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.