Turning Returns into Cash
Studies show returns are three to four times the cost of
outbound shipments. Time to get some money back.
by Tom Andel, chief editor,
and Mary Aichlmayr, contributing
editor
If the backward supply chain
looked the same as the forward supply chain, everyone could afford to be
masters of reverse logistics. Unfortunately, they’re two different
animals, both difficult to tame. Just as unfortunately, the customer doesn’t
care about your challenges. Nor will regulatory agencies in the U.S. as they
start mandating that companies take back and deal with what they send out
— both product and packaging.
Returns may never have been a big
issue for you, but times are changing. If your company is growing, chances are
the number and variety of products you handle are also growing. Customer
service demands are rising. Competitors are proliferating. More than ever, how
you manage the reverse supply chain will set you apart from competitors and
keep your company’s growth from becoming cancerous.
There are several variations of
the reverse supply chain, each of which can lead to multiple outcomes:
• Repair;
• Remanufacture;
• Recycle;
• Resell.
These outcomes represent
low-hanging fruit for companies that learn how to take advantage of them. Some
companies exist solely to help you harvest the crop.
Profit by asset recovery
Though cost reduction should be a
goal of any reverse logistics program, asset recovery is the real hidden gem.
Better asset recovery will help to squeeze profit out of returns, which are
notoriously costly.
“When businesses were going
gangbusters, no one cared about returns,” says Dave Hommrich, CEO of ReturnCentral,
a third party dedicated to processing returns.
“Now that top lines are
taking nose dives, manufacturers are looking for ways to save money, and
there’s a lot of opportunity in the reverse supply chain. These companies
can get 50 percent more value for things being returned. When you look at
volume, you have to improve recovery rate by only five percent or 10 percent
and you’re talking tens, if not hundreds, of millions of dollars. [The
reverse supply chain] is one of the last places where there is still a lot of
easy money to be saved.”
ReturnCentral’s solution is
called ReturnMatrix. This software suite manages returns based on information
collected from the user. The inbound returns management module automatically
determines approval or denial of the return based on the business rules engine
set up by the client. With the returns processing management module, status
changes are reported to help trace product moves between receiving, inspection
and pre-disposition. The outbound returns management module issues alerts when
criteria required to execute disposition options are met.
Through dynamic decision-tree
technology, the solution determines the ship-to location and optimal carrier.
Outbound transportation is arranged through the company’s shipping wizard
or by linking to an internal transportation management system. It also closes
the return out of inventory and triggers appropriate financial reconciliation
or settlement. An advance shipping notification (ASN), containing the product,
shipment and return-specific information, alerts the receiver that a return
shipment is in transit and due to arrive at a specified time.
Mining the data
“Reporting capabilities
allow companies to access reports, tracking returns by criteria such as volume,
item, buyer, reason for return, and ultimate disposition,” Hommrich
explains. “Companies can use these data for product enhancement or
redesign, budgeting, forecasting, and product recalls.”
This is a fairly sophisticated
solution, but, depending on your company’s size and order volumes,
sophistication is not a requirement to handle returns, according to Dale S.
Rogers, professor of supply chain management, director of the center for
logistics management, University of Nevada, Reno, and chair of the Reverse
Logistics Executive Council. The main criterion for reverse logistics
management is the ability to make decisions quickly.
“In this exception-driven
process, many decisions have to be made,” Rogers adds. “You
don’t have to spend a million dollars to fix your returns problem. Rules
can be on paper. But the more information you have, the better off you are. In
many companies, returns represent an area where there’s cost and profit
leakage. Dispositioning should be done before product gets to your dock. [In
the retail supply chain] retailers can signal suppliers what’s coming
back.”
Indeed, to master the reverse
supply chain, you need a master of the returns process — someone
dedicated to synchronizing the flow of returned products with the flow of data
to appropriate points in your information stream. This job must be entrusted to
someone in your organization, not just to a system.
“That person needs to
determine why a product was returned and what to do with it,” says Jane
Boon, industry analyst with Catalyst, provider of logistics execution systems.
