Streamlining the Return to Vendor Process to Reduce Costs for Retailers and Suppliers

What does return to vendor (RTV) mean?

Return to vendor, commonly abbreviated to “RTV”, is the process whereby unsold, returned products, or defective merchandise is sent back from retailers to their original suppliers or vendors. RTV, is an aspect of the reverse supply chain that is intended to help retailers, consumer brands and Original Equipment Manufacturers (OEMs) recover value on returned inventory.

The RTV process is a key element of returns management and inventory control, designed to mitigate losses, manage stock quantities, and uphold product quality. Understanding the nuances of RTV is important for retailers aiming to maintain effective vendor partnerships and ensure seamless reverse logistics and supply chain operations.

Understanding RTV contractual agreements

The RTV process is integral to the relationship between retailers and vendors or OEMs and is governed by the terms outlined in their contractual agreements. These agreements typically contain clauses that specify the percentage of total inventory a retailer can return to the manufacturer, either due to unsold items or customer returns. In return, the manufacturer is obligated to accept these unsold goods and provide the retailer with credits or refunds. Additionally, the contract details various conditions surrounding the return process, including the proportion of inventory the manufacturer agrees to repurchase, the unit price for returned items, the condition in which items must be returned, the schedule for returns, and any other stipulations deemed necessary by both parties.

For instance, let us consider a hypothetical scenario involving Apple and Target. Suppose they enter into a contract for the purchase of one million iPhones. Given the nature of manufacturing processes, it's reasonable to expect that a certain percentage of these iPhones may have minor defects or issues. Therefore, as part of their agreement, the vendor (Apple) may allow the retailer (Target) to return a predetermined percentage of the iPhones for credit.

According to industry data, the average return rate for smartphones ranges from 5% to 7%. In this case, Apple might agree to accept returns of up to 7% of the iPhones purchased by Target. This means that if out of the one million iPhones, 70,000 units are returned due to defects, customer returns, or other reasons covered by the contract, Apple would have to reimburse Target accordingly.

By incorporating specific percentages into their contractual agreements, retailers and vendors can better manage their inventory and mitigate potential losses associated with unsold or returned merchandise.

How does having an effective RTV process impact your bottom line as a retailer and vendor?

Consider RTV as a form of insurance for the retailer—while it's preferable to never require it, having it in place can provide significant relief and value if the situation necessitates it. Simultaneously, OEMs benefit by safeguarding their brand integrity, as they retain control to manage their unsold goods. This regulation allows them to determine the subsequent handling of their products, preventing potential harm to their brand's reputation from defective items or unauthorized resale in the secondary market.

The financial impact of an effective RTV process is multi-faceted, positively affecting a brand’s image and reputation, revenue recovery, and sustainability efforts. By maintaining control over unsold merchandise, OEMs can decide on the second life of their products, ensuring that items do not enter unapproved channels or get discarded in a way that could harm the brand image. For retailers, an efficient RTV process means being able to return unsold inventory, thereby reducing the financial burden of holding onto stock that isn't generating revenue. 

Optimizing profit recoveries with RTV

Returns devour profits for merchants and vendors, and can also be costly for customers as the retail industry is witnessing free return policies slowly diminishing. A well-managed RTV process allows retailers to recover a portion of the product's cost by returning items to vendors, who may then resell them in secondary markets. OEMs can then relist the returned products on secondary markets. This recovery is significant as retailers can typically recoup between 12% to 25% of an item’s original cost through secondary markets, as opposed to less than two percent from recycling.

It's worth noting here that goTRG offers comprehensive end-to-end reverse logistics and returns management solutions. These solutions cover everything from managing contract policies to handling RTV processes, restoring items to like-new condition through refurbishment services at our specialized facilities across North America, and giving returned products a second shelf by inserting them into the circular economy. With our integrated suite of SaaS, Reverse Supply Chain, and ReCommerce capabilities, we consistently achieve a profit recovery rate of up to 60% of the retail value on returned items for our retail clients. 

