The e-commerce market has been characterized by steadily growing sales for many years, so it is little wonder that as sales grow, the number of returns also increases. Goods returned by customers therefore represent an ever greater challenge for online retailers, making well-organized returns management a critical factor in the commercial success of companies. At the same time, it should be said that successful returns management doesn’t begin with the supremely efficient processing of goods that have actually been returned, but also involves planning preventive measures in advance to avoid the incidence of returns in the first place. These measures include providing a highly detailed description of the goods or optimizing communication with the customer, giving them the opportunity to contact the retailer before, during, and after the sales transaction. Financial aspects such as the selection of suitable payment methods (PayPal, credit card, etc.) also have to be considered.
In the following we outline the challenges associated with the rising number of returns and examine how companies can adapt their storage logistics accordingly.
Returns – particularly a big problem in Germany
Retailers in the clothing industry are especially affected by returns. The return rate here is between 35 and 40 percent on average. The rates fluctuate considerably from one company to the next, which means that figures of up to 60 percent have been recorded in the most unfortunate cases. The main reason for returns in the clothing industry is the fact that customers are only able to try on the goods after they have been delivered. According to a study conducted by the University of Regensburg, four out of ten customers already consciously factor in the possibility of returning goods when buying them. The study also revealed that online retailers have to spend up to ten euros on each return, with almost 70 percent of the costs attributable to processing the goods and returning them to stock.
Accordingly, efficient processing of returns is essential for online retailers if they are to hold their ground successfully against the competition. The benefits can be easily illustrated with an example: An online shop with 1.5 million deliveries annually has a return rate of 40 percent. With annual wages of 30,000 euros per employee, each minute saved per return would add up to an annual saving of 180,000 euros.
For the area of storage logistics, this partly means that there is permanent pressure to optimize transport and logistics processes (efficient location strategy, easy-to-handle packaging, etc.). Above all else, however, it requires optimal organization of internal handling processes, which is often associated with considerable investment in storage.
Returns and storage
Shuttle systems manage processes in Europe’s biggest returns operation
As the number of returns increases, so does the importance of handling returned goods professionally. That is why Hermes Fulfilment GmbH, a wholly owned subsidiary of Otto, has been continuously expanding its returns operation in Hamburg since 2010 and is now the largest of its kind in Europe. Around 1,200 employees process between 50 and 60 million returned goods there every year in a three-shift operation on a site occupying 13,500 square meters. To this end, the company has invested in the installation of the world’s largest shuttle storage system. At the heart of the new returns warehouse is a dynamic OSR shuttle system with around 176,000 spaces, resulting in storage capacity for approximately one million items, of which up to 15,000 can be processed and picked per hour at peak times. This allows the mail-order business to process and inspect the returned goods and prepare them to be resold quickly and with a high level of automation.
A fully electronic sorting robot (the so-called sorter) assists in automatically conveying the returns from the incoming goods section to the location where they will be returned to stock. Since the introduction of this system, it has been possible to process the returned goods more efficiently, store them back in the high-bay shuttle storage systems more quickly, and release them to be resent more swiftly. The fully automatic acquisition of order data and reasons for returning goods via computer-assisted cameras further increases productivity. This has reduced the time it takes to handle clothing returns to one hour, which also significantly cuts the costs associated with processing and repicking the items.
The returns process in the warehouse
In the following we illustrate the process based on the example of the Hermes Fulfilment returns warehouse in Hamburg. The following steps are involved in processing returns:
- Taking receipt of incoming goods
- Preparing goods
- Assessing goods
- Returning goods to stock
The aim in each step is to reduce the amount of resources employed to what is absolutely necessary in order to keep the returns process as short as possible.
TAKING RECEIPT OF INCOMING GOODS
In the incoming goods section of the Hamburg warehouse, flexible telescopic conveyors facilitate the unloading of the arriving containers. In this area the employees place all incoming packages, bags, and parcels containing returns the same distance apart on the conveyor belts with the bar codes on the return label facing upwards. This allows the scanners to scan the returns individually with a very low error rate. The returns arrive in the area where goods are prepared via a total of six conveyor belts.
This is where the sorter manages both the flow of goods and the workload in the area where goods are prepared. It organizes and transports the returnsvia slides to the individual workstations where photocells constantly monitor the distributed workload so that no workstation is overburdened with parcels.
