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”.

The “Five Rights of Reverse Logistics” are:

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
• Recycled
• 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.

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

Your host is Curtis Greve.

In Part 1 – Five Components to a Recall Action Plan it was pointed out that there are many reasons for product recalls. Causes range from poor buying decisions to mandatory recalls ordered by government authorities.  Product recalls are a fact of life for both resellers and manufacturers.  If your company sells products of any type, it isn’t an exaggeration to say it is only a matter of time before you will have recalled products to deal with.  Therefore it is every organization’s responsibility to be prepared and to have a plan in place to deal with this inevitability.

Whether you are a pharmaceutical manufacturer, infant toy maker, an electronics retailer, or grocer who sells ground beef, recalls can impact both short term costs and long term relationships that your business depends on.  Like many things in life, companies get to choose how they will deal with these recall issues and whether the impact on their organization will be positive or negative. 

When talking about how a recall impacts an organization, we are talking about not only the cost of pulling the product off the market and writing off the inventory, but we are talking about how a company’s reputation with employees, customers and shareholders can be harmed.  Often, these indirect consequences can cost a great deal more than the cost of processing.  In order to minimize the risk of a recall and the unknown product liability you could face, a company must have a comprehensive plan of action to deal with recalls.  This “Recall Action Plan” must include guidelines for:

1. Internal communications procedures

2. External communications procedures

3. Physical process of removing the recalled goods

4. Product sorting, accounting and disposal process

5. Data gathering, reporting and record keeping

In  Part 1 – Five Components to a Recall Action Plan internal and external communications were discussed in detail.  In Part 2 physical processing, sorting and reporting will be addressed.

The first step in the physical process of removing the recalled goods must start with the internal notification of the customers, stores, distribution centers and other partners concerning the recall.  This notification must be designed to standout from the other notifications.  In the old days when everything was on paper, we put all recall notifications on red paper.  Today with emails, companies should designate a specific subject heading such as”

Subject: RECALL NOTIFICATION – IMMEDIATE RESPONSE REQUIRED

You must get everyone’s attention and you must send out notification repeatedly.  I recommend that notification be sent out through a series of six different communications.  In some cases, such danger to the public, potential fines, emanate litigation,  or over exposure in the press, companies will want to have a combination of verbal and written communications.  I’ve had some recalls that were so serious that all parties were required to call in on conference calls twice a day for over a week until it was clear all products had been returned.  Remember, when it comes to product recalls, you cannot over communicate when it comes to providing direction and support when pulling product off the market. When in doubt, repeat.

When developing transportation channels and packaging instructions, do not overlook the normal regulatory requirements.  If a government agency is involved, it is advisable to get their approval on all instructions and logistics arrangements.

Once the product is physically removed from the market, it must be taken to a secured location for processing.  Many companies ship product back to their return center, some use recall outsourcing specialists, and others simply send the product back to a warehouse or storage facility within their supply chain.  Regardless of where the product ends up, the receiving facility will need to know:

1. When the product is going to start arriving
2. When is the last date they should receive any new inbound shipments.
3. What are SKU’s, model numbers, serial numbers, or other identifying codes that are to be received and processed.
4. What is to be done with any receipts that are not included in the list of product on the recall.
5. What are the condition requirements for the recalled goods.  Examples would be sealed cases, or opened box, de-ticketed, or other similar conditions.
6. How is the product to be stored.  (Pallet quantities, in the DC, off site, storage trailers, etc.)
7. What information is needed from the product. (quantities, condition, diagnostics, sender information etc.)
8. What will be the final disposition of the product. (return to OEM, landfill, incinerator, modified, shipped to location etc.)

NEVER destroy or ship any government mandated recalled product unless given approval by internal council and the government agency involved.  When developing these instructions, give thought to the amount of reporting that will be required.  It is better to track to much information and a lot cheaper than it would be to have to go back and get addition information on processed goods.

The last component of a Recall Action Plan is record keeping.  You must keep good track of when, where, and how much was received and processed and where did it come from.  For most recall processes, the information is the only thing an attorney or government inspector will want to see.  You must be prepared to give regular updates throughout the recall and a complete report at the conclusion of the recall.   For the vast majority of recalls a written report is not required but you may be asked to provide quantities and other basic product information.  Failure to be able to produce this type of information could result in fines and a lot more attention from regulators.

It is important to keep detailed records of all activities related to a recalled product.  Many times, companies are able to file claims against another party, and file insurance claims to recoup financial damage.  A companies ability to show how much money, time and effort was spent to ensure they processed a recall “properly” can reduce risks of shareholder suits, customer suits, and employee issues.

As you can see, developing a Recall Action Plan cannot be done on the fly.  Companies must know who is going to process the recall, where it is going to be processed, who is going to provide oversight internally and who will be responsible for reporting on all recall activities.  Companies must plan ahead.  You Recall Action Plan must be thought through and completely locked down before you have a major recall to deal with.  It is like installing the red phone in White House.  You hope you never have to use it, but if you ever do need it, you won’t want to waist any time on details and you will have no time to lose.

There are many reasons for product recalls. Bad buying decisions are a big one reason for recalls. Regulator’s orders is another. Every year for the past twenty years, for example, the FDA has ordered between 200 and 300 pharmaceuticals off the market. Most of these recalls go unnoticed and were recalled for reasons other than any adverse effects on people who may have taken the drugs.