Offsetting restocking and shipping fees

Retailers should be aware that RTV agreements may introduce costs such as restocking and shipping fees. These additional costs must be carefully managed to prevent them from eroding the benefits of the RTV process. Using technology such as a returns management SaaS, such as goTRG’s R1 for enterprise or ReturnPro from SMBs and 3P sellers, can help retailers track and manage these agreements efficiently, consolidate shipments to save on transport costs, and provide data insights to optimize the RTV process and enhance customer service. 

Promoting sustainability goals

The RTV process also plays a crucial role in sustainability efforts. An optimal RTV strategy should consider and align with green initiatives by reducing the number of products from ending up in landfills and instead finding ways to give them a second shelf, be it through repair, resale, or recycle. This not only supports corporate environmental goals but also resonates positively with consumers who are becoming increasingly more eco-conscious. Furthermore, establishing a business model that will thrive in a carbon net-zero economy will become evermore important as the federal government aims to reduce greenhouse gas emissions to half by 2030 and reach net-zero emissions by 2050.

An effective RTV process is a strategic investment for both retailers and vendors, protecting brand integrity, enhancing revenue recovery, and supporting sustainability initiatives — from mitigating financial losses associated with returns, to optimizing profit recoveries through secondary markets, and offsetting additional costs like restocking and shipping fees. Furthermore, a well-managed RTV process aligns with environmental goals by reducing waste and promoting product reuse or recycling while also maximizing profit recovery.

Translating Theory into Practice: Insights from goTRG’s RTV & Cost of Returns Survey

Building upon the foundational understanding of RTV processes and their significance in enhancing operational efficiency and financial outcomes, we will now shift towards practical application and empirical insights. To bridge theory with real-world dynamics, goTRG initiated a comprehensive Survey: The Cost of Retail Returns involving over 500 top U.S. retail executives representing leading brands.

This survey delves into the intricate dynamics between retailers and vendors regarding returns, uncovering the tangible costs, challenges, and opportunities inherent in the RTV process. By synthesizing theoretical frameworks with empirical data, we offer actionable insights to illuminate the path toward optimizing RTV and returns management strategies and maximizing value for all stakeholders involved.

Survey Findings: RTV and the Cost of Returns

The RTV process is burdened with manual tasks common across many organizations, leading to inefficiencies ripe for disruption. From physically inspecting returned products to manually entering data and restocking items, these processes are labor-intensive and time-consuming. Moreover, disposing of unsellable products adds to the challenge, contributing to both financial and environmental costs. Addressing these manual aspects of RTV is crucial for improving efficiency and reducing waste.

goTRG’s Survey: The Cost of Retail Returns conducted with more than 500 U.S. retail executives has revealed the following key insights on the cost of returns and RTV practices:

Inefficiency

Returns pose a significant financial burden on businesses, devouring approximately 66% of the original item's price due to the extensive labor, transportation, and inspection processes involved. This includes the meticulous physical examination of returned products to assess their condition, quality, and suitability for restocking or resale. Manual inspection, in particular, emerges as a major cost factor in the RTV process, especially when it necessitates labor-intensive efforts.

Our research highlights that a staggering 50% of retailers engage more than six employees in the handling of RTV returns before dispatching them. Furthermore, among these large retailers, half have over 50 dedicated employees solely focused on managing returns. These statistics underscore the profound operational challenge posed by returns management in the retail landscape.

Data entry

Another manual part of the RTV process is data entry. This involves manually entering data from return forms, packing slips, and other documents into the company's RTV system. This can be a time-consuming and error-prone process, especially if the data is incomplete or hard to read. Manual data entry can also be a significant cost driver, especially if it leads to errors or delays in processing returns. Data entry errors in business expose organizations to compliance risks and waste large amounts of money. Key findings from the 2023 Survey of Data and Analytics Professionals reveal that 70% struggle to trust their data because of poor data quality.

