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Forward Thinking About Reverse Logistics

Feb. 1, 2007
Returned merchandise, whether in consumer or commercial supply chains, has become a fact of business life. In the highly competitive business world, poor handling of returns can suck the lifeblood from a company.

Third-party providers (3PLs) are relieving some of the pain of returns, even showing their clients how to staunch the flow. Here's what a few reverse logistics specialists are doing today to do more than just take back what someone does not want.

"One of our customers, a manufacturer, was involved in a product recall just before the start of the big holiday sales period" says Tom Sanderson, president, Transplace, a non-asset-based 3PL (Plano, Texas, www.trans "The retailers, his customers, wanted all of the product off the shelf, now. So we managed all of the activity to get the product out of the retail stores and back to the manufacturer."

Reverse logistics is different than being a standard 3PL where all the focus is on moving product out to distribution centers or retail stories. In those scenarios the carrier relationships are all about having full truckloads, or finding intermodal transport, often all going in one direction.

"Bringing it back means working in smaller quantities," says Sanderson. "And that means less than truckload. Plus, it's all moving in a different direction, which means a different set of traffic patterns."

Because everything is always changing with returns, any service provider has to be flexible, establishing relationships with the right carriers and negotiating the best rates to move goods back to a distribution facility. As a non-assetbased company, Transplace negotiates with many carriers to move $2.4 billion worth of freight each year.

"Because of this volume we have a comprehensive network of carriers and transportation rates available to us," he says. In the case of the product recall he cites above, Transplace consolidated returns from many stores into full truckloads, thus saving time and money for the manufacturer.

Small quantities, big bucks
Returns have become a major aspect of customer service, and like other facets of customer service, there are hidden costs. Many of those hidden costs are manifested in excess labor. For example, products going out in neat, stretch-wrapped pallet loads never come back that way. The extra handling required to unload a trailer of loose boxes adds up.

"Paperwork is another area people neglect," says Sanderson. "In a distribution center, people are familiar with paperwork and know to have everything ready for the driver. Retailers are not as familiar with proper bills-of-lading and can delay drivers, thus increasing labor costs."

Because customer service is an important part of any business, more managers are figuring in the cost of returns into their business plan. "The focus is on customer satisfaction," says Sanderson, "and that has made reverse logistics a natural part of the supply chain."

Toward that end, Sanderson cites one customer, an auto parts retailer, that operates a private fleet to move products between its distribution centers and retail stores. "It then uses those dedicated trucks to take material back to the distribution center. The efficiencies come in being able to plan movements of excess store inventory to the DC or to other stores, using the same mode of transport."

Reverse logistics is not mainstream shipping. It requires more communication and strong customer service skills on the part of an outside provider. It also requires some unusual up-front planning and inventory forecasting, says Tom Giovingo, executive vice president, Fidelitone (Chicago,

"The provider has to do the physical part," he says, "and [the 3PL] also has to do the data collecting part that ties directly into the customer's accounting systems."

As an example, he cites his company's work with Sears, one of its larger customers. "We provide the support, in both directions, for more than 1,000 manufacturers that supply repair parts to Sears. Sears orders repair parts through us and we ship to a Sears facility or directly to the customer. We also provide the Sears technician to install that part if required."

And when things come back? Parts returned for whatever reason have to be inspected to see if they've been used. Then Fidelitone must determine what the disposition of returned parts will be according to the plan established by Sears.

"What happens to returned items is our customer's call," says Giovingo. "It might be recycled, scrapped or, if clean, go back on the shelf."

With consumer goods returns it's a bit different, he says. "Another of our customers, Best Buy, requires that we deal with independent service centers as well as its employees. Returns are a bit more straightforward because we're dealing with a finished product, not parts."

Why consumer goods are returned is often anyone's guess. Giovingo says boxes sometimes just arrive on the doorstep. Inspection of returns involves determining if the shipment was wrong, wrong color or wrong size, or if the item is defective. Again, it's his customer's call as to what the disposition of the returned item should be.

On the commercial side of the returns business, like repair parts, returns can account for 3% to 5% of sales. With consumer goods returns as percent of sales are much higher. As a service provider Giovingo reports all of these costs to his customers so they're aware of any additional expenses.

