December 2021

Order fulfillment is a uniquely important spoke in the production and distribution wheel. Once customers go through the path to purchase, fulfillment — what makes it possible for them to actually receive their merchandise — is their eventual destination.

But whether due to a breakdown in communication, inventory listing errors or technological snafus, sometimes buyers wind up with the wrong item. Most studies on picking errors put the rate at between 1% and 3% of all orders. That may not seem like a lot of mistakes, but they add up over time if the rate is consistent from one day, week or month to the next.

With humans being what they are — naturally imperfect — fulfillment foibles will likely never be fully neutralized. But there are a variety of strategies manufacturers can deploy to lower the error rate.

Here are a few tips:

1. Consider a combination of automation solutions
Automation has revolutionized distribution warehouses in a litany of ways, but perhaps the biggest is in terms of minimizing errors. From collaborative mobile robots to pick-to-light technologies, warehouse automation specializes in performing several tasks at once, particularly the labor-intensive ones. Leveraging these and other AI technologies can not only reduce error rates, but make the fulfillment process as a whole much faster. IT also can free up your staff to perform functions that require more thought, deftness or dexterity that a machine cannot adequately replicate.

2.  Leverage labels
It may seem obvious, but many order fulfillment problems are resolved with the simplest of solutions. Whether it's through bar code scanners, unique SKUs or tags that are more easily discernible (i.e. bold font, placement, color contrasts, etc.), making sure all items are properly labeled can streamline the picking process for all involved. If the problems with your labeling system aren't readily discernible, picking the brains of your warehouse staff may provide clarity.

Barcodes help with product recognition and tracking.Barcodes help with product recognition and tracking.

3. Coordinate with other departments
Sometimes, errors in order fulfillment originate with an entirely different department. While the supply chain is increasingly interconnected, fulfillment stands on its own. As a result, if an order goes out that is damaged or defective, the problem may originate with receiving, which didn't recognize the flaw or failed to remove it from the assembly.

This is why it's important to maintain ongoing communication with other departments so problems are recognized before they arrive at fulfillment. Teams may need to flesh out what steps they take to enhance coordination and problem identification.

4. Codify inventory checks
Occasionally, fulfillment errors may stem from problems with inventory, where teams failed to account for items that needed to be replenished due to heavy buyer volume. Crucial to inventory management is consistency. Whether it's carried out once a week, every other week, monthly or some other appropriate interval, inventory management should be very systematic so the steps are easily repeatable and executable. It also ensures that the supply for hot-ticket items that sell quickly aligns with demand.

Whether through the air, by road or over the water, merchandise for eventual purchase flows through a variety of channels, but one of those channels is proving to be increasingly unreliable for those scheduled to receive shipments, according to the results of a new report.

In the month of October, schedule reliability among ocean freight carriers stayed below 40% for the sixth consecutive month. According to the Global Liner Performance report, a monthly analysis carried out by Sea-Intelligence that tracks 60 carriers and nearly three dozen trade lines, the schedule reliability index in October reached 34.4%. While that's a notch up from September, rising 0.4%, it's down 18 percentage points from the 52% seen a year ago.

Alan Murphy, chief executive officer for the analytics and advisory services firm, said there are some modest signs of optimism.

"The average delay for late vessel arrivals [has] improved marginally, dropping to 7.34 days, albeit still the highest figure for this month, which has been a theme throughout 2021," Murphy said in a press release.

Not too long ago, goods arriving on time by way of the sea was a veritable lock, with the measure reaching a high of 83.5% in June 2019, based on Sea-Intelligence data compiled by Supply Chain Dive. But the reliability of items reaching their destinations as originally forecast has tumbled fairly consistently since then, particularly in the second half of 2020.

This reality has contributed to the boatload of issues shippers are facing, said Sri Laxmana, vice president of global ocean product for the Minnesota-based logistics firm C.H. Robinson.

"Poor schedule reliability, coupled with high consumer demand, has handed shippers and forwarders a myriad of challenges," Laxmana told Supply Chain Dive.

Trucking is the dominant method of freight movement in the U.S.Trucking is the dominant method of freight movement in the U.S.

