Strategies for Recovering Costs With an Efficient Returns Process

Any warehouse manager can relate to how bothersome it is to deal with product returns. Without a reliable returns process, they can make an already busy warehouse completely chaotic. Even more concerning is the cost of dealing with the problem: It is estimated that a $50 item that is sent back can cost another $33 on average in transportation, processing, customer care, and disposal or discounting. 

Multiply this by all of the eCommerce companies in the U.S. and the numbers are astounding. According to a 2021 report by the National Retail Federation, $781 billion worth of merchandise was estimated to be returned, accounting for more than 16% of that year’s retail sales.  

While no company can reduce its returns to zero, there are things that a business can do to reduce its operational and financial toll. Many of the same actions that help optimize a warehouse’s efficiency in order fulfillment can work for returns, too. These, along with good returns management practices, can help reduce the cost both per item and overall.

Understand the Full Cost of Returns

The true cost of returns is difficult to measure, but even a brief survey reveals that, for most warehouses, they can add up quickly:

Shipping/transportation. Because most companies offer free returns, they must absorb the transportation costs of getting the product back to the warehouse.

Labor costs. Even if customers pay for return shipping or a restocking fee (which is not as common as it once was), there are labor costs for processing returns, including handling the item when it arrives. Someone needs to unpack it, inspect it, decide if it is resellable, repack it and put it back on the shelf.

Item damage and discounts. Upon inspection, some products may not hold the same value after being returned. Selling items at a discount or having to discard them further adds to the overall cost of the return. There are additional costs for hauling away dead stock. Efficiently handling returned products is essential to minimize losses and recover value where possible.

Refund processing fees. Let’s say the product is usable to sell again at full price. In addition to the costs of the returns process, including offering a full refund, there is a cost to processing a refund for the original purchaser. Credit card companies typically do not reimburse the merchant fee (approximately 3% is the industry standard) or may charge a refund fee, or both.

Efficiency. The chaos that returns can cause in a warehouse can not be measured directly, but there is certainly a cost in terms of decreased efficiency and productivity. Managing return items presents additional challenges, as returns increase clutter and create confusion as workers try to find room for excess stock or try to tell returned inventory from new, ultimately affecting operational efficiency. And making room for returns and workstations to deal with them means additional carrying costs.

Being less green. There are even some indirect and less obvious costs of returns: the environmental concerns like increased CO2 emissions due to extra shipping, and dead stock and packaging that ends up in landfills.

Balance Customer Satisfaction With Smart Return Policies

Recently, some retailers have been stepping back from entirely free return policies and have once again started to charge fees or find other ways to limit returns. But generous return policies have become expected to enhance customer loyalty. One survey showed free returns were important to 79% of online shoppers, second only to free shipping. Offering free return shipping and store credit options can boost customer satisfaction and build customer trust by making the returns process more convenient and flexible.

Nowhere is this more apparent than in the apparel industry where shoppers will order several styles, sizes and colors and essentially create a fitting room in their home. Those items that don’t make the cut are sent back—at the seller’s expense. Flexible return policies for customer returns play a key role in enhancing customer satisfaction and creating satisfied customers in this sector.

Sellers must strike a balance between the generosity of their policies and the cost of their returns process to improve the customer experience. Making sending things back too cumbersome will drive away customers. This adds yet another cost to the list—customer acquisition costs.

Know When a Return Isn’t Worth It

Some retailers today choose not to deal with returns in the warehouse at all. When requested, they will give a refund or replacement without asking for the original item back. 

These companies have calculated the value of reselling the item and it is less than the cost of handling the return. Often the return on investment to examine, repackage, reshelve, and possibly refurbish or liquidate is not worth it. An added perk: customers might be more likely to order again if they are saved the time and trouble of sending something back, especially in the context of eCommerce returns.

Reduce Returns With Smarter Fulfillment Practices

Returns are inevitable, but that doesn’t mean they can’t be rendered less frequent by addressing anything in the fulfillment process that might be causing them. If people are sending things back because they got an incorrect or damaged item, these actions will help:

• Optimize picking accuracy. Making sure that slotting and labeling are on-point in the warehouse can cut down on picking the wrong items. Using barcode readers and other automation tools can help ensure accurate picking, too. Leveraging warehouse management systems and inventory data can further improve inventory management and inventory control, reducing errors and optimizing stock levels.
• Use the correct packaging. The wrong-sized box or insufficient packing materials can lead to a customer receiving a broken product. Using cartonization tools can cut down on this considerably.
• Do a quality check. When quality control happens right before closing up a package, there’s a better chance of the item reaching its destination intact. This can also help pinpoint when the problem isn’t in the warehouse but with a careless carrier instead.
• Provide return labels and instructions. Remember contacting a retailer and waiting for return authorization paperwork? Adding these to every order eliminates a step for the customer and the company.

Finding out why something is returned is the only way to know whether there is an error in the fulfillment process that the company can fix or if the customer simply changed their mind.

Streamline the Warehouse Returns Process

Every warehouse needs a well-defined returns process that fits in with, but does not interfere with, its fulfillment process. Even the layout of a small warehouse should dedicate space for returns. 

In this space, workers can handle returns management tasks such as unpacking, assessing condition, and then scanning those items back into inventory (or discarding them). 

As with fulfillment, efficient return handling is key. Every step and touch counts, and automating with warehouse management software can ensure that products are processed quickly and accurately. With the swipe of the barcode, the item can be logged back into inventory in real-time. And automation can show exactly on which shelf it belongs.

One useful tool to save time (and as a result, money) is cross-docking. If a returned item can fill a backorder, it can skip steps in the process and move directly to the forward pick area.

Warehouse management software can also help with reverse logistics. Unlike the warehouse returns process, which covers what happens to items once they’re back in the warehouse, reverse logistics manages the supply chain moving products from customers back to suppliers, manufacturers, recyclers or wherever their final destination is. 

Use Data to Drive Smarter Returns Decisions

Collecting data as part of the returns process is as valuable as for any other part of warehouse management. Data analytics can provide useful information to find the source of problems that might result in returns.

• Reasons for returns. Did someone not like a birthday gift, or did the item arrive broken? Maybe it arrived after the promised delivery date. While personal preferences are out of the warehouse’s control, many things are a direct result of faulty warehouse operations or inefficiency.
• Looking for patterns. Is there an excess of returns for a specific product? Perhaps there is a problem with that supplier and their merchandise’s consistency. Maybe a certain carrier is becoming unreliable. Spotting patterns in what is returned and why can pinpoint where to make changes.
• Returns are seasonal too. Just as the holiday season sees a ramp-up of buying, the following months are sure to see a flood of returns. This information allows warehouse managers to staff up when needed. They’ll also be able to predict how much of which items are likely to be back on the shelf and can adjust their procurement accordingly.

Like everything in a warehouse, the returns process has a wealth of data points that a warehouse management system can collect and analyze. With this information, managers can look back at what’s working and what isn’t, as well as forward to what is likely to happen in the future. 

Optimize for Cost Recovery, Not Just Processing

While returns are inevitable in any retail business, it is possible to mitigate their costs through a few different avenues. The best way is to avoid them in the first place when possible. This requires optimizing efficiency in picking, packing and shipping. 

Businesses must strike the right balance between their own costs and customer expectations. They can’t simply pass all return costs on to their buyers and expect them to remain loyal. And if the ROI of taking back products is not profitable, they need to know when to cut their losses.

Finally, every company needs a reliable returns process in place. With good returns management and returns management software—along with warehouse management software—those things that do come back can be handled in the most efficient way possible.