Five steps to managing material returns

Many building supply businesses I visit have a sacred burial ground someplace on the yard or in a warehouse resulting in tens of thousands of gross profit dollars being lost. This grave yard is where they stack returned materials.

The first corrective step in not losing profits to returns is to develop a system with which to manage the returns and to measure them. The most efficient dealers I work with hold returns to as low as 2.5% of sales, but it’s not unusual to find businesses that allow returned merchandise to reach more than 5% of sales.

A return in and of itself is not so bad; returns are simply a cost of doing business in our industry. But when returns get out of control they eat into the bottom line.

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Regardless of whether you enforce a restocking charge, all dealers need a firm return procedure that both delivery drivers and receiving personnel respect and follow. How many times, as an example, has one of your drivers unloaded returned material to a spot that was convenient for him, but no where near the designated return area? Then to make matters worse, he forgot to tell a receiver where he unloaded the material and which job it was picked up from.

Every building supply business needs someone on its team who is talented at designing systems and procedures. As a business grows, the more important well-designed systems and procedures become. But systems are not an end in and of themselves. Without someone to enforce them, they usually fail.

An effective material return procedure

Step 1

Drivers are responsible for keeping a supply of customer return forms in their trucks at all times. When a customer asks a driver to pick up material for credit, the driver will fill out a three-part merchandise return form. One copy will be left with the customer, one copy will be given to the yard foreman and one copy stays in the book.

If the customer were to call into the office and request that material be picked up for credit, the salesperson taking the call will fill out the customer return form and give it to the yard foreman to execute.

Step 2

After picking up the material from the jobsite, drivers will return the material to a designated spot in the vicinity of where it was originally picked up.

Step 3

The yard foreman is responsible for determining if the returned material is resalable and note his decision on his copy of the form. He will make a photocopy of his copy of the form and forward the photocopy to the designated buyer. The buyer will receive the material back into inventory within a maximum of four working hours.

Step 4

The yard foreman is responsible for getting any resalable material placed back into inventory. He will label any material that cannot be resold with a special class code and have the material placed in a designated area for damaged merchandise. The merchandise return form number is also written on this label.

Step 5

The buyer will write off unsellable material by invoicing it to a special customer account for Damaged and Obsolete Goods (DOG) at zero sell price. This procedure not only writes off the DOG material, it also provides an audit trail. The buyer will also handwrite a price on the class code label. If the material is sold, sales personnel will use the special class code and the handwritten price. Since the material has already been “written off,” the price it’s sold for becomes 100% gross profit.

The buyer’s assistant is responsible for researching the item’s history and for writing the reason for the return on his copy of the merchandise return form.

While this system is effective, and it does work, it is not the only system you might choose. What’s critical, however, is that someone in your company designs a workable system and makes sure the system management approves is enforced.