New UK legislation puts reverse supply chain under scrutiny

Following reforms to shoppers' rights - the Consumer Rights Act 2015, introduced on 1 October - and the new 'early right to reject' a faulty product within 30 days, it's now more important than ever that retailers have a more effective returns process and assess the financial risk of the reverse supply chain.

Handling consumer returns is increasingly complex with multiple channels in use, while the cost of returns is already on average 8.1 per cent of total sales across multiple industries. From store returns to online courier direct collections, returns have become a major challenge for retailers with this latest legislation adding a further cost dimension by allowing for a full refund or replacement product rather than multiple repairs.

Many companies are already losing millions of pounds a year from revenue that could be made on returned and refunded items by improving the supply and disposal of returned or faulty goods. For example, retailers currently achieve only 12-25 per cent on average of a returned product’s price (from sale, reuse or scrap).

Yet lowering return rates and increasing value from liquidation by just single percentages has a huge impact on profitability, along with improving the visibility, agility and sustainability of their reverse supply chain. While the new Act inevitably puts more pressure on under-invested reverse logistics processes including transportation, returns management and suppliers, another complexity is tightening legislation around disposal and environmental responsibility.

Many companies mistakenly assume the reverse supply chain is simply the opposite of outbound flows – but with smaller and unpredictable quantities and the need to assess, grade and identify ways to extract value from the returned items it nearly always comes with higher administrative costs.

Disposal and reclamation are big business, with over 400 billion electronic consumer goods ending up in landfill annually, while the resale and liquidation of stock is now a trillion dollar market, but many companies are not optimising value – seeing returns as a hassle and making limited investment in handling reverse flows and commonly outsourcing them to take the problem away.

Keeping returns at arm’s length, charged as a cost to the business and not directly linked in real time to the cost of sale makes the product gross margin not clearly visible and limits the focus on return causes, or avoidance. Here, there are lessons we could learn from supply chain models used in Germany, where retailers are incentivised on returns and the reverse chain processes in place.

This new legislation should have a positive effect by forcing companies to take a more rigorous look at the true cost of returns, emphasising avoidance as well as optimising current processes. Waste can be turned into profit through better agility, end-to-end visibility and sustainability in the supply chain, while better integration between supply chain and procurement as well as across planning, manufacturing, marketing and sales also brings benefits. Supply chain organisations and suppliers need to actively develop services in returns that lower costs, create transparency and still provide customers with simple returns options.

Mike McCormack is a director and new head of the logistics practice at procurement services company 4C Associates

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