Supply-Chain Management: Mike Bernon, John Cullen and Jonathan Gorst Explain Why Financial Managers Can Play a Key Role in Reducing the Costs of Reverse Logistics

By Bernon, Mike; Cullen, John et al. | Financial Management (UK), February 2009 | Go to article overview

Supply-Chain Management: Mike Bernon, John Cullen and Jonathan Gorst Explain Why Financial Managers Can Play a Key Role in Reducing the Costs of Reverse Logistics


Bernon, Mike, Cullen, John, Gorst, Jonathan, Financial Management (UK)


Reverse logistics--dealing with returned goods--has become a topic that retailers and manufacturers can't afford to ignore. Total retail returns in the UK have been valued at 6bn [pounds sterling] a year. Some firms can see as many as 30 per cent of their products returned by customers.

Although handling unwanted purchases incurs substantial costs, many firms seem to have inadequate processes in place, so efficiency improvements can have a significant effect on the bottom line. The environmental impact can be serious as well, since reverse logistics operations tend to involve a large amount of lorry movements.

Given this chance to help companies cut both their costs and their carbon emissions, we undertook a project for both CIMA and the Department for Transport to develop a reverse logistics diagnostic and performance improvement toolkit. We published our work in 2008 (an electronic copy can be obtained by e-mailing john.cullen@sheffield.ac.uk). The toolkit enables firms to audit their returns management activities and identify opportunities to reduce costs and waste--and to improve their customer service.

What we found particularly interesting in our research was a recognition among supply-chain managers that management accountants can play an important role in this area. Our workshop discussions with logistics specialists from 40 firms linked to the UK retail industry identified that the support of management accounting information was crucial if cultural changes were to be made. Management accountants can use their analytical skills to highlight the financial benefits of improving reverse logistics processes. Techniques such as quality costing and transparent performance measurement systems have a significant role to play here.

[ILLUSTRATION OMITTED]

The toolkit is based on the nine key themes that comprise the management aspects of reverse logistics:

Cost and performance measurement.

* Avoidance of product returns.

* Process management.

* Physical network.

* Inventory management.

* Information and communication technology.

* Material handling containers.

* Sustainable distribution.

* Compliance with legislation.

In order to illustrate the content of the toolkit, the section focusing on performance measurement is shown in figure 1 on the opposite page. A traffic-light system is used to denote whether the organisation is performing well or poorly in relation to each question. To determine which questions you need to answer, we have identified a minimum standard--a company where returns are always likely to represent an insignificant part of its supply-chain activity and account for a minimal amount of supply-chain cost--and an advanced standard--a company where returns represent a strategic element of its supply-chain activity and account for a significant level of supply-chain cost. Each question includes a performance improvement element, with suggested techniques for change. For example, where red is indicated against a specific question, you can identify relevant performance improvement actions and who will be responsible for taking them.

The toolkit also provides some examples of the ways in which different management accounting techniques can be used to improve performance. The panel on the opposite page features an extract from the toolkit covering quality costing.

We worked closely with a number of firms during our research. One of them, Halfords, has significantly improved its reverse logistics processes. Returns were previously shipped back to distribution centres and "jobbed off" at a cost to the company. Its stores now sell some of the safely saleable returned goods below a certain value as "manager's specials", cutting the number of items flowing back down the supply chain by 40 per cent. The introduction of a customer helpline has significantly reduced the return rate for high-tech products, improving service as well as cutting costs. …

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