Best Practices for Returned and Excess Merchandise

Impact your overall operating margin with a solution for returned and excess merchandise slated for liquidation

Howard Rosenberg
Howard Rosenberg

In 2014, consumers returned a record $284 billion worth of merchandise to retailers. This number is increasing largely due to the increase in online sales (which typically bring a higher return rate) and relaxed return policies to drive customer loyalty. Lack of innovation over the past 50 years for dealing with consumer-returned and excess inventory is costing retailers billions of dollars, and can no longer be approached as an afterthought or left to inefficient traditional liquidation methods. This is especially true in today’s climate when every point of operating margin matters so much. By implementing an efficient solution for returned and excess merchandise slated for liquidation, a company can meaningfully impact its overall operating margin.

So, once merchandise is slated for liquidation, what are the best practices to implement in order to achieve maximum efficiency? Furthermore, what does maximum efficiency actually mean? Let’s answer that first.

What Does Maximum Efficiency Mean?

Simply put, maximum efficiency means the highest possible recovery rate at any given level of asset utilization. Asset utilization is a broad measure. The assets impacted by excess inventory can include employees, warehouse space and capital. Dealing with excess inventory can place demands in all these areas since people have to account for it, move it around a warehouse and figure out how to sell it. Excess inventory also represents trapped capital that cannot be invested somewhere else that could yield a positive return on investment (ROI). Recovery rate is more clear-cut, and looks at how much cash the inventory returns to the bank account after it is liquidated and all associated costs were paid.

The most efficient process will yield the highest possible recovery, while utilizing the least amount of company assets. However, it is not always that simple. Priorities change constantly. It is also important for a solution to be flexible enough to allow you to accommodate these shifts in priorities. Utilizing a solution that emphasizes variable rather than fixed overhead can provide this flexibility.

Best Practices to Achieve Maximum Efficiency

Now that we defined what maximum efficiency is, let’s talk about what needs to happen in order to achieve it. There are questions you should ask yourself when implementing a solution for your excess merchandise either in-house or through a liquidation provider, including:

  • Do you reap the benefits or does your liquidation provider? Make sure you aren’t relying on a solution that creates apparent efficiency by making inventory disappear quickly, but only at the huge cost of getting much less for it than you otherwise could.
  • Does it provide the control you want? It’s important to retain control over who is able to buy your excess inventory and how your brand enters the secondary market.
  • Are you building a strategic advantage for your company? While excess inventory may have little value inside your company, it has substantial value to others outside of your business. By getting smart about the secondary market for your products through robust data and analysis, you can create a strategic advantage.
  • Is the solution adequately flexible? The one constant in business is change; this includes priorities and goals with respect to liquidation. Make sure your solution is flexible enough to accommodate changing needs.
  • Is the solution compliant with public company filing requirements? Public companies have stringent compliance requirements that are often not met by traditional liquidation methods.

Taking a look at some of the new approaches being used by other retailers with their excess inventory can also provide clarity and direction. Many large retailers opt to build customized, private-label liquidation marketplaces catering to business buyers. These marketplaces connect retailers directly to buyers via a branded, online auction platform, enabling the retailer more control over the entire process while protecting how its returned and overstock inventory enters the secondary market.

Take this example: A Fortune 500, multi-channel consumer electronics retailer was maintaining the status quo of selling its trade-in electronics inventory to a limited group of approved wholesalers and resellers via a fixed price model. However, due to the limited competition, it noticed a gradual decrease in its rate of return on an annual basis. This retailer launched a branded online liquidation marketplace and quickly had a robust buyer base of thousands in targeted global markets. This quickly boosted its inventory recovery rate by more than 30 percent across all merchandise categories and offloaded virtually all of the operational work associated with selling the products, creating a primarily variable cost structure. This provided the team with complete flexibility to run the business more intelligently by reacting appropriately to market conditions without the fear of damaging the profit and loss.

No matter the platform, strategic, proactive management of overstock merchandise is critical, and requires a dedicated and experienced team to manage it well. Every minute of time spent on back-room handling of returned-merchandise transactions is a minute taken away from focusing on core business functions. Sometimes the best choice is for retailers to work with a trusted partner whose primary business is providing solutions for returned and overstock merchandise. The best partners will have a low cost structure, a great reputation among clients, extensive knowledge of the secondary market, and a data-driven, analytical and transparent approach.

Be sure to look for:

  • Online marketplace expertise. It is not enough just to have a web-based technology platform. Such a platform must be well-designed, flexible and scalable. More important, your partner must have extensive experience in managing marketplaces and developing strategies to maximize your results. If you were given a Ferrari, you would probably not win many races without putting a very skilled driver behind the wheel.
  • Targeted demand generation. The best technology on the planet will underperform if you lack demand for your products. A good partner will have a proven track record of growing custom buyer bases interested in a given type of inventory.
  • Logistics services and support. Make sure the partner has experience working with a variety of third-party service providers to ensure seamless integration. This should include hands-on client support, logistics, inventory handling and warehousing.

Whether implementing a solution for consumer returns in house or through a trusted provider, retailers can save time and money, protect brand image, and create new growth opportunities. What’s more, the reverse supply chain is also a place where retailers can support sustainability initiatives. Historically, certain products, particularly damaged or salvage items, went straight to a landfill, but these days, regardless of the condition of the returned product, there is a buyer base that exists that will facilitate either reuse or recycling.

Implementing an efficient solution for excess merchandise is a necessity is today’s global economy. If managed correctly, consumer returns and excess merchandise can support strategic business goals, including driving higher margins, protecting brand image and supporting sustainability initiatives.

Howard Rosenberg is the CEO of B-Stock Solutions, a large network of private-label business-to-business (B2B) liquidation marketplaces. Hundreds of retailers, including four of the top five U.S. retailers, have leveraged B-Stock Solutions’ technology and service offerings to sell over $1 billion in consumer returned and excess inventory. For more information, please visit www.bstocksolutions.com.

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