In the U.S. alone, returned products are a $100 billion annual headache, when you factor in the logistics costs of transportation, handling, processing and disposing of $50 billion worth of returned products. “Research suggests that returns from customers reduce the profitability of retailers by 4.3% and manufacturers by 3.8%,” says Julian Mosquera, director of LCP Consulting.
The numbers make it difficult to understand why many companies don't manage returns at all. On the other hand, it's easy to make a case for outsourcing management to a third-party processor.
“There are a number of reasons to outsource returns,” states George Kurth, director, supply chain and logistics with Hyundai Motor America. “It gets the process out of our warehouse,” Kurth says. “The third party consolidates parts and ships full containerloads to save transportation costs. Since they serve other auto manufacturers, they bring expertise we don't have,” he adds.
The third party in question — Roadway Reverse Logistics — retrieves Hyundai cores (reusable parts) for remanufacture of transmissions and other parts. Dealers input core returns into the Roadway information system, which generates a bill of lading, signaling Roadway to make a pickup. At its returns centers, Roadway inspects cores and notifies Hyundai if a part is not up to specs.
As part of the inspection process, Roadway keys in dealer credit information — $1,000 per core to encourage their return. “When we get information from Roadway, we immediately give the dealer credit,” says Kurth.
“Reverse logistics is extremely important in the automotive industry,” he continues. “We all allow dealers to return parts they cannot use. We sell them to another dealer or put them back in stock. We can use our outbound dedicated delivery service to return parts at little additional cost.”
Perhaps the greatest opportunity for savings is managing the reverse inventory flow, suggests Kurth. From the time a dealer keys returns into Roadway's system, it takes, on average, 45 days to repackage, ship and put it back into inventory. Hyundai's lead time on new parts from Korea is 41 days. “Once our system knows there is a return on its way, we key it into our inventory so we can reduce the new parts order,” he explains.
“The best scenario is to look at returns as a separate demand stream and forecast the number of returns,” continues Kurth. “For example, if our 640 dealers order 100 pieces per month of Part A, and each dealer returns four per month, that's more than 30,000 per year. If we can forecast what's coming back, we can factor it into inventory management. That's our goal for 2005.”
Scott Bradford's goal may take longer to achieve. As vice president reverse logistics with pharmaceutical distributor McKesson Corp., his vision is certified returns processors. He believes processors are more dependable today than they were five years ago and certification would improve the trust factor. Trust is necessary so the huge amount of unsaleable pharmaceutical product currently returned to manufacturers could be counted once and disposed of, eliminating multiple touches.
Ninety percent of McKesson's revenue stream is from pharmaceuticals, a market where expired returns are valued at nearly $2.5 billion. USF Processors handles McKesson's return of expired product to manufacturers.
“We outsource to simplify,” Bradford explains. “There are 500 manufacturers, all with different policies. Returns policies change, manufacturers merge. It's very complex and it's not our core competency.”
McKesson targets reducing costs in the entire supply chain by minimizing the number of touches. “Our customers and wholesalers use one group of processors. Manufacturers use another set. That can mean handling returns two to four times,” notes Bradford.
“We're working with our suppliers to use the same returns processor and share the cost,” he adds. “Instead of bringing it back to our warehouses or returning it to the manufacturer's processor to count again, what if we could trust each other to properly dispose of product earlier in the process?”
Trust in the relationship is important, but systems also play a critical role in the decision to outsource returns management. John Jordan, director of logistics with consumer electronics retailer Best Buy Co. Inc., realized the company needed to invest in or find systems in a partner. The resulting relationship with Genco has brought significant savings.
“When a customer returns a purchase to a Best Buy store, it is either returned to the vendor or sold in an alternate market,” Jordan explains. “Returns information transfer starts at the store, flowing to us and to Genco daily. They have the information before the goods arrive at their processing center.”
Rules for disposition are in the system, he notes. “For example, if a customer is returning a DVD player, the correct disposition of the product comes up as the transaction closes.”
Jordan finds this reverse logistics process has broader applications. “Historically, we just used the returns process for defective products. Now we also use it to return new product to vendors. When time is of the essence — for example, a vendor agrees to take back a large amount of product, but must have it quickly for full credit — we can process these returns more rapidly through the returns center than through our warehouse,” he claims.
