We were thinking here about how Wal-Mart wants to eliminate all returns from its suppliers over the next 2-3 years and it reminded us that even though you expect the carrier or supplier to cover the cost of damaged products — it still makes sense for buyers to take an active role.
Here’s what our consultant Fred Parkinson had to say on the matter.
When products or merchandise that arrive at your loading dock damaged – what do you do? Could the damage have been prevented? What are the actual costs, both direct and indirect, of managing product that has to be returned or discarded?
OK, you can’t control weather or sloppy package handlers, but you can write packaging specifications into your product orders. Purchasing should call on other departments within the company to help develop specifications and shipping requirements that will insure the integrity of the product when it arrives from the supplier.
Your supplier should also be used as a resource to develop the packaging and shipping requirements because they likely have dealt with damage returns in the past.
Your parts supplier may guide you to its corrugated supplier, who will likely have a packaging engineer or designer whose services would be available to you free of charge.
The transportation carrier should also be able to provide or recommend shipping solutions that will get the product to your dock without being damaged. Maintaining good supplier relations will help you in times like these when you need to draw on their expertise.
The hidden costs associated with returning damaged product may include:
· Warehouse labor costs, both at your facility and at the suppliers plant, that result from handling the damaged goods three or four times.
· Administrative labor costs of notifying the supplier of the problem, submitting claim forms with the carrier, arranging for pick ups and expediting a replacement shipment.
· Inventory costs associated with carrying a larger safety stock if the problem is a reoccurring one. If the product is being imported the pipeline will be substantially longer, which will also have a big impact on how much safety stock has to be carried.
· Accounting labor costs to process and handle multipliable invoices and credit vouchers.
· Cash flow issues while claims are being settled or waiting for credit.
· Lost sales revenue from being out of stock and customer dissatisfaction which may result in loss of business long term.
All good suppliers and carriers will cover the obvious expenses, but when you calculate these hidden costs – you can see why it’s in the interest of buyers to take active steps to prevent damaged goods from arriving at their plants.