Finance and the Logistics of Returned Goods

Coming out of recession, it would be easy for businesses to focus all their energies on winning sales and getting goods out of the door. But with an estimated US$9 billion in retail returns each year (and that’s just in the UK), understanding the impact of goods coming back is also important for operations and the finance function to understand.

The processes and systems companies use to handle these returns can make a big difference to the bottom line. After all, a return is a zero revenue transaction that still incurs costs such as transport. Administering returns takes up disproportionate people power and resources – usually because each case has to be handled separately – and companies are left with stock that often can’t be resold at full value.
That’s where reverse logistics (RL) comes in. According to the U.S.-based Reverse Logistics Association, RL is ‘all activity associated with a product/service after the point of sale, the ultimate goal to optimise or make more efficient after market activity, thus saving money and environmental resources.’
After-market not afterthought
The idea is gaining traction. In an Aberdeen Group global study conducted in February this year, 87% of the 164 companies surveyed said that the effective management of the reverse service supply chain was either ‘extremely’ or ‘very’ important to operational and financial performance – up from 74% in 2008, and 61% in 2007.
Apart from a growing sense that efficient RL can help minimise costs, regulations designed to protect consumers and environmental concerns are pushing it up the corporate agenda too. In short, the after market shouldn’t be an afterthought.
The role of management accountants
Understanding exactly how your reverse supply chain works is not easy. RL is not simply a question of handling the postage and packaging for faulty goods. For example, quality control issues in manufacturing will increase returns – as will poor customer support and even a badly designed instruction manual.
That’s where management accountants come in. They instinctively understand the interconnectedness of business and know how to look for linkages and metrics that will enable managers to address the problem across the enterprise, not just for their own purposes.
To help tease out the plethora of processes, costs and opportunities in reverse logistics, the Chartered Institute of Management Accounts (CIMA) has published a reverse logistics tool kit. It’s designed to flag up areas where RL can be improved, identify weaknesses in the reverse supply chain, and articulate the value of remedial action.
Beyond traditional logistics
In many situations, those actions go way beyond traditional logistics solutions. A good example is the sale of satellite navigation units by UK-based Halfords, a large retailer of car parts, accessories and other travel related goods. The company was handling a large volume of ‘no fault’ returns – customers exercising their statutory rights to a refund, simply because the product ‘wasn’t right’ for them.
RL analysis of these returns by management accountants opened up new lines of investigation with suppliers and allowed identification of the root cause of the problem. In most cases, the issues customers identified were not intrinsic problems with the goods, but incorrect usage.
The team realised that investment in staff training would help ensure that customers would understand how the units worked and that they would be installed correctly. Moreover, the cost of that staff training would be more than offset by savings in the reverse supply chain. Better still, the programme matured into a fully fledged customer service proposition called WeFit, delivering additional value for the business.
Halfords was involved in the CIMA-sponsored project to design the toolkit – and now uses it to manage the processes and costs associated with returns. Chris Hall, head of quality and cost reduction at the company, says: ‘The identification of new tools and the support provided by discussions at the [toolkit] workshops played a vital part in the implementation of change at Halfords.’ Even a relatively simple step identified in the project – coding certain products as 'safe to resell' in-store – resulted in a 40% reduction in goods flowing back up the supply chain.
The fundamentals of reverse logistics
One of the other benefits of a holistic, cost-centred approach to reverse logistics is a smaller environmental footprint. Fewer goods returned means fewer lorry journeys, lower wastage and higher efficiency. That’s good for CO2 emissions as well as profits.
In fact the language of environmentalism also sits at the core of the whole RL concept. It’s all about using three Rs – reducing, re-using and recycling – to become more efficient.
  • Reducing is all about smarter process management at the outset – making better products or increasing customer satisfaction to ensure fewer products are returned at all. That’s important: businesses rated in the top 20% in terms of quality of reverse logistics in the Aberdeen Group survey had an average customer satisfaction rating of 93% compared to an average of just 81%.


  • Re-using requires companies to find ways to divert returns into secondary markets or refurbish them for sale – as Halfords did.


  • Recycling means efficient disposal of goods that can’t be resold. This is particularly important where the cost of components or materials is relatively high.
For companies to arrive at optimum positions in all three areas, they need ICE. First, integration of approaches across the business – RL can’t be achieved by any one function in isolation. Then collaboration, to ensure the whole supply chain is aligned with the objective. Finally, evaluation – because monitoring all the costs and processes affected by returns demonstrates the real value of RL.
How the toolkit works
Coping with those concepts involves a complex set of tasks, made more taxing for those charged with evaluating RL by the fact that no two companies have the same set of RL challenges.
But CIMA’s Reverse Logistics Diagnostics and Performance Toolkit, to give it its full name, addresses this problem with a straightforward dashboard style system. Put simply, it’s a series of checklists within nine key themes that ensure a company isn’t ignoring any low profile, yet critical, aspects of the reverse supply chain. Those areas are:


  • cost and performance measurement
  • avoidance of product returns
  • process management
  • physical network
  • inventory management
  • information and communications technology
  • material handling containers/totes
  • sustainable distribution
  • compliance with legislation.


Each item in the checklists prompts the user to assess the level of performance and evaluate its impact on sustainable distribution. A traffic light system flags up areas of concern, while drop down help boxes provide additional support in each area. Remedial actions can be recorded in project management fields attached to the key areas, too.
Management accountants need to bring all their skills to bear on an RL project, even with the help of the toolkit. Aside from the obvious analytical skills, team work with managers across the business is a critical success factor. Logistics tend to rely on third parties – so there are contractual and supplier relationship issues to consider, too. And once problem areas are highlighted, solutions may well require unconventional thinking, as the Halfords example illustrates.
But even just articulating the real cost of returns is a major first step. The toolkit includes guidance on quality costing which should help you develop a convincing argument to win over key decision makers to the concept of reverse logistics – and engineer a welcome boost to the bottom line.
About the Author
Richard Young is a freelance journalist based in the U.K. 



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