Trucks hauled over 80% of freight in 2020
Where possible, those on the receiving end of these deliveries aim to diversify the means by which items arrive. While the sea may be and remains a major thoroughfare, especially for big box retailers, trucking has long been the dominant method. It maintained that status in 2020. Trucking also brought in 80% of the revenue transportation companies were paid to move freight last year, according to the American Trucking Associations. In terms of weight, this equated to 10.23 billion tons, dropping from 11.84 billion in 2019. On a share basis, trucks typically account for around 72% of the tonnage that's carried.

Shippers also relied more heavily on air transport in 2020, with air cargo demand rising 3% on a year-over-year basis, according to Clive Data Services. Greater demand pressed air cargo rates higher as well, jumping 37% from 2020 and 155% versus October 2019.

The slowness and diminished reliability of shipments by way of the sea traces back to the congestion at the ports. From not enough truck drivers to an insufficient amount of containers drivers need to transport goods, bottlenecks at major shipping ports have created supply chain challenges that are rippling across the economy. The question is when the logjam will relent.

What is the smartest, most efficient way to get products into people's hands? This is a question business owners are constantly asking themselves. And that inquiry is more common than ever given the supply chain frustrations that remain ubiquitous. Historically, businesses have leveraged the road, as more than 70% of the tonnage carried is hauled by motor carriers providers, according to the American Trucking Associations.

But with many trucking entities helping out at at the ports, more companies are taking advantage of the friendly skies to get customers their purchases in a more timely manner, even though the costs are greater.

One such organization is the toy manufacturing giant Ty, Inc. In a recent press release, the Oak Brook, Illinois-based toy conglomerate announced that it had completed over 280 air shipments thus far, with the first one occurring in October.

Ty Warner, who serves as chairman and CEO for Ty, Inc., noted he's committed to ensuring families have their holiday gifts in hand and under the tree before the big day arrives.

"I'm doubling down on what I said two weeks ago: Christmas is not canceled," Warner explained. "I'm determined not to let the global supply chain issues interfere with the holidays, and I'm committed to supporting independent retailers."

More retailers are shipping by air than by sea or road.More retailers are shipping by air than by sea or road.

Gap also flying freight
Product delays have been felt by just about every retailer, largely fueled by massive delays at shipping ports. And likely because of this fact, Ty, Inc. isn't the only one utilizing the airways as a workaround. As Supply Chain Dive recently reported, clothing retailer Gap has already spent approximately $100 million to air ship products and deliverables, and the apparel chain expects to spend nearly $500 million on air freight in 2021 overall.

Another apparel giant — FIGS, which specializes in manufacturing work clothing for health care workers — is also spending millions of dollars on air freight. In an earnings call, FIGS Chief Financial Officer Jeff Lawrence noted the company is poised to top $8 million in air shipping in the fourth quarter alone, up from $1 million in the third quarter. He stressed, however, that this is a temporary measure.

"We don't think it's going to be air freight business ongoing," Lawrence said. "That was really just a reaction to the in-transit issues that everyone is having."

Shipping by air is fast, but expensive
This may be due to the costs involved. Just one cargo flight can cost between $1.5 million and $2 million, according to Ty, Inc. Similarly, the amount of money Gap has spent on aerial shipping needs will likely impact earnings expectations, the company announced in a third quarter sales update. However, Gap says it will continue to leverage air freight "to navigate ongoing delivery challenges for [the] holiday."

With more manufacturers relying on airlines and airports for cargo handling and distribution, it's pushing the associated rates up. In October, air cargo rates rose 37% compared to the same month last year and by 155% versus 2019, according to Cargo Airports & Airline Services.

Just as a combination of factors led to the existing supply chain challenges echoing across the economy, it will likely take a variety of solutions to get things back on track and moving as freely as they did pre-COVID. In any case, it may be a while yet before those improvements become more noticeable.

That was the general consensus of several chief executives who recently participated in a CEO summit held by The Wall Street Journal. While conditions do seem to be getting better for certain industries and businesses, it will take time for the bottlenecks to fully unclog.

