manufacturing versus return cost (transportation and processing)
to determine which products weren’t worth being returned.
This TCO approach helped the company institute a process
of crediting the customer without expecting the product to be
Second, focus on consolidating returns flows to enhance volume
for processing purposes. When selling to customers with multiple
shipping addresses, work with them to consolidate returns
rather than accepting returns from each location. Likewise, if
your company struggles to manage the return flow of product to
suppliers, work with them to develop consolidated flows.
Volume returns attract a supplier’s attention and enable you, as
the customer, to gain leverage in the negotiation process. More
efficient for a supplier to process, they result in transportation
savings and create more value to be credited to your account.
Also, quality or defect issues will become more apparent,
providing an opportunity to rectify the problem.
Third, process returns and move them toward appropriate
disposition as quickly as possible to maximize value recapture.
This will ensure that quality issues are identified early, and will
enable “good” inventory to be returned to stock for sale.
If your product is technical or component-based, consider how
the recapture of returned goods can be used to build the supply
of repair parts. Every product or part returned that can be reused
is one less piece that will need to be purchased. Companies can
reap dramatic cost of goods sold savings by “harvesting” parts
from the return flow to use in service operations.
Visibility is key: Companies need to know what and how much is
being returned, and when it is expected. This information needs
to be available across the organization, including:
• Warehouse personnel who receive and process returns, so
they can plan for the workload
• Service technicians and inventory managers, who need to
know the product is back in inventory, as well as its condition
• Technical specialists, who may need to assess the reparability
of the product
• Procurement specialists, who need to know how the product
return affects the next purchase decision in that product
• The accounting department, so they can adjust the inventory
ledger and credit the customer.
One of the biggest challenges to managing information flow
lies with systems that are disconnected across an organization.
Before thinking that this issue can be solved only with a major
systems upgrade, map the return flow and the touch points
throughout your organization to find ways to share appropriate
information. Or at least figure out who needs to be authorized for
certain modules in the existing systems.
If your firm is the customer returning products to a supplier,
find out the information the supplier needs to ensure the most
efficient means of processing your return shipment. Work with the
supplier to create visibility for your firm regarding the status of the
return, because it ties closely to the financial flow.
Coordination and control are key concepts when managing
financial flow. In today’s digital world, information and funds can
be exchanged instantaneously, but products still travel through
space and time at a much slower rate. Thus, coordinating
product and information flows will save time and effort in
reconciling financial flows.
A company I’ve worked with was so slow to process returns in
the warehouse that its customers (retailers) became frustrated
and “took” the credits they thought they were due by shorting
electronic invoice payments. This caused all kinds of headaches
for the company, which had to then match the return-processing
documentation with the credit taken, and manage disputes
with customers if the credit amount they “took” differed from
the amount the company determined was due. The company
essentially lost control of the crediting process and had little
legitimacy in contesting the credit value if there was a dispute. It
lost significant amounts of money each year because returns and
credits couldn’t be correctly reconciled.
If your organization is the customer, work with the supplier to
ensure that proper credit is assigned to your account within a
reasonable time of the return. While simply “claiming” credits by
short-paying on invoices may solve immediate financial concerns
about closing out return transactions, such a practice doesn’t
make for good customer-supplier relationships.
It’s important to focus on the value-creation opportunities of
managing returns well. Customers build loyalty to companies
that reduce purchase risk by accepting and handling returns well,
which bodes well for future sales. A well-run returns management
process also creates significant savings for your firm — and
those savings go straight to the bottom line. ISM
Diane Mollenkopf, Ph.D., is McCormick associate professor of logistics at
the Haslam College of Business at the University of Tennessee in Knoxville,