Prioritising reverse logistics

Finance professionals will need to pay closer attention to reverse logistics in the coming years as the retail and consumer landscape changes. The pandemic played a major part in raising e-commerce's share of global retail from 16% in 2019 to 19% in 2020, according to a report by the United Nations Conference on Trade and Development, and that surge is highlighting the importance of reverse logistics.

The rise was considerably more rapid in more economically developed countries, which already have a significant e-commerce presence. For example, the share of total online sales compared with 2019 rose by 47% in the UK, 27% in the US, and 98% in Singapore in 2020.

Combined with greater regulatory and consumer pressure for greener and less wasteful business practices, these changes mean that reverse logistics — everything from simple returns of unwanted products, to returns for recycling or disposal, the return of unsold goods from retail stores, and temporary returns for servicing — can no longer be overlooked.

Even before the pandemic, it was estimated that some $550 billion worth of goods globally were returned annually to e-commerce retailers alone, with a cost to supply chains of $50 billion.

Given the financial impact that reverse logistics operations can have across an organisation, from design through sales and marketing to environmental, social, and governance compliance, CFOs have a responsibility to take the lead.

"Looking at the governance of organisations, we've seen more success when the issue of reverse logistics is taken seriously at board level," said Gareth Crockett, who is part of the Reverse Logistics Research Team involving academics from the University of Sheffield, Cranfield University, and Sheffield Hallam University. "Accountants can make the business case probably better than anyone else. CFOs have the level of understanding and responsibility across the business."

Indeed, an understanding of how reverse logistics are working within a company, why they are working in a particular way, and which products are affected can be a crucial part of driving sales growth.

"A key part of meeting customer expectations is offering the right product, at the right time, at the right price, and on the right terms," said Justin Bailey, vice-president of value consulting at Denver, Colorado-based Vendavo, which provides pricing and sales solutions for digital commerce. "Doing this upfront helps CFOs manage effort and investment in reverse logistics operations with the end result of a smaller investment in reverse logistics infrastructure."

So what can CFOs do to ensure their companies thrive in this altered environment?

Keep your customers happy

The growth of reverse logistics has been driven in large part by market demand. Customers increasingly expect friction- and cost-free returns, as well as a proactive stance towards recycling and reuse by companies they engage with. Indeed, the quality of returns operations can be a key tool in attracting and retaining business.

"Reverse logistics is about value-chain management — but it's also about value creation," said Juliana Meira, Ph.D., lecturer in management accounting at Sheffield University Management School and also part of the Reverse Logistics Research Team. "The returns process has a very significant influence on the consumer. We've found that the ease of return is a decision-point for customers."

Nikolai Bozhilov, Bulgaria-based executive chairman of supply chain management company Unimasters Logistics, said that improving customer experience in reverse logistics can be a "driver for growth and even a business saver" and that interactive web-based or mobile return management reduces costs and saves time.

"You can create excellent customer experience through guiding the customer using his/her preferences and real-time data," he said. "You can use voice of the customer, engagement data, location data, device data, and so on. Cutting IT costs is the worst financial management approach, although one often practised by CFOs."

Adapt your modelling

Vaggelis Giannikas, director of the Centre for Smart Warehousing and Logistics Systems at the University of Bath's School of Management, said that consumer behaviour has changed to the extent that many see it as entirely normal to order multiple items and return the unwanted ones for free — behaviour promoted by many retailers. This creates opportunity for value but also significant costs for businesses.

While the return rate of goods bought in-store is estimated at 5%—10%, this rises to 15%—40% for online sales. When online retail was a relatively small part of overall sales — less than 10% in most segments — the cost of the higher rate of returns was manageable and often subsidised by higher margins in bricks-and-mortar retail. However, with e-commerce rising as a share of overall transactions and returns rising in parallel, costs have also risen. Managing the cost of reverse logistics has rapidly become a priority for a range of businesses.

"One of the key problems for financial managers is tracing the costs of different distribution channels," said John Cullen, FCMA, CGMA, emeritus professor of management accounting at the University of Sheffield Management School and another member of the Reverse Logistics Research Team (and author of the article "Adding Value to Reverse Logistics", FM magazine, October 2019).

"Most companies don't really know the costs of returns for online purchases versus returns for bricks-and-mortar. There's a lack of transparency in these sorts of costs. But identifying the cost aspect is critical for CFOs, particularly in mid-channel retail."

Giannikas notes that there is a wide range of aspects of reverse logistics that CFOs will need to monitor as cost points, some more "hidden" than others.

"Companies often fail to measure the total cost of a return, which goes beyond transportation of an item back to a warehouse," he said. "Factors such as warehousing costs, staff and nonstaff, packing material, customer service staff dealing with unhappy customers, and resources at drop-off points should also be considered in order to get a more accurate picture of the total cost. On top of that, you are quite often required to send another item to replace the unwanted one or resell and redistribute the returned item to another customer."

