Setting up a return center operation is significantly different from a typical warehouse operation. First, unlike a warehouse, you don’t have a purchase order that will tell you what you are going to be receiving. Second, goods received must be sorted based on condition, SKU, and return point. Return point is where the goods are going to be shipped. This often requires different items to be sorted together, unlike a warehouse where only like items are stored together. Many items, such as laptops or recalled merchandise must be inspected for condition and sometimes repackaged and/or repaired. Other items will be recycled or put on a pallet that is going to charity.

All of these different functions must be built into the return center process flow correctly to ensure there are no bottlenecks and to ensure an efficient process flow that minimizes touches. A poor process design can result in excessive processing costs and create more damage to the product. The return center process flow, illustrated on this page, shows the typical layout of a “typical” return center.  Before we get into the nuts and bolts of how a return center operates, there are a few things to keep in mind.

First, a return center is NOT a warehouse or distribution center.  That is to say, the purpose of a return center is not to store returns.  Return centers are processing facilities.  They are used to receive, sort, test, repair, package, consolidate and ship recalled goods or customer returns.  They are flow-through facilities not storage locations.

Return centers cannot be designed to hold returns due to the variability of the returns. While one can predict certain things at a high level, it is virtually impossible to predict any granular detail of inbound receipts for a return center.

The second reason why return centers are not holding facilities is that returns lose value the longer they are held.  Returns are not like fine wine. They do not improve or increase in value with age. In fact, many returns tend to lose about ten percent of their retail value for every month they are held.  You must move returns through the return process to their final disposition as quickly as possible.  Every day returned inventory sits in your facility, it could lose up to one half of one percent in value. Because of these drivers, a good return center will turn their inventory twenty-five to thirty times a year or more.

The physical flow of product through a return center is somewhat uniform across industries.  The following chart outlines the flow of product through a centralized return center by area and function:

                Area                                      Function

Inbound Receiving	Unload inbound trucks; receive pallets and small parcel shipments.
Scanning	Enter units into the returns management system or manually record each unit.  This is the point of transferring ownership and where product is added to the return center inventory and the time to reconcile physical units to financial charges.
Primary Sortation	High volume units are sorted to pallets according to final disposition such as return to vendor, liquidation, etc.
Repair Area	Designated items are tested and repaired.  Units that cannot be repaired are scrapped and recycled while usable parts or rare, earth minerals are collected, saved, and used to repair or manufacture other units.
Flow Rack Sortation	Flow rack or shelf sort area for small cube items.  Product sorted by final destination address.
Bulk Storage	Area for large items that are too big for fixed rack area.  Product will be sorted by final destination address.
Fixed Rack Locations	Lower level slot locations are used to sort case pack items.  Upper level used to re-warehouse full pallets from fixed and flow rack areas.
Recycling Area	Area where products are sorted, broken down and prepared for shipment to recyclers.
Dumpster	Trash compactor / bailer for packaging and product disposal.
Outbound Shipping	Area where product is staged for shipping.  Outbound manifests are reconciled to shipments and shipments are loaded on outbound trailers.

Setting up the proper return center process is critical to the financial results of a reverse logistics pipeline. A well thought out process will ensure efficient use of manpower and will help every company maximize the value of the goods flowing through the reverse logistics pipeline. If you have any questions about setting up an efficient return center operation contact Greve-Davis.

Reverse logistics service providers often struggle to grow sales. Most seem to hit a glass ceiling in terms of total revenue and can’t seem to figure out how to get to that magical next level. Most often, the missing ingredient to the secret sauce is developing and implementing a strategic plan.

Without a well thought out strategic plan, companies do not have focus across their organization, no commitment to invest time and resources in critical areas, and they end up doing the same things getting the same results. Thus, once again they hit ceiling and end up with flat revenue, if they are lucky.

Strategic planning often gets a bad rap, usually from the CEO who thinks the entire exercise is a waist of time. With the wrong approach and the wrong attitude, this will become a self fulfilling prophesy.

However, with the right approach, strategic planning process, implementation plan, and support from the top of the organization, companies can realize unprecedented growth THIS YEAR.

The Right Approach

Strategic planning for reverse logistics must take a different approach in many key areas to be effective. Unlike other companies, reverse 3PLs, liquidators, and repair service providers live in a world where product flow is unknown, requirements change without notice, and investment in capital assets is very risky. Traditional strategic planning tends to force companies to rely on these variable, basing plans on assumptions that could result in disaster. Companies in the reverse logistics space have to build flexibility and contingencies into their strategic plans. They must have identified red flags that will drive action based on real market conditions.

Back in the 1990s there were a number of good sized computer repair companies, for example, that invested a lot of money on capital assets used to diagnose and repair CRT’s. They ignored the market signs and as laptops and flat screens took market share, all their investment in fixed assets and non-transferrable processes resulted in most of them going out of business.

The Strategic Planning Process

There are two types of strategic planning processes. One is high level, very theoretical, and usually results in a very big binder of information that sits on a shelf and is ignored by the entire company until the next strategic planning meeting. The other is very practical and focused on implementation over a three to six month period. This second type of strategic planning focuses on actions and results. Clearly there is only one choice here.

