Waste and Returns in the Last Mile — The Problem and How to Fix It
We’ve all ordered something online only to return it. The e-commerce order volume has only grown due to the pandemic. But return stock often ends up in the landfill. James Song, a visiting analyst at Amplifier, looks at solutions for an end-to-end transformation in the last mile.
The COVID-19 pandemic and the subsequent lockdown of economies across the world has accelerated the growth of e-commerce. A recent IBM report shows the pandemic accelerating the shift away from physical stores to digital shopping by up to five years. And where e-commerce grows, so does the returns problem.
800,000 e-commerce shops found mostly in Germany, the UK and the Netherlands, with some of the highest levels of returns. In Germany, for example, 52% of online purchases go back. The majority of returned goods become overstock that is either sent to the landfill or liquidated for pennies (in the US, more than two billion kilograms of returned goods end up in the landfill). The problem is massive and requires an end-to-end transformation in the last mile. This is where Amplifier comes into play.
The “Amazon Effect” is also impacting consumer expectation, with the majority now expecting low prices, same-day shipping and free returns as a standard. Any deviation from this expectation leads the consumer to simply click and buy elsewhere. This normalisation of returns has now resulted in over 40% of online shoppers buying with the intention of immediately returning.
Return of the Mac … Literally
Reverse last-mile logistics add incredible complexity to the supply chain. Take my Mac for example: Returning it would require dropping it off at a partner location, taken from there by courier to a dedicated warehouse, before being sent on again to a centralised facility for diagnostics and repair, before being repackaged and made available for sale again as a refurbished Mac. Anything beyond repair is stripped and destroyed.
Ultimately, there is no such thing as a free return! In the US alone, reverse last-mile logistics will cost $550 billion this year due to the lost revenues associated with liquidated or unsold goods, together with the logistical costs of repatriating unwanted items. As a result, profit margins are eroded.
With each returned good, the environment also bears the cost through increased transport emissions. It is estimated that returned goods in the US create over 15 million metric tons of CO2 emissions annually — roughly the same output as three million cars — and that is before we even get to the landfill waste we flagged earlier.
- Return and reselling platforms, recapturing revenue and limiting environmental damage — US-based Optoro is an early mover.
- Integration of predictive AI software to optimise inventory management and fulfilment.
- IoT sensors for traceability to optimise distribution, collection and returns with full truckloads (pickup and drop-off).
- Automation of warehouse operations with precision robotics to manage sorting and distribution — Magazino delivers guided vehicles for tote handling.
- Computer vision to carry out automated returned product inspection for repair or resale —An example is Amazon’s optical tracking solution.
- Customisation AI and automated on-demand manufacturing for fashion retail, reducing return rates, inventory size and the need to predict demand.
In Europe, we have seen a number of return and resale optimisation platforms which are attempting to replicate Optoro’s success, but they have struggled to scale. However, environmental regulation may work in their favour. As of February 2020, German law now prohibits companies from destroying stock unless it’s unusable. Thus, online retailers have to adopt return and resale solutions.
All of these solutions have the potential to significantly impact the problem. However, we must also acknowledge that in the long run consumer behaviour will likely need to change. Companies like TrueFit are having an effect as they help shoppers pick the right size when buying fashion online through data-driven recommendations. Another example is Boston-based Returnalyze, an e-commerce analytics company focused on helping retailers understand the drivers behind product returns.
As e-commerce becomes central to the way we shop, the volume of goods returned will continue to grow. The first step to reducing the environmental cost is to enable greater traceability in the supply chain, allowing companies to accurately identify the environmental impact of their supply chain. By identifying the impact and calculating the associated costs, companies will be incentivised to drive operational efficiencies and address the process of returns as it currently stands. The current model is unsustainable and unprofitable. Disruption is imminent and Amplifier believes that those startups that can effectively refine the reverse logistics process at scale stand to benefit immensely — as will end customers, the environment and the original sellers.
To learn more about some of the points touched on above, a good podcast to check out is the Supply Chain Radio episode, “But what about all those returns?”, hosted by Matt Gunn.
Author: James Song
Visiting Analyst, Amplifier Ventures