PackageX is committed to transforming logistics operations for warehouses, stores, and buildings by digitizing data and automating day-to-day receiving and fulfillment workflows. In this series, we pinpoint common areas in logistics that are ripe for automation and offer quick-win solutions to improve efficiency and reduce costs.
This article explores reverse logistics, or the customer-initiated process of returning goods to the seller or manufacturer. According to Shopify, the average return rate in ecommerce is 20% to 30%. In 2022, US customers returned $861 billion in merchandise, representing 16.5% of total retail sales. Of the total returns, 10.4% were fraudulent—for every $100 in returned merchandise accepted, retailers lose $10.40 to return fraud.
Despite the costs incurred for returns, offering a free and intuitive returns process can boost conversions on high-ticket items by 17%, making returns both a cost center and revenue driver. Employing opportunities for automation in reverse logistics could significantly reduce total costs.
Retailers have heavily invested in improving the ease of customer returns over the last ten years. Despite these efforts, the manual and outdated returns operations at warehouses, stores, and consolidation centers have persisted, leading to increased costs from delays in restocking and fraud.
In this article, we’ll break down key steps in reverse logistics, from customer initiation to warehouse receiving, and suggest opportunities for automation.
Customer Initiation, Label Creation, & Returns Authorization
Reverse logistics begins after a customer has received a package, inspected the product, and decided to make a return. The reason for returns varies: the item doesn’t fit (75%), the item doesn’t align with the description on the website (56%), the customer is dissatisfied with the item (33%), the customer ordered multiple items with the intent of returning some (14%), or the item arrived late (11%).
There are several approaches retailers employ to help shoppers initiate a return. Some retailers include a return label in the initial package, eliminating the need for shoppers to create a label. Many retailers still require shoppers to contact their support teams to obtain a return label, depending on the nature of the product. Other retailers require shoppers to enter their order number into a self-service returns portal to generate a label or QR code, often utilizing returns management software like Happy Returns or Loop. In addition to shipping returns directly to warehouses, many retailers introduced convenient drop-off locations in partnership with carriers and big-box retailers.
Automation Opportunity: An Optimized Digital Returns Journey
Many warehouses accept hundreds or thousands of returns from dozens of portals. Each portal has a different process associated with getting returns to the warehouse, and the workforce is left manually checking different systems to ensure returns are routed and sorted correctly.
Rather than a customer creating a label and initiating a return in a process disconnected from the supply chain, retailers should look to digital returns portals that provide retailers with instant insights on what items are being returned, who is returning them, when to expect the return at the warehouse, and more. Most digital returns platforms integrate with systems you already rely on: your order management system (OMS), warehouse management system (WMS), inventory control software, and more.
For example, suppose a shopper initiates the return process. In that case, they can attach an image of the item during the initiation process, allowing the retailer to identify the product and its condition. A label or QR code is generated based on its disposition, ensuring the product is shipped to the right warehouse for restocking or recycling. Not only does this improve visibility and automatic routing, but it also represents a roadblock for shoppers trying to commit fraud.
Many retailers have already employed digital returns portals to improve the customer experience during the returns process. However, many warehouses accept hundreds or thousands of returns from dozens of portals. Each portal has a different process associated with getting returns to the warehouse, and the workforce is left manually checking different systems to ensure returns are routed and sorted correctly. This often results in a drawn-out returns journey because returns get sent to the wrong place, visibility is non-existent until the return is at the warehouse and more. Retailers must ensure that changes to the digital returns journey balance shopper experience with workforce productivity and return-to-stock rate.
Free returns improve conversion rates, but returns fraud and friction in reverse logistics significantly cut retailers’ profit margins. Establishing simple and intuitive processes for shoppers to assess, classify, and document their returns can minimize friction and fraud.