“Some of that can be automated, but there’s some inspection that
will have to be done to best determine what to do with returned goods. One of
the greatest values that can be gleaned from this is an understanding of why
something came back. Was it a quality problem? Were the stores improperly
stocked? Was there a labeling issue? If you can capture that information, you
can fine-tune your operations to a greater degree. You can provide your company
with a lot of data regarding what products are succeeding or failing. It shows
where problems might be arising — perhaps with engineering, manufacturing
or distribution. This information loop could add a lot of value.”
Tech challenges
The value of data can only be
realized if your information system is designed to handle it. The problem is,
those systems that have been designed from the ground up to handle reverse
logistics are usually distinct from your company’s Enterprise Resource
Planning (ERP) system, and, therefore, not as effective as they could be.
“You need technology that
recognizes the way you manage supply chain management in reverse is different
from the way you do it in a forward sense,” says William T. Walker,
supply chain architect for Agilent Technologies (previously Hewlett-Packard).
“There are pieces of technology that are identical in both directions,
like bar code and transportation management, but in the reverse path you
typically deal with a higher content of hazardous material.”
The nature of product flow is also
different.
“In reverse logistics, the
flow is a bit sporadic and the people who do it well try to keep stuff moving
all the time,” Walker adds. “The people who don’t do it well
take a false economic approach and say ‘We’ll let stuff accumulate
so we get a full truckload or full palletload or full container load.’
That means the system is without inventory in key places.
“Let’s say
you’re a repair depot and you have repair technicians whom you count on
to do so many repairs a week. If you don’t have a flow of defective units
coming in to be repaired, then the number of people you have ready, willing and
able to do those repairs is out of synch. If you have people in the business of
doing separating, smelting and recycling, and you’re not continuously
feeding them a waste stream to deal with, that capacity is not being used. This
can create more of a problem than what it saves in expenses.”
Finding outlets
Third parties like Genco have
leveraged the pain of reverse logistics by helping customers manage both the
forward and reverse streams. Part of the solution lies in technology, but a bigger
piece is the physical infrastructure. Genco offers value-added service centers
equipped to build displays, offer postponement for mass customization of
product and do special packaging. It dovetails returns into those capabilities,
according to Buzzy Wyland, president of manufacturing services for Genco.
Genco’s WMS handles credit
reconciliation and disposition management for clients. Forward and reverse
streams are both managed by a common system.
“Returned product
isn’t like fine wine — it doesn’t get better with age,”
Wyland says. “You need to shorten the cycle time as much as possible and
turn those unproductive assets back into productive assets as quickly as you
can.”
Genco’s R-Log program is
integrated with its WMS. Genco workers trained on global product standards
input quality characteristics to the system as returns come in. These products
can then be remarketed all over the world in secondary markets offshore.
Some third parties, like Dealtree,
help companies liquidate their returns via online outlets. According to Paul
Fletcher, Dealtree’s president, auction management maximizes the return
on distressed or end-of-life goods.
“Traditional bulk
liquidation — selling 2,000 units to a few customers — yields a
return of 10 to 20 cents on the dollar,” he explains. “But
liquidation should not be a decision point that’s made once a month. We
want people to be more proactive. Ship to us once a week and we’ll test,
recondition, categorize missing parts and assess cosmetic defects. We’ll
put product on a platform where it will get the highest market value. A
thousand units can be broken down and sold to 1,000 customers individually,
yielding a much higher return.”
Dealtree has partnered with
ReturnsOnline to do the physical handling, testing and disposition. This
provides an additional benefit to the client: information. Who returned the
product? Why? Such market intelligence can help keep existing customers and
capture new ones.
It pays to be kind
All this being said, maybe you
just don’t want to bother with housing and handling returns. Why not give
them away?
That’s the idea behind Gifts
In Kind International, one of the world’s largest charities. It takes
overstock, excess or out-of-date inventories from retailers, computer
manufacturers, cosmetics firms and healthcare companies, and delivers them to
charities, primarily in this country. Currently about $700 million in product
is flowing through the Gifts In Kind supply chain.
“You can take the write-off
sooner, and because it’s a charitable situation, you get to deduct twice
the cost you have sunk in the products,” says Roger Kallock, chairman of
Chagrin Consulting Associates and a member of the Gifts In Kind board of
directors. “You also generate public good will, and all the benefits that
come with that.”
