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Processing Product Returns in Your Warehouse/DC

After languishing for years as a back room activity in many companies, reverse logistics has become an opportunity to improve customer service levels, reduce costs, and, in a few instances, a source of competitive advantage. However, in some firms, product returns/reverse logistics is still just a hassle and something that is a necessary evil of doing business.

By James R. Stock, Ph.D.

In a recent research study of manufacturing, wholesale/distributor and retail members of the Warehousing Education and Research Council (WERC), the product returns processes of warehouses and distribution centers (DC) were examined. Interviews, combined with warehouse/DC site visits, were conducted with 20+ companies. Based on information gathered from the site visits, a mail survey was sent to 1,095 WERC members. Total response rate was 242 (22.1 percent).

Based on the information obtained, the product returns process was identified as consisting of five phases: (1) receipt; (2) sort & stage; (3) processing; (4) analyze return; and (5) support operations (i.e., disposition). Some of these phases may be combined if product return volumes are small or if the majority of returns can be placed directly back into inventory because they are ready for sale. Exhibit 1 identifies the five phases of the warehouse/DC product returns process.

The Product Returns Process
A key question by firms is whether customers will be required or encouraged to utilize a return authorization (RA) when sending back an item for credit. Companies prefer to use RA’s because they facilitate the returns processing activity. Customers often don’t like them because they add extra work for them.

If customers are not required to use RA’s and can return items at any time, sellers will not know when or how many items to expect at their returns processing facility. This makes forecasting difficult and can lead to inefficient utilization of labor and equipment. If RA’s are required, the seller can plan their returns processing activities accordingly and usually operate more effectively and efficiently. In the companies surveyed, 83 percent use some type of RA and about 70 percent require pre-approval of RA’s prior to accepting product returns. Interestingly, less than one-half of RA’s are computerized, that is, available from the Internet or in some other electronic format. That means that a majority of RA’s are still generated and processed manually.

The more and better information provided by the customer to the seller, the more efficiently the product return can be processed. Returns will be processed more quickly and cheaply, resulting in higher levels of customer service and lower costs. Leading edge firms are more likely to use RA’s and know more precisely when, and how many, returns will be received at their warehouse/DC processing facility.

Although individual firms handle product returns in many different ways, most follow a five-step process. Exhibit 1 list sthe stages as receipt, sort & stage, processing, analyze return, and support operations.

Stage 1, or RECEIPT, entails receiving the product returns from various delivery carriers at dedicated or combination receiving doors in the warehouse/DC. During Stage 2, SORT & STAGE, items are sorted and positioned for initial returns processing. This stage allows for the fastest processing of returned items that can be placed directly back into inventory or require little or no processing activities. Stage 3, PROCESSING, involves several activities, most notably the initial information input into the firm’s data system and the determination of the initial disposition strategy. Customer credits are sometimes made at this stage, especially if the items returned can be returned to stock or otherwise processed quickly. In Stage 4, ANALYSIS OF THE RETURN, more detailed information is entered into the information system, the optimal disposition strategy is determined for each returned item, and in most instances, customers are credited for their returns. Stage 5, SUPPORT OPERATIONS, includes several activities associated with the disposition of returned items: return-to-stock, return to vendor, repair/refurbish/remanufacture, send to stores, donation/charity, salvage/scrap, destroy/landfill, or return to customer.

In the discussion that follows, some of the key elements of each stage of the process are presented.

Stage 1—Receipt
As product returns come back to the warehouse/DC, they are received and enter the first stage of the process. When product returns arrive at a facility, they are usually staged prior to further processing. Often, there are receiving standards regarding how long the return can wait before being processed. Typically that time horizon is 48 hours or less, except during periods of unusually high volumes. Firms must be able to identify when returns are received so that employees can determine how long they have been in the facility prior to initial processing. A “first-in, first-out” (FIFO) processing scheme is the most often utilized procedure. One of the best, and in some ways easiest, ways of keeping track of the time items have been at the facility since receipt is by using a manual system for recording arrival time.