Shipping & Receiving of the Return
Shipping begins with the customer taking the relabeled package containing the return to a location for shipping. Retailers offer different options for return shipping, including a dropoff location provided by a parcel carrier (63%), partner locations (40%), dropoff in brick-and-mortar stores (36%), and collection from the customer’s home (26%). From there, the item can begin transportation to a warehouse. Offering more return options is generally favorable; customer loyalty and seamless returns processes go hand-in-hand.
Once the return arrives at the warehouse, the process typically begins with a barcode scan to capture tracking details. From there, packages will be opened and manually sorted to be inspected. Before the inspection, however, the workforce will need to manually record information like the Return Materials Authorization (RMA), sender details, weight, etc.
Over the past decade, retailers have made significant investments to make customer returns as frictionless as possible. However, the actual returns processing at the warehouses and consolidation centers still involves manual data entry and working with legacy backend systems. According to a 2024 study by Blue Yonder, more than half of retailers are using non-digital methods of returns initiation, and at least 42% are still manually approving refunds, meaning returns are often received blind at the warehouse. The downstream effects of manual entry during returns include a slowed down return-to-inventory rate and processing time. These inefficiencies continue to increase costs and reduce margins for retailers as returns move through receiving, verification, and restocking at their own or a 3PL warehouse.
Automation Opportunity: Digitizing Returns Data at Receiving
Digitizing data is key to an efficient returns process. Instead of traditional barcode scanners, warehouses, and stores can use computer vision and AI software like Packagex's OCR API to scan detailed returns label information, integrating it with existing systems like digital returns portals, WMS, and inventory management software.
Additionally, suppose data digitization is initiated upstream during the customer initiation and label creation process, as suggested above. In that case, automated receiving can be coupled with that data to consolidate return data and prevent fraudulent returns. This data can also be used to enhance existing workflows in the warehouse. For example, if a customer returns an item they claim is damaged and has created a label that indicates that, upon receiving, items can be redirected on a conveyor belt to an area for damaged products.
Inspection and Processing of Returned Items
After receiving is complete, the return begins an inspection process to determine the condition of the items and what amount of value can be salvaged from the return. If an item is damaged, it must be sorted for appropriate disposal. If the item is not damaged, it can be scanned into the WMS or returns system. This is a hugely time-consuming step in the returns process—all items must be inspected differently and according to different rules. A broken smartphone, for example, would have much more stringent inspection rules than a lipstick, which could simply be disposed of.
If you combine complicated, manual, and lengthy inspection procedures with a large volume and variety of products eligible for returns, the warehouse workforce becomes bogged down with inspections. However, forgoing a sufficient inspection process will be costly. Returns will need to be disposed of, regardless of their condition.
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Automation Opportunity: AI-Detected Package Damage Detection and Digitized SOPs
Instantly identify any signs of damage on packages or items moving along warehouse conveyor belts or during the inspection process with advanced vision technology, artificial intelligence, and deep learning. PackageX Damage Detection helps the workforce at warehouses and stores become more efficient by reducing inspection time and manual sorting errors.
Data digitization at receiving and AI can do much of the upfront damage detection and sorting, helping to sort damaged items before any human inspection is needed automatically. However, the warehouse workforce must still inspect many items using detailed, multi-criteria inspection processes. Most standard operating procedures (SOPs) for ecommerce returns are still captured manually. This lack of digitization or standardization means inspection data is not connected to relevant systems or analyzed to identify return patterns or fraudulent shoppers.
Creating standardized, digitized SOPs for each product will speed up the inspection process and provide retailers with invaluable data on the state of returns for their brand.
Getting Started with Returns Automation
Returns are hard. They are complex and costly. Still, a seamless returns process is a nonnegotiable for many shoppers. While most retailers have prioritized the shopper experience, it’s time also to consider profitability. How much money and stock are you losing to returns every year? How many of your shoppers are taking advantage of your return policy at the expense of your profit margins? How bogged down are your warehouse workers with manual returns processes?
At PackageX, we help retailers reshape their logistics workflows to multiply efficiency at warehouses and stores. To learn how our solutions can help you incorporate automation into your reverse logistics workflows, speak with our Sales team.
