Putting Returns to Work

Sept. 1, 2004
How do you transform returns from headache to brainstorm? Here are some "outside-the-box" reverse logistics models.

Part 3 in our Reverse Logistics Series

"We're on the threshold of what I think will be a huge outpouring of investment in material handling logistics and its associated networks, largely because we're becoming more competitive and people are realizing that waste is the cost, not material handling."

Said like a true material handling industry insider — except this was said by an insider of the George W. Bush administration.

Jim Connaughton is chairman of the White House Council on Environmental Quality, and the president's senior environmental adviser. As such, he oversees environmental policy development. In fact, it was through his influence, as well as that of the government's Trade and Environmental Protection administrators, that the three R's of reverse logistics (Reduce, Reuse, Recycle) became part of this administration's vernacular. President Bush recently announced that his administration planned to implement the G8 Action Plan on Science and Technology for Sustainable Development.

"We're committed to launching the 3R initiative to encourage more efficient use of resources and material," he said, adding that the initiative would make its world debut at a Ministerial Conference in spring 2005, hosted by the Japanese government.

The first two parts of MHM's series on reverse logistics (see February and May 2004 issues) addressed aspects of all three R's. This article will introduce you to players in the 3R game with a unique approach to making reverse logistics work for them. They're not only reducing waste, but they're increasing revenue in ways that might surprise you.

From product to environmental engineering

It starts with a shift in mindset. Connaughton recalls his encounters with plant managers as he made industrial site visits around the country:

"I would often ask, 'How would you like to be unregulated?'

"The plant manager's face would light up and he'd ask 'How do you make that happen?'

"I'd answer, 'Make no waste.' Then I'd ask, 'How many environmental engineers do you have on staff?'

"The answer would usually be 'One.'

"Then I'd ask 'How many engineers do you have on staff?'

"They'd say anywhere from 50 to 1,000.

"You mean to tell me those engineers aren't focused on eliminating waste from
your process stream?

"The manager would say 'Of course, their day job is to get more product throughput with minimum waste.'

"I'd say, 'Those people are your environmental engineers.'

"As more of our companies have their engineers trained on understanding the environmental aspects of their engineering choices, the more we'll see innovations like remanufacturing and byproduct synergy," Connaughton predicts.


  • A shoe retailer is taking back shoes under warranty and processing them through a returns center (Genco). This center aggregates the shoes and moves them in full truckloads to U.S. based organizations that buy them for $3 a pair, then ship them to Central and South America, where the shoes are sorted and refurbished (adding rubber, restitching, etc.). The retailer is not paying to have the shoes taken away and landfilled. Instead, it is recovering some cash while the organizations that bought them for $3 a pair are selling them for $20 a pair.
  • Fragrance manufacturers will take back unsold fragrances packaged in heart-shaped boxes for Valentine's Day and, through returns centers, repackage the fragrances in a "Just for Mom" box for Mother's Day, adding a free mini-bottle of body lotion.
  • These same return centers will break down "back-to-school" packs containing two combination locks, a locker mirror and a comb, repackage these items individually for clients and either resell them on the salvage market or put them away for the next school year. "We do the same kind of thing for a suntan lotion manufacturer," says Pete Rector, senior vice president of Genco. "That product goes out on a consignment basis in the spring; it's sold throughout the sun-care season; and the deal with the retailers is they'll take back what's not sold. At the end of the year we take back all this sun-care product that has a long shelf life and we'll rebox it in groups of three or in club packs for BJ's or Costco."

Secondary markets

Rector adds that there can be tax advantages for manufacturers who import goods and eventually send them back out of the country to secondary markets.

"If you're importing goods into the U.S., you pay duties," he explains. "Once they've served their useful life, if you export these products back out of the country with appropriate documentation on the import duties that were paid and verification that the same product is going back out of the country, you can recover all or a portion of the original duty paid. That's duty drawback."

"We're committed to launching the 3R initiative to encourage
more efficient use of resources and material,"

- Jim Connaughton, chairman of the White House Council on Environmental Quality,
and the president's senior environmental adviser.

Ron Giuntini, executive director of the OEM Product-Services Institute, says the real opportunity to sell returned and refurbished goods lies in less developed nations. "Most countries have barriers protecting their capital goods industries, and they throw everything including the kitchen sink into these barriers," Giuntini explains. "But these less developed countries, which may not be able to afford new products, can sure afford remanufactured, one-generationoff products. Used stuff costing 20 percent to 30 percent of new can open a huge explosive market for OEMs that choose to try to control it."

High-tech returns

Even high-tech products are being designed for reuse and refurbishment. Cell phone manufacturers design their products so components can be reclaimed, new skins can be applied, and the units can be resold.

