Sunday 26th Mar 2017 - Logistics & Supply Chain

Counting the cost of returns

It’s official, the logistics business is wasting up to €300m pounds per year on collecting and transporting returned goods worth €9bn. The inefficient handling of reverse logistics carries a high environmental cost says a recent Department for Transportsponsored report prepared by The Chartered Institute of Logistics and Transport (CILT) in the UK.

The report, entitled ‘The Efficiency of Reverse Logistics’, maintains that few businesses are effectively managing their returned goods policies and that the problem is likely to get worse as trends towards home shopping and recycling mean that more goods will be routinely returned to suppliers.

Legislation to meet the recent Waste Electrical and Electronic Equipment (WEEE) directive targeting electrical and electronic goods recycling and the new vehicle end-of-life directive are among the tide of regulations also swelling the number of returns.

Holistic approach
The study calls for a ‘holistic’ and ‘sustainable’ supply chain approach, with businesses putting as much energy into getting their return strategies right as they do into the sophisticated logistics models they employ to get the goods to market in the first place. By so doing, businesses could reduce their logistics costs by between 20 and 40 per cent, which conservatively equates to between €150 and €300 million per year in the UK, says the 85-page document.

Effective real-time IT and transport solutions are already being employed throughout the retail supply chain.

‘The main product return mechanism impacting upon sustainable distribution is the use of transport, a major contributor to emissions and the generation of greenhouse gases,’ says Mike Bernon at Cranfield School of Management, one of the report’s authors.

‘In the delivery chain, logistics practitioners accept that empty running is a quantifiable problem they are attempting to address but no similar strategy exists for return goods which constitute between 0.4 and 0.8 per cent of road freight.’

Cracking the reverse logistics problem isn’t easy, despite the potential cost savings. Many logistics systems aren’t well prepared to deal with reverse logistics processes. And accounting for reverse logistics losses isn’t a simple matter, making the problem easy to ignore when planning.

The result is that often there are time lags between product arrival and product disposition. In fact, the average company takes between 30 and 70 days to get a returned product back into the market, including return transportation, repair or refurbishing, and redistribution to the market, according to Boston-based analyst firm The Aberdeen Group.

In some sectors, however, turning returns into revenue is a critical part of the business. In fact, in industries where returned goods represent a substantial volume of the business, such as book publishing, home shopping and consumer electronics, returns management can be important to overall company profitability.

US PC manufacturers, for example, have a great deal to lose if return rates are high. The average profit from a PC is about €76, but the combined cost of technical support and returns is about €95, according to data from PC and peripheral suppliers and software organisations.

In other industries, the sheer volume of returns cries out for attention. For example, book publishers see 20 to 30 per cent return rates. Home shopping retailers experience rates as high as 35 per cent.

The CILT report suggests that companies need to incorporate accounting systems that identify and record the full cost of managing returns to bring home the sobering figures to financial and managing directors. They must then evaluate the impact that any returns policy has on sustainable distribution in order that they can make more informed decisions.

The report goes on to quote examples of good practice. These include the work that was being carried out at Safeway at the time of the survey that was in line with a strategy to expand non-grocery lines. Moving a returns distribution centre from the south of England to the Midlands and the introduction of satellite tracking systems made a positive impact on bottom-line cost recovery.

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