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:
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.”
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.”
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.”
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.