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10 Things You Need to Know About Managing Returns
By Kristen Metzger

Depending upon your industry, your returns can run as high as 8% of sales and significantly dilute profits. In some industries, it can even be 30% of revenues. As a result, you need to plan the returns process with the same forethought as your forward sales process.

There are a number of proactive steps that vendors can take to prevent and better control returns.

1. Establish a returns management team including sales, warehousing, logistics, finance, credit, etc. to drive process improvements that minimize returns, facilitate the process, and maximize the asset recovery. Set up the reverse logistics process with the same care you invest in the forward logistics pipeline.
2. Categorize returns at receipt and inspection, not the original RMA, to track the real reasons why products are returned. For example, the customer may claim "defective product," but inspection may reveal that it was packaging problem, or confusing consumer instructions.
3. Schedule meetings with your top five or ten customers to understand their viewpoint, policies, and processes, and learn how your company's operations, packaging, etc., impact the results. You can't make much progress otherwise.
4. Benchmark customer returns against other customers, and also benchmark your company's experience returns against competitors to determine if others have found solutions you can emulate.
5. Develop a Return Policy that sets clear ground rules and require that your customers sign off. As example as, state (i) what you will accept for return (nothing more than one year old, for example), (ii) what charges that you consider unacceptable (such as handling charges), and (iii) the price at which returns will be credited (i.e., lowest price in past year).
6. When auditing returns and charging back variances, itemize not only the product that has been credited, but also the product that has not, price differences, and the reason. Doing so will not only facilitate the reinforcement of your policy with the customer, but also the reconciliation of any variances. In determining the price to credit, deduct any allowances or markdowns previously given.
7. Automate reconciliations, if possible, to reconcile return debits and credits at the SKU level. We have found that this ability to match large quantities of data and identify variances produces outstanding recovery results.
8. Negotiating a return/defective allowance can sometimes be cost effective, but review it for adjustment over time so it stays in line with your returns experience. Be cautious, as many customers will find ways to take the allowance and yet make the return as well.
9. To extract the most value out of your returned goods, develop a detailed Asset Recovery Program stipulating how returns are to be processed (recycled, donated to charity, repaired, resold in secondary market, destroyed, returned to vendor, etc.). Treat the reverse logistics pipeline as a secondary sales channel, since the value of a product doesn't end at the point of return. Some reverse logistics service providers also provide inventory liquidation services
10. Evaluate your progress monthly with each major customer.

Kristen Metzger is President of Smyth Solutions LLC, a provider of comprehensive accounts receivable management solutions, including accounts receivable, deduction, returns and trade promotion management outsourcing. For more information, contact her at kmetzger@smythsolutions.com.

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