Negotiating returns privileges are often overlooked by many buyers and sellers. However, studies have shown that returns can cost a company between 9% and 15% of sales. With an impact this large, nobody can afford to overlook the terms and conditions that govern product flowing back through the reverse logistics pipeline.
There are many factors that determine who pays for returns, product testing, refurbishment and transportation. Usually, it’s a matter for negotiation and there is not one set of rules to go by when working out the critical details. There are, however, some general industry arrangement that one can use as a starting point for negotiating return privileges. Those include:
- The manufacturer / OEM generally pays for freight directly or indirectly for returned assets, whether defective or recalled.
- Retailers typically deduct the cost of returns, including charges for inventory, processing and freight from any outstanding payables they have with the manufacturer.
- Liquidators, meaning buyers of product on the secondary market, generally provide their own transportation.
- Hi-tech, market dominating manufacturers will not pay consolidation or handling fees and will be much more strict when it comes to enforcing terms and conditions for returns.
- Goods returned that do not comply with previously agreed to terms and conditions are generally not returned, nor credited in any way.
- Manufacturers of commodities will pay handling fees but will expect compliance and support where customer abuse is evident.
- Often, off shore OEM’s have no place to receive and process returns. These OEM’s will often agree to allow you to liquidate their product AND cover the cost of the return. They generally don’t pay handling fees but the liquidation revenue is much higher so it is a win/win.
- Consolidation fees are paid on a percent of wholesale cost or a flat dollar amount per unit for higher priced items.
- The basis for the consolidation fees should be the cost of processing returns, not including transportation.
- Disposal fees are passed on directly to OEM’s when required by the manufacturer. This is especially true if assets have to be incinerated or dumped in a hazardous materials landfill. Disposal fees are NOT passed on for private label goods or product that the retailer or customer facing business destroys for brand protection reasons.
All these terms and many more factors involved in processing returns are negotiable so use this list as a base line to work off of when working out return privileges. If you are new to the world of return agreements, this will help get you off on the right foot so you can ensure you don’t leave money on the table while promoting good relationships between you and your partner across the table.
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.
Being a Walmart supplier can be tough. The stories of manufacturers who made bad deals with Walmart that resulted in disaster are legend. Walmart buyers are tough, they know their numbers, and they are skilled negotiators. However, Walmart buyers do not force manufacturers to make bad deals. The only person in those small rooms in Walmart’s Home Office than can make a deal that will result in financial trauma for the manufacturer is the manufacturer’s sales person.
A common mistake that many manufacturers make when preparing to sell Walmart is to only prepare to discuss their product and their price. Many don’t even consider the last two pages of the supplier’s agreement before they meet with a buyer. These last two pages can have a significant impact on their overall profit margin without them even realizing it. The last two pages of a Walmart Supplier Agreement covers the terms and conditions for returned product.
There are ten questions about returns that suppliers should be ready to discuss and negotiate with the buyer when closing the deal at Walmart. For those who may be thinking “Returns? What is the big deal?” we would point out that a study conducted by the Aberdeen Group in 2007 found that on average manufacturers spend 9% to 14% of sales on returns. Another interesting finding from the same study found that 30% of the companies surveyed had no idea how much returns cost them. They were literally blind to cost of returns. The point is that proper preparation, knowing Walmart’s expectations and what the benchmark for returns processes are for your products will have a significant impact on the bottom line. In fact it could be worth as much as 5% of sales!
If a you have answers to the following ten questions you will have everything you need to negotiate a win/win deal with Walmart and maximize the your profits.
- Will you credit Walmart for returns based on actual items returned or provide a standard off invoice allowance?
- Do you want Walmart to dispose of the returns or send them back to you?
- Are you going to receive returns directly from each store or through the return center?
- What should your company’s consolidation fee be for items returned through Walmart’s return center?
- What is your end of life strategy for your product?
- How are you going to handle recalled product?
- What are your return authorization requirements?
- What is your plan for seasonal overstocks?
- Are you going to have “return caps” or other limits to the value of returns that you will credit in a given period?
- If you are going to use an off invoice allowance, what is the standard for your product and how will it be adjusted?
To learn more about how Greve-Davis can help you in preparing to negotiate your terms and conditions with Walmart, go to http://bit.ly/lC8zqW.
Walmart and Sam’s Club will bring on board literally thousands of new suppliers every year. These new suppliers are only 2% of the manufacturers that attempt to become a supplier to the world’s largest retailer. Manufacturers across the globe work hard to join this elite club. While they will work pricing and sales pitch to perfection, they often over look a critical part of the program every Walmart Supplier must bring to the table to finalize the deal. We are talking about their program to handle returns, end-of-life product, and recalls.
Due to the huge number of companies wanting to pitch their service, Walmart developed a process to “qualify” potential suppliers. This process is detailed and can be difficult to navigate for those who are unfamiliar with the “Walmart way.” Having a product that would look good on a store shelf is just the beginning. A manufacturer’s ability to provide a comprehensive support program for their goods is as important to Walmart or Sam’s as is the item and the price.
Once a supplier has the required paperwork in hand and has completed the online questionnaire, they can then attempt to set up a meeting with a Walmart Buyer. This meeting will determine if your item will be sold in a Walmart or Sam’s club, or not. All the stories you’ve heard about going to the Walmart Home Office to pitch your product are true. For many, their company’s future will come done to 45 minutes with a Buyer who is tired, overworked, and has no time to waste. You have a limited window to get the Buyer excited and you must be prepared to make the most of it.
Just imagine; the meeting is going well, the Buyer seems excited about your item, you talk about price and seem to be close to a deal, then you get blind sided. The Buyer asks, “How are you going to handle returns?” The meeting comes to a complete stop. If you don’t have an answer the Buyer will ask you go do you homework and come back another time. Have fun flying home, knowing that you will have to reschedule another trip to Bentonville and try again to make a deal. All the way home you will be kicking yourself for not having the answers to the Buyer’s questions. If you had a plan to handle returns you would be flying home with a deal.
Within the Supplier’s Agreement, there is a large section that address returns. However, according to Walmart associates this is often overlooked or poorly addressed, which reduces the supplier’s chances of success. You will need to be prepared to quickly explain how you will handle returns and negotiate the terms in the returns section of the Supplier’s Agreement. You will need to have a plan to deal with customer returns, end-of-life, and recalled products.
There are two requirements in the returns section of the Walmart Supplier Agreement, and eleven different variations of returns terms that you’ll need to quickly negotiate with the Buyer. The processes and terms used can vary greatly depending on the product. In addition, the terms for end-of-life and recalls are often different from terms to cover customer returns or damage.
Do not assume that these terms are inconsequential just because they only apply to returned goods. According to a study conducted by the Aberdeen Group in 2010, manufacturers spend between 9% and 14% of sales on returns. Poor preparation and negotiation of return terms can have a huge impact on the bottom line of a new Walmart or Sam’s supplier. In fact, the returns terms can impact a manufacturer’s bottom line by as much as five percent of sales. It is worth the extra effort to get it right.
Remember the motto of the Boy Scouts of America – Be Prepared. If you want to be part of the 2% of manufacturers that become Walmart or Sam’s Club suppliers, do your homework. You will need to have a program to deal with customer returns, end-of-life, and recalls. You will also need to have a competitive returns fee structure in hand and ready to quickly discuss with the Buyer. The purchase price is critical but it is not the only number you will need to have in hand.
To find out more about how the terms and conditions of a Walmart Supplier’s Agreement and the program you will need to have ready for you meeting with the Walmart Buyer, check out our Walmart Supplier Returns Program.