UK Royal Mail/Cranfield Report identifies GBP200 million retail black hole

Retailers waste millions on the return of goods through the supply chain

The UK’s retail sector wastes up to GBP200 million a year, according to a report commissioned by Royal Mail.

The research was undertaken by Cranfield School of Management, Sheffield Hallam University and The Institute of Logistics and Transport.

The report “Not Many Happy Returns”, attributes the wasted millions to inefficient supply chain practices surrounding the return of unwanted, unsold or damaged goods. These include:
· Inaccurate sales forecasts leading to overstocking of products in-store
· A disproportionate focus on the flow of products into stores
· Excessive stocking by retailers to avoid ‘running out’ of a product
· Warehousing and transport costs, incurred by excessive stocking
· Accounting procedures that do not capture all the costs associated with returned goods

Figures supplied by retailers indicate that the product value of returned goods is GBP5.75 billion each year.

The report was commissioned by Royal Mail to examine the distribution costs associated with handling these returned goods – a process known as reverse logistics. It found that although retailers spend GBP500 million a year on handling returned goods, this could be reduced by as much as 40% with better management of the process.

Writing in the report, Michael Bernon, Senior Lecturer in Supply Chain at Cranfield School of Management claimed: “If an integrated supply chain approach was taken to the management of returns, the opportunity for companies to reduce the associated logistics costs (GBP500 million) could be in the order of 20 to 40 percent (GBP100 – GBP200 million).”

He continued: “The true cost of this could be significantly higher as companies do not measure the total costs involved.”

These include opportunity costs not factored into the accounting procedures such as lower outbound logistics costs if over stocks are not sent in the first place, the cost of picking and packing returns and the loss of revenue from having out of date stock on the shelves.

“The report has uncovered a financial black hole in the retail sector’s supply chain,” explained Richard Rogers, Head of Warehousing and Distribution at Royal Mail.

“We know from dealing with retailers that the problem of returned goods – which are often left to pile-up in the corner of a warehouse somewhere in the hope they will go away – is a problem the industry has known about, but failed to address for a long time.”

John Cullen, Professor of Management Accounting, Sheffield Hallam University continues:

“The purpose of the report was to identify the scale of the problem in financial terms and to highlight areas of good practice by retailers that have efficient returns management policies.

“In addition retailers need to recognise the financial scale of the problem and develop accounting practices which accurately reflect the total cost of returns.”

Sectors
The report claims that, on average, 2.5percent of goods are returned across the whole of the retail sector, however areas that face the highest levels of waste include catalogue and internet retailing where returns can be around 30percent. Music and entertainment and the book industry also have returns levels estimated at 10 per cent.

Elements of good practice highlighted by the report include:
· Fully integrated supply chain management
· Integrated technology systems that link stores and sales with the logistics operation
· Refurbishment programmes that enable ‘cash recovery’ on returned goods and create new revenue streams
· Enhanced accounting procedures that account for all of the costs and benefits of managing returned goods
· Reverse logistics processes that support the strategic direction of the company

Legislation
The report also cited increasing levels of environmental legislation as something that will intensify the problems of managing returned goods. The biggest driver could be the forthcoming (August 2005) Waste, Electrical and Electronic Equipment (WEEE) Directive that will affect the GBP10 billion of electrical goods sold in the UK each year and means retailers may have to manage and pay for the collection and disposal of the electrical goods they sell.

According to the report: “In the future, the problem of return is likely to increase as new environmental legislation such as the European Union WEEE Directive force organisations to take back the products they produce and sell at ‘end of life’ post consumer use.”