Niraj Shah, CEO and co-founder of the e-commerce giant Wayfair, said he believes the biggest obstacles standing in the way appear to have been cleared, noting that June, July and August were likely the worst period for supply chain managers in recent memory.

"The bottom was this past summer, but it's recovering slowly," Shah said at the CEO Council Summit, which was held in Washington, D.C. on Dec. 7.

Dwell times starting to diminish
Those modest improvements are ongoing at several of the United States' largest shipping ports, where dozens of ships have been waiting for weeks on end to unload at unoccupied docking stations. For instance, according to the Marine Exchange of Southern California, on the last day of November, there were 134 total ships in port at the Ports of Los Angeles and Long Beach, 77 of which were at anchor or loitering. As of Dec. 7, there were 122 total ships and 66 anchored or loitering, according to the organization's regularly updated Twitter account.

But for certain items that flow through the supply chain, such as computer chips, the current environment is likely the nadir, according to Intel CEO Patrick Gelsinger.

"We think the period we are in now is the worst of it," Gelsinger said at the chief executive confab.

The nation's capital hosted The Wall Street Journal CEO Council Summit in December.The nation's capital hosted The Wall Street Journal CEO Council Summit in December.

Chip shortage expected to persist into 2023
Of all the core building blocks producers, distributors and supply chain stakeholders most rely upon to complete their processes, microchips may top them all. From toys to ATMs to smartphones to gaming consoles to automobiles, microprocessor chips shortages are having a domino-like effect for retailers and manufacturers.  And these components were hard to find well before the supply chain struggles as a whole became more evident.

Gelsinger added that in his view, the chip shortage could extend beyond next year and into 2023, The Wall Street Journal reported separately.

We have a long way to go yet, Gelsinger said. "It just takes a long time to build [manufacturing] capacity."

A number of other CEO with high name recognition spoke at the CEO Summit, including Tesla's Elon Musk, Bombardier's Eric Martel and Sysco's Kevin Hourican. All offered their views of the supply chain and what they anticipated heading into 2022. Growth in hiring may hasten the pace with which conditions improve and productivity enhances supply. In November, for the 18th consecutive month, manufacturing production edged higher, reaching 61.1% compared to October, according to the Institute for Supply Chain Management. A higher job participation rate should also help reduce product shortages.

Just as the supply chain is made up of many players and contributors, the bottlenecks that currently exist are a product of many factors. In an attempt to identify the root causes of the congestion, the Federal Trade Commission is getting involved.

As the agency announced in a prepared statement, the FTC has formally called upon several household-name retailers and suppliers to turn over all their internal documents and data that relate to supply chain management. These companies include Walmart — the world's largest employer — Proctor & Gamble, Amazon and Associated Wholesale Grocers Incorporated, among others. In a 4-0 vote, the commission that comprises the FTC was unanimous in its decision to issue the order to the aforementioned companies. 

Lina Khan, chairperson for the FTC, noted the inquiry is designed to get a better understanding of where the supply chain bottlenecks exist and how to best resolve them.

"The FTC has a long history of pursuing market studies to deepen our understanding of economic conditions and business conduct, and we should continue to make nimble and timely use of these information-gathering tools and authorities," Khan said.

The order is designed to inform a study that the FTC is currently putting together related to the ongoing supply chain challenges affecting the global economy. Khan noted that the 6(b) study — the title deriving from Section 6(b) of the FTC Act, which authorizes the agency to conduct such investigations — is meant to "shed light on market conditions and business practices" that may have exacerbated the disruptions or contributed to added instability.

The FTC has requested documents from nine retailers, suppliers and wholesalers.The FTC has requested documents from nine retailers, suppliers and wholesalers.

Other ways government is getting involved
The federal government has taken a number of steps toward improving the flow of the supply chain. This includes ordering the nation's two largest shipping ports — located in Long Beach and Los Angeles — to remain open 24 hours a day, seven days a week. Additionally, in mid-November, President Joe Biden told reporters that he met privately with several CEOs of organizations like Target, Walmart, FedEx and UPS to see what strategies they were working on. Biden noted at the time that the CEOs provided assurances their shelves would be sufficiently stocked for shoppers during the holidays. 

