Many online fashion retailers struggle to manage the complexities of product returns, while at the same time their competitive position is often heavily influenced by how effectively and efficiently they manage the returns process. Possible dispositions for product returns might include refurbishment for resale in the primary channel, diversion to secondary markets, or disposal, with the second two options being more likely for fashion items that have been returned multiple times (and thus are no longer “in season”). Mathematically, such flows can be represented as a queueing system in which delays in product flow can be quantified, and even optimized, given key business context parameters.
In their recent publication in the operations research journal Omega, Rita Maria Difrancesco and her coauthors develop and analyze a queueing system of fashion product returns that incorporates both new production and returns, with multiple returns dispositions in a closed-loop system. Their model enables the authors to derive optimal return time windows that incorporate multiple elements of the business context including holding costs, sorting and testing costs, the age and product value decay of the product, and even the possibility of a restocking fee (which is expected to dampen demand as well as returns). Using data from a Berlin-based online fashion retailer, the authors numerically examine the sensitivity of firm profits across a wide range of real-world parameter values. Their comprehensive analysis suggests that the decision between refurbishment, secondary markets, and scrap is quite nuanced, and the firm’s best choice will depend critically on its cost structure and secondary market access. Furthermore, a tightening of the return window can improve profits by speeding up both the customer refund and the flow of returned items through the system, which means that each item has a better chance of being available to consumers again during its original selling season.
The above is a summary and commentary based on: Difrancesco, R., Huchzermeier, A, and Schroeder, D. (2018) “Optimizing the return window for online fashion retailers with closed-loop refurbishment” Omega, 78 (pp. 205-221).
This recurring series provides plain-English summaries of leading academic research in the area of consumer returns. It is co-produced by Mark Ferguson (Univ. of South Carolina), Michael Galbreth (Univ. of Tennessee), and Guangzhi Shang (Florida State Univ.).