Adding value to reverse logistics

The impact of the growth in online shopping and the influence this has had on traditional retailers who have been slower in developing an effective online presence is well understood. However, less well understood within today’s complex omni-channel environment is how retailers can best manage returns, given the opportunity for customers to buy online and return in store.

With return rates varying between 5% and 50%, managing returns can lead to substantial costs through logistics, inventory, and disposal. Many companies employ inadequate processes for dealing with returns. The rise in internet shopping has also resulted in a significant rise in the number of van traffic movements, and these “last mile challenges” are important, from both an operator efficiency perspective and an environmental perspective.

This is the background to research carried out by Sheffield University, Cranfield School of Management, and Sheffield Business School in the UK, and funded by CIMA’s academic research programme and the UK government (Department for Transport). It set out to explore the possibilities of using strategic management accounting techniques and other managerial disciplines to improve the management of reverse logistics processes. This was aimed at improving bottom-line performance, customer service, and reduced transport movements.

Data collection for the project, using extensive mixed methods, started in 2005 and has continued until 2019 and is ongoing. It has involved regular industrial and research forums and collection of quantitative data relating to returns rates across different product categories. Also part of the mix were qualitative interviews with individuals and teams involved in returns processes in retail organisations, and manufacturing and third-party logistics organisations.

The result of the research was a reverse logistics toolkit (open access, and originally created in 2008 and updated last year), which was co-produced by researchers and practitioners.

Cost underestimation

Generally speaking, companies underestimate the cost of managing returns and employ inadequate processes for dealing with them. Given the small margins in much of the retail sector, non-value-adding costs in returns processes can easily impact negatively on retailers’ profit margins to the point that organisations cease to operate profitably and their future is put at risk.

Other costs obviously contribute to profit-margin issues for bricks-and-mortar stores as compared with online retailers; eg, local government business rates (taxes). Further implications for the bottom line relate to transportation costs associated with processing returns, including consumer expectations and assumptions around the idea of “free delivery and free returns”.

The surprise is that retailers have been relatively slow to recognise the cost implications of poor returns processes and, equally, the impact returns have on forward logistics operations as well. The lack of joined-up thinking, both inside and across supply chains, means that information systems do not sufficiently motivate effective management of both forward and reverse logistics flows.

The supply chain

Organisations cannot work independently in today’s world where global supply chains are common. This means it is important for organisations to understand the costs, as well as the value created, at different stages in the supply chain. Working together means that members of the supply chain can identify non-value-adding activities between supply chain partners and enhance profitability throughout the chain.

In terms of reverse logistics, improvements in processes between suppliers and retailers can significantly help to improve profit margins and satisfaction levels of the end consumer. It is therefore important that management accountants engage in cost management through the supply chain rather than just focusing on their own organisation.

A positive role

Management accountants can play an important and positive role in the supply chain and logistics areas by using their analytical skills to highlight the financial benefits from making improvements to reverse logistics processes. They can also support other areas of the business on key performance indicators and costing information.

Techniques such as quality costing and transparent performance measurement systems have a significant role to play. There is also an opportunity to use tools to assess the value of different forms of distribution (eg, bricks and mortar versus online).

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 prior to purchasing online minimises the likelihood that it will be returned, or that the option to return an item in store drives online sales. Therefore, understanding the “real” cost of different channels of distribution is strategically important for modern retailers, and it is a task that accountants would seem well equipped to influence.

Improving the returns process

Taking the following three steps can help organisations begin the process of improving their returns process:

• Global supply chains create opportunities for returns processes to be factored into strategic planning at an early stage of relationships between suppliers (manufacturers) and retailers.
• Use analytical skills to communicate to the business how the cost of returns is undervalued by most companies and can have a significant effect on the bottom line.
• Help set key performance indicators and costing information that recognises relationships within the supply chain — to both reduce costs and enhance value for the organisations.

Toolkit

The Reverse Logistics Tool Kit – 2.0 (open access) can be downloaded at cgma.org.

— 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 UK’s Sheffield University Management School. 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.