If you use a strategic planning process that is built on theory and not on action, don’t expect any changes to your results. For example, some companies will spend an entire day defining their Mission Statement. Great! Every company has one so every company must need one. I’ve never known a company that made money from their Mission Statement. You might want to spend maybe an hour on this but that’s it. Think about it. Would you make more money focusing on “Mission Statements” or focusing on what your customers are asking for, where their pain is, what is happening in the market, what your competitors are up to, and what you are going to do to take advantage of the real world your people deal with everyday?

The Implementation Plan

Strategic plans can only impact an organization if the plan is implemented. You must have a method to monitor the implementation of the plan. In order to do this effectively, sub-plans must be developed that are measurable and in alignment with the overall strategy. Key management must be directly responsible for developing, executing, and reporting on these sub-plans. The best way to do this is to setup one-on-one update meetings and base a significant part of their incentive or bonus on completing the plans.

Support From The Top

For small to medium size companies to get to the big leagues, the CEO must be driving force behind the strategic plan. CEO’s that do not spend most of their time thinking strategically will never succeed. There have been countless books written about this and management gurus from Peters to Drucker to Covey all agree. The CEO’s job is to focus the company on long term performance, not short term execution. In reality every CEO focuses on a bit of both, but if you show me a company that has had flat revenue for the past few years, I’ll show you a company with a CEO that spends way to much time working on short term issues of the day and not enough time on strategically driving his organization.

The champion of the strategic plan and the implementation process must be the CEO. If at all possible, the CEO should be the person in the organization that meets with sub-plan leaders for monthly one-on-one updates. If the CEO is committed to implementing and driving the strategic plan, it will get done.

Remember

One last note on strategic planning. A wise man once said “It’s not a good plan unless it is flexible.” A healthy strategic planning process is one where plans are changed based on real world conditions and what the people responsible for the plans find out during the implementation process. It is not unusual for some parts of the plan to be dropped completely once the team learns more about the topic. Just because something sounded great back in the “Big Strategic Planning Meeting” doesn’t mean it is a good idea once your team digs into details. You must be flexible. Again, this is why the monthly one-on-one meetings with CEO are critical. Issues can be identified and addressed quickly.

The results of a quality Strategic Planning Process will be a turbo charged company with breakout, sustainable results.

If you would like more details on strategic planning and how a reverse logistics service provider can develop a plan that will result in dramatically improved sales and profits, contact Greve-Davis.

The biggest challenge most third party service providers face is growing sales. Whether a company is a traditional 3PL, a repair service provider or a liquidator growth is always a challenge. The largest companies always seem to have an advantage and regularly post 10% to 15% growth year after year, while second and third tier companies seem to struggle with simply maintaining their revenue.

Why is this?

Does size really matter to companies that outsource? Do larger 3PLs and service providers have a big advantage simply because of a larger sales force? Is it the software and infrastructure large companies have invested millions into that makes the difference? The answer to these questions is the same – NO.

They key to driving sales in for 3PLs, service providers, and liquidators really has nothing to do with the size of company, the number of sales people on the street, nor the fancy systems or technology used monitor sales efforts. The answer is much simpler and a lot less expensive.

We have worked with several large and small 3PLs for the past five years and we were part of the senior staff of a 3PL that averaged over 10% growth in sales, every year, for 15 years. Looking back, the keys to growth are clear. It comes down to five best practices:

• Strategy
• The Sales Team
• Focus
• Reporting
• Alignment

Strategy

You would never pack up your family, get in the car, start driving down the road, and then look at your spouse and ask where they want to go on vacation. However, if you do not have a well develop sales strategy that is exactly what you are doing every day. The best 3PLs have a clearly defined sales strategy that clearly articulates:

• Target markets
• Marketing strategy – speaking, social media, and traditional marketing activities
• Sales growth goals in terms of dollars and percent
• Targeted number of proposals sent to new prospects
• Targeted win rate for proposals sent to new prospects
• Cross selling or customer share expansion strategy

Developing a clear, comprehensive sales strategy is the key to growing a third party service provider.

The Sales Team

For many medium and small companies, the “sales team” is really the owner or CEO. Sometimes they may have a VP of Sales, but in practice this person provides the admin support to the owner so they can go close the deal. Growth in companies where the CEO is the key sales executive is limited to the time and energy available for the CEO to focus on sales.

Companies should look at hiring a strong sales executive as an investment. Depending on the market and the relative sales cycles, it could take six to twelve months for a top sales executive to bring in enough revenue to pay for their expenses. Successful 3PLs know this and invest in top talent, knowing it will pay off in the long run. They also know that there are many “sales executives” that never sell anything. They monitor their individual efforts and results, and cut their loses when it is clear they made a bad hire.

Focus

Many companies have a decent strategy and a good sales team but they don’t focus their efforts to ensure they are pursuing the right prospects. If left unchecked, an energetic sales person will go after any business they think they can close quickly. The fact is that the time and money it takes to pursue a prospect worth $300,000 is the same as a prospect worth $15,000,000.

3PLs must provide the oversight and be engaged with their sales team on a daily basis to ensure each sales executive is focused properly. The best sales strategy in the world is worthless if a sales executive is left to go their own way and pursue any prospect that will answer the phone.

Reporting

Monitoring sales activities is critical to achieving your growth goals. This does not require expensive CRM systems, though a good CRM can help. For years, we had a 20 man sales team and all we used was a simple spreadsheet and email to track their activities.

