THE BLACK HOLE OF E COMMERCE

Unless he or she has just returned from an extended visit to a deserted South Pacific island, every supply chain manager (and everyone else for that matter) realizes that consumer buying habits have changed dramatically over the past few years. Electronic commerce, or on-line buying has increased from problem ridden sales of $42 Billion in 2002 to a whopping $526 Billion (estimated) in 2018, and now represents about 10% of total retail sales. While total retail sales rose only 3.7% over last year, e commerce purchases increased 16%. By 2020, on-line buying is expected to exceed 12% of retail sales.

We have come a long way since bright, young, technology-driven entrepreneurs, with plentiful sources of capital, were designing attractive web sites touting a variety of products delivered right to your door. What they failed to understand was to meet the demand, responsive and efficient distribution systems had to be in place. In most cases they were not, and the next few years were conspicuous by their delivery failures. But as Little Orphan Annie sang in the musical “Annie”, “The sun will come out tomorrow”, and it did. Other bright technology savvy systems designers stepped in to develop the systems necessary to meet the demands. They planted the seeds for the technology that has improved our supply chains so dramatically.

Amazon, as we all know, has become the primary trend setter – a long way from their 1994 entry into on-line book sales. The phrase “Amazon Effect” has become a common term in the industry and describes the environment in which many of us are operating.

But what is the Amazon Effect? The Seattle Times described it as “huge company uses the internet to sell stuff cheap, wiping out the competition”. Amazon describes it as “a way of doing business with your customer that provides positive customer experience before and after the sale in order to drive repeat business, customer loyalty, and profits.” Other firms have tried to emulate this philosophy; but in doing so, along with Amazon, have encouraged a troublesome post sale activity – product returns. It is not uncommon to receive free shipping of the items you order, but also the items you return. Just paste the seller- provided label on the package and send it back. Today, about 30% of all items ordered on line are returned, compared to about 8-9% returned to brick and mortar stores. The reasons are not surprising. According to a recent report by Investcpr.com, 20% of last year’s returns were due to damage, 23% of the items were not what was ordered, 22% were not what the buyer expected, and 35% were for various other reasons.

In my opinion, the major reason for many of the returns likes in the fact that it is too easy to do. About 50% of retailers offer free returns, and 67% of buyers check the return provisions before placing an order. Many consumers, called “serial returners” in the industry, will order items in different colors or sizes, fully intending to send back what they do not like.

Distribution centers are customer focused and their primary reason for being is to ship orders to their customers. It is not difficult to imagine how products “swimming upstream” can be disruptive to the orderly flow of shipping activity. Pulling items back in, inspecting them, refurbishing, disposing, or restocking them is costly and adds an extra burden to both operations and costs. Many sellers have turned to third parties to handle returns, and this has proven to be a huge load off the shoulders of the sellers. Regardless of how they are handled however, internally or by logistics service providers, returns represent a major cost to the sellers and are disruptive to distribution operations. As long as buyers find it so easy to abuse the system, the situation is not likely to improve; and the cost must eventually find its way to the price of the products.

Written By: Clifford F. Lynch