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.
It is once again that time of year when reverse logistics executives need to start planning for Christmas returns. For both retailers and manufacturers, the Christmas returns season is the by far the most important time of year. Your ability to process the tidal wave of returns during the first quarter of year will have big impact on your company’s bottom line.
In order to help you prepare for this, we have put together our own Christmas Checklist. It’s like Santa’s list only it not about being naughty or nice, it is about maximizing the value of goods that will be coming your way after Christmas and minimizing the cost of processing those goods.
Use our 31 Point Christmas Returns Checklist tp ensure that all preparations have been made for processing all your Christmas returns. Just like those Christmas calendars, there is something for every day in December, but don’t wait until December to start planning.
The Christmas Returns Checklist
- Update defective returns estimates based on sales since Thanksgiving
- Update seasonal recall volumes by SKU and vendor / OEM / ODM
- Review existing processed inventory waiting to ship – clear out as much as possible
- Prioritize shipments by value and cube to reduce inventory and create space
- Contact primary and secondary temp agencies and review requirements
- Review management staffing and organization chart for the first quarter
- Review volume estimates and plans for outbound shipping with carriers
- Contact the provider of storage trailers and ensure adequate supply will be available
- Inspect temporary space that will be used during peak season
- Review plans for temporary space and storage trailers with Loss Prevention
- Contact top 20 vendors / ODM’s to review plans and estimates
- Review manpower plans for quality assurance and inventory control
- Review plans with Systems to ensure NO major systems changes are planned during peak season or with any systems that directly interface with the RMS
- Review plans for leasing temporary fork lifts and other power equipment
- Review all parts supplies and ensure procurement plans and sourcing is ready
- If additional shift are anticipated, procure addition lift batteries if needed
- Review shipping plans and requirements with top salvage buyers
- Review inbound sortation plans and shipping plans with internal Liquidation Department
- Test all risers, security systems, and emergency procedures immediately
- Schedule preventative maintenance ASAP for all equipment and conveyor systems prior to January
- Review first quarter manpower plans by function, by shift
- Review plans & volumes with recyclers and with waste management companies
- Send any special instructions to all stores, branches, etc.
- Notify all stores, branches, customers, and/or vendors contact information during peak
- Review plans of all outsourced repair vendors,
- Get reports of existing backlogs for all repair vendors or outsourced support areas
- Review weekly communications plans with key internal and external teams
- Review aged files for any claims or disputes to clear up prior to year end
- Meet with financial support systems management and review plans
- Contact high volume vendors and ask if they have any plans to shut down during the first quarter for retooling
- Have a merry Christmas! – Enjoy your family while you can!
With a good plan for peak returns season, and working through the 31 point Christmas Checklist, you can be assured the reverse logistics function is well prepared for this most critical time of the year.
In Reverse Logistics Podcast #13 – 4 Key Metrics in Reverse Logistics, Curtis Greve discusses the four critical metrics that a reverse logistics expert should monitor to ensure there return centers are operating efficiently and effectively.
There are two primary goals for every return center: 1. Maximize the net asset value of inventory flowing through the reverse logistics pipeline; 2. Process reverse logistics inventory at the lowest possible over all cost to the organization, while maximizing inventory recovery value.
Net asset value is the value of returned goods realized after being processed through a returns facility, less the cost of processing. In order to maximize net asset value, the reverse logistics leadership team should monitor a number of metrics. There are many activities that should be measured and monitored to ensure you are running a best-in-class operation. There are countless variations, the complexity of which is dependent upon the returns process, the inventory, and a number of critical business decisions such as brand protection, sustainability concerns, liquidation options and the like. Among the variations there are four critical metrics that you must pay very close attention to and they are:
- Thru Put
- Cost per Unit
- Yield Rate
- Recovery Rate
Before you start writing emails pointing out the need for quality, it should be said that quality is a given for each area of your operation and should be a part of every operation. In order to achieve your primary goals stated above and to achieve the desired results for each metric above, a high level of quality is required.
In this podcast, Curtis Greve will discuss each of these metrics and why they are important pulse points for every reverse logistics operation.
In this podcast Curtis Greve shares best management practices for peak returns season. During the first quarter, many retailers and manufacturers will receive 30% to 60% of their total annual returns volume. This is the critical time of year when reverse logistics managers can really add significant value to their company. With the seasonal spike in volumes in both customer returns and recalls, it is important for returns operations executives to focus their teams on the key areas of the reverse logistics process to ensure they maximize the value of assets flowing through the reverse logistics pipeline.