The Federal Maritime Commission is also taking a lead role in the supply chain relief effort. According to a statement the FMC issued on Nov. 15, the focus of the effort will be on identifying what data constraints are contributing to supply chain inefficiencies pertaining to cargo shipped by sea. FMC Chairman Daniel Maffei noted in the release that information sharing and transparency should help to shed more light on this ongoing problem and thanked FMC Commissioner Carl Bentzel for launching the inquiry.

"I am confident his work will lead to beneficial and implementable recommendations," Maffei said. The phased effort is slated to begin in December when Bentzel will hold the first meeting.

After five consecutive months of declines, the cost of lumber appears to be back on the rise again as residential builders head into winter.

Softwood lumber prices rose more than 9% in October on a seasonally adjusted basis, according to the most recent Producer Price Index released by the Bureau of Labor Statistics. This marks the first monthly increase in softwood lumber since May.

Lumber is one of numerous commodities experiencing dramatic price growth, largely due to limited quantities of said commodities. According to the Institute for Supply Chain Management, prices rose for over two dozen commodities in October, including adhesives, aluminum, copper, corrugate, diesel fuel and electrical components, as well as pallets and steel.

Building materials prices as a whole have also climbed, although not quite as substantially as softwood lumber, which is primarily used for interior moldings, framing and windows. As highlighted by the National Association of Home Builders, the cost for ready-mix concrete, gypsum and steel mill products all rose in October from August, up 0.6%, 2.1% and nearly 5%, respectively. And on a year-to-date basis, prices for those building products have soared — by nearly 117% for steel mill products.

Lumber prices are climbing ever higher.Lumber prices are increasing for a variety of reasons.

What is causing lumber prices to increase?
Several factors appear to be contributing to the price pressures. One is the elevated rate of home buying — and the speed with which newly listed properties are purchased. In October, existing-home sales totaled approximately 6.3 million on a seasonally adjusted basis, according to the National Association of Realtors. More than 80% of the houses listed in October were sold within a month's time or less.

Another factor is the amount of lumber that builders wind up using with each construction project. For example, according to the National Association of Home Builders' analysis of quarterly home starts data released by the Census Bureau, the median square footage for a single-family house completed in the third quarter was 2,337 square feet. That's up from 2,299 in the second quarter and 2,273 in the third quarter of 2020. The average square footage also rose, totaling 2,541 square feet from 2,540 in the second quarter and 2,479 in the corresponding period from last year.

Tariffs are an additional inflationary pressure on wood. In November, the Department of Commerce nearly doubled tariffs on lumber originating from Canada to 17.9% from what was 9%. Perhaps unsurprisingly, the decision has been roundly condemned by several lawmakers as well as industry trade groups, including the National Association of Realtors and the National Association of Home Builders.

Chuck Fowke, NAHB chairman, warned that this action will make a challenging situation for developers as well as home buyers that much worse.

"Doubling the tariffs will only exacerbate market volatility, put upward pressure on lumber prices and make housing more expensive," Fowke said.

Senators from New Hampshire and Kansas have since reached out to Commerce Secretary Gina Raimondo, urging the department and the Biden administration to reconsider.

On the surface, the solution to the supply chain bottleneck at shipping ports seems straightforward enough: Get chassis to truckers for delivery before the next batch of imports arrives. But the massive backlog that crews are slowly whittling away at is preventing crews from making serious headway in the mishmash of idling containers.

In an attempt to speed up the process, relevant stakeholders are devising productivity inducements that can expedite the movement of freight.

From the Federal Maritime Commission to major ocean carriers, several organizations are offering certain incentives to work crews. The theory is if stakeholders reward hard work to make it more worth crew members' while, they'll be that much more likely to give it their all in terms of effort and execution.

Some traffic mitigation fees suspended until late January
For example, the aforementioned Federal Maritime Commission has decided to temporarily waive traffic mitigation fees on weekends so companies will take advantage of non-peak hours. Instead, the fees will only be in place from Monday through Friday and from 7 in the morning to just before 6 in the evening. The exemption is slated to sunset Jan. 31 and went into effect Dec. 1.

"Domestic and overseas ocean carriers are taking similar measures, providing financial incentives for jobs well done."

