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.
At the core of every reverse logistics process, there are five fundamentals that you must get right in order to ensure you maximize the value of the assets flowing through your reverse supply chain. By “maximize the value of assets” I mean to process returns the most cost efficient manner that results in the highest net recovery value for each item. In order to do this, you must have the five fundamentals “Right”.
Identify the right source of the returned assets – Determining who returned the product is perhaps the most critical step in any returns or reclamation process. In a returns process, the receiving process is what triggers the financial transaction with the customer. The customer can be impacted directly, or in the case of retail returns, the store’s inventory will be negatively impacted. Crediting the right entity for the assets they returned is critical.
Diagnose the right condition of the goods returned – By condition, we are talking about whether the item is new, used, defective, abused, etc. Recognizing the condition will drive proper dispositioning of the goods. Properly diagnosing the condition of any returned asset will impact the OEM / ODM, subsequent recovery rates if liquidated, or will increase disposal costs. If, for example, an item is new and has never been used, it might be returned to the OEM / ODM for full cost credit. But if the condition is mis-diagnosed, it may end up in the dumpster. This results in a loss of value on the item plus additional rubbish removal fees.
Determine the right disposition of goods processed in the reverse pipeline – There are only six dispositions for any asset flowing through any reverse logistics pipeline. The six dispositions are:
- Return to OEM / ODM for full or partial cost credit
- Return to warehouse for distribution next season
- Sold on the secondary market for anywhere between 2% and 90% of original value
- Donated to charity
- Destroyed – sent to a landfill or incinerated
As you can clearly see, determining which “disposition bucket” returned goods end up in will have dramatic impact on whether a company pays additional costs or if they receive significant credit for parties down the line.
Design the right process to efficiently process returned assets in a timely fashion - Returns processing is critical to ensuring companies maximize the value of goods flowing through their reverse logistics / reclamation pipeline. Many companies do not appreciate the importance of timely processing of returned goods. Keep in mind that returned assets are not like wine. They don’t get better with age. Typical returns don’t come in good packaging and their condition will deteriorate over time, as will their value. For example, electronic returns will lose 10% of their value per month on the secondary market. Similarly, the percent of product that has to be recycled or thrown in the dumpster will grow the longer product sits on the dock. Processing goods efficiently and learning to deal with seasonal spikes is critical to the overall contribution from the reclamation center or returns process.
Ensure the right amount is charged to the right party for the processed returns – Once the goods have been received, sorted, and processed, the final step is to ship product to the next party in the reverse supply chain. With returns, this is more complicated than in distribution because the value of the goods will vary based on disposition, the ship to point will depend on the disposition, and the charges for the items depend on the returns agreement and the party receiving the goods. There are some companies that give credit for goods but only want specific models sent back to them. The other models not returned to the OEM / ODM might be recycled, destroyed, or liquidated. The variations are endless and often there are consolidation fees, disposal fees, and packaging fees that complicate the final billing even more.
For the uninitiated, returns can be a confusing and costly part of their supply chain. If, however, you approach developing your reverse capabilities around the Five Rights of Reverse Logistics, you may find significant amounts of hidden profits you can recover.
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
Today I am launching my new web site under the new company name of Greve Consulting, formerly known as Metreks. The focus of my practice is to help companies develop their returns management, aka reverse logistics capabilities. Viewers will find a lot of useful information on returns including the Reverse Logistics Podcast, which will feature industry leaders from the world of reverse logistics, and my blog which is packed with articles and information to help service providers, manufacturers, retailers, and liquidators make more money.
Register to get the blogs sent to your desktop automatically or save www.GreveConsulting.com as a favorite on your browser. Your comments, questions, suggestions and feedback are encouraged. I will use your feedback to improve the value delivered from the site.
Check in from time to time to see what is new. For example, you might want to check out The Cost of Doing Nothing. This is a form you can fill out to find out how much opportunity you and your company have in developing your reverse logistics capabilities.
Whether you call it returns management or reverse logistics, it’s all about improving returns and maximizing profits. I hope you enjoy the new site and get a lot of value out of GreveConsulting.com.
In this podcast, Curtis Greve covers recent studies that show the impact of reverse logistics on customer satisfaction. Did you know that companies that are considered in the top 20% in terms of reverse logistics capabilities have, on average, a 12% higher rating in customer satisfaction than the lower 80% of companies?
Also, according to a study conducted by Harvard Business Review, for each 1.3% improvement in customer satisfaction, sale increase by 0.5%. Extrapolated, this gives companies that are considered best-in-class in reverse logistics programs almost a 5% increase in sales.
The Reverse Logistics Podcast
The Reverse Logistics Podcast
Attention manufacturers, OEM’s, and retailers, you can work together to reduce the cost of transporting returned goods from the retailer to the manufacturer simply by working together. Most retailers do a lot more business with carriers than do their suppliers, manufacturers, and OEM’s. As a result, retailers are able to negotiate better LTL, Truckload, and small package rates.
However, many times when it comes to who pays transportation bills for goods moving from the retailer to the manufacturer in the reverse logistics pipeline, the manufacturer end up paying the carrier directly, at a higher rate. This is often the default assumption, but it doesn’t have to be.