There are a few metrics you need to establish and these metrics should be used for monitoring purposes as well as incentivized goals for your sales executive. Keep it simple. Use something like:

• Number of leads per month/quarter/year
• Number of proposals per month/quarter/year with annual revenue per proposal
• Track dates of when a proposal was submitted and establish rules on when a proposal that is not won or lost comes off the board
• Number of wins with annual revenue
• Number of losses

A typical 3PL should win about a third of the proposals submitted to a new prospect and about half of the proposals submitted to an existing customer.

Alignment

Perhaps the most important discipline a service provider or 3PL should have is to make sure that the sales strategy, individual sales goals, incentive programs, and sales reporting metrics are all in alignment. There are many companies that use one set of metrics for long term sales strategies, a different set of metrics for sales activity monitoring, and incentivize the sales team based upon something completely different than any of the above. Everything must be in alignment. Sales executives will focus their activities on what drives their income higher, not on a strategy or a report.

Aligning sales strategy with sales executive goals and incentives, along with a simple monitoring process will establish a self correcting system that will help ensure your company achieves both long term and short term growth goals. This will also help the 3PL leadership team efficiently use their time.

If you have any questions or would like to learn more about how to drive sales and monitor your sales team, contact Greve-Davis.

 

The world is getting smaller every day and thanks to the internet, many foreign companies are now able to reach the US market. However, many struggle dealing with customer service issues such as developing and administering a return policy, figuring out how to deal with US retailers when it comes to reverse logistics, product recalls, and processing customer returns.

Whether a company in China is selling goods to a retailer or direct to the consumer via the internet, they often face big hurdles when it comes to the reverse supply chain. Just as US companies face big cultural differences when going to China or India, the same is true for Chinese and Indian manufacturers and online retailers selling in the US. Large companies such as Alibaba, DHGate, and Ally Express have significant challenges when it comes to providing after sales support to their US customers.

APAC companies working to break into the US market or increase sales should consider developing tailored programs that provide reverse logistics services to their  US customers.

A reverse logistics program should include:

• A competitive returns policy
• A solution for customer returns and product recalls
• Returns terms and conditions that would be included in the original purchase agreement
• Disposition management capabilities that will protect their customer, maximize the recovery rate on returned goods, and protect their brand name

Selling product in the US is often the easy part of doing business. The challenge is to provide after sales support that will improve customer satisfaction and ultimately lead to increased sales.  If you would like to learn more about how to set up comprehensive reverse logistics capabilities in the US and Canada, contact Greve-Davis.

According to an article written by J. Andrew Peterson and V. Kumar and published in the Spring 2010 edition of MIT Sloan Management Review, product returns cost companies over $100 billion or approximately 3.8 percent of profits every year.

When executives realize how returns impact sales, many will do what seems to come naturally and that is to reduce the volume of returns by tightening up their customer return policy.  Many go so far as to institute anti-customer strategies such as restocking fees, reducing the time frame in which goods can be returned, or complicating the return authorization process.   While these tactics may be effective in the short run, most of these measures have a detrimental impact on sales and are more costly than the product return over the long term.

In their study, Petersen and Kumar analyzed six years of customer purchases and subsequent returns for a nationally known catalogue retailer. They found that a lenient return policy does NOT reduce profits but in fact promotes greater profits.  They found that even with a higher return volume, the impact on the bottom line was positive. The Peterson-Kumar study results seem counter intuitive to what many think when looking at returns.  Because of the huge financial impact of returns and the obvious impact on a company’s bottom line, many companies attack the problem by restricting customer return privileges, which has been proven, time and again, not to work. In fact, this tactic is an unhealthy business practice.  What many retailers find, much to their subsequent regret, is that when customer return privileges are restricted, sales are restricted, providing marketplace competitors a clear advantage.

Easing Return Policy – A Real World Example

In the fall of 2010, Best Buy realized that restricting returns did have a negative impact on sales.  This strategy drove Best Buy customers away. For a number of years, Best Buy had one of the most restrictive returns policies in the U.S. retail market.  They would not accept some returns after specific time periods and would often charge restocking fees when purchases were retuned within the prescribed time after the initial sale.  The result of this policy contributed to disappointing sales figures in November of 2010 and a warning about fourth quarter results that pulled the rug out from under their share price.

However, Best Buy didn’t sit back and hope for miracle.  Immediately following their poor numbers, they announced an easing of their customer return policy and eliminated many of their restocking fees.  This all took place just a few days before Christmas of 2010. Best Buy’s turn around on returns had a positive impact on customers, sales, and Best Buy’s stock price.  Customers responded positively to this easing of the return policy and purchased at Best Buy because the risk of making a bad purchase was limited.  This is a clear illustration of the link between a company’s return policy, their sales, and the company’s stock price.

Return Policies Limit Customer’s Risk

To a customer, the return policy is really about limiting their risk.  For the majority of buyers, the return policy is not about taking advantage of the retailer.  It is about spending money on an asset with some assurance that if the item does not satisfy their need for any reason, they can return it and spend their money on a different item that will satisfy their need. If many executives looked at their return policies with this in mind, they would discard old return policies and rewrite them with their customers’ needs, fears and concerns in mind.

