Returned goods are not supposed to happen. The problem is that they do—to the tune of more than $100 billion a year in retail products in this country alone, an amount that is expected to grow over the next decade.

For companies that must manage returned goods (a function often referred to as "reverse logistics"), the three most critical factors to consider include why products are being returned; how to optimize their returns management operations; and whether they should manage those operations internally or outsource them to a third party.

All of those considerations will greatly influence warehouse and distribution center operations, including a facility's internal configuration, labor requirements, and asset allocations.

Determining why merchandise is being returned also can influence decisions later on in the returns management process. Some possible reasons for a return include size, style, fit, or color; breakage or improper operation; and obsolescence, to name just a few.

Analysts consider the percentage of a company's products that are returned to be a gauge of the integrity of its internal processes as well as of the quality of its products. Thus, understanding the reasons behind returns plays a big role in cost control.

"The degree to which prevention can be effected, lessening the return rate, will depend on the nature of the product and whether the company is a manufacturer or a retailer," says Robert E. Mann, associate partner at the consulting firm Accenture in Atlanta. "But on average, a company should expect return rates to be no more than about 10 percent of the product sold."

Once a shipper has established the volume of returns and has taken preventive measures, it can then address the physical demands of processing returned goods. Most retailers and manufacturers set up returns operations inside existing warehouses and distribution centers. For that approach to be effective, it's necessary to physically segregate the returned-goods area from the rest of the operation.

Using a quarantined or fenced-in space has three objectives: to prevent loss, to prevent mixing with "first quality" merchandise, and to prevent returned product from mistakenly being shipped out before it has been properly processed.

To keep the "forward" and reverse operations separate, many warehouses dedicate a separate entryway for returns, or at least set specific times for receiving returned goods to avoid conflicts with forward distribution activities. "Some companies go so far as to set up a distinct returns business address to ensure differentiation of returns from new product coming in," reports warehousing consultant John Tracy of Tracy-Hayden Associates Inc. in South Orange, N.J.

In addition to physically separating the returns area, it's essential that it be laid out to allow for expeditious, orderly workflow management—and it must be kept that way.

"Most companies don't do a very good job with this," notes Mann. "The area is usually disorderly, confused, and the [product] flow is haphazard. A warehouse manager should put as much thought into setting up the returns process as [is put into the] picking process."

The need for dedicated, properly trained personnel is just as important as the physical layout. "Sometimes the warehouse manager controls both forward and reverse distribution, but this is never as effective as [having] a full-time manager and specialized staff," comments James R. Stock, professor of marketing and logistics at the University of South Florida, Tampa.  Continued...

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