First Delivery Gaps: A Supply Chain Lever to Reduce Product Returns in Online Retail

Posted: 25 Apr 2019

See all articles by Georgia Perakis

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Divya Singhvi

Massachusetts Institute of Technology (MIT) - Operations Research Center

Date Written: March 26, 2019

Abstract

With the rise of online retail in recent years, one of the key challenges that retailers face is product returns. Each year products worth billions of dollars are returned for various reasons including product quality, packaging, delivery delays and others. Working with one of India's largest online fashion retailers, we focus on identifying whether increased delivery gaps lead to an increase in Returns To Origin (RTO) orders. That is, the setting where customer refuses to accept the delivered package and pay for it at the door step when delivered. Given the cost of returns that retailers experience is double, namely, sending the order to the customer and then shipping it back to the warehouse, mitigating RTO is an important problem. We investigate the problem of RTOs with a supply chain lens and show the causal effect of delivery gaps (time to deliver a product) on RTOs. In order to show the causal effect of delivery gaps on RTOs and address endogeniety concerns prevalent in observational data, we use the instrumental variables approach. Then, we formulate the problem of optimally choosing strategic and tactical delivery threshold targets. We show that there can be substantial gains from carefully balancing RTO costs with faster deliveries. We show that for our industry partner, a 2-day reduction in the delivery gap from the current average, can lead to annual cost savings of upt \$1.8 million just from RTO reduction. We also perform a Randomized Control Trial to test the hypothesis of whether customer promise can be used as a lever for RTO reduction in regions where product deliveries are already expedited. We find that \textit{beating} customer promise, by overshooting delivery dates can further lead to a reduction in product RTO. Reducing product returns is one of the most important problems in modern retail. By showing the causal relationship between RTOs and delivery gaps, we identify a supply chain lever that can reduce RTOs. Furthermore, the novel framework we introduce, optimizes delivery gaps for retailers while at the same time accounting for various delivery improvement costs.

Keywords: Data-Driven Operations, Returns, Inventory Optimization

Suggested Citation

Perakis, Georgia and Singhvi, Divya, First Delivery Gaps: A Supply Chain Lever to Reduce Product Returns in Online Retail (March 26, 2019). Available at SSRN: https://ssrn.com/abstract=3360554

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-565
Cambridge, MA 02142
United States

Divya Singhvi (Contact Author)

Massachusetts Institute of Technology (MIT) - Operations Research Center ( email )

77 Massachusetts Avenue
Bldg. E 40-149
Cambridge, MA 02139
United States

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