When asked about their reverse logistics programs, many manufacturers reply that they don’t have enough customer returns to justify spending any time on the subject. They look at the amount of actual defective customer returns and conclude that the impact of reverse logistics is simply immaterial to their business. It isn’t worth talking about.
What they often do not understand is that defective customer returns on average accounts for less than 25% of assets that flow through the reverse pipeline. The big mistake that many executives make is that they confuse their customer return rate with the total volume of goods returned. Customer returns is only a piece of the pie.
Another fact that is often overlooked is that for companies that send parts to the field for repair, on average get one out of six parts returned. Parts are returned because they weren’t needed, they ordered the wrong part, or they ordered more than they needed. Components and replacement parts are a big part of many manufacturer’s returns. Processing returned parts is a key component to an economically efficient parts management program.
Product recalls are another major volume contributor to the reverse pipeline. Last year the US Government ordered over 1,000 products recalled off the market. Empirical evidence shows that for every government mandated recall there is at least one non-mandatory recall made by either the manufacturer or their customers. For every manufacturer, the question is not if you will have a product recalled off the market. The question is when will you have a product recalled off the market.
Another aspect of reverse logistics that is often overlooked by many manufacturers is end-of-life strategies and seasonal recalls. These are recalls that are generated when new models are sold or there is a change in season. The product in the field or on the shelf is in great condition, it just didn’t sell and it needs to come out of the market in order to avoid conflicts with new product sales. Many companies such as Walmart require manufacturers to have end-of-life strategies and plans in place to process recalls before they will agree to purchase from them.
To recap, here are four reasons why every manufacturer should focus their resources and efforts on improving their returns processes:
- Defective returns, while only 3% – 6% of sales, are only 25% of the assets that get returned.
- One out of every six parts shipped to a customer or repair technician is returned
- The Government ordered over 1,000 different products recalled off the market in 2010
- Many manufacturing customers require end-of-life and recall processes to be in place before they will buy
Studies have found that ON AVERAGE manufacturers spend between 8% to 15% of sales on returns. When manufacturing executives understand that these returns include much more than simple customer defective returns they suddenly find the time and resources to focus on improving their reverse logistics processes. These efforts often result in increasing profits by as much as 3% to 5% of sales!
Now that is worth talking about.