If you are a supplier or OEM that does this, I have a great tip for you. Go to your retail customer and ask them to pay for shipping and bill you. Of course you will want to see what their transportation rates will be, but for the vast majority of suppliers, they will see a significant savings.
Savvy manufacturers often encourage their retail customers to work with them on this by agreeing on a mark up on the rates paid by the retailer, which is still lower than they would pay with their rates. With this arrangement the retailers make the spread between what they pay the carrier and what they bill their supplier. This also helps by providing the retailer more volume with their favorite carriers that the retailer can leverage to get better rates in the future on all their freight. The manufacturers saves big because they can dramatically reduce their transportation costs on returns by using the retailers rates which will be much better than what they can typically get from their carriers.
According to a recent report by the National Retail Federation on Customer Returns in the Retail Industry 2009, retail return rates dropped from 8.70% in 2008 to 8.04% in 2009. This is on total retail sales of $2,307 billion for 2009, which was down 3.5% from 2008. While this shows a decline in return rates for 2009 compared to 2008, the total dollars returned is still 10% higher in 2009 than in 2007.
The relative drop in returns could be caused by a number of factors:
- Higher percentage of staple items versus luxury items. In a poor economy people tend to spend less on “nice to have’s” and more on “need to have’s”. This buying pattern drives down return rates.
- This study doesn’t include recalled items that were returned into stock or back to the manufacturer resulting from guaranteed sales agreements. Retailers stocked up, customers didn’t buy and the product was pulled from the shelf and returned to the manufacturer.
- Consumers in poor economies tend to drop down to a lower price retailers. People that may have shopped at higher priced mall shops started to going to Walmart, while people that shopped at discounters started shopping at outlet malls, flea markets, or simply doing without. Generally as you drop down from one level of retail to the next, the return rates are less due to customer expectations and retailer return policies.
One point is clear from this report. Returns and how retailers and manufacturers deal with those returns will have a significant impact on the bottom line. According to this report, retailers processed over $185 billion in returns in 2009. Considering how, according to a recent study by the Aberdeen Group, 93% of companies don’t even measure associated costs of processing returns, there is significant opportunities for improvement for many retailers and their manufacturers.
Focusing only on the bottom line is not the best way to improve profitability. That’s the conclusion of recent research conducted by Mary Sully de Luque and Nathan T. Washburn of Thunderbird School of Global Management; David A. Waldman, of Arizona State University West; and Robert J. House, of the University of Pennsylvania, that underscores the risk of single-minded pursuit of profits.
This finding is based on survey data gathered from 520 business organizations in 17 countries designed to test if a CEO’s primary focus on profit maximization resulted in employees developing negative feelings toward the organization. The result? Employees in these companies tend to perceive the CEO as autocratic and focused on the short term, and they report being somewhat less willing to sacrifice for the company. Corporate performance is poorer as a result.
But when the CEO makes it a priority to balance the concerns of customers, employees, and the community while also taking environmental impact into account, employees perceive him or her as visionary and participatory. And they report being more willing to exert extra effort, and corporate results improve.
So does this mean that CEO’s don’t have to worry about profits. No. What it does mean is that if you want a motivated workforce who will support all your goals, including bottom line goals, show them that you have a balanced approach. It also means that taking a balanced, “sustainable” approach is more profitable.
This research also confirms what many progressive companies such as Walmart, P&G, and Dell already know. That is that focusing on sustainability, aka – the triple bottom line, is not only good PR, but is the best strategy to maximize long term bottom line results.
When transferring into the logistics department at Wal-Mart, the first subject I was taught was Manpower Planning. I remember thinking,”I thought I was going to learn about running a warehouse and managing transportation.” Little did I realize then that manpower planning was the key to everything.
If your warehouse and transportation leadership team has not incorporated manpower planning into their daily rituals, you are spending a lot of money on labor that could be avoided. Every person managing a function or team of people should be planning their work load using some form of the following variables:
- U = Total Units of work per shift ( labels, cases, cube, or deliveries, etc.)
- P = Units per hour/shift/day per person or FTE (Full Time Equivalent)
- H = Number of hours worked per day/shift
- F = Total Employees or FTE’s needed
Once you have the variables, each manager/supervisor/functional leader uses the following calculation:
- F = U / (PxH)
If you had to pick 8,000 units, in an 8 hour shift, with a standard productivity rate of 100 units per hour the calculation of the number of workers you need in the area would be:
- 8,000 units / (100 uph x 8 hours/shift) = 10 FTE’s Needed
Each manager/supervisor completes the manpower calculation prior to the start of the shift and brings the numbers to the Staff Meeting each day. In the Staff Meeting each supervisors reviews their numbers and the number of people they need to complete the workload, based on the standard productivity. Those that need more people are loaned people from other areas that are overstaffed based on their workload.
If everyone has more work than people, temps are called in or overtime is planned for that day or week, depending on the operation.
This simple, quick exercise will ensure that your supply chain operates efficiently and this will ensure you avoid having people standing around in one area while other areas fall behind. This will ultimately save you money, improve moral, and help ensure productivity targets are achieved. This requires NO technology or additional reporting, just basic numbers and disciplined leadership.