Returns inventory: Its influence on total productivity management and working capital management

With increasing competition and a growing emphasis on customer satisfaction, companies are pursuing policies that enable them to attract and retain a customer base. One such strategy is to allow customers time to assess a product and return it if it is not in alignment with their expectations. As beneficial as such a strategy can be in terms of growing the customer base, it can have potentially adverse effects too, one of which is a growing returns inventory. Any sale made cannot potentially be considered as such until the time for returns is past. Given inventory is considered to comprise working capital (WC) by conventional accounting standards, returns inventory can be expected to impact cash conversion cycle (CCC), which is used as the basis for Working Capital Management (WCM). The same holds true for the theory of Total Productivity Management (TPMgmt), which places WC front and center based on its ability to influence productivity and profits. This paper explores the effects of returns inventory on both CCC and productivity with the aim to unearth synergies between TPMgmt and WCM. In doing so, it explores the common grounds for both management theories based on the Cost of Quality framework.