Why Reconciliation Matters

  • Simplifies the RTV (Return to Vendor) process
  • Determines revenue leakages
  • Identifies breaks in the chain of custody

Every retailer and manufacturer faces the mounting challenge of managing product returns. In order to recover the highest profits, while minimizing losses, it is vital to create an effective strategy that ensures companies have visibility to where every dollar of inventory exists at all times.

It’s easy to discredit, or dedicate less focus, to returned items, as they are often perceived as more of a cost than a revenue driver. However, many opportunities exist in new markets that retailers or OEMs may not be catering to.

Sounds great in theory, but what about in practice? Well, it begins with visibility as to how, where and for how much these products sell. As robust IT solutions become readily available to implement, there is no reason why retailers or OEMs should not be reviewing returns data in real time. This visibility, coupled with the financial payment process, is known in the industry as Reconciliation.

Despite the fact that returns are rising exponentially, few companies actually conduct this vital step in returns management, and if they are doing it, they often neglect important steps. Some companies try, but often use antiquated systems that lead to increased overhead costs, errors, and mistrust between vendor and seller.

What is returns reconciliation?

On an accounting level, reconciliation refers to the task of comparing two sets of records to ensure everything matches up. At a returns level, advanced reconciliation creates physical and financial transparency for every product through its entire life cycle.

With returns reconciliation, retailers and manufacturers can view external data from marketplaces, carriers, banks, and merchants and combine it with internal data on returns disposition, seasonality, and other inputs. Using this data, retailers & OEMs can leverage both internal and external experts to build the best returns plan for them.

At this level, reconciliation allows companies to see not just where the inventory is, but who touched it, why it was touched, where it was moved to, and how it was sold. Every event, both financial and physical is captured to give organizations the full view of inventory at any given time.

Returns reconciliation and management also matches returns inventory and account reconciliation for payments that may be due to the seller or supplier. This allows either party to dispute returns that may not adhere to the terms of their contract.

By making regular reconciliation review part of the company’s suite of best practices, retailers and manufacturers can achieve greater accuracy in their records, prevent errors, and turn losses into profits. The reality is that most of the big players are already doing this, and if they are not, they have plans over the next fiscal year to build this process out.

If the smaller or medium sized retailers and OEMs do not begin to build out their own reconciliation process, it will be even more difficult to compete.

How much do returns really cost retailers?

Retail returns occur about 10% of the time for in-store purchases while e-commerce return rates hover near 30%. This growing issue has a direct impact on profits and inventory control.

In fact, retailers can lose a third of their revenue to returns. In a recent article, Vogue business reported a frightening stat from a California-based fashion e-tailer. According to the piece, Revolve did $499 million in sales in 2018 but reportedly spent $531 million on returns after accounting for processing costs and lost sales. That is a staggering blunder, which might have been avoided through proper reconciliation.

Through reconciliation, companies can account for costs and benefits of:

  • Refurbishing items for resale
  • Obsolescence of returned items
  • Lost warehouse efficiency
  • Shipping costs

For normal businesses, managing return and repairs can cost at least 10% of supply chain costs. However, poor management can cost a retailer even more. The only way to truly gauge how expensive returns are and do something about it, is by tracking and reconciling inventory.

Why is reconciliation Is so important?

1. Improves buyer/seller relationship through RTV

When retailers and manufacturers agree to do business, they create a contract that outlines the activities and terms that each agrees to fulfill in the event of returns and damaged goods. Contracts undeniably affect profitability due to their emphasis on processes that drive revenue and expenses. Yet, most organizations have no idea how to easily locate their top 50-100 contracts, let alone determine if the terms are being followed. This can breed a relationship of mistrust that only contract management and transparent reconciliation can reverse.

With reconciliation, both vendor and seller have enterprise-wide visibility into the physical chain of custody of every product, its quality status, and the costs involved in moving it from point A to B. There are no secrets and no one feels slighted. This is paramount in two parties continuing to grow their mutually beneficial relationship.

2. Determines revenue leakages

Returns reconciliation is the most necessary step to check revenue leakages and diagnose the health of the business. Through reconciliation software, companies have a record of every time a product was touched. This allows them to evaluate relationships, technology implementation, overhead, and logistics to determine the resale value of returned products. Only by knowing how many touches they can make before a product loses value, can retailers and manufacturers create a plan to cut costs, improve efficiencies and determine the most optimal disposition strategy.

3. Identifies breaks in the chain of custody

Sometimes questionable transactions are accidental, such as unintentionally mishandling products that lead to damage in transit. While unintentional, these mistakes can severely diminish the resale value of the product.

Other times, inconsistencies are a direct result of shady dealings. Sadly, employee theft costs businesses in the U.S approximately $50 million per year. If businesses aren’t vigilant about conducting regular reconciliations, they may be facing unnecessary loss.

But by frequently analyzing every touchpoint in a returned product’s lifecycle, companies can swiftly identify shady transactions and mistakes that could be costing them revenue.

Why reconciliation software is the best method

Infrequent reconciliations using antiquated tools give little room for businesses to scale up and have extremely limited functionality. Beyond a certain threshold, it’s nearly impossible to conduct transactional matching. Not to mention the fact that physical tracking becomes almost impossible with often-limited transaction reports.  

Alternatively, reconciliation software automatically accounts for every returned unit both physically and financially, allowing for full transparency and a way to ensure that every cost, down to the penny is reconciled and allocated to the appropriate party. The best logistics reconciliation software works with the existing enterprise CRM or financial software to provide this data, and keeps existing internal resources focused on their competencies.

To ensure enterprises keep returns as a source of revenue and not a cost, all of this ultimately needs to be translated into a payday. Whether organizations want to track revenue on an accrual or cash basis, or prefer results shared weekly by FTP or live through dashboards, reconciliation software should deliver customized solutions aimed at delivering accurate, timely, and profitable payments.

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Conclusion

In any business with a supply chain, there are errors, unexplained discrepancies, and unknown efficiencies. Quite often, these anomalies can be minor. But sometimes, they may indicate institutional failures that cost serious profits. Whatever the case may be, there is a lot to be gained from regular reconciliation.

The best part of returns reconciliation is that it ties the under-the-hood bells and whistles of reverse (and forward) supply chain data points into what retailers and manufacturers are ultimately after – improved recovery through a new source of RTV and market-driven liquidation revenue.