Meanwhile, domestic and overseas ocean carriers are taking similar measures, providing financial incentives for jobs well done. This includes CMA CGM. As Supply Chain Dive reported, the France-based carrier announced it will offer $100 per container for timely pickups that occur before sunset. And if those same punctual pickups take place on weekends, the credits will be doubled to $200.

"The CMA CGM Group is committed to doing everything we can to assist in improving overall supply chain velocity in southern California," said Ed Aldridge, president of CMA North America. "By incentivizing the movement of containers off the terminals and ensuring pickups can be made on nights and weekends at FMS, we will decrease truck turn times and expedite the flow of goods into the United States."

Aldridge added that this is one of the ways supply chain stakeholders need to step up and be a part of the solution to the current inventory crisis.

Backlogs are diminishing — slowly
The supply crunch has been illustrated in a number of different ways. From out-of-stock signs on retail shelves to steadily climbing prices for major foodstuffs like beef, pork and rice, virtually every aspect of the supply chain is feeling the effects of port bottlenecks. While there are various opinions as to the root cause of the snags — not to mention inflation — the amount of time containers are stuck in neutral is impossible to ignore. In July 2020, the percentage of shipments sitting for more than five days was less than 6%. Fourteen months later, nearly a third of shipments were experiencing such dwell times.

As of Dec. 6, 123 total ships were within 40 miles of the Port of Los Angeles and Long Beach, according to a Twitter post from the Marine Exchange of Southern California. Of these, 62 were container ships, 35 of which were anchored or loitering. That's down from 135 total ships as of Dec. 3, of which 71 were container ships and 40 anchored or loitering.

Many categories, especially those related to construction and transportation have recently been subject to volatile price fluctuations due to a wide array of unique market conditions.  As a result of this volatility many organizations have seen their cost of goods experience an unexpected and rather drastic rise in price.  While predicting these market fluctuations can be difficult, many strategies do exist to help protect your organization against this unpredictability.  The following section below will help identify a few tactics to help protect your organization against market volatility:

Market Index Protection via Contracting

When entering into an agreement with any supplier, from a best practice perspective a “core list” of commonly used items should be populated in the exhibits portion of the contract with a negotiated price list.  This core price list should have competitive unit costs locked in for the entirety of the agreement.  Historically, when pricing is locked in language is populated in the agreement to protect the supplier from unexpected market disruptions and material shortages.  

For example, if a product you are buying is made from stainless steel, and the market price of steel increases at such a drastic rate that it results in a cost increase outside of your current negotiated rate, the goal in this scenario is to protect yourself from additional increases outside of the market index percentage increase.  To achieve this, your supplier must be contractually responsible to provide documentation in writing direct from the manufacturer and/or source that illustrates this price increase as a passthrough to you the buyer, with specific information tied back to steel’s price index supporting the reason for this increase.  This will help protect you from any potential increases outside of market conditions established within each commodity’s pricing index.   

Negotiate Pricing Rebates

Another way to protect your organization against market unpredictability is by engaging in end of year rebate programs associated with spend volumes.  For instance, you can structure your agreement with your supplier in a way to capture a year end rebate based off total annual spend.  Creating a sliding scale of larger rebates associated with higher spend volumes will help protect your bottom line against some of these unexpected increases, while also establishing organizational rewards for program purchasing compliance.  For example, structuring a contract with a 1.5% rebate for $1 million in spend, a 2% rebate for $1.5 million spend, and so on will create protections for your organization in unpredictable market conditions.  

Forecasting & Planning

It’s also important to analyze historical spend data to help identify trends to help get ahead of potential future-state needs.  For instance, if you properly analyze supplier usage reports while also holding discussions with stakeholders regarding organizational goals and objectives, this will help establish a strong understanding of future needs.  It’s also important connect directly with your key suppliers to understand what their market expectations are.  For instance, are they anticipating an unexpected increase in any cost of materials, or perhaps they have potential cost saving opportunities through bulk purchases that could benefit your organization from an economies of scale perspective?

In short, it’s impossible to forecast market unpredictability, but you can implement protections from a contractual and forecasting perspective to help mitigate risk for your organization.  

