Distribution & Supply Chain Strategies Customer Returns Process: Understanding the Real Costs of Returns

The customer returns process is one that many retailers understand to be a critical aspect to customer loyalty. Make the returns process cumbersome and difficult, and customers are apt to avoid future purchases. To structure a sound customer returns process, companies must first understand the real costs associated with returns.

Dealing with customer returns poses a growing challenge, for businesses often underestimating the costs involved. Retail and ecommerce companies can see return rates that range from 1%-3% on the low end for durable goods, to as high as 35%+ for high fashion apparel.

These returns not only affect revenue, but also strain logistics, customer support and inventory management systems. Factors like restocking fees reverse logistics and possible product devaluation can significantly increase the burden. Companies need to acknowledge these expenses to develop a solid returns management process.  The best way to uncover these aspects is a disciplined warehouse optimization assessment. 

Key Takeaways Regarding Customer Return Processes

• High Return Rates. Ecommerce experiences much higher return rates compared to physical stores, especially in apparel and electronics.
• Reverse Logistics Expenses. An efficient returns process involves intricate logistics such as transportation, inspection and restocking which are often costlier.
• Customer Service Impact. Dealing with the customer return process demands substantial customer service resources, leading to increased operational expenses.
• Inventory Management Challenges. Returns can complicate inventory management processes resulting in excess stock or outdated products.
• Environmental Sustainability Concerns. The environmental impact of returns is significant due to increased carbon emissions from transportation and additional waste generated by returned items.
  

The True Expense Associated with the Customer Returns Process

The expansion of online purchases has undoubtedly made the purchasing process more convenient. It has also resulted in a notable uptick, in the volume of returns. While the promise of a hassle-free return process and exchanges is commonly used to provide a positive experience. However, the actual financial impact of the return process is frequently underestimated.

For retailers managing returns goes beyond a logistical hurdle; it involves a complicated and costly procedure that impacts their profitability, operational efficiency and customer contentment. Recognizing these expenses is crucial for companies aiming to sustain a performance while providing excellent customer services.

Layer in the cost of customer return due to the wrong item being shipped out, and the operational costs skyrocket. Consider the following chart based on one of our clients' costs.

This highlights the need to identify the cost of ecommerce returns and the need to proactively reduce the rate of returns. This is especially true when the types of returns are associated with picking errors in the warehouse.

The most critical takeaway:

• A business processing 1,000 orders per day on average handles roughly 250,000 to 260,000 orders annually. 
• A simple 5% return rate results in 12,500 to 13,000 return orders.  
• Assuming there were zero warehouse errors, only customer satisfaction issues, this would result in at least $160,000 in lost labor not including freight, etc. 
• How much more is lost by customers not ordering again?

Managing the returns process, also known as reverse logistics, is critical to driving out operational costs. Unlike logistics operations that are streamlined and well-defined, reverse logistics entails unpredictable factors such as the condition of returned items restocking requirements and the possibility of unsellable products.

Each stage—ranging from inspecting returned merchandise to refurbishing or repackaging—demands resources that increase operational costs rapidly. Furthermore, the expenses associated with managing returns often surpass those linked to shipping orders. This underscores the necessity for companies to refine their strategies for logistics in order to minimize these financial burdens.

Defective products and poor product quality are additional aspects that not only drive customer returns, but also erode customer experiences. Your customer service team must be an integral part of uncovering of any good returns management process.

The Influence of Ecommerce Returns on Inventory Management

Ecommerce returns not disrupt the flow of goods, but these returns also play a significant role in inventory management. When items are returned, they must go through an extensive inspection and rework process before they can go back into inventory.

Unfortunately, many of these customer returns come back to the distribution center after peak season. For an ecommerce business, this can create substantial inventory problems. Common situations that can affect inventory include:

• The original packaging may be damaged, making the item difficult to resell.
• Defective items and quality issues can create a return to vendor bottleneck.
• Returns after peak seasons can create an influx of inventory that may be difficult to sell.
• High return rates from electronic devices can create bottlenecks in having to potentially test items before dispositioning inventory.
• Returned apparel can often lead to odd sizes left in inventory that must be managed. Additionally, these items often require extensive rework and inspections.

