Returns are a fact of life for just about every manufacturer in the world. Some see it as a necessary evil, while other see it as an opportunity to improve customer relations and improve their bottom line. The facts are that returns cost manufacturers on average 9% to 14% of sales. Manufacturers, however, are often hesitant to invest in their reverse logistics programs. This is often because the senior leadership team does not understand the actual cost and associated risks. Once they understand how much they are really spending and the risks of short changing the process, it is not difficult to get support for resources to focus on the reverse logistics pipeline.
In addition to the financial impact of returns, there can be an even bigger impact on customer satisfaction. In fact, a study completed by the Aberdeen Group in February of 2010 found that manufacturers that were rated best-in-class in reverse logistics had, on average, a 12% advantage in customer satisfaction over their competition. Another study published in the spring 2010 MIT Sloan Management Review found that focusing efforts to improve and manage customer returns actually increased overall profits, even during tough economic times. When we say “manage returns” we do not mean reject returns or make it harder for customer to return goods. This same study found that a lenient return policy actually increased total sales and profits, while a more restrictive policy has a detrimental impact on both the top and bottom lines.
Case in point, during the 2010 Christmas season Best Buy Stores revised their return policies, making it easier to return products and eliminating most restocking fees. The result was a surge in sales and profits for December. While Best Buy is not a manufacturer, this shows the impact managing returns can have on a company’s sales and earnings.
In addition to customer returns, product recalls can have dramatic impact on a manufacturer as well. For a manufacturer to have a comprehensive reverse logistics program, the program must include a robust recall process. In 2009 the Consumer Product Safety Commission ordered 465 product recalls and 433 recalls in 2010. You can expect more product recalls from this point on as well. The first piece of legislation passed by Congress after the election in November was to give broader authority to order more manufacturer recalls.
So what does all this mean for manufacturers? Simply put, the question is not if one of your products is going to be recalled but when and how many products will be recalled. Because of the very real possibility of being forced to recall product from the market and the potential for financial liability and damage to your reputation, manufacturers must have a sound plan in place to ensure they have a means to process recalls on very short notice. Johnson & Johnson can certain testify about how recalls can hurt a company. Between April and September of 2010 the value of J&J stock dropped over 13.5% due to product recalls and the way J&J handled those recalls.
Reverse logistics will have a significant impact on every manufacturer. The question is whether returns will have a negative impact or if it will provide a competitive advantage. Developing and investing in your company’s reverse logistics processes can improve sales, reduce risks, and increase profits. It takes a long term dedicated commitment to be best-in-class and proper resources but in the end it will be well worth it.