As a planner, you are responsible for forecasting and projecting sales, margin rates, and inventory levels for your assigned product category. How do you generate this information? Through the thoughtful analysis of historical data coupled with current trends. A key factor that impacts your forecasts and is often overlooked is return rates. It is easy to disregard the impact of returns to your business when you are busy focused on quantifying sales velocities and receipt needs; however, returns should never be “out of sight, out of mind.” Since return rates can trend upwards of 50 percent (or more!) in some categories, it is necessary to build return rate assumptions into your buy plans and open-to-buys to show a more accurate inventory position and prevent purchasing unnecessary receipts. Returns data provides important information to your team. It can help you determine categories to grow or decline, vendors to discontinue, and site enhancements to better convey fit intent.
Returns are items that a customer sends back to a company for a variety of reasons. For eCommerce retailers, common return reasons include the following: fit issues, quality issues, and the purchase of multiple sizes with the intent to return. Return rates can dramatically vary by category. ECommerce retailers can prevent categories such as intimates, makeup, and hosiery from being returned. Thus, these categories exhibit 0 percent return rates. Conversely, bridal dresses can have return rates around 50 percent. This is because customers tend to purchase multiple sizes of a desired style since they are unable to try on items in person.
Return rates should be monitored frequently and it is up to both the planner and buyer to determine the taxonomy level or appropriate categorization to be analyzed. For example, as a planner overseeing a dress business, my team decided to analyze return rates at the vendor level. By assessing returns at the vendor level, we were able to identify vendors with increasing return rates and work with these partners to address the factors driving returns. My buyers realized that there were a handful of styles from one of our vendors garnering over a 60 percent return rate. After assessing customer feedback data from the returns, it was clear that these styles were tight in the bust and therefore did not fit our customer appropriately. With this information, we worked with the vendor to ensure that future styles did not have this issue and we were able to negotiate a return credit on the highly returned styles.
ECommerce retailers are equipped with a wealth of returns data, both quantitative and qualitative; therefore, it is easy to aggregate customer feedback and present these findings to vendor partners in order to mitigate high returns and rectify future orders.
Why is it important to forecast returns in your plans? To provide an accurate picture of inventory and ensure proper receipt recommendations are made. Let’s walk through a quick example.
Imagine that you are an inventory planner managing the sweaters business at your company. You are planning your Q1 sales and inventory positioning, which of course takes into account carry over inventory from Q4. Given that sweaters are a gifting category in Q4, it is important to account for a spike in returns during the months of November, December, and January. You look at historical return rates date for the past two years and notice that return rates increase to 25 percent versus an average of 20 percent in the previous months. You then update your open to buy to account for a 25 percent return rate in these months.
By doing this, you are assuming that a quarter of your inventory will be returned by customers and re-enter your pool of inventory. By factoring this in, you prevent purchasing excess receipts to support sales since a greater proportion of your units will be returning to your warehouse as returned merchandise. Now, it is important to note that if your returns are due to poor quality, bad fit, or other product issues, you can consider return credit negotiations with your vendor partners or product liquidation. The return rate assumptions that you build into your open-to-buy or buy plan assume that inventory returned is saleable to customers (i.e. the item is not being returned because of an unfixable garment issue).
Keep a close eye on your return rates and be sure to address potential returns issues as early as possible. Vendors are amenable to negotiating returns credits if you provide them with data and customer comments. Maintain an open dialogue with partners if you are seeing trends in your return reasons.
For more information on the metrics inventory planners need to track, and how to track them, download our Retail Math Guide. For more information on the inventory planning role and how to do it effectively at your retail business, download A Guide to Inventory Planning.