The Importance of Return Centers for Ecommerce Warehousing
Originally published on March 16, 2023 by Elizabeth Walsh, Updated on March 29, 2023
Fulfillment Solutions with Erhan Musaoglu
These days, returns have become a major driver of customer success for ecommerce businesses – especially since 30% of all online orders end up back in the warehouse. As a result, the emergence of return centers and returns management technology have become a major component in DTC success.
We sat down with Logiwa Founder & CEO, Erhan Musaoglu, to discuss returns in further detail. Below is the transcript of our interview.
Q: Why do direct to consumer warehouses struggle with returns?
Musaoglu: “DTC operations are different from B2B. In B2B, returns are not as disruptive to fulfillment operations. When there is a return for B2B, it is usually due to damaged product, which doesn’t require a complicated process. In fact, most B2B returns either need to be discarded (due to breaks or product flaws) or enter a separate reverse logistics process to regain some profits. Over time, we’ve seen the unique needs of the DTC business model emerge and returns become an increasingly important part of the overall fulfillment process.
Returns have increased because consumers expect a similar experience to what is offered by brick and mortar stores. Therefore, returns became an essential component to ecommerce. COVID impacted this trend. I even found myself doing it. You don’t tend to treat online stores the same as brick-and-mortar establishments. You order all the sizes, all different products, even though you’re not sure. Because you know once you try items on at home if it doesn’t work out, you can just return them.
Because DTC businesses did not anticipate consumers to expect this level of service with returns, many fulfillment centers today are designed exclusively for outbound operations—to push things to the consumers. And, unfortunately, return and outbound shipping are totally different processes.”
Q: Can warehouses still manage returns even if they were not initially designed with them in mind?
Musaoglu: “If you have something like a 1% return rate, your facility can probably handle it. Up to a certain point, low rates of returns can be managed. But the moment you start experiencing return rates of 10%, 15%, or higher- it is more likely your facility is not designed for that. Warehouses have traditionally been designed for moving items in one direction, or pushing things straight through to consumers as quickly as possible. Returns add much more complexity.
Here’s an example to compare the typical receiving process versus receiving a return: Imagine shipping 10,000 orders from your warehouse and receiving 200 returns as a result. Rather than simply putting returns through the standard inbound putaway process, you must take all the necessary steps to ensure the item is suitable for re-entering the supply chain.
From unpacking the items, checking the product, and determining whether the item is resellable… to taking photos of perceivable issues and comparing those details to the consumer’s return report… returns are complex. You must also ensure customers are credited or reimbursed properly then re-enter items into your supply chains and physical warehouse environments with as little disruptions as possible… It is 4X, 5X more difficult than outbound processes.
For warehouses not built to handle high-volumes of returns, they are going to fail.”
Q: How are warehouses reacting to this industry-wide struggle ?
Musaoglu: “Good question. In addition to open dedicated return centers, operators are definitely focusing on tracking return rates and the cost of returns, both of which increased after COVID. They are also taking extra steps to ensure operational efficiency to keep those rates as low as possible. Even with a highly optimized fulfillment process, operators can expect the cost of one return to equal the profits of 10 successfully sold products or more. On average, warehouses can plan for one return to cancel out 8-10 good sales to evaluate the impact of their current returns.
Such expenses are why returns are so painful. And truth be told, if a consumer buys a cheap product, many warehouses don’t even want them to return it. The cost of the return is more than the product is worth. And if the warehouse cannot resell the product, that’s an even more complicated and costly scenario. That is why, for certain operations, optimizing warehouse efficiency is more beneficial than the process of adding a return center.”
Q: So retailers tend to handle the returns, but how does that impact the 3PLs? Since they handle fulfillment on behalf of the retailer, who takes the margin hit?
Musaoglu: “The retailer. For example, if the return is because of the third-party logistics provider (perhaps the wrong product was shipped), then they will take on the penalty as the shipper. But if it is an unavoidable customer return, then it is the retailer’s responsibility. And 3PLs charge more for managing that process on behalf of the retailer – because it adds labor and warehousing costs to process items back into inventory for redistribution.”
Q: How are warehouses easing the burden of returns on both sides? Is this different for fulfillment centers?
Musaoglu: “Fulfillment centers, or warehouses, are evolving to ease the burden of returns. When you say a warehouse, you are also referring to a fulfillment center. But, fulfillment centers are primarily experienced in pushing orders to consumers. Now, they have to be prepared to reverse the movement of items the opposite way. That is why so many warehouses are considering adding return centers. When you google fulfillment centers, you can expect to see return centers.
Operators, especially 3PLs, must be able to maintain operations based on the presence of returns – by adding return centers, evolving operations to get returns easily back to the ideal fulfillment centers, selling items to a secondary market, or executing removal.”
Q: How do return center facilities differ from fulfillment centers, aside from their primary objective being to handle returns?
Musaoglu: “In most fulfillment centers you see a ton of locations, racks because you are handling millions of products and shipping them. In the return centers, there are still racks, but much more space is prioritized for the other critical return management processes. Processes like value-added services, or return stations for doing control checks, can take up a lot of space in a standard warehouse. In return centers, there are whole areas dedicated to these operations.
That said, both return centers and fulfillment centers are evolving their processes. There is no longer just marketplace and website orders to consider, but a full end-to-end order management process to uphold: Someone submits an order. You check the inventory, and this order goes to the fulfillment center before the item is shipped for last-mile delivery. But now you must also be providing return labels and an easy return process.”
Q: How are returns management centers becoming their own separate entity? Or just another element for fulfillment operations to factor in?
Musaoglu: “First of all, 99% of all the fulfillment centers have designated areas for returns. But ideally, this will be a very small part of their warehouse floor. If you are overseeing major return operations, it is better to have a specific facility to avoid disrupting the rest of your fulfillment operations. Return centers just don’t have the same functionalities, making returns something standard warehouses have to work much harder around.
Return centers host different types of integrations and integration logic. They also take processes like refurbishment into consideration, and other value added services. With proper returns management, you can change the package, change the label, fix the product… all before the item re-enters the supply chain. That’s why the layout is totally different between these two, and it is why returns management centers can feel quite separate from the rest of fulfillment operations.”
Q: Do warehouse management systems (WMS) solutions need to integrate with return management systems? How critical is it for achieving customer success?
Musaoglu: “Not necessarily. Returns are ultimately just incoming shipments that need to be entered into an existing system. That being said, returns management is absolutely critical for achieving customer satisfaction and long-term brand loyalty. Just put yourself in the shoes of the buyer: You purchase three pairs of reading glasses for 19 bucks from Amazon. If you know that Amazon is not going to accept a return or make it difficult for you to return the items — you wouldn’t buy them, right?
So for online ecommerce, not so much for normal retail, if you’re not able to streamline your returns, and make things easy for customers, they aren’t going to buy from you. This is even more important than your price point. That’s why retailers, especially big retailers, are embracing return centers. Either third party, or internal.
For major online sellers, especially in apparel, seasonality plays a large role in returns management needs. With seasonal trends, many return items can’t be put back into stock in time to be valuable. In those cases, the speed of return centers is vital and something a warehouse management solution will have a much more challenging time with. The faster you return, the faster you can process, the faster you can put it back into the market.”
Looking for more expert insights on achieving fulfillment excellence? Follow Erhan Musaoglu on LinkedIn or contact our team of warehouse technology experts for a non-commitment demo of our industry-leading WMS.
For access to additional guides, whitepapers, case studies, videos, tools and templates, visit our resource page at: https://www.logiwa.com/resources.