"It might seem counter productive," says Giovingo, "but we work with our customers up front to build a plan that will reduce their returns expenses." Fidelitone does that through analyzing data, looking for geographic areas or stores that might have higher than average returns.

"Maybe there are employee training issues that need to be addressed," he says. "It's our job to raise the flag, not correct the problem."

When to outsource returns
Companies seeking outside help to handle returns are most often trying to change their business, says Giovingo. Fidelitone starts by getting a thorough understanding of where the client company is in its battle against returns, and then working with them to change the rules of how they process returns. Most often, he adds, companies are looking for better service and more flexibility, things they can't do themselves because of physical limitations or lack of data management systems.

When it began handling Best Buy's returns, Fidelitone needed to illustrate why data capture is important, even for returns. It instituted a bar code labeltracking program that brought benefits to both Fidelitone and to Best Buy.

"An item taken to a Best Buy store for return is given a special bar code label that, when scanned, populates Best Buy's [accounting] front end so its financial reports are aware of the return," explains Giovingo. "When we close out the back end of the transaction, based on how they want us to handle the item, the label is scanned and all of the information is shared. The entire transaction can be automatically closed."

Aside from not having to deal with the physical aspects of returned merchandise, companies that specialize in returns offer a level of expertise and a wealth of knowledge and experience most individual companies don't have. "We gain experience working with a variety of clients," says Giovingo, "and we can share that knowledge base with other clients."

Information management is key to the service that these outside providers offer. Returns information can be analyzed to find trouble spots. Then processes can be developed, and business rules modified, to make more sales a one-way transaction.

Returns processing can mean inspection, refurbishing, repacking and returning goods to inventory. Once the labor intensive work is finished, the client receives pertinent inventory information.

Warehouse automation is a big part of spare parts replacement for Fidelitone's clients where returns can range from washers and screws to large palletized items.

Buy the Book: A Returns Challenge Like No Other
Think about a worst-case scenario for reverse logistics. With that picture in mind, listen to Pete Brightwell's story. He's director of engineering for Book Fairs, Scholastic Inc. (Fenton, Mo.,

"We're sort of like the world's largest library," explains Brightwell. "Except a library doesn't get the volume of returns that we do. We send books out and most of the books come back."

It's not uncommon for more than half of the books Scholastic sends out to its weekly book fairs at schools around the country to be returned. In a day, a bad day, as many as 100,000 books might be returned to its 67 different branch distribution points. That's an incredible volume of returns to efficiently track, receive, inspect and restock.

School book fairs are a unique selling event that Scholastic arranges with schools or communities to sell non-textbooks to children. Books are shipped in three forms, says Brightwell. "We have a display box with four cells that can sit on a tabletop and you can easily see what's in it," he explains.

They also have a flip-top box, which are modules or kits of books that can be set out on tables. There might be three boxes of these, such as best sellers or cookbooks on a table. Then there are display cases.

"We might send six to 12 cases per Fair. They're large metal cases with casters and hinged doors." These cases are set up so that when the doors are opened the books are displayed on the shelves like in a library or bookstore.

"To each Book Fair we send about 1,500 titles and each title has between a four and 20 count," he says. An average distribution branch does about 25 fairs per day during peak season and might handle 70,000 to 100,000 items per day.

When the Book Fair ends much of that inventory comes back. At the distribution branch the returned books must be re-shelved, the metal cases replenished, and out they go again. That might sound like the end of the story, however, for Brightwell it's just the beginning.

Because he's dealing with dedicated delivery people and trucks, he's spared some of the problems of reverse logistics. Brightwell's challenges are inside the building. And he's still looking for a solution.

When the large metal cases come back, replenishing what's been sold is a simple matter of looking to see what's missing. "When teachers or other helpers are preparing boxes to return books, it's a different story," says Brightwell. "They'll mix best sellers with cookbooks, or whatever. We have to open every box, and manually re-shelve the books."

It's a time-consuming process that he would like to automate. "When I ask systems providers how I can automate this process of re-shelving tens of thousands of books on a near-daily basis, they either turn away from me, or say, ‘You can't,' " he says with a chuckle.

Is there help for Brightwell and his returns problem? Probably. He says he'll keep looking until he finds the answer. Meanwhile, kids will get their books and Book Fairs will handle its returns the old fashioned way, one book at a time.

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