Moving forward in reverse

Product returns have become a major headache for U.S. manufacturers and retailers, with an estimated $100 billion in goods being returned every year, according to the Reverse Logistics Research Council. What's more, thanks to the ever-quickening pace of commerce and product obsolescence, returns can drastically cut into a company's bottom line. Though managing returns is still an inefficient process for far too many companies, the good news is that some shippers are restoring balance to their supply chains thanks to some forward-thinking on reverse logistics.

Best Practices in Distribution: Reverse Logistics

For Logitech (www.logitech.com), a $1.4 billion maker of computer devices such as mice, joysticks and keyboards, synchronizing supply and demand is a constant challenge. Returns often represent 10% or more of all outbound shipments, notes Gray Williams, the company's vice president worldwide of supply chain. The challenge, he says, is to keep inventory moving because, for a high-tech company like Logitech, "Price erosion is the silent killer."

Logitech has embraced a process it calls progressive dispositioning. The goal, Williams says, is to "continuously identify and disposition excess as early in the cycle as possible." Dispositioning includes repairing, refurbishing, liquidating, and recycling/scrapping. For Logitech, part of the returns process involves WCTBid.com, an online site that dispositions excess inventory through various channels, such as intranet auctions.

Williams emphasizes the importance of defining metrics to measure the success of reverse logistics activities. Logitech, for instance, uses an excess index that calculates the cost of doing nothing, i.e., how much money the company stands to lose by not properly dispositioning its returned/excess products:

period costs + [price erosion factor x (excess in DC + excess in channel)]

Period costs include warehousing, standard revision costs, maintaining excess & obsolete reserve, and the cost of capital. The price erosion factor depends on the company and the products, but for his example Williams uses 1%. If, to continue the example, a company has $40 million in current excess inventory + $30 million excess in the channel, multiplying that $70 million by 1% equals $700,000. Add to that the total period costs — Williams suggests $1.3 million — and in that example, the cost of inaction for one month is $2 million.

For obvious reasons, then, Logitech is continuing to move forward with its product recovery operation.

Road Runner Sports (www.roadrunnersports.com), a multi-channel retailer of running shoes, has to deal with about 500-700 returns per day, or roughly 140,000-150,000 per year out of 1 million packages sold. The company, which primarily sells through its catalogs but also offers a website and three retail stores on the West Coast, considers customer service one of its core competencies. The question became: How do you improve service to customers who are returning products, not purchasing them?

To begin with, Road Runner's customer service reps aren't merely order takers. When a catalog customer calls in to place an order, they get a personal consultation from a service rep about the types of running shoes that would be most appropriate for their fitness regimen (e.g., outdoor dirt trail running or indoor treadmill? A couple miles a week or 10 miles a day?).

"Our staff does a good job recommending products," explains Jennifer Melzer, customer care manager at Road Runner. "It's amazing that they can recommend shoe sizes for running shoes over the phone so accurately, but they get a lot of training." That kind of service pays off, as Road Runner's return rate is 12%, well under the industry average of 15-20% returns, Melzer notes.

Even so, 150,000 returned products could add up to a lot of unhappy excustomers if the returns side of the transaction is an ordeal. To keep everything running smoothly, in January of this year Road Runner adopted the SmartLabel from Newgistics Inc. (www.newgistics.com), a provider of returns management solutions.

The SmartLabel is a pre-paid, preaddressed, bar-coded return label that a customer can remove from their purchase invoice, put on their package and drop it off in any USPS mail box. Previously, customers had to pay for the return postage upfront and wait in line to mail it at the Post Office, Melzer explains.

The returns are then consolidated and passed on to Newgistics. "At that point Newgistics tells us which orders are on their way back," she says, "which allows us to communicate with our customers earlier than ever before." Road Runner sends the customers e-mail updates to inform them the status of their return, which has helped reduce the volume of calls in its call center from customers wondering about the status of the return. The total number of calls has dropped 10-15% in the past year, and Road Runner attributes part of that reduction to the SmartLabel program. Current indications are that customers like the ease of use of the SmartLabel, with 70%-80% usage, Melzer notes.

Road Runner has also found a way to generate profit from returns.

While new and unused shoes are returned to the warehouse, Road Runner has also found a way to generate revenues from its returns by selling slightly worn products at dramatically reduced prices in its retail stores rather than disposing of it. "Customers love it," Melzer says, "because the price is right."

Three years ago, when $27 billion specialty retailer Best Buy Co. Inc. (www.bestbuy.com) benchmarked its reverse logistics capabilities against other companies, it became clear that to become best-in-class would involve investments in systems, processes and physical infrastructure. "We decided that processing returns was not something we wanted to develop a competency in," remembers John Jordan, Best Buy's director of logistics, "but we wanted to align ourselves with somebody that did have that competency."

To that end, Best Buy turned to third-party logistics provider Genco Distribution System (www.genco.com) to integrate a centralized returns management process that includes Genco's reverse logistics software. Thanks to going the 3PL route, Best Buy's in-house processing costs have gone down by about 50%, says Jordan.

The returns process begins when a customer brings back a product that is defective, he explains. Those defective units are consolidated at the stores, and are taken to one of 15 consolidation points, which also serve as Best Buy's metro area home delivery centers.

"Store returns are consolidated until we build truckload quantities, and then we send them back to one of our two return locations," Jordan says. It's worth noting that when the retailer first began working with Genco, they performed a network analysis focused on both the inbound and outbound components of defective product returns. As part of that process Best Buy was able to reduce its return locations from four to two — one in Brownsburg, Ind., and one in Fresno, Calif., and both managed by Genco.

Genco receives the products at the return centers, consolidates them, and ultimately submits the returns to the supplier for a return authorization.

Using Genco as a third-party allows Best Buy to quickly receive product, build it, consolidate it and ship it out, Jordan says. In addition to the cost savings (Jordan declined to be specific, but noted they are significant), Best Buy has gained by having the returns area develop into an operation that is running very well, he notes.

"We used to have a internal team of upwards of 10 people that managed the returns process," Jordan adds, "and now we have just a couple people working closely with Genco to monitor returns. We've been able to redeploy and refocus on the many projects that are out there to improve our supply chain.

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