Why should the CFO care about returns management?

Ease of returns is an important criteria for shoppers as they decide where to shop. E-commerce companies have used ease of returns as a significant differentiator to attract and retain customers. At the same time, both the volume and value of returns have increased significantly over the past decade. Recent estimates state that there is 5% to 6% of revenue impact on the profitability of retailers. For most retailers who operate on less than 10% net margins, this represents a significant erosion of value.

Over the past two decades, retailers and OEMs have focused on improving efficiencies in the forward supply chain. Technology companies have invested in developing solutions for all aspects of the forward supply chain — demand forecasting, inventory management, customer experience, etc. These investments have resulted in a large number of technology choices for retailers to choose in improving the efficacy of the forward supply chain. As enterprises optimized their individual supply chains, the adoption of common technology solutions such as SAP led to the standardization of forward supply chain processes across the industry.

The same cannot be said of the reverse supply chain.

Unlike the forward supply chain, the reverse supply chain varies widely from company to company, and in some cases from product to product within an enterprise or from division to division. This process inefficiency results in negative customer experience and impacts profitability.

Due to the lack of technology solutions, retailers and OEMs have been using spreadsheets and emails to manage the complexities of the reverse supply chain. This has resulted in inefficiencies that include:

Unwarranted returns

The optimal way to prevent value erosion is to prevent a return from happening without sacrificing customer experience. Retailers have in their arsenal various tools to prevent/reduce a return without impacting customer experience. These include offering store credit, discount on the item if the customer agrees to keep the items, or repairs. Sometimes, a return may be accepted by the retailer even when it is out of the policy period because the retailer lacks the technology to check the validity of the return. In addition to the cost of the returned item, unwarranted returns result in handling and storage costs, which can be up to three/four times the cost of moving the same item in the forward supply chain.

Lack of visibility

Most retailers are using the limited capabilities of existing forward supply chain software to manage a complex reverse supply chain. Such solutions do not have the capability to provide item-level visibility in the reverse supply chain. Without this capability, retailers and OEMs cannot take the actions necessary to unclog the reverse supply chain and release warehouse capacity. Every cubic foot of warehouse space that is taken up by a returned item, is one cubic foot not available to store a new item. This results in unnecessary costs, lost sales and impacts the profitability of the organization.

Sub-optimal disposition decision

Testing and grading of the returned item is a necessary process for improving the recovery from a returned item. Retailers can get the maximum amount of recovery if they return the item back to the OEM or restock the item. To return an item back to the OEM, there are very strict policies to be followed and they vary from OEM to OEM. Due to the inability of the current solutions to keep track of the different policies, retailers find that they have missed out on a large number of items that could have been returned back to the OEM for full credit. Testing and grading is another important capability. It provides information on the next best action for the retailer to follow, either to claim insurance, repair, e-waste the item or liquidate.

Audit exposure

The lack of transparency results in leakages across the reverse supply chain, from the initiation of returns to the warehouse, to liquidation of the returned item. In an environment of extreme focus on governance by regulators and the stock market, this is not a risk that the CFO should take lightly.?

So, how should a CFO go about transforming the reverse supply chain?

Reverse supply chain processes remain one of the few remaining areas of rich opportunities for enterprise transformation and high ROI. Transformation of the reverse supply chain will lead to significant increases in customer experience, the bottom line and shareholder value. With Returns Automation – Platform as a Service [RA–PaaS], solutions are now available and transformation of the reverse supply chain has now become an imperative.

The absence of a process owner across the enterprise is one of the most critical issues in the reverse supply chain.

The reverse supply chain process impacts several departments across the enterprise — customer support, logistics, warehousing, finance, customer experience, front end operations, returns management, etc. As such, the first step in transforming the reverse supply chain is the appointment of an owner to manage the end-to-end returns management process.

As mentioned earlier, returns management process impacts customer experience and profitability. While these indicators influence each other, enterprises should focus on improving customer experience as the first step in the returns supply chain transformation. These include increasing the choices available to the customer in lieu of returns such as store credits, spot discounts, repair services, extending warranty periods, etc. This will not only improve customer experience but also impact profitability positively by reducing/eliminating costly returns. The initiative chosen for reverse supply chain process transformation can follow the following framework:

Transformed processes should be supported by enabling technology. The chosen technology platform should be versatile so that it can be implemented in a modular manner based on the chosen priorities and integrate with the existing ERP systems through APIs. In addition, the technology enabler should have the following features:

• AI/ML embedded enablers and protocols that will automate and improve the accuracy of testing and grading
• Flexibility to configure returns management processes that may differ from product to product
• Insightful reports that recommend the next best action
• Actionable analytics that provide valuable insights into the returns data
• Strong regulatory compliance in line with industry standards
• Integrated remarketing platform with category-specific buyers to ensure secondary sales and prevent leakages

The role of the CFO, given its enterprise-wide focus, is suited to take ownership of the returns management process. As noted earlier, the rewards are high.