A common question from retailers is whether forecasting should be based on sales with or without returns. The answer? Instead of trying to forecast sales including returns, forecast them separately.
With sales forecasts retailers want to maximise availability; they need to know what will be shipped and when, irrespective of whether it will be returned or not. Forecasting returns separately will give a clear overview of the associated costs and requirements such as logistics capacity, and therefore helps both operational and financial planning.
If retailers want to take their returns forecasting to the next level, they could calculate it in two ways: first, as a separate independent time series, and then, as a percentage of their sales. Monitoring the difference between the two would provide them with early indicators if the rate of returns is increasing too much: if the independent forecast clearly starts to exceed the percentage-driven forecast, it means the trend is pointing to the wrong direction and that some action should be taken. Bringing in a returns budget can also act as an alert threshold and help inform decisions about what levels of returns are acceptable within the company’s overall financial plans and business goals.
Finally, to really take advantage of the return forecast, a retailer could use it to test different what-if scenarios. For instance: “So if my sales keep increasing with the rate of X and returns keep increasing with a rate of Y, what would that mean in terms of warehouse operations in total, end-of-season stock, markdown costs and/or total margin?”
Having a system that manages all this information, and keeps it at hand, helps operations to be managed more smoothly as well as informing strategic decisions concerning the retail offering and returns policy.
Effectively, by forecasting sales and returns separately, retailers can better manage costs and handle the rate for returns, and these principles are effective whether a retailer is running a standalone ecommerce operation or has an online retail presence as part of a multi- or omnichannel business.
Tommi Ylinen is vice president of product of supply chain solutions firm Relex Solutions