Build a returns strategy to prevent erosion of profit

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by Emily Atkins

Returns erode profits. This is a simple fact of life for supply chain managers, but there are ways to turn that negative into a positive.

This was the main message in a presentation delivered by Eian Campbell, CCLP, director of operations at Danby Products Ltd during a CITT webinar in September. More than 80 participants took part in the webinar, and many engaged Campbell in a Q&A after his presentation, which was entitled, “How to turn a cost centre into a profit centre”.

Campbell based his remarks on the learnings he’s gathered at Danby Products, where he says a very high percentage of returned product is not defective or even damaged. Items come back for two basic reasons: defective or not wanted. Defective items can be either damaged or non-functional.

On the undamaged side, people change their mind or realize they bought the wrong thing. They also sometimes buy an item to use for a special event and then return it—he cited Superbowl week as a prime time for sales of big-screen TVs, followed closely by a post-Superbowl flood of returns. Items also come back at the end of the season as buy-backs in guaranteed sale programs.

Whatever the reason they come back, returns eat into margins for manufacturers and retailers. They create costs for freight, handling, and warehousing. With storage space at a premium these days, returned inventory is not what you want piling up at the inbound docks as staff try to figure out if it can be returned to stock for resale, needs to be scrapped, or what level of refurbishment or remanufacturing is required. “It creates a burden on your day to day warehousing function,” Campbell said.

Design a strategy

To prevent this strain, and to reduce costs, it is essential to develop a comprehensive plan for dealing with your reverse supply chain. Campbell noted that there are four moments when you can mitigate the pain: Pre- and post-purchase, in the reverse logistics process, and by managing quality.

In the pre-purchase phase you have the opportunity to guide future consumers once they have received your product. Campbell suggests simple measures such as having a toll-free phone number available with extended hours that accommodate consumers across the country in every time zone and making sure it’s posted clearly. Highly visible hang tags with instructions and well-written user manuals are also key. He also suggests ensuring that when items are packaged inside box inserts they are clearly labeled so they don’t end up overlooked or in the garbage as the box gets unpacked.

For the second phase, it is critical that the returns process be mapped out and roles and costs negotiated with all the players. Every step needs to be articulated and communicated.

Reverse logistics requires a look at rates to ensure they are the same coming and going. Campbell notes that cube will be higher for returns since items don’t come back in their original packaging, making stacking and palletization tricky.

Handling needs to be addressed for the same reason: items that are not damaged, but are not in their protective packaging, need to be handled with more care than normal to prevent damage. Will you need extra insurance? If an item is returned damaged how easy will it be to prove a claim?

You also need to figure out when returns will come back and if they will be sent to a central or regional DC or to a specialist third-party returns handler. The bottom line requires that returns be organized to avoid interfering with your regular inbound and outbound operations.

“All of those discussions need to be had because if you have a whole bunch of returns come back in that you don’t have a plan for, it cripples your key focus on inbound and outbound prime inventory,” Campbell said. “It does nobody any good to just receive them and stack them up and put them in a back corner. You need to decide and have a strategy for throughput.”

Quality control

The last piece of the strategy is measuring quality. Campbell suggested tracking FITs and RITs, which are failures in time and returns in time. Take a close look at exactly why every return comes back and document in detail.

You’ll benefit by being able to use the data to improve product quality and potentially set up thresholds for chargebacks to suppliers for unacceptable defects. Having insight into defects may also give you a head start if there is every need for a recall, he noted.

“It is key to analyze why returns happen in order to prevent returns,” Campbell concluded.