Reverse logistics’ financial “black hole”

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The UK’s retail sector wastes up to £200M a year because of inefficient supply chain practices surrounding the return of unwanted, unsold or damaged goods. That is the finding of a new report commissioned by Royal Mail and by Cranfield School of Management, Sheffield Hallam University and The Institute of Logistics and Transport (ILT).

The report, called Not Many Happy Returns, highlights several reasons for the inefficiencies including:

lInaccurate sales forecasts leading to overstocking of products in-store.

lA disproportionate focus on the flow of products into stores.

lExcessive stocking by retailers to avoid ‘running out’ of a product.

lWarehousing and transport costs, incurred by excessive stocking.

lAccounting procedures that do not capture all the costs associated with returned goods.

Figures supplied by retailers indicate that the product value of returned goods is £5.75Bn each year. The report examines the distribution costs associated with handling these returned goods. It found that although retailers spend £500M a year on handling returned goods, this could be reduced by as much as 40% with better management of the process.

Michael Bernon, senior lecturer in supply chain at Cranfield School of Management, says: “If an integrated supply chain approach was taken to the management of returns, the opportunity for companies to reduce the associated logistics costs (£500M) could be in the order of 20% to 40% (£100M – £200M). The true cost of this could be significantly higher as companies do not measure the total costs involved.”

These include opportunity costs not factored into the accounting procedures such as lower outbound logistics costs if over stocks are not sent in the first place, the cost of picking and packing returns and the loss of revenue from having out of date stock on the shelves.

“The report has uncovered a financial black hole in the retail sector’s supply chain,” explains Richard Rogers, head of warehousing and distribution at Royal Mail. “We know from dealing with retailers that the problem of returned goods – which are often left to pile-up in the corner of a warehouse somewhere in the hope they will go away – is a problem the industry has known about, but failed to address for a long time.”

The report suggests that 2.5% of goods are returned across the whole of the retail sector, although areas that face the highest levels of waste include catalogue and Internet retailing where returns can be around 30%. Music and entertainment and the book industry also have returns levels estimated at 10%.

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