Inventory Management Guide

Chapter 10. How Do You Handle Returned Inventory?

Businesses will always have to deal with returned products. We discuss how to best handle returned products and re-introduce them to your inventory.

Welcome to Chapter 10 of our inventory management guide. This chapter covers the inevitable task of handling returned inventory.

According to an article by Shopify, the average return rate is between 20% and 30% for e-commerce companies. So, inventory management professionals must have a robust strategy to deal with them.

This chapter will focus on why people return products, explain return slips, what a quality inspection is, and how to re-enter returned stock into your inventory.

Feeling a little lost? Head back to the inventory management guide homepage.

Why Do Customers Return Products?

Returns and refunds shouldn’t be seen as an affront to your company. They should never be taken personally. No matter how well-organized your company is, there will always be returns.

More recently, free returns on many platforms have made it easier for customers to return items, so arguably, it’s a little more complex than it used to be.

You should always be prepared for returns and have a strategy to deal with them properly.

A bad experience returning products can be reflected in bad reviews and loss of new and repeat customers.

According to an article by Entrepreneur, 89% of customers say they will return to a store if the return experience is positive.

Returns could result from mistakes in inventory management, fulfillment, or from the customer. Here are the top reasons for customer returns.

Fault of the business:

  • The wrong product or variation (e.g., color or size) was sent.
  • A product was missing from a kit.
  • The product was damaged, broken, or just didn’t work.
  • The product arrived too late. (It may even get canceled on its way to the customer.)
  • The product didn’t match the description or match the customer’s expectations.

Fault of the customer:

  • The customer ordered the wrong product or variation.
  • The customer was wardrobing—when they buy apparel just to wear it once and send it back.
  • The product was a gift—in which case the person returning the gift might not be the one who purchased it.
  • The customer found the product somewhere else at a lower price.
  • The customer doesn’t need the product anymore. (It could be because it arrived too late or, again, they were wardrobing.)
  • The customer experienced buyer’s remorse—the customer realized that the product didn’t suit them.

Returns should be treated equally no matter why they were sent back—if it was the company’s or the customer’s fault.

It is also worth noting that some product types are returned more than others. Clothing, for example, gets returned the most. According to data from Statista, 26% of Americans returned clothing in 2023.

Understanding the Importance of Returns Policies

Working in inventory management, you should have a good grasp of your company’s returns policy (including why the company has certain rules) and ensure they are adhered to.

This is particularly the case when you have returns that need to be rejected, as your company’s return policy will define what can and cannot be accepted and the process to follow.

Here are the top things to consider for returns policy for inventory management professionals.

Where Can the Customer Return the Product?

Some companies prefer returns to go back through the channel they were purchased. For example, only allowing customers to return a product to the same store where they made the purchase, not another in a different town.

Meanwhile, some companies have no problem allowing customers to return products purchased online to brick-and-mortar stores or vice versa.

In such cases, businesses need effective communication between these channels because information can get lost, and inventory managers won’t necessarily know the problem when the product arrives.

Length of Time

When is it too late for a customer to return a product? Often, companies have return windows of 14, 30, and 90 days after purchasing the product.

This limit is largely to reduce the chance of bad faith returns. On top of that, at a certain point, the product is just not worth the seller’s time to deal with. It may even be a product you no longer sell.

Number of Returns

How many times can the same customer return a single product? Furthermore, how many products can they return before it gets suspicious?

You might not include this in your returns policy, but it could be a red flag that you should monitor.

Product Value

Is it an expensive or low-value product? If it’s a low-value product, it might not be worth the time to handle. Meanwhile, failing to deal with more expensive products could result in bad reviews.

Your return policy may include a clause on the value of the returned product.

How Do You Define If the Customer Is Correct?

If the customer claims the product has a problem, this must be checked.

They could be wrong, the product could be fine, and they may have misunderstood how certain features worked. There needs to be a process and adequate communication with the customer.

You may do the opposite and accept all returns, no matter what the customer claims (more on that in a moment).

What Should the Product Be Returned With?

Your return policy may specify what must be included with the returned product. It may mention certain accessories or parts of the product, the product’s packaging, and other materials such as instruction manuals, etc.

It can depend on how strict you are and if you are strategically planning to discourage returns.

If the product is part of a kit, you may need the whole kit returned, even if the issue is only with one item within the kit.

Elsewhere, some companies may allow the customer to send a part of the product back to the company for repair.

What Are Return Slips and Return Labels?