Restocking

Restocking returned products can indeed become a labor intensive endeavor, particularly when items require cleaning, repairing, or repackaging before they can be reintroduced into inventory. This process often involves a series of meticulous steps, including sorting, tagging, and shelving, all of which demand significant manual labor.

Moreover, the costs associated with restocking returned products can vary widely depending on the company and the specific product category involved. These costs can encompass not only direct expenses related to labor and materials but also indirect costs such as storage space and potential markdowns on refurbished items.

Considering our recent survey findings, the challenges of restocking become even more apparent. Over half of our respondents indicated that it takes over two weeks for restocked inventory to become available for sale. This extended timeline underscores the complexity and time-consuming nature of the restocking process, further highlighting the importance of streamlining return processes and optimizing inventory management strategies.

Disposal

In cases where returned products cannot be restocked or resold, the disposal process also typically involves manual labor. This may include physically transporting the products to a recycling center, landfill, or other disposal site, which can be time-consuming and costly. Additionally, these end-of-life returns create a significant environmental problem, with the number of returned goods sent to landfills doubling between 2019 and 2022, reaching a total of 4.3 billion tons. 

Friction between retailers and vendors/OEMs

In today's retail landscape, friction between retailers and vendors/OEMs regarding their RTV products has become increasingly prevalent, as our survey has revealed. This friction arises from various challenges encountered throughout the RTV process, hindering the smooth operation of their relationship, including:

Communication breakdown

One of the biggest challenges in the RTV process is communication breakdown between retailers and vendors/OEMs.Misunderstandings about return policies, return reasons, and return condition can lead to delays, errors, and disputes. Our survey results show that almost 25% of large retailers have a ‘not good’ or ‘terrible’ relationship with vendors, with complaints about slow response times, disorganization, and a lack of clear direction regarding what to do with customer returns.  

Inefficient processes

Many retailers and vendors/OEMs still rely on manual or outdated RTV processes, which can be time-consuming, error-prone, and costly. Inefficient processes can lead to delays in processing returns, increased handling costs, and lost sales. Our survey results show that 35% of respondents ship inventory back to their vendors with a frequency of only once per quarter or longer.

Limited visibility

Without real-time visibility into their RTV products, retailers and vendors/OEMs may struggle to track inventory levels, identify trends, and make data-driven decisions. Limited visibility can also make it harder to manage returns and allocate resources effectively. More than 25% of respondents stated that they have limited to no visibility and 30% said they had some visibility, translating to more than half lacking the benefits that come from monitoring and tracking returns to better understand how they impact their business and how they can improve the returns management process to boost their bottom line.

Disagreements over responsibility

Disagreements over responsibility can lead to significant hurdles in the RTV process, as retailers and vendors/OEMs may engage in disputes regarding product defects, damages, or other issues. Retailers might attribute faulty products to vendors/OEMs, while the latter may counter by alleging mishandling or misuse by the retailers.

Our survey findings shed light on the severity of this issue, revealing that two-thirds of respondents experience a significant challenge in obtaining vendor credits, with half of their credit requests being denied. This means that a substantial portion of claimed credits—those crucial for offsetting losses incurred due to returns—are not granted.

Returning to our hypothetical example involving Apple and Target, if 70,000 units are slated for return to the vendor due to defects or other covered reasons, and half of the credit requests are rejected, the implications are substantial. Considering the estimated average cost of an iPhone is $1,000, this translates to the retailer facing a potential loss of $35,000 due to denied vendor credits alone. Such losses underscore the urgent need for effective resolution mechanisms and clearly defined contract policies to address disagreements and ensure fair allocation of responsibility in the RTV process.

Friction over costs

Cost is a significant challenge in the RTV process, as both retailers and vendors/OEMs bear the costs of shipping, handling, restocking, and disposal. Disagreements over who should pay for what can lead to friction in their relationship, especially if there is no clear agreement in place. In addition to costs, 56% of retailers told us that it takes over 4 weeks to receive their vendor credits back.