Using Artificial Intelligence for Returns Management

In today’s world of direct-to-consumer (DTC) delivery, it’s no longer enough to design an efficient warehouse layout or anticipate staffing levels to meet demand. Warehouses today must consistently deliver a seamless end-to-end experience for consumers, from order placement all the way through returns.

According to a study by University of Alabama researchers, “Information Search and Product Returns Across Mobile and Traditional Online Channels,” 30% of e-commerce orders are returned by consumers, compared with 9% for brick-and-mortar stores. In physical stores returned items can inspected, repackaged and often put back on shelves, But e-commerce returns require an entirely different approach.  Outbound and returns are two different shipping functions that require different processes.

In 2021, the total number of e-commerce orders surpassed $5.2 trillion. If the current rate of e-commerce expansion continues on its current trajectory, the anticipated cost of e-commerce returns will soon reach more than a trillion dollars a year for online sellers.  Today’s warehouses are designed primarily for outbound fulfillment, but returns are increasingly a customer service differentiator.

The Cost of Poor Returns Management

Returns can come with a high cost for retailers and third-party logistics providers, eroding already narrow margins.  Many simply refund the purchase and take a loss on the returned product. The alternative returns process is often more time-consuming and expensive than letting shoppers hang on to the returns and offering their money back.

According to CBRE, the average cost of an e-commerce return ranges from $20.75 to $45.25. This amount factors in the costs of transportation, processing, markdowns and liquidation to resell, regardless of item value. While this is not an effective or affordable option for many warehouse operations, the consequences of an ineffective returns operation can result in more than just loss of product, operational efficiency and labor time. It can lead to irreparable brand damage, and cause a snowball effect of financial losses. 

The Benefits of AI

In order fulfillment and many other supply chain functions, artificial intelligence is now an indispensable asset in improving the quality and efficiency of returns for high-volume DTC operations. To provide “free, no-hassle” returns for customers and regain lost profits for the business, AI helps in a variety of ways. Following are a few of the key benefits.

AI get returned goods back into the supply chain faster, with applications that enable organizations to make returns allocation decisions based on real-time data. AI algorithms can assess product condition, resale price, processing costs, future touch points, transportation fees and storage requirements to get returns sorted for the highest possible recovery rate. With the ability to automatically calculate the total returns management cost, AI can determine the best course of action for each return scenario and cut returns processing time by 75%. 

AI can find the underlying causes of returns, including identifying problems in fulfillment operations, which may be causing an influx of returns. Specifically, it can evaluate data such as customer reviews or track returns communication channels. This helps organizations react to consumer behavior, customize returns management operations and make changes to fulfillment processes where needed.

AI can recover higher profits from returned goods. Once items are back in inventory, a common mistake is to list second-hand items on a single online marketplace at one set price. With AI support for returns management operations, organizations can use intelligent dynamic pricing (or data-driven intelligent pricing) to ensure that the maximum value can be earned on all returned items.

AI can route returns to the best fulfillment centers. Once a returned order arrives at a warehouse or returns center, AI can route it to the next best internal storage location, fulfillment center or geographic region. The decision is based on demand, item availability and the costs associated with transferring the item somewhere else in your fulfillment network. Just like smart inventory management and directed putaway algorithms, AI provides clarity and control to manage returned inventory like it never even left the warehouse.

For DTC e-commerce businesses, customer returns are inevitable and unavoidable. But return rates are manageable, and their negative impact can be reduced with the help of AI-powered warehouse management systems.

If your e-commerce organization hasn’t made returns a priority, now is the time to assess your operations and ensure you’re equipped to handle the challenges of returns management. For retailers and 3PLs, returns management and reverse logistics have become two of the most impactful factors in long-term DTC success. 

Erhan Musaoglu is the founder and chief executive officer of Logiwa, Inc.