The study conducted by Drs. Petersen and Kumar found that when return policies are less restrictive, customers tend to make more purchases because their risks are diminished. The study also found that the returns process provides the seller with a critical opportunity to improve their relationship with their customers. In fact, this study also found that the more a customer returns, the more they buy! 

Updating Return Policies Can Reduce Return Rates and Improve Customer Satisfaction

Every retailer and manufacturer today has the same return policy in place, for the most part, that they had a decade ago. To make matters worse, every company I know of has the same return policy and requires the same actions by the customer regardless of what item was purchased. There is a tremendous opportunity to developed tailored return policies and procedures that will reduce customer return rates and improve customer satisfaction.

Consider the fact that the “no fault found” rate of personal computers for manufacturers processing returns directly from the customer is less than half the “no fault found” rate for the same items returned to a retailer. Why? The manufacturers have developed sophisticated call centers and used other methods to help the customer problem solve. They have also developed different scripts and procedures based on complexity of the product and price point.

Retailers and manufacturers would be well served if they would collaborate with each other, leverage each other capabilities and develop more sophisticated returns procedures. The results would be reduced returned rates and improved customer satisfaction.

Managing returns is a business function that most companies prefer to ignore. Unfortunately, dealing with returns is a fact of life for every retailer.  To effectively manage a reverse logistics supply chain, you must understand that there are a number of important support areas that have a significant impact on the cost of processing assets that flow through the reverse logistics pipeline.

One of the most high-impact support areas is the transportation department.  Over the next ten years, transportation expenses will increase more quickly and impact reverse logistics more extensively than any other support function in the reverse logistics ecosystem.  Factors such as rising fuel prices, truck driver shortages, and increased regulation will force transportation executives to rethink their reverse logistics network in light of the new cost reality.

These recommendations are the result of working with many companies around the world for more than twenty-five years and helping them improve their reverse logistics processes.  These best practices address errors in design that companies initially made at the onset of processing returns.

The time to develop a returns handling process—devoting resources to returns management—is BEFORE a company begins to receive returns in a critical mass. In the early stages of returns-processing development, companies typically look to the vice president of transportation formulate a  process that moves returned assets from point A to point B. Transportation executives, who are largely unfamiliar with reverse logistics processes, would naturally turn to models applied to managing forward transportation of goods. They might think that, compared to the volume of goods and the complexity of managing transportation for new goods, developing unique cost models for the transportation of used goods is not worth the extra time and effort. . Thus, the existing infrastructure, processes, and costing systems that are used for outbound transportation are foolishly used for returned goods.  Therein, lies the problem.

Transportation, in the world of reverse logistics, must be designed with unique, different terms and conditions (Ts & Cs) than typical forward transportation.   Just as driving your car in reverse requires a different approach and posture than driving your vehicle forward, transportation agreements that govern moving goods through a reverse pipeline require different terms, conditions, and controls to properly manage transportation and its related costs.

Managing transportation costs is one of those often-overlooked areas when designing reverse logistics processes.  Very often, the internal traffic department is completely excluded from the discussion or folded into it at the back end.  Excluding transportation as an integral piece in developing reverse logistics solutions always results in higher costs.

While moving products in reverse, the control mechanisms that exist in the forward supply chain either don’t exist or are in the wrong location within the supply chain infrastructure.  For example, a retail company may have great LTL rates for goods shipped from their distribution centers to their stores.  The pallets are weighed and put on the appropriate trailer along with the manifest and other shipping documents that have been efficiently produced by the transportation system or warehouse management system.  When the truck arrives at the back of the store, the receiving manager simply signs for load and verifies that everything on the manifest is received. Now, let’s reverse this.

The store moves all the returned, defective, and recalled goods from the customer service desk to the stock room. Here, it is recorded and prepared to return to the company’s return or distribution center.  If you used the same transportation processes and controls as the forward process, the store would first have to weigh the shipment before it is loaded onto a truck.

STOP!!

This is where the problems start.  Stores usually do not have a scale in the back of the store to weigh a pallet. For those executives who don’t work with transportation terms, traditional carrier contracts are based on a cost-per-one -hundred pounds shipped, commonly referred to as cost per hundred-weight (CWT).   CWT is the unit of measure for charging and transporting products.  This is the common basis for carrier contracts used since the 1800s.  Using this standard, the trucking company charges its customers a negotiated dollar amount for every one hundred pounds of product shipped.  In returns processing, calculating transportation costs in this way poses a significant problem.  Assume for a second that you actually do have a scale at store-level to weigh the pallet.  Once weighed, a proper shipping manifest that lists all the items in the shipment must be produced.  Again, these manifesting systems typically only reside in the distribution center, not in the store.

Assuming the same systems, processes, and agreements that are used going forward is not a best practice in reverse.  In fact, it is not even practical.  Not only will this not work efficiently, it will cost a lot more money.  Using a traditional transportation processes to move assets through the reverse logistics pipeline results either in losing control, inflating transportation costs or both.

Most often, manufacturers and retailers ship customer returns and recalled product in LTL quantities.  The standards and methods employed in moving product forward are often built into the process when the carrier contracts are negotiated, thus ensuring poor controls and inflated costs.

