I see this question a lot. So I'm going to share with you how I handle returns. Remember, this is how I do it, that doesn't mean that it is the right way to handle it for your business. It's just one way to do it.
The first thing you need to do is set up your client's expectations. This means that you put a refund policy in your contract, not only for product and orders, but also for the markup on that product, for your time procuring and expediting that product, shipping and freight fees, install costs, and restocking fees.
Here is sample language from my contract: CAN I CHANGE MY MIND AFTER AN ORDER IS PLACED? Most often orders cannot be cancelled or refunded. In the event that a full refund can be attained, you may cancel the order and receive a refund for the cost of the item minus the restocking fee, markup, design fees, shipping costs and any other applicable fees. Returns will be billed at standard hourly rate. You will be charged hourly for the time spent on cancelled orders. Custom orders are non-refundable.
It is also a good idea to reinforce your policy when your contract is signed with a conversation about returns, "Unlike retail, we're not ordering from a catalog and because products are generally made just for you they cannot be cancelled or refunded." Maybe even have clients initial next to this clause in your contract.
To take it a step further you could also write the return policy at the bottom of proposals and make sure that the client signs - not just pays - the proposal. "Orders are non-refundable and non-returnable" Is making the clients sign the proposal an extra (annoying) step - yes. However, later they could claim that they never saw the details for the purchase or that they were changed (I would have never approved a light oak credenza! I'm sure that you told me it would be walnut!)
Then you want to cross your fingers that everything that you order arrives correctly and the clients like it. This step is important. Give an offering to the design gods.
It's a good idea to make sure that your shipping & receiving warehouse opens and inspects all items. If it is something that is important and expensive, I suggest doing it yourself. Often if a piece comes in wrong (for example it arrives in oak and not dark walnut) the manufacturer will replace it, but wait too long and your return window will pass. Do not let items go unopened. Check to make sure that the finish is right, but also that it is free from scratches, not broken, the right size, etc. If there is something wrong about the piece - that is up to the designer to fix. Wait too long and you could end up the owner of a broken light fixture.
Money is important to people and just like you, they want to get as much for it as possible and hold onto it if they can!
After all this, you should be pretty safe if your client decides they would rather have a leather sectional instead of the two chairs you ordered.
Now, there are always a few instances that it is better to take the hit and absorb the cost of an item to appease the client. You also want to work with the client if the expensive sofa they ordered is starting to come apart at the seams after a year. This is why it is important to have good relationships with vendors.
There are going to be times when the issue is clearly the client's issue with the piece and you should gently let them know about your contract, your conversation about refunds, the refund policy on the item's proposal and that it's just not possible to return it.
Other times it will fall squarely on the designer's shoulders to make it right and you should be gracious and fix it - fast.
Unfortunately, there is a grey area of what qualifies as client's problem or designer's problem and you'll have to take those on a case-by-case basis. With social media and the internet nowadays you don't want to piss a client off too much. Try to work out a good solution for both of you. Another way to think about this is if you were out of the picture, would the client have to deal with the return?