According to Susan Corrigan,
president and CEO of Gifts In Kind, the organization manages product-giving
programs for 40 percent of the Fortune 500. To date, that represents about $3
billion in products donated over the past 20 years. Those products are given to
a network of more than 50,000 non-profits in the U.S. and around the world.
Typical donations include seasonal
merchandise and returns from customers, all things that are perfectly good and
able to be used, but would probably not sell through to the normal marketplace.
Firms can designate the type of charity they’d like to receive the items,
and Gifts In Kind will find appropriate matches using its database of 50,000
charities.
“There may be three or four
charities identified; we’ll call them to determine who wants to
participate,” says Corrigan. “Then on a weekly or monthly basis, or
if it’s a one-time opportunity, at a designated time, it will pick up the
merchandise and distribute it according to the guidelines we share with
them.”
That’s what happens at the
local level. There are also programs affiliated with Gifts In Kind that manage
all the pickup opportunities in a city, then distribute donations to agencies
in those regions or take them back to their own distribution centers so that
charities can come and pick products up as needed.
The result is a win/win for
companies and charities.
“It improves the community
in which a donor company operates, but the companies also save reverse
logistics costs from their retail operations, not to mention the handling costs
when returned product gets to the DC,” Corrigan concludes.
“Secondly, there are environmental savings. Companies save by not having
to destroy or dispose of that inventory. What you get for selling at a penny a pound
is overshadowed by the recovery costs. Finally, there’s a tax reduction
of up to twice the cost. So if you add all those things together, it is better
for some companies to donate than it would be for them to handle all that
product back through their normal marketplace.”
Full-time job
If your company is growing,
everything about it is growing — including the cost of returns. By
dedicating someone (from a third party or homegrown) to controlling these costs
and collecting data on them, you can save a significant amount of money. Joan
Starkowsky, president of Roadway Reverse Logistics, says asset recovery is
getting so important, there’s even a new title for those who perform it:
investment recovery managers.
“A lot of used parts are
more profitable than new,” she concludes. “Equipment leasing is
also becoming more attractive. Now is the time to look at returns. They
represent a big opportunity for customer satisfaction. In fact, those companies
able to make them a non-issue for the customer will be more competitive.” MHM
Take a Lesson from McKesson
The average pharmaceutical product
costs more than $60 per bottle. Some are worth more than $1,000. If you were a
logistics manager for a pharma wholesaler, responsible for handling the return
of expired and defective lots from stores, you’d also want to make sure
manufacturers returned the costs of those products, wouldn’t you?
The bigger you are, the harder it
is to coordinate those returns. Take McKesson, for example. It is one of the
three larger wholesalers of prescription and over-the-counter pharmaceuticals.
It used to be that its 33 distribution centers were responsible for returning
product to manufacturers to get credited. That meant 33 different return
streams.
The cost of that alone provided a
great motivation to outsource returns management. And that was McKesson’s
initial motivation to hire USF Processors and consolidate the function. But
Scott Bradford, vice president of reverse logistics for McKesson, says his
company soon realized that the greater value of outsourcing is to improve
recovery of product value from the manufacturer.
When McKesson DCs ship returns to
USF, the 3PL scans them, sorts them for different dispositions, transmits a
request for return authorization to the manufacturers, then ships the products
back to their makers. This saves the wholesaler accounting, administrative and
transportation costs.
“The differentiator is how
much cost you can recover by the data the third-party provider is delivering
and the efficiency by which it’s moving product through the
channels,” Bradford adds. “When choosing a third party, people
should be motivated by accelerating return process cycle time. There will be
cost reduction, especially in terms of transportation, but the biggest
motivation should be to maximize recovery. You cut the time it takes to get
product to the manufacturers while adhering to many different policies. Now the
process is simple for us: throw the product in a box, send it to the third
party, and let them work through the idiosyncrasies of each supplier.”
Many industries can learn from
McKesson’s lesson. Whether you work with a third party or keep returns
in-house, you’re better off if that responsibility is in fewer hands.
They’ll react quicker to problems and provide clearer resolutions.
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