While the aforementioned CWT standard for forward distribution of product does not work for transporting returns.  As previously mentioned, the problem is that the vast majority of reverse logistics networks do not have a way to verify the weight of a pallet of returns at the point where the pallet is created. When this happens, the company shipping the returns must rely on the weight reported by the carrier to determine how much is to be paid for transporting the load of returns.  This lack of verification and control can lead to many problems, the largest of which is paying too much in freight charges.  In addition, products are generally not returned in nice new cartons or in over-wraps that will hold up well during shipping.

Standard methods used to identify inventory and to file freight claims are also compromised.  Odd-sized items such as ladders, power tools, and knockdown furniture are problematic.  To top it all off, literally, in an effort to maximize a trailer’s cube utilization, carriers will often double-stack pallets of returns, which causes a significant amount of damage and loss of recovery value.

Transporting returned goods that are later re-classified as hazardous materials can be complicated and very costly.  The largest lawsuit ever brought against a business by the State of California was one involving the transportation of returned goods from a retailer’s stores to its return center.  The products shipped were widely used consumer goods that the majority of the world uses every day—nuclear waste.  The State of California took exception to the retailer using the long-standing practice of shipping returns to their return center as non-hazardous product.  At the returns facility, the products were reclassified as hazardous and processed for appropriate destruction.   The State of California said no!  The State ruled that products such as shampoo and household cleaners were, in fact, “hazardous.”   The requirements for shipping returns classified as hazardous material are much more complicated.  The liability is exponentially larger. The cost of transportation is three to four times higher than non-hazardous shipping charges. Because of the complexities of moving hazardous goods out of the primary stream of commerce, manufacturers of particularly dangerous products utilize special reverse logistics transportation services.  Manufacturers of car batteries, pool chemicals, and pesticides have well-developed transportation procedures that should be followed.  Transporting hazardous products using homegrown processes and systems is not worth the risk.

SOLUTION!!

In general, the best transportation contract for palletized returned goods is often not based on CWT but on the space the pallet of goods takes up on the trailer.  Instead of negotiating a cost based on weight, write a contract based on the cost of space for one pallet on the trailer.  Buying space on the trailer will actually discourage carriers from double stacking pallets, which can cause significant damage to returned goods that aren’t packaged in their original cartons.  Reducing the freight damage to returns will increase the assets recovery rate, which will fall directly to the bottom line.  Carriers don’t exactly love this method but they will eventually agree to this pricing method as long as they have the protection of a maximum weight per pallet, limited liability for claims which we will discuss later, and a piece rate for those odd shaped items referred to above.

You must be prepared to help convert CWT rates to a rate per pallet.  It is simple and straightforward; but it is so foreign to carriers that they often need help calculating the rate.  To calculate the rate per pallet, you will need the following:

• Average of pallets per trailer
• Average weight per pallet
• Average cube per pallet
• Carriers proposed CWT

Once you have these variables, work with the carrier to develop a cost per pallet.  You will want to plan quarterly internal reviews of your assumptions and rate reviews with the carriers.  These reviews will give both parties a way to mitigate any risks from any incorrect assumptions and changing variables.  After a year or so, you may want to reduce the number of rate reviews to once, annually.

Transportation Based on Space

Setting up transportation based on space will give your employees who prepare the returns for shipment an opportunity to control transportation costs by insuring they “stack it high and tight”.  A key, measurable metric is quantity per pallet.  An expected minimum should be established for the average quantity of product returned on a pallet.  An example of palletizing instructions is: each pallet should hold an average of three hundred units, be at least six feet but no taller than eight feet high, and should not extend beyond the dimensions of the pallet itself. As the product is received or shipped, depending on the control points within your specific reverse pipeline, tracking the average units per pallet provides an easy way to minimize the cost-per-unit for transportation.  Shipment inspections and feedback to the shippers will ensure proper pallet stacking and height. Negotiating reverse logistics carrier rates based on space makes accounting and verification of the freight charges simple and straight-forward.  This method will eliminate the need for tare weight calculations and any debates on hub readings or other weight disputes.

If you have any questions on how to figure out how to manage and/or reduce reverse logistics transportation expenses contact Greve-Davis.

In order to more fully understand reverse logistics and sustainability, an executive must grasp one of the most important concepts: disposition management.  Disposition management is the key to maximizing the value of assets flowing through an organization’s reverse logistics pipeline.  The term “disposition management” refers to the process of identifying, inspecting, sorting, processing, and shipping products as well as to any related financial transactions. This is all done in accordance with predetermined agreements between the buyer and seller of that specific asset, and based on the condition of that specific, unique item in the reverse logistics pipeline.

Perhaps the best way to explain disposition management is to use a fairly common example.  First, you must understand a key difference in the handling requirements of a distribution facility versus a returns facility.  Just for the record, this example applies to any returns process, whether the returns processing function is centralized or not.

A distribution center receives items by SKU, UPC, model number, or some other form of unique identifier assigned to that item.  The item comes in a the same size box, in new condition, and is generally put in the same area of the warehouse where it is picked and shipped according to order requirements.  There is typically little or no variation from one unit of the same SKU to the next unit.  The red balls always go in location “X”, are picked by the full case, and shipped to the store or customer, packed and delivered in the normal manner.  Red balls are handled the same way today that they were yesterday and will be handled that way tomorrow.