Improve your data management and technology

As such, companies need to enhance how they record and handle data around reverse logistics and returns in particular. This may reveal that the cost of free returns is eroding margins and that charges need to be introduced or costs recouped elsewhere. High levels of orders online may disguise that there are equally high levels of returns, or return rates may differ from category to category, necessitating changes to optimise pricing and costs.

"Unless a proper information system is in place, a business model that relies significantly on regular returns creates a false picture of customer demand and sales," Giannikas said. "This can be key for finance and marketing people alike, as knowing what your market actually wants and how much your company sells are among your first priorities."

Given the competing needs to deliver customer experience and reduce costs, management accountants should play an active role in ensuring that data is collected, managed, and analysed effectively. "Margins can be very low in retail," Cullen said. "So you can introduce a whole range of performance indicators to improve cost transparency. It's a natural area for accountants to get involved in."

Data can also be used to fight fraud in returns — for example, customers buying clothes, wearing them, and then returning them. "There are really rich data around this sort of thing that can be used to understand what's happening," Cullen said.

Bozhilov said that the logistics industry also needs to upgrade its ICT infrastructure to deliver better for its customers and reduce costs — many operations still lack the powerful software to handle complex urban transportation tasks. "Many processes are still manual and nonscalable," he said. "Despite the digitalisation progress during COVID-19, many operations are still siloed, static, and paper-based."

Keep costs down

While returns have become an essential part of the business model of many companies, and a key selling point for many customers, CFOs will be keen to reduce costs where possible, particularly in the context of the recovery from a global recession. As such, they may seek to reduce the rate of returns, even while maintaining returns services as they were, or indeed enhancing them. "Reverse logistics can be a clear indicator of poor customer experience — and could be an indication of inappropriate pricing, both of which were impacted by the pandemic," Bailey said.

Returns can be the result of damage in transit, inaccurate product specifications, damage within a warranty period, or simply the product being unappealing to a customer on arrival, having been bought remotely.

"Companies need to look at product design and try to reduce returns at the beginning of the process," Meira said. "This starts with product development and takes in every aspect of the supply chain. When developing new products, companies need to think all along the supply chain."

This can involve ensuring that products are well made to lessen the risk of damage or malfunction, ensuring technological products are easy to use and understand, or ensuring that clothing sizes conform to market standards. Again, monitoring of data can play a crucial role both in identifying problems and in addressing them. "We do a lot of open-book accounting in which we work with companies to ascertain the reason for the returns," Meira said. "Is it because of the colour? Because of the size? There's often not sufficient information going back to the retailer. There needs to be more transparency."

Giannikas cites two other means of lowering return rates. The first is allowing customers to keep lower-value or outsize products that would be disproportionately expensive to process as a return, while still providing a refund, where possible. Amazon and Walmart are among the retailers already practising such policies. Second and more obvious is providing richer and more accurate information about products on websites.

Lowering return rates involves investment — but this should offset costs while raising customer satisfaction.

"Rigorous match of customer expectations is needed," Bozhilov said. "Many e-commerce returns happen because arriving products are different or damaged — select the right distributor or logistics partners. User experience perspective is vitally important, even decisive, especially for online shoppers. Online product design has advanced through use of VR and AR [virtual reality and augmented reality], which has greatly improved customer digital experience and the 'real feel' about products, thus lowering returns."

Consider the environmental impact

With consumers and regulators ever more conscious of the environmental impact of business, taking into account the effects on the environment of reverse logistics — and considering how systems can enhance recycling and reuse — is more important than ever.

"Most companies look into the financial and the customer satisfaction aspect of the issue," Giannikas said. "However, returns come with a significant environmental footprint. Unnecessary trips of trucks, counterproductive transportation of inventory back and forth, wasted packing and labelling material are just some of the ways online shopping returns directly impact on the environment. This should be seriously considered by practitioners, especially for those organisations with big sustainability agendas."

Reducing emissions and other environmental harms in reverse logistics operations is not only important to meet regulatory requirements and reduce associated costs but can also enhance a company's green credentials, improving customer attraction and retention.

Other than reducing the rate of returns overall, and greening the transportation aspects of their supply chain, companies can also reduce the environmental impact of their operations by improving the rate of recycling and reuse. Again, this can be done from product design onwards. Indeed, better reverse logistics processes are an essential part of recycling.

"Asset recovery can be a big aspect of reverse logistics," Cullen said. "Sending things to a landfill has huge environmental costs. Reusing and recycling processes can be both environmentally friendly and financially beneficial. This is how accountants can get involved in the process."

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Andrew MacDowall is an independent consultant and writer based in France. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.

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Resources

Article

"Adding Value to Reverse Logistics", FM magazine, October 2019

Toolkit

Reverse Logistics Toolkit