Manufacturing firms constantly seek new ways to increase revenue and reduce cost amid growing global competition. The last thing they need is a commercial customer returning products for refund.
Customers, for their part, return products for a variety of reasons. These can range from damaged or expired goods to poor quality or end-user complaints. Obsolete items or clothing that have gone "out of style" may also prompt retailers to return them, especially if they are consigned. For some durable goods firms, trade-ins of appliances and automobiles may also equate to customer returns.
Returned products are "negative sales," i.e., they burden manufacturers with lower net sales, but the additional cost to the firm depends on what happens to these rejected goods. Some firms simply dispose of them outright while others recycle their products back into their value streams. The latter entails retrieving and receiving the product, transporting it then storing it, all of which end up as additional expenses.
In some cases, retrieving an unwanted product may cost more than what it cost to make it, but firms may still opt to get it back to avoid the possibility of the commercial customer selling it to his clients. If the items are expired or in a substandard state, having them land on the end-users’ laps would mean more damage to the manufacturer’s image.
Another challenge for product returns is the environmental impact of disposal. Some countries have introduced legislation regulating the discard of returned items. In California in the US, new personal computer prices come with an environmental fee, which means that buyers now subsidize the proper disposal of old computers and their parts.
The bottom line is, firms want the management of product returns to be as cost-efficient as possible, and some have created organizational functions that deal with this field.
Managers, for their part, may find the following proven ideas helpful for their own returns divisions:
Develop a returns policy. A firm should define its return policy. For instance, what is an acceptable return? They may opt to accept any return but still charge customers for what they deem an invalid return. Some companies simply refund their customers in cash outright without taking the product back while others would take anything back and give 100% credit, no questions asked. Whatever the case, a clear return policy and process would avoid customer misunderstanding, which can further tarnish a firm’s reputation.
Establish a measurement system. After a firm defines its return policy, the next step is to track how many items customers are returning. Measuring this can serve as the managers’ starting point in assessing the financial impact of returns on the company’s pocket.
Understand the nature of returns. Depending on the industry, a return can be due to damage, obsolescence, or a simple trade-in. Some returns, however, can be due to errors in packing or invoicing, or to improper practices on the customer’s part (e.g. not following first-in, first-out scheme for perishable products). By understanding the major causes for product returns, companies can develop plans to directly address the problem.
Improve product quality. Do it right the first time. If firms practice quality ownership at all levels of the organization, they lessen the chances of having substandard products shipped to customers. It’s surprising how some firms still leave quality ownership solely to the quality control department.
Improve storage, handling, and transportation. What could be more frustrating than making a high-quality product only to have it mishandled and damaged during delivery or storage? It is interesting that some firms in the first place don’t even track how much of their goods are damaged this way. Over-stacking, water damage from roof leaks, poorly maintained vehicles, and outright pilferage during transport are some of the many causes in this category. One firm lost thousands of pesos because the products that were erroneously loaded on a flatbed truck melted under direct sunlight. These are not easy problems but firms may benefit a great deal when effective solutions are found.
Managing product returns has become a critical business process for most organizations, especially as the cost of returns becomes significant and the returns process complex. The goal may not necessarily be to totally eliminate the possibility of returns but to minimize them to a manageable level. In the end, it still boils down to strengthening the collaboration between firms and their customers.
(Jovy J. Jader is a management consultant and regional speaker on Supply Chain Management. He has directed and implemented Supply Chain Management projects both local and international, which have resulted to company-wide improvements in inventory, total cost, customer service, response time, quality, and on-time delivery. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers. Should you have questions or comments e-mail to email@example.com.)
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