Processing by Disposition

Returns processing is quite different.  For example, in a return center, items are received by SKU, UPC, model number, or some other unique item identifier.  However, each individual item is then inspected and the profile of that item is determined.  The “return profile” of an item denotes its cosmetic condition, functionality, components, age, reason for return, and other general characteristics of that specific item.  After each individual item has been profiled, the product is sorted by item and profile.  These different sorts are shipped to different locations and each sort type can have a dramatically different financial impact on the company processing that returned item.

For example, a retail return facility receives a pallet with six flat screens televisions.  Each of the televisions is the same size and all are the same SKU and model number.  The first is brand new.  In fact, it was a special order for Christmas but did not sell.  The packaging has never been opened but there is a big Christmas tree on the side of the box.  When the manufacturer sold the television to the retail buyer, a commitment was made by the manufacturer to take back any unsold items that are in the special Christmas packaging for full cost credit plus transportation costs and a handling or consolidation fee.  As a result, the first television is sorted as a “recall” and shipped back to the manufacturer for full cost plus a consolidation fee.  In the reverse logistics world, a consolidation fee is the same as a handling fee.

Upon inspecting the second television on the pallet, it is determined that it was sold to and returned by a customer who said it “didn’t work”.  Upon further investigation, according to the serial number and the attached receipt, the item was sold fewer than ninety days ago.  This television is unboxed.  The return center operations team, plugs the set in, tests it by running the manufacturer’s suggested diagnostic package, and ensures that all of the original components are present.  The inspection found no faults and the television seems to be in perfect condition, other than the open packaging.  This item was probably returned due to “buyer’s remorse which is a politically correct way of saying “my wife got really mad when she found out how much I paid for this thing and I have to get my money back or get a lawyer.”

In this example, we are going to assume that the terms of the vendor agreement that governs returns clearly address this type of return and the retailer is not allowed to return items that passed the operational test. With this condition, the item is repackaged and will be sold, “as is”, on the retailer’s business –to-consumer (B2C) web site for eighty percent of normal retail cost.

The third television looks like it has been run over by a truck.  The glass screen is broken, the frame is cracked in three places, and there is no way this item can be repaired.  An item in this condition can’t be returned because it is a clear case of customer abuse.  In this scenario, the unit would be taken to the recycling area where useable parts are salvaged for the repair of other units. The remaining pieces that can be recycled, are recycled.  What can’t be recycled or used in the repair process is thrown in the dumpster.  In this situation, this television is a complete loss and the retailer hopes to break even between the value of saving parts, recycling, and the cost of disposal.

The fourth television coming off of this pallet to be processed appears to be in good working order but it is about two years old and clearly beyond the return terms agreed to with the manufacturer.  The retailer will place this unit on a bulk liquidation pallet, where it will be shipped to a buyer who will pay 25% of wholesale cost for “as is” consumer electronic products.  There are two options for most companies when it comes to product of this type.  First, you can repair the item, if necessary, and sell it at a higher recovery rate or you can sell it “as is”, and in both cases, sell the product directly to the end consumer (B2C), or to a bulk liquidator B2B.

The fifth television looks fine, but it fails diagnostic checks.  There is something wrong and it is deemed “defective”. This item is will be sent back to the manufacturer for full cost credit, plus a handling or consolidation fee.  This is similar to the seasonally recalled item discussed above, however, televisions in this category are shipped to different locations and the consolidation fee for the defect unit is higher than the fee charged for the recalled unit.

NOTE:  The standard default basis for cost of returned goods, or any asset processed through a reverse channel is last cost in the system.

The final television on the pallet to be processed is over ninety days old, passes all tests, but has a significant scratch on the screen that won’t buff out.  The liquidators will only pay fifteen percent of cost for flat screen television with a scratched screen.  The huge discount the secondary market will want for a unit with this cosmetic issue coupled with the high cost to replace the glass, does not warrant repair of the item.  However, the local Catholic Charities Home for Unwed Mothers will take the item with a smile and the retailer can write off the retail value of the television off as a charitable donation.  The Home for Unwed Mothers is delighted.  The retailer gets a tax benefit, the satisfaction of helping the needy and achieving a sustainability goal of keeping usable items in use for as long as possible.

This process of inspecting and sorting the same item by condition and profile compared to a predetermined set of guidelines, as in this example, is effective disposition management.  Consider the huge variation in the value of the returned item based on the disposition management rules that are established for this single television SKU.  At the high end of the spectrum, the item will result in a full cost credit plus a higher handling fee.  At the low end, the retailer not only had to write the item off, but also had to pay to have parts of the unit disposed of in a landfill.

The variation of disposition avenues and their related financial consequences impact the decision-making process. The expert management of these variations is what separates the best-in-class reverse logistics operations from their competitors.    In simple terms, it is the difference between having to write off the item completely, and the cost of disposal— versus averaging a total recovery rate of eighty to ninety percent plus handling fees that can range from one to ten percent of the value of the asset processed. In the 1970s and 1980s most companies simply destroyed these returned products by sending all returns that could not be put directly back on the shelf to landfills. Today, companies can dramatically impact not only their bottom line but reduce the amount of usable product that pollutes our environment and save landfill fees in the process.

When you first look at disposition management, it seems very complicated and challenging.  At a certain level of detail, disposition management can be complicated.  If a company has a significant number of SKU’s the sum of the total can be challenging to say the least.  Many companies, however, are surprised to learn that, regardless of whether you are returning a can of soup, a big screen television, a $25,000 server, or a ten dollar doll, there are, ultimately, only six different dispositions for any returned item.

