Managing product returns

By on April 1, 2013

Managing product returns is probably one of the most complex organizational tasks. It involves complete re-processing of the sales transaction which incurs huge costs in terms of money, time and customer dissatisfaction. In past, returns were usually discouraged. But it also discouraged the sales and revenues (Petersen and Kumar, 2012). The idea today has shifted from discouraging product returns to managing product returns. Today companies cannot manage by simply minimizing product return costs. Rather they need to earn some value out of product returns. Before going any further, it is important to understand the kinds of returns an organization manages.

Types of product returns  

Often, the term ‘product returns’ is used in the context of the products that are returned by customers primarily on account of defects. But in reality, the scope of product returns is not restricted to returns only from the customers. It extends to returns from middlemen as well as from the production floor (Gattorna, 2003). When one talks about managing returns, it is usually the following that needs to be managed by firms:

  • Product returns from customers.
  • Return of unsold products from retailers.
  • Return of surplus units at production.
  • Return of complete batch of a product i.e. product recalls.
  • Return of products under guarantee or warranty.
  • End-of-life products (products which are at the end of their useful lifetime).

How to manage product returns

Companies need to understand that returns can never be completely avoided. They can only be managed through an effective returns management system. In order to be effective, the system should basically aim at:

  1. Re-using whatever is possible without incurring any further costs.
  2. Re-selling whatever is possible at no-profit, no-loss.
  3. Disposing of everything else in an environment-friendly manner.

When to reuse returned products

Many times a product is returned by customers not because the quality was poor but because they changed their mind after purchase. Similarly, the unsold products can be returned by the retailers not because there was no demand, but because they did not take initiative to promote its sales. Even at times when the inventory is not well-planned and there is the excess of finished units at the production floor (Gattorna, 2003). For all such returns companies must aim to re-use and further improve:

  • Inventory management in the organization
  • Middlemen communication, training and incentive structure
  • Consumers’ research and development (R&D)

When to re-sell the returned products

Another case can be when products were really found defective or of inferior quality. The retailers could not sell it anymore due to lack of quality. Thus the finished units are lying idle at the production floor. There has been a complete product recall i.e. the whole batch of the product was to be withdrawn from the market. In all such cases, the best way out is reselling the product in the secondary market. It is popularly known as the ‘second-hand’ market (Greve and Davis, n.d.). The products are sold with minimum repackaging and refurbishing at a much lesser price than original, recovering only the costs. Companies, however, need to improve:

  • Quality control measures at the production floor like Six Sigma and Total Quality Management (TQM).
  • A trade-off between centralizing and decentralizing returns. While centralization offers economies of scale, decentralization of returns enables quick recovery of products facilitating re-sale at best possible prices.
  • Automation in the organization so that the returns process is completely transparent.
  • Communication with middlemen and customers to maintain their trust in the firm.

When to dispose of returned products completely

Only the products that cannot be re-used or resold should be completely disposed. These may include products that are hazardous to individual health or the environment as a whole or that have been banned by some order of the country’s government (Wisner and Stanley, 2008). The disposal may include complete disposition in an environment-friendly manner or recycling of the product in a cost-effective manner.


  • Gattorna, J. 5th Edition. (2003). Gower Handbook of Supply Chain Management. Burlington: Gower Publishing.
  • Greve, C. and Davis, J. (n.d.). “Recovering Lost Profits by Improving Reverse Logistics. UPS.
  • Petersen, A. and Kumar, V. (June 14, 2012). “Get Smart About Product Returns.” The Wall Street Journal. Retrieved from:
  • Wisner, J. and Stanley, L. (2008). Process Management: Creating Value Along the Supply Chain. Thomson South-Western.