This should be your next move! Apply a zero returns policy

One of the key challenges faced by CFOs/Controllers in the fast-moving consumer goods (FMCG) industry is managing product returns. Returns often have a significant impact on costs, extending far beyond the cost of the product itself.

For example, imagine we are selling to one of our biggest retailers, and two months later, the retailer returns several cases. These cases may have been damaged during the loading or unloading process. The retailer then requests that the damaged products be returned. At first glance, this might seem like a routine transaction, just another part of day-to-day operations. Naturally, we’d need to adhere to our returns policy and obtain the necessary approvals to process these damaged returns. Sounds straightforward, right?

In a multimillion-dollar business with high transaction volumes and multiple warehouses, returns are often considered an accepted part of operations, with many organizations allocating a budget for them. However, if you think this is simply "business as usual," it’s time to reconsider.

Let’s break down the associated costs of such transactions. First, warehouse employees are required to load the initial shipment, incurring labour costs. Then, there’s the transportation cost and the time spent delivering the goods. When returns occur, the organization must retrieve the products from the customer’s warehouse, again incurring transportation costs. Additionally, a portion of the warehouse must be dedicated to storing the returned goods, creating inefficiencies. At some point, a committee from finance, operations, or supply chain may need to convene to authorize the disposal of these products, further consuming valuable resources. Now imagine a company with eight warehouses nationwide having to repeat this process for each location, compounding the waste of time and resources.

Returns also create significant challenges for customer reconciliation and receivables management. Reconciling orders and returns often becomes a nightmare for accountants, potentially leading to disputes over receivables for items older than 90 days. This can result in accounts being placed on hold, jeopardizing customer relationships, causing lost sales, and ultimately, eroding profits.

The company should only accept returns under the following conditions: if the product is recalled due to safety or compliance issues, has manufacturing defects, or does not meet quality standards. Returns of damaged products, expired stock, overstock or unsold inventory, and seasonal items should not be accepted.

Allowing returns for expired stock, overstock, unsold inventory, or seasonal items opens the door to channel stuffing, where the sales team pushes more products into the distribution channel (e.g., wholesalers and retailers) than can be sold to end customers. This also creates an opportunity for trade loading, where the sales team offers incentives (such as discounts, extended credit terms, or promotions) to distributors or retailers to encourage them to purchase more inventory than they can handle, all in an effort to meet monthly, quarterly, or annual sales targets. Furthermore, it becomes very difficult for the finance team to prevent these practices, If the company is not meeting its targets in certain regions or overall. The finance team is often blamed especially after a few incidents where the finance team rejects orders due to suspicions of channel stuffing or trade loading. The prevailing sentiment within the company is that finance is holding up sales, even though they are simply following the necessary protocols.

The solution is a zero-returns policy, accepting only products that are recalled due to safety, compliance issues, manufacturing defects, or those that do not meet quality standards, ’’recall policy’’. The million-dollar question is: Can we implement a zero-returns policy if it is the market norm and all our peers and competitors accept returns for damaged products, expired stock, overstock or unsold inventory, and seasonal items?

The answer is simple: The firm needs to apply different tactics for different customers. Let’s assume that the total value of returns/damaged products we accept from one customer is $5,000 at cost, and the firm’s annual sales to this customer amount to $1,000,000. We could offer this customer an additional 0.75% rebate or discount on the invoice, calculated as follows: 5,000/1,000,000 = 0.5%, plus an additional 0.25% for logistics costs. This can be formalized in the agreement, stipulating that the firm will not accept any returns. With this approach, the customer will be satisfied and compensated for the returns. Adopting such a policy would optimise supply chain costs and time spent. Furthermore, our sales team and customers will not be incentivised to inflate orders or create sales that may cannibalise future sales.

A zero-returns policy may be challenging, but it can bring major benefits, like simplifying operations, cutting unnecessary costs, and reflects the revenues properly. By offering customised solutions for different customers and setting clear terms in agreements, the company can build a stronger and more sustainable relationship with its partners. This forward-thinking approach not only optimise performance but also helps the company stand out as a leader, known for its integrity and efficiency in a competitive market. In the long run, this policy will support growth, make the best use of resources, and strengthen the business overall.