Regardless of the item returned, it will be returned to the original manufacturer, returned to stock, sold on the secondary market, recycled, donated to charity, or disposed of in a landfill or incinerator.  That is it.  The most important part of a reverse process is how the process sorts returned assets into these six dispositions.  While there are only six primary disposition sorts, there are numerous variations that can have a significant financial impact on a company, but eighty percent of the value of a reverse logistics process is derived from getting assets in the right disposition bucket.

Understanding disposition management is key to improving recovery rates for manufacturers and retailers. If you need help understanding disposition management or if you need help negotiating returns terms and conditions contact Greve-Davis.

For years, according to the NRF, the average customer return rate for retailers has been 8.1% of sales. This varies greatly depending on the merchandise sold. For example, department store returns can be as much as 25% of sales compared to automotive retail return rates can be as low as 3%. Internet returns can also be significantly higher as well.

Retailing has gotten much more sophisticated over the past decade with the growth of internet sales, improvements in merchandising techniques and inventory management. However, retailers have not changed their customer returns policies and processes in the past 20 years. Retailers have the same basic return policy for every item regardless of how it was purchased or the complexity of the item.

There is a significant opportunity for retailers to improve their return policies and procedures that will reduce the amount of returns and improve customer satisfaction. 

Retailers have focused a tremendous amount of resources on improving their supply chains and retail sales channels and now it is time to focus resources on addressing their return policies and procedures to address todays consumer returns. Just as sales and merchandising techniques are different for brick and mortar stores compared to internet sales, policies and techniques for handling consumer returns should be tailored to address the different drivers behind consumer returns.

Retailers can develop policies and customer interaction procedures that can reduce consumer returns by 10% to 20%. We are not talking about restricting policies and saying “NO” to customers nor should retailer simply revise their return policies to restrict consumer returns.

We recommend developing sophisticated policies and procedures that will improve customer satisfaction with items purchased. When done properly, this will result in reduced return rates, improved customer satisfaction, improved vendor relations, and increased profits. Policies and procedures should be augmented based on:

• Sales channel
• Complexity of item sold
• Manufacturer capabilities to provide customer support

There will always be returns because of actual product defects and buyer remorse. The opportunity is to assist customers who really want to solve their problem. Our experience has found that 10% to 20% of consumers want the item they purchased and they would not return the item if they could get help in resolving their issues. Research has found, for example, that “No Fault Found” (NFFs) for consumer electronic returns for items returned directly to retailers is two to three times higher than consumer returns that are directly returned to the manufacturer. Why? The manufacturer have tailored consumer returns policies and procedures that assist the customer and help them solve their problems.

The incremental cost of revising these policies and developing sophisticated customer support is a fraction of the cost of a returns processing and the impact on customer satisfaction. If you’d like to learn how your company can tailor your returns policies and procedures that result in reduced return rates and improved customer satisfaction, contact Greve-Davis.

 

Third party service providers (3PLs) have a tough job. They have a customer who hired them primarily because they couldn’t do the job themselves. They have to worry about keeping the parties upstream and downstream happy and inline. They are held to high standards and act as a surrogate insurance provider, protecting their customer from issues with inventory shrink, damage, workers comp, and productivity.

If things go wrong, the 3PL pays. If things go right, everybody is happy and the 3PL makes a profit. My 15 years working for a 3PL taught me that there are many things that can go wrong and there are a few things that must go right to make money. Over time we had to develop some key disciplines to make sure we kept our customers happy and to made money.

When I started with Genco, our revenue was about $34 million per year and when I left it was over $850 million. However, if you charted our success it wouldn’t be a straight line.  In fact, it would look more like a saw tooth. The one thing we were good at was learning from our mistakes and putting in controls and disciplines that helped prevent us from making similar mistakes in the future.  There were 5 key disciplines we put in place that enabled us to be successful and retain our customers over time.

The 5 keys to running a sustainable, profitable 3PL are:

1. Contract Terms: For a 3PL, the contract with the customer is the most critical document. Get the contract right and you have a chance to succeed. Get it wrong and you are doomed. When negotiating, I broke down the contract into two categories.  On the one hand, there will be service level agreement (SLAs) that protect the customer and sets the standards of performance for the 3PL. Often customers will try to set SLAs extraordinarily high. The 3PL must be realistic and agree to terms they know they can achieve. The key here is to have data and experience in hand. Don’t guess and if you make assumptions be sure those are included in the contact and a mechanism for SLA adjustments are included. This is critical especially for key metrics such as volume, timing, and product condition.

On the other hand, there are other various terms that provide for other factors that will have a financial impact on either the customer or the 3PL. Thing such as gain sharing, health insurance increases, building maintenance expenses, out of scope work, and other non-operational events can cost a 3PL big time or provide for nice profits if properly addressed. One key point to remember is to build in flexibility for anything the 3PL cannot control, and there are many.

2. Key Indicators: One of the keys to our success was when we established key operating indicators for each operation. As the adage goes, you can’t manage it if you don’t measure it. You need to track key metrics that are in alignment with the contract. This needs to be tracked on a daily, weekly, monthly, quarterly, and yearly basis. You must track the critical metrics, not just the contracted SLA’s. Every operation has problems. The key to being a successful 3PL is to have a mechanism in place that recognizes there is problem before it is to late.

