Effectively Managing Returns

by | Aug 15, 2024 | Best Practices, General

Effectively Managing Returns
By Matt & Jon Schreibfeder

Companies with inventory are organized to sell and distribute products. Policies and procedures are designed to aid or promote this activity. As long as material flows through the warehouse “in the right direction” (i.e., from the supplier through the warehouse to the end user) operations run smoothly.

Many organizations have trouble when products flow in the opposite direction; that is when material is returned by the customer or user. Typically, the customer is given a replacement unit, refund, or credit, and the returned goods are set aside to be dealt with “later”. But in many cases “later” never comes, and the pile of returned material continues to grow. The result: a return goods area that looks like a combination of the sets of “The Adams Family Movie” and “Sanford and Son”. A hodgepodge of material covered in dust.

Unfortunately, this material does not magically disappear. Dealing with it takes human intervention. The sooner you deal with a return the more likely you are to minimize your losses from the return. Best practice is for returns, like any other stock receipt to flow through your receiving department and be consistently handled in a two-step process:

Step #1 – Issue a RMA (Returned Material Authorization). This form should contain the answer to several questions:

  • Who is returning the material? Does this customer return a disproportionate amount of material?
  • Why is the product being returned? Is the item defective or is the customer not satisfied with it for some other reason?
  • Is the material eligible to be returned by the customer? Often times discontinued products cannot be returned unless they are defective.
  • If the item is defective, is it covered under a vendor warranty?
  • Will the customer be assessed a handling charge? Many companies charge a customer a service charge of 2% to 10% of the purchase price for non-defective returns. Determining your actual cost is discussed below.

Step #2 – Process the Return within 24 Hours. The receiving clerk must inspect the returned material on the day it arrives from the customer. If there is evidence of customer abuse, the returned product should be refused or immediately returned to the customer. If there are no signs of abuse (or management has decided to accept the return of the abused product as a good will gesture), the receiving clerk should determine how the item should be processed:

  • If it is in resalable condition or can be reused, it should immediately be staged to be returned to inventory with other stock receipts.
  • If it must be repackaged or repaired, the receiving clerk should detail what needs to be done, and the material should be sent to a “reprocessing area”. All products needing work should be processed within 24 hours. That is, they should be repaired, sent to be repaired, or the supplies necessary for repair should be ordered.
  • If it is to be returned to the supplier, the paperwork necessary to process the return should be created, and the material should be staged to be shipped out.
  • If the material is unusable, it should be immediately scrapped. It is taking up valuable space in your warehouse, and the chances of it miraculously repairing itself are slim.

Following this two-step process will help minimize the cost of returns to your organization. But management must realize there is a cost associated with each customer return, a cost that will negatively affect your profitability. Let’s look at these costs, from “best case” to “worst case”:

  • The material is returned to the vendor: You incur the cost of processing the return as well as packing and shipping the material back to the vendor.
  • The material is returned to stock and can be resold or used in another process: You have incurred the cost of processing the return, returning the material to stock, maintaining the inventory in your facility until it can be sold or used again, and filling and shipping the second order.
  • The material must be repaired before it can be resold or used. In addition to the costs listed above, you incur the cost of repairing the product(s).
  • The material must be scrapped. You incur the cost of processing the return, arranging for the material to be liquidated, and either the actual or replacement cost of the product(s).

It is evident that returns cost you money. Every effort should be made to avoid returns from your customers. The following proactive approaches would help reduce the number of future returns:

  • Check to be sure that the right quantity of the right item is being shipped on each outgoing order. The cost of the effort to verify the accuracy of order fulfillment is far less than the cost of processing a return when you ship the wrong quantity or the wrong product.
  • Monitor how often each customer returns items. If a customer often returns purchased material, assess if the effort associated with dealing with these situations results in you losing money when dealing with this particular account.
  • Track what products are being returned. If a vendor’s products are being returned on a regular basis, you are probably better off discontinuing their line and finding a better quality alternative.

Processing returns is an unpleasant and expensive task. The goal is to minimize customer returns and efficiently process the material that comes back into your warehouse. That will allow you to concentrate on your primary objective: making money by supplying needed material to your customers.

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