8 Steps to Optimize Returns

With the precipitous increase in online sales — and the disproportionate frequency of order returns — it’s clear that new returns processing approaches are needed. To maintain profits, retailers must apply the same level of focus to the reverse logistics process as they do to outbound operations. The problem — and the opportunities — justify a closer look.

According to a report by CBRE and Optoro, the cost of an average return in 2021 was two-thirds of the original sale price — factoring in labor, transportation and warehousing costs. It’s no wonder that many companies outsource the entire returns process or send returned merchandise directly to liquidation. But with proper processes that quickly recirculate products back into sellable inventory, returns can be good for the bottom line and the environment.

If you’re among those retailers who think implementing efficient processing returns is not a good use of internal resources, it’s time to rethink that assumption. Consider the following eight steps toward optimizing returns for improved profitability.

Appointing a single person to oversee company-wide returns process is key. That person’s focus should be on streamlining the overall process — from collaborating with suppliers to share ownership for returns to the liquidation of inventory. S/he should develop cross-functional metrics that encourage the desired behaviors. For example, all commissioned sales associates should be measured on net returns, and product profitability should include the cost of processing returned items. Finally, they should develop an executive dashboard that gives everyone a high-level view of returns, including the following metrics:

• What is the cost per unit to process a return for each return channel?
• Are returns routing decisions optimized for efficiency?
• Are you incentivizing customers to the most profitable returns behaviors?
• What is your returns rate for each product and product group?
• What percent of returns do you salvage?
• What percent of returns are resold at full price? At a discount?

3. Improve your systems

To ensure the highest returns recovery rates, you’ll need good systems. At a minimum, a system should support a single view of inventory that tracks returned items and issues credit. As soon as a return is received, it should be immediately recorded in the system and assessed as fit for resale, easily repairable or damaged. Bar codes and radio-frequency identification (RFID) tags can help to identify items, and new artificial intelligence (AI) solutions use cameras to help assess the condition of returns quickly.

To maximize the profitability of returns, your system will need to use insights from inventory and sales data to intelligently route each return to the ideal channel or location based on:

• How quickly the item is likely to be resold at each node
• Minimizing the cost of transportation
• Reducing touches and processing costs
• Factoring in re-packing and re-labeling costs

The system should also be equipped with machine-learning (ML) algorithms that analyze market demand and historical data to determine the best resale price and incentivize customers to return the item via the most cost-effective channel. These data-driven decisions are complex, but they can have a big financial impact when well executed.

5. Take advantage of brick-and-mortar stores

When it comes to returns processing, your brick-and-mortar stores can be transformed into a strategic advantage. Even items that are purchased online can be returned and resold in physical stores. In addition to eliminating the cost of shipping the item back to a distribution center (DC), you have an opportunity to cross-sell additional items when they come into the store. Reducing the need for transporting returns throughout the DC network also lessens your carbon footprint and has a positive impact on the environment.

Be aware that buy online, return to store (BORTS) processing can introduce its own set of challenges — especially if an item is out of season, damaged or not a store SKU. In these cases, you may face the decision of selling the item at a discounted rate in the store or shipping it back to the DC or supplier. Many retailers are implementing ship-from-store fulfillment models that are enabling items returned to a store to be used to fulfill online orders — which can also result in transportation cost savings.

6. Refresh your returns policy.

Two-thirds of consumers review returns policies before making a purchase, and 54% of buyers are unlikely to buy from a retailer with a poor or unclear returns policy⁶. Because it is an important part of your overall customer service capabilities, having a pro-customer returns policy is now a competitive advantage.

A key aspect of your returns policy is the decision whether to offer free returns. Consider the following consumer data:

• Customers spend three times more at online stores with free returns⁷.
• Buyers say that free returns make them more loyal and likely to buy again⁸.
• 66% of U.S. shoppers say they are more likely to purchase an item online when it can be returned at a local store⁹.

7. Mine customer feedback for process improvements

Instead of thinking of returns as a lost revenue, many retailers leverage them as a feedback loop and/or gold mine of information that can lead to company-wide improvements and higher sales. Insights include:

• Products returned frequently due to damage or low quality should trigger an alert to the buying or merchandising team.
• Products returned due to damage, late deliveries or mis-picks indicate a problem in fulfillment processing.
• Products returned due to color or fit may indicate a misleading website description.
• A vendor with a large volume of returns should be re-assessed, as should a customer with a large percentage of returns.

A cross-functional returns owner can make an immediate impact by improving this feedback loop for the good of the entire company.

FORTNA Can Help

As e-commerce volume growth continues, companies must take a strategic approach to handling returns efficiently to continue to delight customers and drive competitive advantage. Failure to apply discipline to this aspect of the business can result in further cost increases and escalating challenges as reverse logistics costs spiral out of control. The returns experience is as important as the purchase experience in earning and maintaining brand loyalty. Although balancing cost and customer expectations can be challenging, FORTNA can help. FORTNA enables companies to improve their distribution operations performance with designs and solutions that optimize seamless omnichannel fulfillment and returns.