"There's a huge market for secondary cell phones," says Dale Rogers, professor of supply chain management, University of Nevada, and chairman of the Reverse Logistics Executive Council (RLEC). "Certainly refurbishment has been a tactic at Xerox for a long time. How much do you use the wheels on the bottom of a copier? You push it in place on the first day you use it and then you hardly ever use them again. Xerox and some of the other copier manufacturers deliberately try to design into their product the ability to cannibalize components. They claim to have saved a ton of money, and they're being a good steward of the world's resources."

Data gathering

Rogers adds that information technologies like radio frequency identification (RFID) and warehouse management systems(WMS) can assist in refurbishment efforts because they help document a product's lifecycle.

"Ten years ago, none of the American auto OEMs was reclaiming used auto parts," he says. "OEMs were letting the auto rebuilders have all that for free. That's not true any more. You can buy genuine GM Goodwrench used parts."

Marc Sherman, director of IT supply chain systems for ATC Logistics and Electronics, relies on information technology to help clients in high-tech industries repair and refurbish. ATC Logistics is a division of Aftermarket Technology Corp. Sherman's segment of the business focuses on providing third-party value-added logistics services for high-value inventory. It does a significant amount of reverse logistics and refurbishment for the wireless industry as well as the automotive industry.

For one client, AT&T Wireless, ATC Logistics receives and refurbishes cellular handsets manufactured by companies like Nokia, Sony and Siemens. ATC partners with Radio Shack in one facility, using a RedPrairie WMS to capture data.

"We've integrated RedPrairie with our customers' host ERP systems in real time," Sherman explains. "Someone will drop the return material authorization [RMA] to us with all the business data and we'll set up the RMA receipt. When the product comes back from the customers we qualify the product, capture the information at the serialized level along with the reason for return and all the other data that come in with it. Then we flow that into the test and repair area where Radio Shack will run that phone through a series of RF tests, refresh it and do whatever component enhancements are necessary, whether that's a buff and polish, etc. That information, which goes on a traveler, is scanned in, and it's captured in one database along with information on part utilization and phone history. From a sheer inventory standpoint you're reducing the cycle time back to the market if you're repairing those units. That reduces inventory carrying costs. You're also capturing data at such a detailed level that you can do a lot of data mining; i.e., your top three failures, or trouble indicated vs. trouble found."

Returns models
Jade Lee, executive vice president of Supply-Chain Services Inc., adds that building a network of secondary markets can help maximize your return on investment in reverse logistics. The data you collect on these markets can help you develop a well-defined and managed market segmentation program, ensuring that these markets don't interfere with your primary markets. Lee says the information technologies described in this article can best be used in the following activities:

  • Testing — Simple testing of returned items can help you generate two or three times more revenue than non-tested items.
  • Repair and refurbish — Although these activities can generate top recovery dollars, they are expensive in terms of setup, machine, tool and technician costs. They might be justifiable for only high-value items.
  • Rekitting and repackaging — For non-defective returns with missing accessories or parts, these activities make products resellable, as do cleaning and relabeling.
  • Parts retrieval and replacement — If you choose not to resell products intact, an alternative may be to harvest and sell the components. Parts retrieval may also prove to be an economical way to inventory parts for warranty or remanufacturing purposes.


You may decide to manage these reverse logistics activities yourself, or leave them to the growing population of niche logistics companies that specialize in them. Even if you don't have the systems or infrastructure to process returns yourself, that's not a roadblock to reverse logistics. But if you can't make the business case for reverse logistics, even a third-party specialist can't help you.

"There are issues around the reverse logistics business that are not easy and make it one of the more difficult things to sell to upper management," says Joan Starkowsky, president of Roadway Reverse Logistics Inc. She identifies the following as barriers to a successful reverse logistics program:

No executive overseer or champion who takes responsibility and drives it.

It's seen as "just a cost," missing the customer satisfaction and service differentiation opportunities.

  • Inability to quantify cost of returns. There are a lot of soft costs, so without quantified data and cross-functional involvement, activity-based costing can be difficult to achieve.
  • Lack of systems/information visibility. If something isn't seen as a core business function, it will get low priority on the internal-programming and budget-expenditure priority list.
  • Silo vs. cross-functional mentality. There's no communication among departments or knowledge as to what anyone else is doing in the reverse logistics chain.
  • Poor manual processes. You can't build a good reverse logistics program on a soft foundation.

    Jim Connaughton, the Bush administration's environmental quality guru, summarizes the case for reverse logistics:

"In this increasingly global economy, the end game of any manufacturer is to take 100 percent of the raw material and produce 100 percent value-added product."