There are two main problems associated with returns. The first is that customers want to be refunded or receive their exchange order quickly. The second is that in many companies, there is a planned return rate.

This return rate is factored into their buying plans. Returns must be expediated so as to reship those units on other orders. The longer companies wait to process returns, the more other customers are affected, further reducing profitability.

The varied return status can lead to situations where companies struggle to sell, or worse face issues like inventory obsolescence where returned items lose value or become outdated.

Moreover, handling the influx of returned products can introduce complexities in warehouse operations leading to inefficiencies and increased labor expenses. Effectively addressing these challenges is essential for minimizing the impact of returns on inventory health.

Effective Returns Management Processes

To develop a smooth returns process, companies must understand the costs and the impacts on customers. Once these understood, it is time to look at the following:

• Why are returns happening in the first place, and what can be done to reduce the inflow of customer returns?
• What can be done in your operations to efficiently handle those customer returns that arrive at the warehouse?

Understanding Customer Returns and Reducing the Inflow

Ecommerce companies need to proactively analyze customer returns, customer feedback, return requests and their overall returns policy. By addressing these challenges head on, companies can reduce the impacts on inventory, operational costs, and customer disruptions. Begin by focusing on these areas:

Analyzing Customer Return Data.

Why Returns are Happening: Begin by examining return data to identify patterns. These could range from issues like sizing, variations in color, product flaws and defects, or missed customer expectations.

How to Reduce Customer Returns: Utilize this data to implement targeted improvements such as refining product descriptions, improving visuals and offering sizing guidance. By pinpointing reasons for returns companies can proactively address issues.

Improve Product Descriptions and Imagery

Why Returns are Happening: Inaccurate or inadequate product descriptions and visuals often lead customers to return items. When a product falls short of expectations returns become almost inevitable. This could be due to inaccurate colors in images or the full item not being visible leading to missed expectations.

How to Reduce Customer Returns: Elevate product listings with descriptions multiple high-resolution images showcasing various perspectives and even video demonstrations. Providing thorough information empowers customers to make informed choices reducing the chances of returns.

Enforcing Stringent Quality Checks

Why Returns are Happening: Returns frequently stem from product defects or subpar quality that slip past quality control measures.

How to Reduce Customer Returns: Strengthen quality control protocols to ensure products meet customer standards before shipment. Consistent quality translates into returns due to defects or customer dissatisfaction. Receiving must have access to accurate product samples and the system must be able to help guide them through the inspections process. This begins with merchandising and buyers providing critical data to support the process.

Introduce Virtual "Try On" and Size Recommendation Tools

Why Returns are Happening: One of the causes of returns in online fashion shopping is incorrect sizing and not understanding the fit.

How to Reduce Customer Returns: Incorporate try on tools and size recommendations that utilize customer information to suggest the suitable fit. By assisting customers in selecting the size before making a purchase this approach can significantly lower returns due to sizing discrepancies.

Improve Customer Support Before Purchase

Why Returns are Happening: At times, customers feel uncertain about a product to buying it leading to dissatisfaction and subsequent returns.

How to Reduce Customer Returns: Provide live chat support or easy access to customer service for addressing queries before making a purchase. Offering assistance can help resolve uncertainties and ensure that customers choose the suitable product for their requirements.

Set Realistic Customer Expectations

Why Returns are Happening: Many returns occur due to expectations especially when customers anticipate more than what the product offers.

How to Reduce Customer Returns: Establish clear expectations by improving communications and details about product features, advantages and limitations. Providing information regarding what the product can do, or wont do, will enable customers to make decisions based on a wealth of information.

Encouraging Customer Reviews and Feedback

Why Returns are Happening: Customers often depend on the opinions of others when making purchase choices. The absence of feedback can result in expectations.

How to Reduce Customer Returns: Promote customer reviews. Showcase them prominently on product pages. Reviews offer insights for buyers, aiding them in grasping the product better and determining if it meets their needs.

