Reducing retail supply chain costs of product returns using digital product fitting

Abstract

Purpose: This paper investigate how fit uncertainty impacts product return costs in online retailing and how digital product fitting, a pre-sales fitting practice, can reduce fit uncertainty. Design/methodology/approach: The paper analyzes the current performance of a retailer's e-commerce and return operations by estimating costs generated by product returns, including product handling costs, tied-up capital, inventory holding costs, transportation costs, and order-picking costs. The estimated costs were built on 2,229 return transactions from a Scandinavian fashion footwear retailer. A digital product fitting technology was tested with the retailer’s products and resulted in estimations on how such technology could affect product returns. Findings: The cost of a return is approximately 17% of the prime cost. The major cost elements are product handling costs and transportation costs, which together amount to 72% of the total costs. If well calibrated, the fitting technology can cut fit-related return costs by up to 80%. The findings show how customers reacted to the fitting technology: it was unable to verify fit every time, but it serves as a useful and effective support tool for customers when placing orders. Research limitations/implications: Virtual fit verification using digital product fitting is key to retailers to reduce fit-related returns. Digital product fitting using three-dimensional scanning is more appropriate for some products, but it is unsuitable for products that are difficult to measure and scan. Originality/value: The paper contributes an empirical estimate of retail supply chain costs associated with fit uncertainty, as well as theoretical understanding of the role of pre-sales fit verification in avoiding product returns.