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.
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