Retailers are tired of saying it and customers are beyond frustrated with hearing it: "Sorry, but your purchase is on backorder." Backordered items come with the territory in just about any industry where products are bought and sold, but due to the ongoing supply chain challenges, backorders have surged, even for items that are traditionally well stocked. Whether it's hooded sweatshirts or backyard swing sets, a number of products remain held up at sea as ships wait to unload at overloaded docking stations.

Given the present environment, backorders may be impossible to avoid. But if you're affected by them as a business owner, how you handle these inconveniences and communicate the issues with your customers can make such pain points more tolerable for all involved.

Here are a few tips:

1. Don't complete the transaction until the order is completed
A major sticking point for customers is being charged for an item and not receiving it in a timely fashion. If customers are aware that an item is out of stock, they may assume that the funds won't be deducted from their debit or credit card until the item becomes available. All too often, though, the charge comes first, and the item arrives much later.

Instead, avoid processing the payment until you can confirm that their purchase has shipped. This has the dual benefit of allowing your customer to hold on to their money and helping you avoid the hassle and fees that may be associated with refunds if they decide to cancel. Bottom line, your customer wants to get what they paid for.

2. Carefully evaluate if backorder status is worth it
It may be that your best option is to not bother with backorders and to simply list the item as "out of stock" or "sold out." For example, as noted by Deliverr, if you have no idea as to when the product will be back in stock, backorder may not make sense because customers, in general, like to have a timeline. Additionally, backorders require you to fulfill the order when the time comes. So if you don't have a reliable method for keeping track of how many inquiries you've received for an item that's unavailable, backorders may be a bad business decision. Falling short in this area may also compromise your trustworthiness with that would-be buyer.

Inadequate supply is one cause of backorders.Inadequate supply is one cause of backorders.

3. Offer a discount
An effective strategy that can lead to repeat buyers is to reward them with discounts after their initial purchase. You may want to do the same thing with backorders. For instance, sometimes a customer will avoid moving forward with a purchase if they know it's unavailable. However, they may be willing to reconsider if they get 5%, 10% or 15% off as a thank you for patiently waiting.

4. Evaluate your processes
If backorders are happening routinely, it may not be related to the supply chain crisis. It could have something to do with your inventory system. As recommended by ShipWorks, taking a closer look at your existing procedures may uncover inefficiencies or weaknesses that explain why this issue is ongoing.

It isn't just the common products customers buy that are in short supply; so too are the plastic packages that hold those items, as the key material used to manufacture plastics is difficult to come by and is contributing to rising inflation. 

That material is resin. A synthetic polymer that is a byproduct of petroleum, resin is a uniquely important building block of many different plastics, varnishes and adhesives. But due to the freak ice storm that struck Texas in February — which led to massive blackouts and interrupted oil production at area refineries for several days — wild weather has led to severe supply chain disruptions. Plastics manufacturers have since stockpiled what resins they have to compensate for volatility in supply and pricing and to guard against the possibility of refineries going offline again during hurricane season. The Atlantic hurricane season just recently ended, running between June 1 and Nov. 30.

Given the fact that resin is in such short supply, prices have skyrocketed. Indeed, the Producer Price Index for plastics material and resins manufacturing reached nearly 381 in May, up from 249 a year earlier, according to Bureau of Labor Statistics data put together by Supply Chain Dive.

PET is the type of plastic used in water bottles.PET is the type of plastic used in water bottles.

But it isn't just resins — and by extension, plastics — that are harder to find. So too are several other key commodities. These include adhesives and paints, corrugated packaging, electrical components, foam, steel and printed circuit board assemblies as well as semiconductors, according to the Institute for Supply Chain Management. And many of these commodities have been reported as scarce for a number of months, including eight now for resin and 13 months for electrical components. As a result, the prices for these materials have risen consistently on a month-over-month basis. Of the dozens of commodities the Institute for Supply Chain Management tracks, only wood experienced a price reduction in October.

PET prices are also higher 
As far as types of plastics are concerned, Polyethylene Terephthalate, or PET, is a major pain point for businesses that rely on the material, such as bottling companies. Not only have limited quantities driven up the cost of PET, but so have the duties that exporters charge. International Bottled Water Association President and CEO Joe Doss told Supply Chain Dive that the duties on PET originating from China are currently $1.80 for each dollar of imported goods.  