Where speed and control are critical, radio frequency identification (RFID) is a hot technology solution. “Many returns come back to Best Buy minus their cartons. We add a new RFID tag at the point of return,” Jordan explains. “For us, the real value is having a system to track a product while it is under our control. If we can scan an item's license plate, that improves our accuracy.”
“RFID will completely change the deal,” insists Dale Rogers, professor of supply chain management with the University of Nevada, Reno and chairman of the Reverse Logistics Executive Council. “Once there are RFID chips on everything, companies can know where the returned item was purchased, when and where it was manufactured, and the serial number.”
“Third parties and software companies are boosting their investment in returns management systems as they deal with RFID. Everyone is scrambling to figure out how to make RFID work. It gives more capability, but we need to know what we want to do,” adds Rogers (see “Keeping it simple” on p. 26 for a discussion of smart labels).
The first challenge for many companies is knowing their actual return rate and whether or not it's acceptable. The Warehousing Education Research Council commissioned James Stock, professor of marketing and logistics with University of South Florida, to study the numbers.
“People don't know what's coming back nor what recovery rate to expect. In our study, companies doing really well are seeing 80% to 90% recovery rates. Average companies realize rates around 60%. For companies doing poorly, 40% is the norm,” says Stock.
“In addition to knowing where it stands in their industry, if a company can collect and analyze returns data — determine the root cause for a return — it may uncover quality or lot-related defects, variations, or design flaws,” notes Emily Rodriguez, vice president-program management with eBoomerang, a returns management software developer. “Companies that track and analyze those data can typically improve customer satisfaction and reduce future returns,” she suggests. “They can create models to improve processes.”
“Once both parties see the reason for returns, they can set up joint task teams to address the root causes,” says Denis Reilly, CEO of USF Processors. “In working to reduce overall costs, they are becoming stronger partners.”
Another challenge is recognizing reverse logistics must be an end-to-end process. “Many companies neglect the front end,” explains Rodriguez. “They need to manage issues such as product validation and checking the warranty or contract. It can be labor-intensive to look up the commitment as you respond to a customer query,” she adds.
The wealth of new systems from eBoomerang and other providers facilitates collection and analysis of data. For example, both eBoomerang's and USF Processors' systems can handle rules customized for the client and offer rapid access to data for fast decision making.
Companies that ignore this complex area of logistics management are leaving a lot of money on the table. And the returns issue can negatively affect relationships between manufacturers and retailers. “When goods come back, no one is happy,” says Reilly. “There will always be returns, but the volume can be mitigated.”
And that can mean fewer headaches and more dollars for everyone. LT
Reversal of fortunes
“The returns button brings access to a screen that creates return labels and gives rules and a database of what's returnable and what's not,” explains Joan Starkowsky, president of Roadway Reverse Logistics. “They cannot process a return for a red-flagged item.
“It's a way for dealers to better understand the requirements and prevent unauthorized returns,” she continues. “Dealers are happy because they don't have to have returns expertise on staff.”
The Roadway application has automatic links from retail management systems directly to customer accounting systems. This link populates their credit system electronically. “It automates giving credit and we can even link directly to a company's enterprise resource planning (ERP) system,” adds Starkowsky.
“We consolidate volume loads to re-manufacturing facilities, sending along our inspection data. By providing visibility to the inspection results, they know what's wrong with the part and it's already sorted according to the client's criteria,” Starkowsky says.
Untangling returns on the web
eBoomerang's software can reside with the manufacturer, distributor, or a third party, using the web for access. The system can direct the transportation provider to pick up product. When picked up, the software sends an advance ship notice so the receiving facility knows what is coming. The system follows the embedded rules to determine disposition of the product.
“It works on logic statements and rules, similar to the process a person goes through to make a decision, but it's automated,” says Rodriguez. “If, for example, a product is near the end of its warranty and is broken, it will be sent to disposal — and the customer has complete visibility throughout the process.”
To facilitate implementation, eBoomerang has built rule constructs including processes and options. “When we go into a new account, we essentially fill in blanks,” says Rodriguez. “They may be 80% to 90% up to speed at kickoff. They can easily modify as they develop historic data.” Companies typically realize $12 to $13 million in first-year savings, Rodriguez claims, achieving payback within three to five months.
Reverse logistics is