October 28, 2013
strategic insight | Reverse Logistics

The difference is in the details

The difference is in the details

Handling returns of online orders in your DC? It's not quite the same as "traditional" reverse logistics. Here's why.

By Toby Gooley

Consumers who buy merchandise online oftentimes return all or part of their orders, and when they do, they expect that transaction to be a breeze. Free shipping, preprinted labels, instant return authorizations, and the option to return e-commerce merchandise to brick-and-mortar stores have become mandatory for e-tailers if they expect to stay in the game.

That was abundantly clear in UPS Pulse of the Online Shopper: A Customer Experience Study, a survey of 3,000 consumers conducted by the research firm comScore Inc. earlier this year. Nearly two-thirds (62 percent) of respondents said they have returned products they purchased online, up 11 percent from the previous year. Eighty-two percent said they would be more likely to complete an online purchase if they knew they could return the item to a store or have free shipping for returns; 67 percent said they would buy more from a retailer that offers hassle-free returns. Returns can be a deal-breaker too: 48 percent would drop a retailer with a less-than-easy returns process.

Therein lies the source of a reverse logistics "vicious cycle." In order to attract and retain customers, online retailers must accede to consumers' demands for quick, easy, and no-cost returns. Yet by doing so, they encourage their customers to return purchases. As the consulting firm Tompkins International noted in a recent commentary on its website, consumers knowingly order more products and different sizes than they need because "they understand that the return will not cost them."

That's why the volume of e-commerce returns is growing, and knowing how to manage them is becoming an imperative for an increasing number of warehouses and DCs. There are some differences, though, between reverse logistics for online purchases and goods sold through more traditional retail channels. What follows is a look at those differences and how they can affect operations.

A typical industrial or retail reverse logistics operation handles consolidated pallet loads or full cartons, usually containing the same or similar products. E-commerce returns from consumers, by contrast, are far less predictable. They tend to arrive in very small and variable quantities, often just one or two items. They may be similar—shirts in different sizes or colors, say—or if the e-tailer offers a wide assortment of items for sale, they might be completely different products with wildly diverse handling characteristics.

E-commerce returns generally arrive in better condition than items returned to stores. That's because they very often are unused, and are unopened and still in the original packaging, says David Vehec, senior vice president, retail for Genco, a third-party logistics company (3PL) and reverse logistics pioneer. Store returns are more likely to have been removed from the packaging and to show signs of use.

Historically, e-commerce purchases, especially consumer electronics, have yielded more "no defect" or "no fault found" diagnoses than other types of returns, says Steve Sensing, vice president and general manager of high-tech operations at Ryder Supply Chain Solutions. One reason is that online shoppers don't have the opportunity to physically examine an item until after they have paid for and received it. "You get a higher percentage of buyer's remorse with someone who buys on the Internet than you would with someone who goes to a store and makes a purchase," he observes.

Another reason for the high rate of "no defect found" e-commerce returns is that the consumer typically obtains a returned merchandise authorization (RMA) by filling out an online form. "At a store, associates have the opportunity to challenge the customer and ask questions about why they are returning the item," Vehec says. "When you're dealing with a Web purchase, you don't have that [face-to-face] engagement with the consumer."

All that creates some challenges for facilities that accept returns of merchandise ordered online, particularly in a multichannel or omnichannel environment. "How you handle [returned merchandise] depends on whether it is coming back through a storefront or through e-commerce," Vehec says. "When you combine the two, that's where the complexity increases."

Carrie Parris, who as director of corporate strategy at UPS is responsible for the company's reverse logistics strategy, cites the example of "noncongruent" inventory—items a customer buys online or in one store location and returns to a store that does not carry that particular stock-keeping unit (SKU). When that happens, the store staff must accept an SKU that is not in their system, be able to track its whereabouts, and make decisions about its disposition based on the retailer's policies. "Some of our retail customers have a clearance strategy [putting all returned merchandise on the clearance racks] and call it a day, while others pull noncongruent inventory back to the DC," Parris says.

Another challenge involves refunds and credits. Consumers usually receive them on the spot when they return merchandise to a store. But in e-commerce, the seller must verify that the specific items that were authorized for return have actually been received before it can issue a refund or a credit. That can stretch things out and color the online shopper's perception of service quality. Some e-tailers, therefore, rely on certain shipment tracking events to trigger refunds. Others wait until the items have gone through the entire returns handling process, Parris says.

A retailer's crediting, accounting, and inventory tracking policies may even influence physical handling procedures. If those policies differ for e-commerce and brick-and-mortar sales, Vehec says, then those parameters will influence the design of the process flow, including at which point e-commerce items should be separated out and handled differently. To make those decisions, processing facilities must be able to identify whether each arriving item was purchased online or at a store.

When a returned item arrives at a warehouse, it is "checked in" by scanning. This is especially important in e-commerce because, unlike store returns, it will be the first time a returned item is physically entered into the retailer's system, Parris says. In most processing facilities, the item will move on to a workstation where employees identify it, inspect it, and determine the best disposition. However, because most e-commerce returns arrive in their original packaging, warehouses that handle large volumes of such items usually set up "detrashing" and "unpackaging" areas with appropriate equipment. In other respects, facility layouts and material handling equipment are similar to those for other types of reverse logistics activities, according to the experts consulted for this article.

Inside the warehouse or DC, flexibility and the ability to accurately identify each item that arrives are paramount. "You need to have the flexibility to process a full pallet of one product, which you might get from a retailer, and also be able to handle different products individually," Sensing says. For that reason, the companies we spoke with for this story favor work cells where associates can identify, inspect, and make decisions about the disposition of the returned items. Ryder, for instance, organizes its cells along Lean principles that allow workers to modify their workspace to accommodate different types of products and dispositions (repair, repackaging, resale, and so forth). Applying the Lean concept of "standard work" helps operations manage the variability and unpredictability of e-commerce returns because it allows an individual who may never have seen the product being returned to follow a process that applies to every item, and thus be highly productive despite so much variability, Sensing says.

An asset-recognition program that helps associates properly identify each item is a must. Such systems usually are proprietary to the retailer. The best incorporate not just the retailer's product database but also photos and detailed descriptions of each SKU. The systems also include the retailer's business rules regarding the disposition of returned items based on value, condition, and other considerations. Some of the ones Parris has seen include example photos of various conditions, which help associates accurately identify the value that could be recovered from each item. Asset-recognition systems can be pricy, but the rapid increase in e-commerce returns makes them well worth it, she says. "The more volume you see, the more you can justify an improvement in systems that let you make a higher impact on value recovery in returns processing."

Online retailers are trying to master the art and science of handling e-commerce returns—most of them in partnership with third-party logistics companies that have long experience and deep expertise in reverse logistics. But the business of electronic commerce seems to change almost daily, and new challenges are likely to replace the old. Many e-tailers, for instance, are growing their international business, and so must deal with the complex, highly regulated process of managing returns across borders. Here again, 3PLs can lend their expertise.

Sensing expects that in the future, online retailers and providers of reverse logistics services will devote more attention to making it easier for consumers to return unwanted products. Some companies are experimenting with urban drop-off lockers and kiosks, while others are exploring how they might leverage their existing networks to bring returns services closer to consumers. Considering the continued robust growth of e-commerce sales and the concurrent increase in returned goods, it seems likely that helping online retailers improve service to consumers is where the reverse logistics action will be for some time to come.

About the Author

Toby Gooley
Contributing Editor
Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Senior Editor at DC VELOCITY and Editor of DCV's sister publication, CSCMP's Supply Chain Quarterly. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.

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