Why Return to Vendor Is the Worst Decision You Can Make
July 26, 2018
For companies of all sizes and markets, return to vendor (RTV) is a consistent, day-to-day business practice related to the rise of e-commerce. In fact, 2016 saw U.S. shoppers send back $260 billion in merchandise, which translates to eight percent of all purchases in the country. It’s a trend that doesn’t show signs of stopping, which is why RTV has become one of the worst decisions for companies worldwide.
What Is Return to Vendor?
An established process, return to vendor refers to when a user or retailer arranges the return of goods to a vendor. A user, for instance, may initiate a return, sending the product to the retailer where they purchased it. The retailer then forwards the product back to the vendor. Or the user may receive a shipment label that directs the product to the vendor instead of the retailer.
In response to an RTV, which may result in an exchange, refund or replacement, the retailer or vendor will usually inquire why the user is returning a product. A few of the most frequent reasons include product defects or errors and delayed shipments. Depending on the company’s return policy, they may charge the user for return shipping and restocking costs — in most instances, however, the business loses money.
The Real Cost of Return to Vendor
To understand why, and how, return to vendor has become one of the worst decisions for companies, it’s essential to break down its real cost, which includes the following factors:
Time: For every party throughout your supply chain, time is valuable and time is money. The process of receiving, inspecting and approving returns, as well as arranging the shipment of a replacement or issue of a refund, is time-consuming — especially during the holiday season or your company’s peak season.
Money: For many companies, return to vendor costs are the most noticeable impact of RTV. Depending on your return policy, you may be paying not only the price of restocking but also shipping the order to your facility. As an example, Amazon’s delivery expenses are $6.6 billion, with only $3.1 billion of that coming from shoppers.
Image: For all industries — from retail to automotive — brands are invaluable. In fact, 70 to 80 percent of your market value comes from intangible assets, which include your brand equity. That’s why it’s essential to protect yours from negative perceptions, which extended return processes can cause, impacting your company profits.
When you’re assessing the true cost of return to vendor, it’s essential to link together its impact on your time, money and image for a full picture of its influence.
A Case Study of the True Cost of RTV
As an example, look at the real-life scenario a luxury brand faced when 15,000 pairs of women’s shoes featured a poorly glued insole — note, financial figures are hypothetical.
Due to their brand equity, many designer labels will markup their products at a rate of 12 times of the product’s actual cost, which includes the following expenses:
- Materials
- Labor
- Transportation
- Duties
In general, luxury brand women’s shoes will range in price from several hundred to several thousand dollars, such as $500, $1,300 or $1,800. If they carried a sticker price of $1,500, their pre-retail cost would be $125, which translates to a potential profit — or loss — of $20 million. If the company proceeded with distributing the footwear, the retailer or customer would return them.
That introduces the cost of RTV, which consists of the following factors:
- Transport
- Replacement
- Time
- Brand
Shipping rates can vary by the size, weight and dimensions of your container. To transport 15,000 shoes, however, you can estimate the cost via FedEx Freight® Box Rates, which vary by zone and whether the shipping is priority or economy. The average is $195 for economy shipping and $211 for priority shipping — the largest container for this service is 48 inches by 40 inches by 38 inches, with a max weight of 1,200 pounds.
If 100 pairs of boxed shoes could fit in a single pallet, the company would need to pay for 150 shipments, which would be $29,250 for economy or $31,650 for priority.
Once the shipments arrived at the appropriate facilities, the cost of labor would come into the equation. On average, warehouse and distribution workers receive $13.50 an hour. If the team could process 100 pairs of footwear an hour or 1,000 pairs a day, the entire shipment would take more than two weeks of work with 10-hour shifts, as well as $2,025 per worker. If you designate a five-person team for this project, that’s more than $10,000.
Plus, you’re shipping new shoes out to your retailer — again, footing the freight bill.
While your brand equity comes from several factors, like your premium pricing and price elasticity, we can look at other luxury brands for an idea of worth. Jimmy Choo, for instance, carries an estimated value of more than $1 billion following its sale to Michael Kors. For brands that experience a drop in reputation — whether due to a data breach, drop in quality or internal scandal — the costs can total $200,000 or more, depending on the extent.
After the return to vendor process finishes, the luxury brand’s total cost would be more than $2 million, consisting of the following charges:
- $58,500 for economy shipping to and from the retailer
- $1.8 million for producing a replacement of 15,000 shoes
- $10,125 for processing return with a five-person team
- $200,000 for repairing any brand damage
For the luxury shoe brand, however, that didn’t happen. Why? They decided to avoid the pitfalls of return to vendor costs and utilize return merchandise authorization (RMA), which let them partner with a rework company, Quality Corrections and Inspections — which assessed, repaired and returned the shoes to the designated distributors at a rate and cost lower than RTV.
Choose QCI, Not Return to Vendor
At Quality Corrections and Inspections, our team can do the same for you with our convenient facilities on the East Coast and West Coast. Contact us today to learn more!