The employees unpack the returns, perform an initial check of the customer-related data, and dispose of the packaging material. Then the individual items are sent to be assessed via conveyor belts. The unpacked items are channeled to the sorter using computer-assisted cameras. The cameras identify all the data related to the customer and the goods, and also record the reason why the individual items have been returned. If the cameras are unable to clearly identify the data on the return label, the returned goods are sent for manual inspection via an automatic lifting device.
Clothing accounts for the majority of returns. The items are initially identified by their bar code at one of almost 200 computer-assisted workstations. The employees scan the item and check whether the goods correspond with the specified data. Employees working in the goods assessment section are specially trained to carefully check all items and ensure that they are returned in new condition.
Up to 98 percent of returned clothing is thus returned to be resold and only around two percent of goods are sent for further processing. Following this process, 80 percent of these goods can be reintegrated into the inventory in new condition.
In the event that a returned item is not found to be in new condition, it is either returned to the manufacturer, sold at a discount, or destroyed.
If the items are deemed to be in new condition, in most cases they are automatically repacked. To this end, they are sent via a conveyor belt to one of the film packaging machines where so-called Polypackers automatically seal the items in film and attach a new bar code label. More than 1,000 items an hour can be sealed on each machine. The sorter subsequently takes most of the items to the areas where they will be returned to stock.
RETURNING GOODS TO STOCK
Larger items and shoes are sorted manually. The rest of the items, however, are collected up automatically in returns containers and prepared for immediate resale. Using information including item bar codes, volume details, and quantity restrictions, the sorter can fill and assemble these containers in the most efficient way.
Conveyor belts transport the filled containers to the outgoing goods section and the corresponding loading areas where they are loaded for transportation completely automatically.
Simplifying the sorting of returns using dynamic intermediate buffer storage
However, returns destined for resale do not necessarily have to be conveyed back to their original storage location. In certain circumstances the use of a dynamic intermediate buffer storage system is ideal for such items, in which retailers can keep (primarily fast-moving) goods in particularly easy-to-access locations within the warehouse until they are sold. One advantage of this intermediate buffer storage system is that it leads to a reduction in the logistical throughput time, which means that goods are available for resale more quickly. However, its use does not always make economic sense, because it requires a “critical” mass of available goods before it can be operated cost-efficiently. Accordingly, in this special case it may only make sense to set up an intermediate buffer storage system if there are more returns.
Strategies to prevent returns
The problem of extraordinarily high return rates is not just a German one, although the situation in this area is especially strained there. Yet why is it that the situation in France or England appears to be so much different? The online markets in those countries are characterized by the fact that customers return up to four times fewer products than their German counterparts.
This prevention of returns may be attributable to the fact that Germany’s European neighbors prefer to pay in advance or by credit card, sometimes also by check (in France). According to retailers, there is a direct relationship between the return rate and the payment methods offered. In Germany almost two thirds of end customers order on account. They are used to only paying for goods once they receive them. This causes end customers to order more than they actually want. According to industry figures, this leads to an average of four out of ten ordered items being returned to the supplier, making the Germans European champions when it comes to returning goods. In France, for instance, retailers only deliver 90 percent of goods after they have been paid for, significantly raising the inhibition threshold for returning bought goods.
Adding the option to pay by credit card while also reducing payments on account therefore represents the first step for companies wishing to improve their return rates.
Furthermore, surveys among retailers come to the conclusion time and again that a detailed product description and accurate picture provide the basis for low returns. As such, retailers are increasingly providing their customers with as much information as possible beforehand: Zoom functions, 360° views, detailed product descriptions, and customer reviews have already had a positive influence on the return rate. Size tables can also help to keep the number of returns as low as possible. Where technical equipment is concerned, besides providing detailed and accurate product information, it is also important to give customers the opportunity to contact the retailer if necessary.
Directly appealing to the buying behavior of customers can also help. Vente Privee, a French supplier of luxury products, openly communicates the dilemma of returns to the press and its 17 million customers throughout Europe. Jean-Michel Guarneri, chairman of the company, explains: “We say to our members: We offer branded items at very low prices. If you want this to continue, we must both play by the rules of the game.” According to Guarneri, the company has been highly successful with this strategy.
The profitability of online retailers is very much dependent on efficient handling of returns. Accordingly, they are compelled to organize their returns logistics as efficiently as possible in order to keep costs under control. Besides implementing preliminary measures to reduce the return rate in the first place, other critical factors include reintegrating the returned goods into the inventory and getting them ready to be resoldas quickly as possible. The most successful companies in this area will be those that have a sophisticated logistics operation and a high level of automation in the returns warehouse, because this is the only way in which goods deemed to be in new condition can be made available for sale again within the shortest space of time.