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Adding value to reverse logistics

Management accountants have an important cost-reduction role in the retail returns process.
 Adding value to reverse logistics

With the growth of online shopping, one challenge for retailers is managing returns — an aspect of "reverse logistics" that can enhance profitability and customer service through the supply chain.

With return rates between 5% and 50%, managing returns can lead to substantial costs through logistics, inventory, and disposal — as well as having an environmental impact.

This is the background to research carried out by Sheffield University Management School, Cranfield School of Management, and Sheffield Business School in the UK, and funded by CIMA's academic research programme and the UK Department for Transport.

The result of the research was a reverse logistics toolkit, co-produced by researchers and practitioners.

Cost underestimation

Companies often underestimate the cost of managing returns and employ inadequate processes for dealing with them. Given the small margins in much of the retail sector, costs in returns processes can easily reduce retailers' profit margins and put their future at risk.

Further implications for the bottom line include consumer expectations of "free delivery and free returns". Retailers have been relatively slow to recognise the cost implications of poor returns processes and, equally, the impact returns have on forward logistics operations.

What accountants can do

Improvements in reverse logistics processes between suppliers and retailers can improve profit margins and consumer satisfaction levels. It is important that accountants engage in cost management through the whole supply chain.

They can also use their analytical skills to highlight the financial benefits from improving reverse logistics processes. Quality costing and transparent performance measurement systems have a significant role to play.

Online retail is often presented as the principal driver of sales, whilst the traditional bricks-and-mortar retail model is seen as financially unsustainable. However, with consumers increasingly factoring the ease of return into their purchasing decision, the "real" value of different distribution channels is likely to be far more complex. It is possible, for instance, that the ability to try out a product in store before purchasing online minimises the likelihood that it will be returned, or that the option to return an item in store drives online sales.

Improving the returns process

Organisations can improve their returns process by:

  • Factoring returns processes into strategic planning at an early stage of relationships between suppliers (manufacturers) and retailers.
  • Using analytical skills to communicate to the business how the cost of returns is often undervalued and can have a significant effect on the bottom line.
  • Helping set key performance indicators and costing information that recognises relationships within the supply chain — to reduce costs and enhance value.

John Cullen, FCMA, CGMA, is professor of management accounting; Gareth Crockett, Ph.D., is a research associate; and Juliana Meira, Ph.D., is a lecturer in management accounting — all at the Sheffield University Management School in the UK. To comment on this article or to suggest an idea for another article, contact Oliver Rowe, an FM magazine senior editor, at Oliver.Rowe@aicpa-cima.com.