tied up and unsellable, in the return process.

However, it’s important to remember nothing can ever be perfect:

As long as retailers are selling, products will be returned. Returns fall under one of two categories: Controllable returns and uncontrollable returns.

Uncontrollable returns include returns a company can do almost nothing to avoid.

Controllable returns are those your company can change by eliminating errors and refining supply chain strategies and processes.

You should aim to attack quality issues at the root while streamlining your response to uncontrollable returns.

The 1 – 10 – 100 Rule

Controllable returns related to defects are usually rooted in operational issues. Therefore, the best method of attack is to improve operational efficiency. You can hone this strategy with the 1-10-100 Rule, which relates to the “cost of quality”.

Here’s how the cost of quality generally plays out:

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In the context of apparel retailers, we’ll define failure as a dissatisfied customer returning a product, saddling the company with all the aforementioned costs of the return.

Why let production quality issues snowball until you spend $100 on the cost of failure in the form of a product return? And why spend $10 correcting a problem with production quality when you could spend a mere $1 maximizing your operational efficiency and preventing the problem from reaching production in the first place?

Prevention is less costly than correction—and much less costly than failure.

It’s far more logical for a company to spend a dollar preventing defects before they even reach the production line than to wait for a problem to spread throughout production, undermining profits. Investing in prevention and correction will dramatically reduce profit losses incurred by the failure of product returns and all their related expenses.

The Solution:

Now that you’ve seen a detailed breakdown of how much product returns can cost, you’re surely eager for a way to reduce $100 in company losses to $10—or, ideally, to only $1. Luckily, there are five great ways you can improve your company’s quality assurance and prevent defects from reaching your customers, improving reputability and maximizing profits.

1. Take advantage of key activities like Pre-Production Meetings.

Taking advantage of Pre-Production Meetings (PPM) early on in the process will help your company spot potential risks as soon as possible. Once you’ve spotted areas with a higher risk for defects or quality issues, you can then collaborate with your manufacturers and form a solid plan on how to manage those risks and prevent them.

By identifying and taking countermeasures against potential risks early in the process, you and your manufacturing partners can nip them in the bud before they ever reach production. This step is one of the best ways to prevent a defect from ever reaching the consumer.

2. Make sure you have an inside view of the production process.

In the event a quality issue or defect risk does manage to make it past your PPM, then you’ll be most able to catch it early if you have a reliable information source from within the production stream. Being able to keep a close eye on production will allow you to catch budding issues quickly so you can intervene immediately and minimize both current and future damages to profitability.

By capturing quality information from an inside source while the product is being made, you’ll be able to get a jump start on knowing exactly where to correct any problems and prevent a $10 cost from becoming a $100 loss.

3. Optimize your quality checkpoints.

Another great way to keep an eye on production quality is to ensure you have the right quality checkpoints in place. Product inspections throughout the production stream are highly important since these will allow you to identify potential issues sooner. Final inspections are also ideal so you can check thoroughly for defects and flaws before your goods leave the manufacturing location.

It’s also a good idea to have a quality checkpoint set up at your warehouse so you can make a final pass over the quality of your goods before they’re distributed to retail locations or online consumers. The warehouse might be a long way down the production stream, but it’s still another golden opportunity to catch errors and protect yourself against profit loss.

4. Begin as far upstream as possible to minimize risk.

No matter how much intel you have on the inside or how many quality checkpoints you’ve installed throughout the production process, it’s crucial to start as far upstream as possible. This concept can’t be stressed enough: The more time and energy you put into the earliest stages of production, the more likely you are to mitigate problems and prevent defects from ever happening in the first place. The earlier the correction, the less it costs!

5. Build upon previous data in order to improve.

Make sure you’re gathering and organizing data from each round of production so you can build off of the trends you see. A.I. and machine learning are excellent tools that can help you do this by analyzing data and highlighting potential errors that are likely to occur. Embrace this technology’s ability to predict future risks and formulate plans for how to avoid them in advance. This way, you can prevent defects entirely.

These five tips all converge into a closed-loop process:

After your PPM, gather important data on the production process with inside info and skillfully-placed quality checkpoints and tie it all together.

Once you centralize the information you’ve gathered through one round of production, you can learn from it and circle back to the beginning of the next round of production with those learnings in hand. Apply what you’ve learned from the data you’ve gathered to prevent even more defects before they happen. Repeat the process so you can fine-tune your quality assurance strategy with each round of production.

These five tips all converge into a closed-loop process:  How The 1 – 10 – 100 Rule Can Help Your Company Save on Return Costs 1134813 GraphicsBlogPost1 10 100Rule B7 072821 copy1

How Inspectorio Can Help

Certainly, every business does their best to spot defects and quality issues before they reach the consumer—often by catching them during the final inspection. With help from Inspectorio, retailers and brands can improve their strategies by taking what they’ve learned during final inspections and carrying that information further up the production stream to catch potential risks sooner.

Inspectorio’s technology platform uses the closed-loop process to help retail companies apply their learnings to earlier and earlier stages of production. That way, clients can optimize their processes like never before, maximizing their profits and streamlining their processes to take their production and brand reputation to a whole new level!

About the author

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Nick Inzeo
Business Development Director at Inspectorio
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