The challenging PET market traces back to the resin shortage and where the material is overwhelmingly manufactured. According to Ferriot, 85% of the nation's resin used to develop plastic comes from Texas, the state that has been on the receiving end of wild weather, including Hurricane Ida in August.

Sudeep Suman, director at Alix Partners, told Supply Chain Dive that he anticipates resin supplies level to remain slim for the foreseeable future, at the very least into 2022. He added that there do seem to be some modest improvements occurring, with supply and demand for the material starting to balance out, albeit slightly

Online shopping may be a highly convenient way to get just about any product that's sold, but given the somewhat impersonal nature of this purchasing channel, those same products are prone to being returned. As 2021 winds its way to a close, business owners are expecting to see more customers sending back their merchandise, further complicating an already highly unstable supply chain.

Nearly two-thirds of respondents in a recent Reverse Logistics Association survey anticipate an increase in product returns between September and December. Additionally, more than half of those same participants said they expect their costs stemming from those returns to rise as well.

Tony Sciarotta, executive director of the Reverse Logistics Association, noted that return activity has intensified throughout 2021, which has contributed to the supply chain crisis.

"The number of returns and costs associated with them continues to climb adding to an already tough environment of rising freight costs, capacity constraints and delays," Sciarrotta explained.

Return volume rose from the previous quarter as well, as 45% of respondents said as much, according to the RLA survey. The costs of those returns also increased during 2021's penultimate quarter for 56% of the poll's participants.

Most retailers are getting more returns  and they expect it to continue in the fourth quarter.Most retailers are getting more returns these days — and they expect it to continue in the fourth quarter.

Why returns can be costly
While the expenses related to shipping and handling may be viewed as unidirectional — from the seller to the buyer — business owners are forced to absorb a variety of costs when merchandise winds up returned to them. This includes those related to placing it back in inventory — a decision determined during the disposition process — transportation, packaging and the potential that the item may not resell. Since it costs money to make goods, anything that isn't sold is a loss.

Items bought online are particularly vulnerable to being returned. Indeed, according to a survey from the National Retail Federation, as a percentage of online sales, nearly 19% of merchandise was returned in 2020. This compares to 10% for goods bought in a brick and mortar environment. And for every $1 billion in sales, retailers absorb $106 million in return-related expenses.

American Eagle Chief Operating Officer Michael Rempell noted in an earnings call that as digital sales increase, so do returns. The goal is to identify how to position that merchandise so it can ultimately wind up in the right hands.

Returns often peak during the holidays, particularly after Christmas when everyone has received their presents. During the Thanksgiving holiday weekend, approximately 180 million Americans shopped, according to a separate survey from the NRF. While that total was more than what the trade organization anticipated, online shopping fell from 2020 by 17.6 million people.

As for the items buyers gravitated toward — whether in store or online — much of what was bought was clothing and accessories. Aside from this, roughly 50% of the items purchased over the five-day Black Friday weekend consisted of toys, books, music, video games and electronics. Clothing and electronics are the most commonly returned items, according to a survey from Power Reviews.

 What is Supplier Relationship Management (SRM)?

Supplier relationship management is the discipline of strategically planning for, and managing, all interactions with third party organizations that supply goods and/or services to an organization in order to maximize the value of those interactions. In practice, SRM entails creating closer, more collaborative relationships with key suppliers to uncover and realize new value and reduce risk of failure.

Getting back to the initial goal of cost savings, the question becomes ‘when cost savings is a critical driver in supplier selection, how do you balance the collaborative relationship with low cost?

The major key is internal alignment between procurement and other business units. Supply Chain leaders must be able to explain why certain vendors are selected who may not be the low-cost option for reasons like customer service, on-time deliveries, payment terms, reporting, etc. while also stating how they are managing those vendors to get the best price possible. 

Category leaders must be able to explain how new suppliers versus incumbent suppliers will impact the company. There are too many cases where the grass appears to be greener on the other side and by selecting a low cost, new supplier, operational differences get lost in the shuffle and the transition becomes a disaster.