Many returns managers make the cardinal mistake of focusing all their time and attention on receiving product. While receiving is important, that is just the start. If management’s attention stops there, a cascade of issues will irrupt and a lot of money can be lost. In today’s podcast Curtis discusses three key areas that should be top priorities for every returns operations manager:
For over 25 years Curtis Greve and Jerry Davis have ran returns operations for manufacturers and retailers around the world. Listen to today’s podcast to learn critical management tips for peak returns season.
The Reverse Logistics Podcast
The Reverse Logistics Podcast
Reverse Logistics Podcast #11 – Future Trends in Reverse Logistics
This podcast is a recording of a presentation given by Curtis Greve to the DRS Customer Symposium on September 9, 2010. The subject of Curtis’ presentation covered four external drivers that will impact every reclamation center and reverse logistics process in the world between now and 2015.
This presentation was directed toward CPG manufacturers but the drivers behind the future changes in the reverse logistics ecosystem will impact every retailer and wholesaler as well.
The DRS Customer Symposium was a great event with a lot of take home value for all attendees. It was attended by over 40 manufacturers who are customers of DRS. For more information on this symposium or about DRS services and solutions visit DRSReturns.com.
The Reverse Logistics Podcast
This podcast is a recording of a presentation Curtis Greve made at the June 2010 GBQ Redbank Executive Breakfast Series in Columbus Ohio. In this presentation Curtis discusses the threats and opportunities posed by three external drivers every company will face in the next five to ten years:
- Dramatic increases in transportation costs and the resulting changes that will be required in supply chain networks
- Reverse logistics networks and how companies can increase their bottom line profits by as much as 4% or more
- Continued demand for development of sustainable solutions and how sustainability can dramatically increase profits
Curtis points out that most companies will agree these three drivers are going to happen. Business executive also realize that these elements will have a negative impact on their business if they don’t address the situation, yet few are doing anything about it. How a company deals with these inevitable changes will determine if they will thrive or if they will find themselves at a significant disadvantage that could result in their ultimate demise.
The Reverse Logistics Podcast
The most important question that an executive in charge of reverse logistics can ask about a new item is “What is the merchandise exit strategy?” It is easy for a company to get excited about a seasonal item or the newest widget in their product line, but it is important for them to think about the exit strategy. Just like an investor who is going to acquirer a company, manufacturers and retailers need to have a clear exit strategy for their goods.
In today’s podcast, Curtis Greve talks about how to develop an exit strategy for products and critical factors to consider when working within an organization to develop merchandise exit strategies. Whether it is a seasonal item that is part of a guaranteed sales agreement, an item with a limited life span like a computer or fashion item, or if it is an item that is coming to the end of it’s life and is going to become obsolete, having a well thought out exit strategy could significantly improve that item’s contribution to the bottom line.
The Reverse Logistics Podcast
In today’s podcast Curtis Greve explains the basics of the secondary market and liquidation. According to Dr. Dale Rogers, the secondary market accounts for over 2.25% of GDP. The secondary market is much bigger than most think and a great opportunity for many companies looking to develop additional sources of revenue and working to reduce their carbon footprint.
With imports growing, economic pressures increasing, and shareholder demands for more sustainable business practices continuing to build, developing liquidation capabilities is an effort that is well worth any executive’s time and attention.
The Reverse Logistics Podcast
In today’s Podcast Curtis Greve shares three tips that can help improve returns processing; improve relationships with key vendors, suppliers, and liquidators; and increase the bottom line contribution of your reverse logistics program.
Do you know how to eat an elephant? One spoonful at a time. Curtis will share his experiences and time tested best practices that will help you improve, one step at a time.
Like Alan Weiss says “If you improve 1% everyday, in 70 days you will be twice as good.” Here is three percent to help get you started.
The Reverse Logistics Podcast
Consolidation fees are the fees that retailers charge to manufacturers to cover the costs associated with processing returns through a centralized return process. A return authorization, better known as RA or RMA, is the mechanism used by manufacturers to “give permission” for their customers to ship to them. It is also the means used to track specific inbound shipments and reconcile the associated financial transactions.
Many retailers and manufacturers leverage consolidation fees and the type of RA used to negotiate better return privileges. Listen to today’s podcast and learn how you can improve the financial performance of your reverse logistics process, one claim at a time.
The Reverse Logistics Podcast