You have probably heard of many of the famous Rx recalls for serious adverse effects such as death, or other serious health problems. However, the vast majority of Rx recalls are for reasons such as a microscopic variance in the chemical compound, or some quality issue with packaging or an issue with the labels and inserts. There are other recalls driven by other regulatory agencies that find an issue with manufacturing of products. Often these recalls are ordered after a significant number of accidents. Recalls for products such as infant products, cars parts, desk lamps, and items such as computer batteries are all good examples of regulator driven recalls.

“Stuff” happens and product recalls are a  fact of life for retailers and manufacturers.  Therefore, it is critical to have a complete recall procedure in place to deal with these unfortunate yet inevitable events.  Having a comprehensive plan of action in place will remove the threat from the public and avoid or at least minimize the liabilities associated with the recalled item.

For many recalls, the liability and the risk to human life is too great not have a well defined recall procedure in place, before it is needed. If a you wait until you need it, the costs and the additional liability could literally put your company out of business.

Recalls can increase exposure to many different risks. There are the obvious potential liabilities such as law suits from customers, clean up costs, and fines from regulatory agencies. But, there could also be significant risks, costs, and exposure caused not by the recalled product itself but how your organization handles the recall. These risks include the impact on long term customer attitudes and satisfaction because of bad press; stockholder concerns and related lawsuits; and the impact from negative employee morale. In order to minimize these risks companies must have a buttoned up recall procedure that addresses the following five key areas:

1. Internal communications procedure

2. External communications procedure

3. Physical process of removing the recalled goods

4. Product sorting, accounting and disposal process

5. Data gathering, reporting and record keeping

Communications is the most critical component of any recall process. This post is the first of a two part series on recalls. The rest of this post will focus on communications and the second post will go into more detail are the physical movement, processing, and reporting of regulated recalls.

The internal communications procedure for a mandatory recall must include emergency communications chain. Who has to be notified and each person must know what their roll is in the recall. Speed is critical. There must be a clear line of communications and the internal communications must be fast. The first hours after being notified of a recall will determine if the rest of the plan has a shot at succeeding. The internal communications process is the start gun to the race to get the recalled goods off the market. This is also where you decide who is going to speak for the company, what they are going to say and who they are going to say it to.

Regardless of what anyone may say, it is always better to be completely honest with every communications. External communications is probably the most critical component to minimize the impact of a recall on customers, employees, and shareholders. Again, honest is the best policy. It is actually the only option. Even companies that try to spin the facts or dodge the truth always end up telling the truth. It is only a matter of time and in some cases that means jail time.

Employees will want to hear from the CEO directly. They will want regular updates and they will want closure when it is over. Remember, employees have families so you must arm with enough information so they can tell their children why their mommy and daddy are good people working for a good company. Many organizations underestimate the impact of bad press and lack of any credible communication will have on employees. It is a big deal to them and can cost a company more than just money for years to come, if not addressed properly.

Shareholders have similar concerns and they have a legal right to know about potential liabilities and actions that could impact the value of their investment. There have been a number of companies that never recovered because management lost the faith of their investors because of their poor communications on negative events.

Talking to the press can be very tricky when dealing with recalls as well. A key thing to remember is that journalists are there to get a story. They aren’t necessarily concerned with right and wrong, or giving your company a fair shake. A professional PR person can be worth their weight in gold during a major recall or any negative event. In the middle of a major recall is not the time to try to your hand at press relations. You will have plenty to keep you busy.

The last group to address in you external communications plan are the regulators. There are two ways management teams can deal with regulators. One way is to treat them as adversaries. Don’t offer any help. Answer only the exact question asked. Make them get a court order for everything, etc. This is a terrible way to deal with people who decide the size of the fine and the scope of the investigation.

The other way to deal with regulators is to politely cooperate with them. This means be polite, escort them around, ask if they need help. This means politely saying things like “Sir, I was told to get you a cup of coffee and set you up in my office until our Vice President of Loss Prevention gets here. This is a big deal and we want to cooperate fully. We want our best and brightest here to assist you with your needs so please bear with us for a few minutes until they arrive.” While you are waiting, talk to them like the intelligent professionals they are.

This is the only way to deal with any kind of public authority figure. You must ensure that your entire staff is trained to be respectful and cooperative. They must have a clear idea of what they can and cannot say, as well. They must know the difference between being cooperative and saying things that will can cause your company harm. Training your staff on who is authorized to speak to regulators, along with what, how, and when to speak to regulators is a prudent, operational best practice.  Don’t leave this up to your staff to figure out on their own. Train your management team.

This training should address both verbal and written communications guidelines. Emails have become law firms favorite hunting grounds. As the team at Goldman Sachs will attest, written communications can cause significant damage in a number of ways, even if you did really do anything illegal.

Recalls are a fact of life and every company must have a well defined recall process that is focused on doing the right thing, communicating the right message, and minimizing all the liabilities and costs associated with every recall. Your recall plan of action must clearly and directly address internal and external communications in order to minimize the damage caused by the recall.

In part 2 of Five Components to a Recall Action Plan, I will discuss the best practices and steps to be taken to properly remove, process, and record physical products that have been recalled.

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

Your host is Curtis Greve.