Utilizing standard 8-1/2” X 11” paper that can be preprinted or handwritten, the date/time of receipt is recorded. That provides warehouse employees with a quick and easy way of identifying which returns have been in the facility the longest and thus, which ones should be handled first. When colored sheets are used to represent a different day of the work week, such recognition is relatively easy and mostly error free.

Stage 2—Sort & Stage
Once returns have been received, they are typically sorted. This sort is usually based on whether the returns are full pallets, cartons, or individual packets. It may be based on the type of return, size and/or number of the items being returned, or a method that would allow balancing employee workload for those involved in the initial processing activity that occurs in Stage 3. Firms in the electronics, computer and retail sectors often have such sorting procedures in place.

If a warehouse/DC receives returns that include small packages, cartons and full pallets, employees sometimes place the packages into totes and put them on a conveyor for delivery to an initial processing station where they are opened and basic information obtained (usually using some type of bar-code scanning technology). Alternatively, they might place them into Gaylord’s for movement to initial processing stations or move the pallets to a staging area near the stations. There, employees would perform initial processing activities.

Stage 3—Processing
Processing the return occurs at the next stage of the process, typically at an initial processing station. Returns are sub-sorted into groups based on their SKU number so that they can ultimately be returned to inventory if they are in saleable condition, while vendor returns are sorted according to the vendor name. Customer credits can be given at this stage of the process because the warehouse/DC is entering product and customer information into the firm’s database.

When returns reach the processing station(s), employees typically process items in one of several ways: (1) order of their receipt (FIFO); (2) according to the type of product; (3) by customer type or location; (4) according to the physical size of the items; or (5) some combination of these or other factors. When one electronics company receives returns from stores on pallets, they stage them in areas adjacent to the processing stations. Employees take items from various pallets or from the same pallet so long as they are not the easiest items to process. This eliminates the selection of the easiest and/or quickest items to process while leaving more difficult and/or slower items for later. Handling a mixture of items evens out the workflow and makes it easier to develop piece handling metrics and standards for each employee, function and/or warehouse/DC location.

A consumer goods company places returns on a belt conveyor after receipt. Items move to processing stations where diverters direct them to a station so that each processing line has an equal number of return items in their queue. Having the appropriate information (i.e., customer ID and return authorization numbers) on the return product label allows for items from the same customer to be diverted to the same conveyor line for processing at the same time. Efficiency and effectiveness are tied to having the right information on the items that are going to be processed. Having a return authorization attached to the item with a bar-code or 2-D label that can be scanned electronically enhances the success of this process.

Most of the necessary information about the returned item should be captured during this initial processing activity. Also, at this stage, the paperwork that accompanied the return is separated from the item and sent to the administrative area for comparison with the electronic records if discrepancies should occur. If there are none, these documents are kept on file or destroyed.

Most firms will have an extremely detailed listing of reason codes for returns. An electronics company had more than 100 reason codes, but typically, there are usually between 20-40 return reason codes that are used to indicate why items have been returned. Some firms perform audits of those return codes and try to determine if anything could be done to reduce their number.

Stage 4—Analyze Return
Potentially, a large number of products will already have been processed by this stage of the returns process. The returns remaining in the system at this stage will be those that will consume the greatest amount of resources (time, personnel, cost) to process. Employees must be the most highly trained since it is here that the most important disposition decisions are made.

Since the value of returns varies depending on the product disposition strategy employed, employees involved in this stage must be very knowledgeable about product repair or refurbishing opportunities, allowable versus non-allowable returns, and the financial benefits associated with each disposition option. Items that can be repackaged for resale result in more revenues than items that must be refurbished, repaired or remanufactured prior to re-sale. Repackaged or refurbished items always result in higher revenues than items being sold as scrap or salvage.

At the completion of this stage, the firm should have entered almost all of the information about the returned items with the exception of data that could not be recorded until after disposition of the product. In addition to the processing of the return, various data related to processing efficiency and effectiveness should have been collected.

Once the returns have been analyzed at the processing stations, they are now ready for disposition. One consumer goods company utilizes three colors of totes to indicate the disposition strategy for their returns. For items that do not fit into totes, carts are used, and for returned items that will be sent directly back to vendors, the shipping boxes in which they were returned are often used.

