Distribution Systems in Omni-Channel Retailing

Concepts in omni-channel backward distribution

An OC retailer's distribution system also requires a backward distribution concept, since online customers demand options for returning the products they purchased if they do not want to keep them. Return processes are almost as important as forward distribution and attract major attention from OC retailers. They are crucial for customer satisfaction, especially in the fashion sector, since it is difficult for customers to choose an ideal product online. Some fashion retailers post return rates of between 40 % and 50 %. The director of a fashion retailer summarizes: "Returns are reality. We need to integrate them cost-efficiently into our business model".

Omni-channel backward distribution typology

As with forward distribution, we leveraged early (e-commerce) literature and the insights from our interviews to inform a typology of OC backward distribution concepts. Hereby, we classify the concepts first according to the return mode (CEP return (CR) and store return (SR)) and then further distinguish between the different processing locations. The different types (1)-(5) are depicted in Fig. 3.

Fig. 3 Typologies of OC backward distribution

We will discuss these types in more detail within the following two subsections: focusing on the return modes and the processing locations that constitute the different concepts.

Archetypes of omni-channel return modes

Before entering the OC business, bricks-and-mortar retailers mainly had processes in place for returns of defective or rejected goods. The goods were returned at the outlet where they had been bought. The requirements for return processes are unequally complex within OC retailing. This starts with the return options which build the first pillar of our return process typology.

The standard mode is returns via CEP delivery. This reduces integration and process challenges for retailers across channels. Returning goods at the stores, regardless of whether they were ordered in the distance retail channel or bought in-store, is the second basic return mode. The following statement of the Head of Logistics of a fashion retailer is a prime example of this:

    "We allow product returns in each outlet as a matter of course, regardless of where the product was bought".

Table 5 Summary of omni-channel return modes

Return mode	CEP return	Store return
Advantages	Simplified processes and reduced complexity for the retailer	Higher customer convenience; access to direct customer feedback; cross-selling potential; fast reintegration into the sellable store inventory
Challenges	Additional transportation costs; time requirements for reintegration into sellable inventory	See CEP return if further processed with CEP to DCs/RCs; refunding issues and related IT requirements; in-store handling effort
Development stage	Initial solution	Advanced and extended solution

OC customers also want to select their preferred channel for returning items. Although all OC retailers surveyed agree that this is obligatory in the long run, it is not yet standard for all. While all retailers offer return with a delivery by a CEP, only half of the OC retailers surveyed explicitly state that they allow returns of goods ordered in the distance channel additionally at their outlets. The additional effort at the outlets, refunding issues, and IT requirements are reasons why retailers hesitate to roll out in-store return processes. Multiple return options for customers mean adjustments for in-store processes and the ERP infrastructure for cross-channel communication, but result in higher convenience for the customers. From this point of view, the most sophisticated OC stage with regard to return modes is reached when products ordered in distance retailing can not only be returned, but can also be directly refunded at the outlet. In-store returns can, however, bring further advantages for the retailer other than offering customers a convenient service. The direct contact with the customer who returns items can help to get information that contributes to tackling high return rates. Additionally, alternative items to the ones returned can be offered to the customer, thus leveraging cross-selling potential as well as possibly increasing customer satisfaction. From an operations point of view, in-store returns offer the possibility of quickly reintegrating returned items into the sellable store inventory. Table 5 summarizes the return modes discussed. Since speed is an important factor in returns handling, it is another potential advantage of in-store returns and will be further elaborated in the next subsection on returns processing locations.

Archetypes of omni-channel return processing locations

From an operational perspective, fast and efficient return processes are necessary. The faster the return processes the sooner the reworked products are available for resale. This is particularly essential for fashion retailers due to high return rates and relatively short seasonal periods. The return processing location itself can also be separated into different categories.

Almost three quarters of the OC retailers interviewed process returns only at the distance retailing DC, where a dedicated area is reserved. One advantage of this processing mode is that reprocessed goods can quickly be returned to the distance retail inventory. A common strategy, therefore, is to process returned goods directly to the picking zone after checking and preparing. Another positive aspect of processing returns at a DC is that the DC's workforce can be assigned flexibly to picking or return reprocessing. This is an important factor because of picking distance retail orders usually peaks at the beginning of a week, while returns arrive at the DC one to two days later, so this system means that the workforce can be balanced. Notifications of returns by the customers before the products are sent back are used as a lever by several retailers to further improve workforce scheduling.

Another return processing location is a separate RC, operated by the retailer or a service provider. It is mainly used when return handling processes become too work-intensive and DC capacities are scarce. These centers are specialized in processing returns. Outsourcing return operations can offer potential cost savings if products are reworked in low-wage countries. This is why external RCs are used most often by fashion retailers with high return rates, because they can reduce their processing costs. However, in this case, a longer lead time for reprocessing has to be taken into consideration. This in turn is a challenge for fashion retailers with high return rates. In general, fashion items are only in demand for a limited period. Long lead times for reintegration into the sellable inventory may therefore lead to a loss of sales, if items are still being reworked and are unavailable. This illustrates the ambivalent nature of separate RCs, particularly for fashion retailers. A combination of processing returns at DCs and RCs is also possible. Goods that require more complex reprocessing are then shipped to the RC, whereas simpler reworking is carried out at the DC. Dedicated RCs are, however, only used by less than 20% of the OC retailers surveyed. The items are shipped from the RC to the DC after return processing.

A further option is processing returns in-store. Within this processing mode, goods need to be checked and reprocessed in-store. Reusable items remain at the store, whereas other goods are further processed to a central return location. This solution can be observed at retailers with large outlets, which have sufficient space for such operations. In this case, transportation costs can be saved, but additional labor costs need to be considered as well as synchronized ERP systems across channels to update the store inventory positions. About one-tenth of the OC retailers surveyed rely on a processing mix of in-store and in-DC. Nevertheless, as the Head of E-commerce at a fashion retailer states:

    "Direct rework at the stores and integrating the products into our store inventory is the fastest option to get the returns back into our sellable inventory. As we have established lean in-store return processes, it is the most efficient option for us".

Processing location	Distance DC	Separate RC	Store
Advantages	Fast reintegration of returns into distance retail inventory; potential of workforce pooling and workload balancing	Specialized processing; potentially cheaper processing	Fast reintegration of returns into store inventory; transportation cost savings
Challenges	Space requirements; processing in case of intensive rework; additional transportation costs if shipped from store	Time for reintegration into sellable inventory; additional transportation costs from store and to DC	Space and IT requirements; higher processing costs than in DC/RC