Although that's a lofty goal, you can start small by finding the model that best suits your products and operations. You may need a third-party partner, but now is a good time to rethink your reverse logistics management. MHM


New Life for Old Lift Truck Tires

The market for refurbished tires has been around since the beginning
of vulcanized rubber. Over the past few years, both Goodyear and Michelin
developed their own programs for refurbishing truck tires. Unfortunately,
where lift trucks are concerned, failed attempts to refurbish these tires
created an impression in the marketplace that they were inferior.

Some of the problems tire refurbishers have run into with their products
include spinning, base bands slipping, and steel delaminating from the
rubber. But according to Bryan Nowotarski, president of Renu Industrial
Tire, these issues have been addressed and no longer prevent companies
like his from producing a top-quality product. In fact, dealers can now
use tires as loss leaders in drawing customers for other services.

"Since tires are the first part to wear out on a lift truck, dealers
will often discount the price of tires to get the other service revenue
such as brake jobs," Nowotarski says. "With the remolded tire, dealers
can still offer a discounted product without having to sacrifice their
bottom-line profit. And because we use worn-out tires as the core raw
material of our product, we can offer to our dealers free scrap tire removal.
Most dealers around the country pay a lot of money to get rid of scrap
tires. One of my favorite things to do is take a dealer out to his 40-yard
trash container and show him $40,000 worth of material he is about to
dispose of . I tell dealers they pay just as much for the tires in their
trash as they do for the ones on their shelves."

Nowotarski contends that remolded tires are not cheaper; they're better
tires for less money. And because not every tire is a candidate for remolding,
he's not worried about a market glut for his product.

"The U.S. market can absorb all the product we can supply," he concludes.
He adds a prediction:

"Any product that is originally manufactured with refurbishing in mind
will be refurbished in the future. In the truck tire industry there has
been a recent trend to guarantee not only the original tread life of the
tire but also the refurbishing of that product as well. This came about
when new tire manufacturers realized the potential in the recapping industry
and used that as a way to sell their new tires."

Material Handling Is a Hit for CD of the Month Club

At one time, the music industry's cassette and compact disc business
was booming. Then came the digital age, and downloadable singles made
prerecorded media like tapes and CDs seem outmoded to a good chunk of
the market. You can imagine how that has affected returns in retail music
outlets. But what about mail order music clubs, where the forward and
reverse flow of CDs is this distribution model's life blood? Thanks to
efficient material handling, you can still find "CD of the Month" clubs.
BMG Music is a good example.

Although BMG's demand is off 40 percent from three years ago, a material
handling system that makes efficient use of labor helps justify its existence.

"This returns system was designed to eliminate a lot of manual labor,"
says Dave Piersma, senior director of operations at BMG Music. "Imagine
someone opening a box and having to walk several feet to get the return
into the right container. We had 100 people doing this. Today I run the
returns department with about 15 people. Material handling has made it
cost justifiable to keep the CD club going."

The heart of the material handling system at BMG is a sortation system
from SI Handling Systems. At peak business, this system could move about
57,000 pieces in eight hours — two CDs a second. BMG doesn't use
all that capacity, but the system's accuracy and efficiency are what count.

"This used to be a three-shift operation," Piersma explains. "We run
on two now. We're still making money, but I don't think we'll see the
volumes we did before."

The returns process begins with a visual inspection. Employees stationed
along a belt conveyor remove and open incoming parcels, dropping the trash
into a slot and onto a takeaway conveyor. If the visual inspection by
the employee indicates anything wrong with the CD, the damaged product
is scanned to record that information for vendor reports.

If the product is good, the bar code label on the item is scanned and
the CD is placed, label up, on a conveyor that leads to sortation.

The sorter has 100 pop-up divert stations, 50 on each side. An algorithm
in the software determines the appropriate divert stations for each product.

CDs headed back into inventory pass beneath a scanner (Accu-Sort). Each
SKU has been assigned a position and tote along the sortation line.

"We'll capture all our slow-moving units closer in, and we may get one,
two or 50," explains Piersma. "At the farthest end, where we can get a
pallet on the floor, we will capture pallet quantities. The pop-up sorter
diverts the trays at those points and operators will stack them."

The system will print a return putaway document so these items can be
returned to stock. At the end of the process, a return manifest is generated
with the SKU number and bin location.

Unusable CDs go to a shredder, which will crunch them and send them to
China or India for reprocessing.

"We're considering a new WMS [warehouse management system] in the next
year," Piersma concludes. "Our last big expenditure was three years ago
when we put in a gantry system with nine different pick heads; it covers
about 15,000 square feet. We use that to pick our slower-moving items."

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