Sales Returns: Flow of Goods in Reverse

Jovy Jader // Uncategorized


June 22, 2018  

Sales returns are products sent back from customers for a number of reasons such as:

  • Defective/damaged goods
  • Off-season/expired merchandise
  • Excess quantity versus ordered
  • Wrong products shipped
  • Product not in accordance with specifications
  • Late delivery
  • No space in customer’s warehouse

Many company executives have long realized the value of managing Sales Returns or what is popularly known as Bad Orders (BO). If not managed properly, the cumulative amount of sales returns could wipe out a firm’s annual earnings. If returned products are not recoverable, sales returns can significantly reduce revenues. Retrieving sale returns from customers has become an obligation by some firms to preserve customer loyalty but the costs of doing so from freight to storage can be expensive.

A large consumer-goods firm once boasted its sales returns year-on-year does not exceed 1% of sales. Analysis, however, showed that that 1% totalled up to PhP 100 million annually of product returned to the firm’s factory. The returns amounted to several tons of merchandise per month such that the company had to spend for a 3rd party provider that required equipment, personnel, and a large warehouse to sort through and recycle the returns.

Sales returns can be a major irritant for customers and the firm’s sales and logistics personnel. Customers demand quick retrieval and credit for damaged products they want to return. Sales representatives don’t like the additional work of inspecting bad orders and doing the paperwork, especially if it results in deductions in their sales account. Logistics workers complain about the extra work and expense in retrieving returns and the space the product returns take up in warehouses. Finance managers fume at having to justify scrapping of unrecoverable product.

Firms apply different strategies in managing sales returns. A wholesaler, for example, does not accept sales returns outright which leads to customers thoroughly inspecting deliveries which sometimes leads to longer delivery turnarounds or higher rejections. Another company simply refunds the amount of sales returns tallied from customers and tells the customers to dispose of the returns themselves although this has resulted in some unscrupulous entities reselling the bad merchandise to the trade as counterfeit items thereby damaging the firm’s reputation.

Some manufacturers, especially those from the glass and steel industry who are equipped with furnaces, accept trade returns wholeheartedly as they can easily re-melt the returned product with the raw material. This, however, becomes burdensome especially if merchandise returns come back mixed and require sorting.

Experience has shown that the best way to manage sales returns is to attack the root cause and eliminate it.

The consumer-goods firm in the first example above, for instance, discovered that bulk of their returns is in damaged goods caused by shoppers opening the packaging of products to inspect them. When the firm redesigned the packaging, the sales return quantities dramatically decreased.

Another manufacturer studied how their products were handled in shipments to customers. They found that some of their products were packed too heavy in boxes such that customer employees frequently dropped the boxes they were receiving, causing damage. When the firm lightened the boxes, the returns lessened.

Sales returns also sometimes occur due to over-deliveries. Some companies I’ve engaged with have monthly sales targets. To meet deadlines or quotas, deliveries would spike towards the end of the month, thus flooding customers with products. Especially for products with limited shelf lives, customers would return items that are near expiration or simply have gotten spoiled. The answer thus to this issue was better sales and operations planning (S&OP) to steady sales and delivery volumes versus actual demand.

Companies need to make visible data from sales returns to pinpoint the root causes. The costs of retrieval and recovery also need to be determined in order to understand the scale of the sales returns and how they are affecting the bottom line. Many times, companies become more preoccupied with streamlining the procedures in managing sales returns than whether the policy governing it is viable in the first place.

No business organization likes sales returns. They don’t add value and they pose as irritants between the firm and the customer. Because they are a reality in the day-to-day operations of most supply chains, executives would do well to define clear-cut policies in how returns are handled and managed with least cost to the business.

About the Author

Mr. Jovy 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 revenue, working capital, total cost, and service levels. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers.

Jovy Jader