Return slips and return labels sound similar and can be easily confused.

The difference is return slips are the pieces of paper customers often need to place inside packages to send them back to sellers while return labels are placed on the outside of the package and they are used for shipping.

Return slips help companies identify the return, the customer, and the issue. They typically require the following information from customers:

  • Name.
  • Email.
  • Return address.
  • Reason for the return.

While return labels, also known as RMA (Return Merchandise Authorization) labels, are primarily used for shipping purposes, and will feature:

  • The customers address (the sender).
  • Your businesses address (the receiver).
  • A tracking number (RMA number) and barcode.

Typically, returns are either ‘authorized,’ which means the customer needs permission to return the package back to the seller, or they are ‘automatic’ (also known as ‘blind returns’), where permission is unnecessary.

For authorized returns, the customer must make a request via email, on the phone, or through a marketplace and must provide an acceptable reason.

Other companies prefer an automatic returns policy because it is easier for the customer and is more likely to encourage them to return.

They make it easy for the customer to simply request a return slip and send the product back, no matter the reason. A return slip and label may even be sent within the packaging of the product.

Choosing between authorized or automatic return slips is entirely up to the company.

However, companies with a more open policy will get more returns, and they may be of poorer quality, which will likely mean returns will be more time-consuming for inventory management professionals.

In rare cases, some companies charge customers for returns. Though this is controversial, it may be an option when returns cost your company a lot. However, this approach is not popular with customers.

It’s important to note that an RMA number differs from other identifying numbers, such as SKU (Stock Keeping Unit), which are used in inventory management to track stock numbers. RMA numbers are only for identifying returns.

Returns may be rejected if the customer requests it past a certain date. Again, this needs to be defined by the company’s returns policy.

Sellercloud’s Receivebridge helps sellers track returns and serial numbers.

What Is Quality Inspection in the Returns Process?

In inventory management, when returns arrive at the warehouse, you will need to do a quality inspection to determine the quality of the product and what to do with it next.

Before that can occur, you need a dedicated space for returns when they arrive.

Returned products should stay there until they can be processed so they don’t get mixed with other inventory by accident—you don’t want broken products to enter inventory or used products to be sold as new!

You will also need a specialist who understands the product and can properly assess its quality. If there is damage or it doesn’t work, they can decide if it is worth fixing and resalable.

When assessing the quality of returns, some start by categorizing them according to condition or potential value, or others may start chronologically from when the item was returned.

Remember, in e-commerce, returns can be between 20% and 30% of sales, so you need to optimize your time.

Unfortunately, some products cannot be put back into inventory and must be disregarded or destroyed. 

Though this will be a loss, there is little else to do. Ensure you act swiftly to remove this stock and free up space and that the change in stock levels is accounted for.

In other cases, returned inventory is repairable but not at the warehouse. It may need to be sent to the vendor for repair if it cannot be done at the warehouse.

If a particular product is being returned significantly more than others, it could be a sign that the stock is defective. 

This must be investigated. If they all have the same problem, you may need to stop selling the product, recall what you have sold, and send it back to the vendor.

Whatever happens to the returned product must be recorded in your software. (Check Chapter 6 for a refresher on inventory management software.)

How to Re-enter Stock to Inventory?

Returns are not the end of the product life cycle—returned products can be sold. In fact, it is better to try to sell returns to reduce any losses.

How you re-enter returned stock to your inventory depends on the state of the product following your quality inspection.

You may need to create a new listing with a different condition to make it clear to customers that this product is ‘refurbished’ or ‘used’ depending on the quality.

In this case, you’ll need to create a new SKU to ensure this is properly displayed to new customers and kept separate from new inventory that has never been sold.

Key Points From Chapter 10

Here are the top points to remember from Chapter 10.

  • Customers can return products for various reasons—sometimes, it’s the business’s fault, and other times, it’s the customer. Either way, returns must be dealt with equally and fairly.
  • A well-formed returns policy helps inventory management professionals decide what can and cannot be accepted when returned.
  • Return slips are sent to customers so they can return products to sellers. An RMA number would contain all the information about the return and help track it back to the warehouse.
  • Products can be re-introduced to your inventory following an inspection of their quality. If they cannot be reused, they may have to be destroyed. Returned products may need to be labeled as used or refurbished.

Next up, in Chapter 11, we will focus on common inventory management challenges and how to solve them.

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Chapter 9. What Are Inventory Management KPIs and Metrics?
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Chapter 11. What Are Common Inventory Management Challenges?