Stage 5—Support Operations
The most common disposition options occurring at the warehouse/DC are return-to-stock, return-to-vendor, repair/ refurbish/remanufacture, send-to-stores, donation/charity, salvage/scrap, destroy/landfill, and return to customer. The disposition of each returned item has been determined at the processing stations, so at this stage of the process, items are distributed to where they should go. If returns can go back-to-stock or back-to-stores, they are moved into the active inventory, or to a special area of the warehouse/DC that stocks returns that are ready for resale.

If repair/refurbishment/remanufacturing and/or repackaging are required, appropriate diagnostics, repairs and assembly/disassembly operations are performed in order to get the items in a saleable condition. Relative to costs, the degree of repair or refurbishing that occurs should be correlated with the potential value of the product once it has been improved. Because recovery rates for these products are high, performing repair/refurbishment/remanufacture efficiently, at low cost, is important to a firm’s return on investment (ROI). From a service perspective, these returns are made ready for resale to customers sooner, thus improving service levels.

Whether performed on-site or off-site, firms that do product refurbishing often reap significant benefits. Recovery rates (as a percent of the dollar value of the product) for refurbished or remanufactured items can be quite high compared to products resold as is, sold for scrap or salvage, or donated. In several of the companies visited in this research study, the recovery rate was as high as 85-90 percent.

For items being returned to vendors, employees determine the appropriate quantities and time windows acceptable to vendors and ship items back accordingly. When vendor return windows are small, it is important to process these returns quickly. It is not unheard of that a vendor will notify its customers that returns of a certain item will not be accepted after a specific time period and the amount of time it takes the firm to recover these items from their stores or other facilities exceeds the allowable time window established by the vendor or supplier.

If the firm utilizes outlet stores, saleable returns can be resold through them. Saleable returns can also serve as replacements to be used in warranty repairs or sold to wholesalers, off-price retailers or offshore buyers. Returned items can also be donated to charities or relief organizations, although this option occurs less than five percent of the time. Returns can be sold as salvage or scrap (this occurs about 20 percent of the time). The last option, and least favorable from an ROI perspective, is to destroy items or place them into a landfill.

In a very few instances (only about two percent of the time), when items are identified as not being returnable (non-allowable) to the firm, they are sent back to the customer or store with a note indicating why the items were being returned and credit not provided. Often, if an item is non-returnable, the firm will ask the customer how they want the product disposed of (which could include destruction, donation, or return), even though no credit is given.

A Concluding Thought
Most warehouses/distribution centers that would be considered leading edge. would possess many, if not all, of the following characteristics:

Processing of returns is done in two stages. The first stage is an initial processing that includes the entry of basic data into the information system and completion of the most simple and rapid processing tasks (e.g., return-to-stock, re-bagging, re-boxing, and non-returnables). The second stage is a more detailed and/or complex processing of returns that require repairs, refurbishing, remanufacturing, return-to-vendor, charity/donations, or donation.

Detailed product returns process maps are available that include a narrative of each sub-process (e.g., receipt, sort and stage, processing, analyze return, support operations), as well as an overall product returns process map.

Higher recovery rates for returned products are achieved. These rates of recovery (80+ percent) are significantly higher than for firms that provide only part-time effort to the management and administration of product returns (who achieve rates of 60 percent or less). When large dollar amounts are involved, the higher recovery rates can mean significant improvements in a firm’s revenues and profits.

When the warehouse/DC makes a determination prior to the customer sending back the item as to whether the product is worth returning, overall product return costs are lower. These firms evaluate the value of the item to be returned given its most likely disposition strategy and subtract the costs of returns processing (including transportation, labor, materials, and administration) to determine if the payback is there for returning the item. If yes, the customer sends the item back using a return authorization (RA). If no, then the customer is instructed to disposition the product at their location.

In sum, there are many opportunities for cost-and service-level improvements in product returns handling if the process is done right.

Key Elements of the Product Returns Process






Dr. James R. Stock is Professor of Marketing & Logistics at the University of South Florida, Tampa. The material presented in this paper was based on a research project conducted at the end of 2003 and funded by the Warehousing Education & Research Council (WERC).