Returns – A Threat to the Bottom Line or an Opportunity to Cut Costs?

CONTRIBUTION BY Robin Kiziak – Finance Manager at Wickes

Reverse logistics is a funny old game.  A company sells a product, either through a bricks and mortar store or through internet retailing, and the consumer returns the product.  What happens next?

The reason the product is returned is manifold.  It could be because the product was damaged or faulty in some way. It could be because it wasn’t what the consumer expected.  It could be it wasn’t the right colour.  It could even be, taking the cynical view, that free delivery was achieved by purchasing a certain value of goods and the consumer added the product to their basket to push them over the minimum spend threshold.

Whatever the reason that a product is returned, the company now has an issue. It has a product that it doesn’t necessarily want and it has an additional customer service issue that it needs to deal with.

Taking the customer service issue on board, if dealt with in the right way not only can the business enhance their reputation with the consumer but this can also build brand loyalty.  If dealt with in the wrong way they could lose a customer and possibly more if the customer takes it upon themselves to use word of mouth and social media to express their dissatisfaction with the organisation.

From a supply chain and logistics point of view how does the company deal with a product that is returned?  In most cases this will fall within the realms of reverse logistics which refers to the life-cycle of your products after they arrive at the end consumer.

Reverse logistics is like cleaning up the morning after a big party – a mess that no one really wants to face, resulting from things that are left over or ill-used from the day before.

The notion of reverse logistics isn’t new, of course.The function has been around since the Phoenicians began shipping amphorae of wine to Rome in 1,500 BC.

Hopefully processes have moved on since then but reverse logistics is the conundrum that every company will face at one time or another and how it deals with this issue will determine whether it is an opportunity or threat to the business.

The graphic above illustrates the typical life-cycle of a product from the industry/manufacturer through the distributor to the retailer and to the end user. Reverse logistics deals with the journey of the product from the end user back to the distributor and onwards to being put back into stock, being recycled, being repaired or something else.

Reverse logistics can represent a significant chunk of supply chain cost, and it’s typically not very well managed. Estimates range from 1 percent of overall supply chain costs (quite well managed) to almost 10 percent (improvement required).

Areas where reverse logistics can drastically add cost to an operation are in terms of: Transportation – moving the product from the retailer back into the supply chain, be that to a distribution warehouse or specialised returns centre.

There are then what has been termed the 4 R’s of integrated returns management — recovery, reconciliation, repair and recycling.

(1) Recovery — it’s important to be able to recover the products to the correct location as soon as possible in order to be able to maintain, oversee and monitor product reliability as well as control inventory levels;

(2) Reconciliation — once a product is returned it needs to be assessed in terms of another 4 R’s – repair, restock, refurbish or recycle – which enables the company to determine which supply chain the returned product should follow. A large percentage of returned goods can be returned to stock and thus increases inventory;

(3) Repair — if the returned product can be repaired then it is time critical to facilitate the repair and ensure the product is returned to the consumer.It could also be possible that a product is either repaired at the distribution centre and returned to stock in cases when perhaps packaging can be re-instated or even sold on to a re-seller who will be able to repair the product and sell as refurbished;

(4) Recycling Government enforcement of proper handling standards for used and obsolete electronic products is increasing globally — e.g., the WEEE (Waste Electrical and Electronics Equipment) regulations being put into place in the European Union. Companies to ensure that they adhere to these standards and go about recycling in the correct manner;

The above costs build up to a significant threat to the bottom line of a company, however, the opportunity to improve overall cost efficiencies has pushed companies to begin looking at the flip side of logistics as the “new frontier” in the continuous improvement of supply chain performance.

What was once mainly an afterthought now has a name. And in a growing number of cases, there’s now a clear mission: How do we manage reverse logistics as an integral part of supply chain management to improve efficiency and reduce cost?

What are the benefits of an efficient reverse logistics network?

(1) Reduced costs – by planning ahead for returns and making the return order right, you can reduce related costs (administration, shipping, transportation, QA, etc.);

(2) Faster Service – this refers to the original shipping of products and the return / reimbursement of products. Quickly refunding or replacing goods can help restore a customer’s faith in a brand;

(3) Customer retention – as mentioned previously dealing with errors is just as important as making sales. If a customer had a bad experience with your product, you have to make it right. Fulfilment blunders can create educational opportunities. Learn how to keep your customers happy and engaged with your company – even after you’ve made a mistake.

(4) Reduced losses and unplanned profits – recover the loss of investment in your failed product by fixing and restocking the unit, scrapping it for parts, or repurposing it in a secondary market. With a good reverse logistics network in place, you don’t have to leave money on the table. Take a product that would otherwise just cost your company money and turn it into an unforeseen asset.

In summary an efficient reverse logistics network is vital in the new age of consumer led retail.  It will add costs to the business but at the same time companies should be planning ahead and embracing the benefits.

Reverse logistics can be seen as an opportunity and a threat but if there is nothing in place to deal with returns then that isn’t a place where your company wants to be.