Steve Dollase | September 18, 2014

What is good customer service worth to you? As a consumer you might say it's the most important factor in obtaining your loyalty. The no-questions-asked returns policies popping up the last decade would indicate that many retailers believe that a liberal returns policy is an essential component of customer service.

Great service, including easy returns does build loyalty. Consumers who can buy without the risk of getting stuck with something they don't want will tend to buy more. We know that. Merchants want to stand behind their merchandise and bolster their commitment to their customers. Not a bad idea, and everyone wins, right?

Yes and no.

Where manufacturers have traditionally built warranties around quality and full functionality of their products, the trend toward more liberal retail returns policies means they now receive returns for any number of reasons — reasons that have nothing to do with quality of the product. In some industries, the actual quality of the product is represented by a tiny fraction of returns manufacturers have to credit.

Can unlimited returns policies be sustained? The reinstating of new, still-gentle limits and other returns restrictions by such former unlimited-returns retailers as REI and Bloomingdale's may suggest that the pendulum is swinging.

The one-upmanship in fiercely competitive markets can get to be a runaway train. It's well-known that returns can actually drive sales, to a certain point. Even within that threshold there are hidden impacts, too often not tracked, that can significantly raise the cost of doing business. And those costly impacts reach far beyond direct customer interaction.

The scramble to be competitive with returns policies costs everyone, from retailers to distributors to manufacturers. And the more it costs all of them, ultimately the more it will cost consumers.

That's tough when, traditionally, a manufacturer stands behind their products, warranting them to be fully functional and free of defect. They take accountability for replacing defective products. But as returns policies get more liberal, they receive returned product for myriad reasons that have nothing to do with their products' quality.

When a retailer has a "no questions asked" returns policy, returned product may not even be evaluated. To the employee at the counter, assessing the product may seem pointless if the store accepts every return regardless of the reason. But this can create many issues and missed opportunities for both retailers and manufacturers. Opportunities to identify and address the root cause of the return are lost. Returned product may have been purchased at another retailer, be stolen or have been removed from a dumpster of unsaleable product at the back of the store. Increasingly, counterfeit product is being introduced into the legitimate supply chain through consumer returns, sometimes creating serious consumer safety risk.

Manufacturers end up with massive amounts of defective product with "no fault found" when tested. They also end up with product that isn't theirs — after they've already assumed cost in the reverse supply process through which they receive returned product.

Liberal returns policies do drive higher sales and customer satisfaction for retailers, but they can be costly in terms of staffing, sorting, and restocking. When the retailer reaches a manufacturer's limits on returns credits, they begin generating additional unrecoverable costs. Furthermore, many retailers have not done the analysis to determine whether an investment in a liberal returns policy is benefitting their most valuable/loyal shoppers, and whether that investment would generate a higher return if used instead for loyalty premiums, promotions or reduced prices.

Excessive levels of returns that are not tied to product quality can create a tremendous drain on profitability for trading partners. A perfect example is the aftermarket automotive parts industry. A 2013 survey showed that as many as 85 percent of manufacturers estimate that only 2.5 percent or less of their returns are due to actual quality issues. So where they warranty the quality of what they make, an enormous majority of the industry's estimated $3.9 billion in annual direct and indirect returns cost has nothing to do with the quality of the product.

Where's the balance? The answer lies in collaboration and complete visibility of the full cost continuum for all trading partners — beyond the limited perspective of one trading partner's own internal impacts. We see this all the time at Inmar when we consult on our clients' supply chain needs and effective returns management. We dig deep to help clients have full visibility to costs in their supply chain, especially hidden costs, and leverage the power of trading partner collaboration. Our experience proves that suppliers and retailers can work through these challenges together. Both want to make it as easy as possible to keep customers loyal; both want to control costs. Working together is the key. Full awareness of each other's' needs and burdens in the process can lead not only to better efficiencies for both, but to innovative solutions wrought from shared expertise.

The increasing complexity of retail demands it. Where you'll often hear me speak about the need for open integration of supply chain to all processes within a company, that integration should extendbeyond company walls to include all trading partners. After all, aren't their processes a part of your overall profitability strategy?

What do you think? Agree? Disagree? Please share your thoughts in the comments section below.