By prioritizing these approaches online retailers can not only understand why returns are happening, but also better support the customer.

Developing an Efficient Customer Return Process in the Warehouse

1. Create a Designated Returns Area. It is important that the returns processing area is sufficient to handle your returns. Most companies tend to squeeze these areas down to the point where the congestion creates inefficiencies. The returns area must be sufficient to handle the following:

• Staging of inbound shipments as they arrive, separated by date received.
• Space to separate the inventory from dunnage, as well as space to accumulate waste.
• Lighting and space or tables needed to handle detailed inspections, testing and repackaging.
• Staging for inventory good to go back into stock as well as inventory to be destroyed.

2. Establish Clear Procedures for Customer Returns. Having a standardized process for managing returns is critical to any operation. Develop a step by step process for receiving returns that covers:

• Checking returns in from the dock.
• Looking up customer order information and processing the return in the warehouse management system.
• How to inspect item conditions and disposition inventory.
• What rework or repackaging is required if the item is to be returned to stock.
• How are items to be destroyed or returned to vendors.
• How should inventory be staged based on inventory disposition.

Training warehouse staff on this process will ensure everyone is on the page and can handle returns smoothly.

3. Utilize Return Merchandise Authorizations (RMAs).  An RMA system can be utilized to streamline return processes by assigning identifiers to each return, simplifying tracking and management. Implementing an RMA system that requires customers to obtain authorization before returning items helps capture details like the items, quantities, reasons for return and product conditions. This system assists in prioritizing and overseeing returns at each processing stage.

4. Perform Thorough Inspections. It is crucial to inspect returned items to evaluate their condition and determine if they can be resold, refurbished or need to be disposed of. Training warehouse staff to conduct inspections by using a checklist to check condition component completeness and resale potential ensures that returns are processed accurately and efficiently.

5. Establish a Grading System for Returned Items. Creating a grading system for returned items enables categorization based on their condition. By assigning grades such as A for the best conditions, and F grades for items needing refurbishment or disposal companies can streamline decision making processes regarding restocking or further actions. This system also helps improve inventory management and processing efficiency.

6. Enhance Reverse Logistics Operations. Effective reverse logistics management is crucial for handling the transportation and processing of returns in a cost-effective manner. Partnering with carriers and negotiating rates are key steps in optimizing this process and shipping costs - especially for returns associated with shipping the wrong item on an order.

For companies managing return volumes collaborating with a third party logistics provider (3PL) could be advantageous. Moreover, integrating logistics data into the warehouse management system (WMS) offers visibility and control, over the returns process.

7. Automate the Handling of Returns Where Feasible. Integrating automation, into the return process can minimize errors, expedite processing times and enhance efficiency. Utilizing technologies like barcode scanners, and automated sorting solutions can streamline the receipt and handling of returns. These tools make it easier to identify returned items ensure inventory updates and efficiently direct items to their next appropriate steps. 

8. Introduce Cross Docking for Swift Processing of Popular Returns. Cross docking allows redirecting returned items that are in demand to go directly to fulfillment.  This keeps inventory from undergoing the traditional restocking process only to be immediately picked. This approach is especially beneficial for products with return and reorder patterns. By implementing a cross docking system these items can be promptly inspected and sent straight to outbound picking and shipping reducing handling time and related expenses.

9. Track and Improve Return Performance Metrics. Monitoring essential return metrics is crucial for pinpointing inefficiencies and areas for improvement in the returns process. Establishing performance indicators such, as return processing time, return rate, restocking duration and the proportion of returned items offers valuable insights. Regularly evaluating these metrics allows improvement of the returns process leading to better warehouse organization staffing choices and overall operational effectiveness.

10. Staff Training and Empowerment. Having prepared employees is vital for managing returns and ensuring a seamless process. Regular training sessions covering return processing procedures, technology utilization and customer service components linked to returns enable staff to carry out their duties. Empowering them to recognize and propose improvements cultivates a culture of progress.  This ultimately improves the returns handling process in the long run.