Why is Supplier Management Important?

In plain and simple terms, it creates a competitive advantage. Whether you are the procurement or the supply chain leader for your organization, having a strong supplier management system in place allows for maximin opportunities in cost reduction, value driven services, and over all systematic efficiencies which otherwise would be achieved.  

Supplier Relationships

A critical component to any company’s success is their ability to maintain strong working relationships with their suppliers and vendors. SRMs should always look to avoid complacency. You should never be satisfied with the idea of ‘if it’s not broke, don’t fix it’. SRMs should always be looking for opportunities to improve the relationship, streamline processes or procedures, or change costing models. Relationship Managers should always be looking to challenge the status quo.

Another key to a strong supplier relationship is to open that line of communication and don’t be afraid to ask the question, ‘what we can be doing better?’ Here are some quick ideas as to how you, as a customer to your key suppliers, can help enhance your relationship and make those suppliers want to compete for your business. 

Trust and Loyalty (treat them as more than just vendors)

Improve technology and automation

Adhere to payment terms

Develop communication plans

Differentiate between price versus value

Have a dedicated Supplier Relationship Manager (SRM)

Internal alignment between Procurement and Supply Chain Category leaders

Retailers sell trillions of dollars worth of merchandise every year. Even in 2020, a period plagued by the coronavirus crisis, industry sales topped $4 trillion, according to the National Retail Federation.

But a substantial chunk of that merchandise winds up back with retailers, whether in inventory or on store shelves. Indeed, as a percentage of total sales last year, returns represented $428 billion, the NRF found.

And with the holiday season now here, easily the biggest shopping period of the year, return activity is virtually guaranteed to be swift, which will not only adversely affect a weak-kneed supply chain but raise costs. In the third quarter, more than half of retailers said their return costs rose compared to the second quarter, according to a survey from the Reverse Logistics Association. Whether the added expenses come from lower margins, shipping and handling, processing or overhead, the costs can be considerable

While returns can't be neutralized entirely, smart strategies can curb return activity. Here are a few best practices:

1.  Avoid silly mistakes
Every now and then, items will be returned purely because the buyer changed their mind. But more often than not, returns are related to items not meeting buyers' expectations. For example, according to Chain Store Age, nearly two-thirds of returns derive from errors that were made by the retailer or associate. Common complaints include the wrong item(s) being shipped and defects.

The easiest fix is for packers to be more cognizant of what they're preparing for shipment. This requires being more diligent about each product and double checking both the item itself as well as the original invoice. 

Smart customer service is central to reducing returns.Smart customer service is central to reducing returns.

2. Simplify your return policy
While it may seem counterintuitive, streamlining your return policies can actually wind up benefiting your company in the long run. From contacting customer support to preparing a product for shipment to paying for the shipment itself to bringing an item to the location where it can actually be returned, the return process can be highly involved and a major hassle. That's the last thing you want when your customers are already frustrated at having to return the item to begin with.

But as polling from SalesCycle reveals, retailers with straightforward return processes wind up getting more business in the long run. Nearly 75% of respondents said they were either somewhat likely (37%) or very likely (35%) to shop more often with a retailer knowing the return process was hassle-free.

Whether it's through prepaid, printable packing labels, store drop-off and pickup or partnering with a shipment organization, a seamless return policy can wind up paying off.

3. Provide accurate sizing charts
It may come as no surprise that clothing is the merchandise category that sees the most returns. And that's frequently due to shirts, pants, jackets and the like being too snug or roomy. Ideally, your website has a size chart that specifies the dimensions of a small, medium or large. Ensure that those dimensions are truly reflective of the products themselves. This may be difficult to do if you have more than one t-shirt supplier, as one company's medium may be another's large or vice versa. It's important to use the same measuring method for your whole line of products. For example, if online buyers are advised to measure the full circumference of their chest for t-shirt, that method should be mirrored for other shirt types (e.g. sweatshirts, sweaters, etc.) and fabricators. You may also encourage previous buyers to offer feedback on the fit in the customer review section of your website.

These and other measures can bring greater stability to your supply chain.