3. Customer Communication: 3PLs should have a formal communications plan with their customers. Typically, this means meeting with their customer on a quarterly basis. You must have a standard agenda for these meetings that focuses on the SLAs, what happened in the previous quarter, the plan for the next quarter, and a year to date financial review. This should be an interactive discussion with plenty of time for open discussion.

You should also have a significant amount of informal communications. This includes regular email updates, week calls to check in, and coordinating facility visits when the customer is going to be in the facility.

4. After Action Reviews: The best way to build excellence across every facility is to get into the habit of conducting After Action Reviews. Every time there is a major event, such as peak season, a major recall, or a major incident in the facility, immediately after the 3PL team sits down and talks about what went right, what went wrong, and what should be done differently the next time. Notes should be taken and sent to key team members across the company. This often results in changing policies, setting up hotlines, or adding a metric to the Key Indicator report. The key for conducting After Action Reviews properly is to make sure you get all the right people in the room and the review is held as soon as possible after the event.

5. Cross Selling: There is an old saying that “Happy Customers Buy More Stuff.” This is a key growth strategy for a 3PL. In practice, it is simple. Anytime you have a “good meeting” with your customer, ask them what else is going on in the company and how you can help. You’d be amazed how many times I met with customers and when I asked this I was told about an opportunity that resulted in new business. I’ve been in a number of meetings where my customer said “You know, I didn’t even think about talking to you about that. I’ll make sure you get to bid on that.”

The reverse logistics 3PL industry is tough and competitive. Once you get a customer to say yes, you can’t afford to fail. If you focus on these 5 key best practices, you will be successful and grow your business. If you have any questions or would like to find out how Greve-Davis can your company grow and succeed contact us here.

RLCON 2013 was held last week in Prague. It was well attended by all the leading consumer electronics manufacturers including HP, Dell, IBM, Acer, Oracle and many others. The caliber and knowledge of the attendees was the best I’ve ever seen at a reverse logistics conference of any kind. It was more like a “think tank” than a traditional conference.  Every session was very interactive with participants sharing their thoughts and ideas. Quademensions Events was able to pull together reverse logistics thought leaders from across the EU.

A few observations to share from RLCON 2013:

• Reverse logistics across the EU has advanced significantly over the last fifteen years. In the mid 1990′s I attended ISTL in Paris and spent two week traveling around speaking with retailers and manufacturers about reverse logistics.  Back then, there was not one company that new anything about reverse logistics. Returns were viewed as a cost of doing business. Product was being destroyed or at best sold on a scratch & dent table in the back of a retail store.  Today, every manufacture has a well developed solution, with a team focused on maximizing the value of returns and minimizing risks when disposing goods that cannot be liquidated or remanufactured.
• A number of 3PLs and software companies have developed reverse logistics capabilities. Much like the US and Canada, OEMs and retailers have leveraged these providers’ expertise and outsource their reverse logistics processes.
•  The biggest reverse logistics challenge most manufacturers and retailers face is figuring out the many complexities of dealing with EU returns across many countries. While the EU has gone a long way to rid business of many of the literal roadblocks faced when moving goods across Europe, there are still significant issues that have to be worked around to deal with returns across Europe.
• The WEEE legislation is the driver behind most reverse logistics processes. The manufacturing sector in particular is acutely aware of the potential liability and leverages their reverse logistics network to minimize the associated risks.

While the EU has advanced significantly, there are still a number of significant opportunities most retailers and manufacturers should implement to increase profits from goods flowing through the reverse logistics networks:

• Most companies have well developed recycling programs, however, many of the products that are being recycled could be sold on the secondary market for a significant amount of money. Liquidating goods extends the useful life of the product which will reduce risks and create significant profits.
• Manufacturers should consider integrating reverse logistics in with manufacturing. Studies have found that over 86% of parts in returned consumer electronics, for example, can be reused in the manufacturing process.  While today, these parts are ground up and recycled, they could be used in manufacturing new goods. The cost of harvesting these parts can be significantly less than the cost of recycling and buying new parts.
• End of life products are largely being ignored and will have to be dealt with in the new future. For example, the majority of households have at least one PC they do not use any longer.  Manufacturers should develop programs to collect these goods direct from the consumers and either liquidate, recycle, or harvest the metals and parts for remanufacturing. The benefits could be significant. Remember, there is more gold in one ton of PCs than there is in 17 tons of gold ore. There is a literal gold mine waiting to be discovered in consumer’s homes. The manufacturers will eventually have to deal with this issue.  The question is whether it will be done proactively in a way that creates profits or reactively that may include government fines and penalties.
• Manufacturers should take steps to reduce return rates by addressing their return policies and leveraging their call centers. Few, if any, companies seem to be taking steps that could reduce their customer return rates by as much as 20% to 40%.  These steps would also significantly improve their customer satisfaction rates.

It is clear that the reverse logistics disciplines across Europe have evolved a great deal over the last decade. Today, they are on par with the US in many ways and are significantly better in other ways. Global manufacturers would do well do encourage sharing best practices within their own company to drive up profits for all.

If you have any questions about this blog post or would like to learn more about what your company can do to find hidden profits in your reverse logistics process, contact Greve-Davis.