Many companies decide they could reap many benefits if they develop their reverse logistics capabilities. Often, they decide to outsource this. It isn’t unusual for such a company to suddenly get cold feet, whether it is outsourced or not, when they see the price tag of the proposed return center.
Unlike transportation or distribution centers, executives often act like developing this complex part of their supply chain, that currently doesn’t exist, should be very cheap or free. In fact, often the very executives that would scoff at the notion of requiring a new truck fleet to have a three month pay off, will be the very ones to suggest the same for a returns center. When the internal champions of the return center aren’t willing to agree to such a high bar, they are often left with “proving the concept” prior to fully committing the company to re-engineering their returns processes . The real question for the executive that requires a proof of concept is “What are you really proving?”
Experience has shown that many companies that set up a pilot to test the “return center concept” end up abandoning the pilot within 12 months. Why? Return center pilots fail because they require the organization to be fully committed and that won’t happen when you are testing only a small subset of the total company. Pilots also fail because they must bear all the costs associated with systems design and implementation, building design and implementation, and employee recruitment and training; BUT they get very little of the offsetting saving and revenue from the existing corporate structure.
For example, let’s say you are a major retailer with 1,000 stores and you decide to run a reverse logistics pilot for 25 of them. Again, why are you running the pilot? Anyway, the typical ROI Calculation for a retail return center is something like:
ROI = (Increased Vendor Credit + Vendor Fees + Increased Liquidation + Disposal Savings + Reduced Store Wages) LESS (Added Transportation Costs to the RC + Systems & Building Cost + Labor & Processing Costs)
This ROI could be significant if all stores went to the program over a 90 day period. That retailer could expect less than a 12 month payback on their investment and significant contributions to profit the following year.
HOWEVER, with a pilot, this ROI model breaks down:
- The buyers can’t negotiate the vendor returns fees because neither the vendors nor the buyers want to try to maintain two different systems for crediting returns
- The retailer wont get the liquidation revenue because the salvage buyers won’t invest in a small, short term program and they don’t have enough time to really determine the value of the goods, so their bids are lower
- Transportation costs are inflated due to a lack of volume coming from few stores
- Systems design and implementation costs are basically the same for 25 stores or 1,000 stores
- Store ops will be very hesitant to reduce headcount because they know they will have to fight to add it back if the program gets scrapped and they don’t want to face the battle of sending somebody home for good
- Return centers take 90 to 120 days to get up to productivity levels and establish quality procedures, which drive up per unit costs in the short term
- If the return center is outsourced, the 3PL will struggle getting a fully committed, experienced staff because the better managers will want to stay put and avoid the risk of taking a job that could be eliminated in months
If you are thinking about building out a return center, do your homework. Look at the industry, the service providers, the volume and the many pro’s and con’s. Make your decision wisely but don’t waste your time and money on a pilot. Companies either have a compelling value proposition that they will commit to deliver or they don’t. Companies should either get committed or save their money they would spend on a pilot. If a pilot is required, have specific realistic goals that are agreed to by all internal constituents, including the executive leadership team. These goals should be built upon clear, specific financial expectations. A “pilot” return center will do little to tell whether your company will benefit from a return center or not, but it will cost a lot of money and help extend your resume’.
As the first quarter of 2010 comes to a close, it is time to review where your reverse logistics program stands. By now, the “Christmas Season” for returns should be finished and whether your returns operation is going to make budget this year has been determined. For the vast majority of reverse logistics operations, over half volume and processing expenses hit the books in the first three months of the calendar year. If an operation didn’t perform well during that time, it will be next to impossible to make up for it over the remaining nine months of the year. However, steps can be taken to make the most of the rest of the year and document learnings to help make next year a success.
Over the next two weeks, organizations should conduct a reverse logistics first quarter review. This review should take a look back at the first quarter results, record lessons learned, make note of where the operation is at the moment, and plan for the next three months activities. A best practice approach to this would to complete an SF-SWOT analysis. The following outlines the basic steps to a good analysis and first quarter review:
- Gather data for the following, the best you can. Do not wait until you have absolutely everything and estimates are acceptable. It’s like the old saying goes “If you wait until you are 100% ready you’ll never be ready.” Close is good enough but get all the details you can.
- Pull together a team to help gather and review components.
- Conduct the SF-SWOT analysis as follows:
- S – Successes: For the previous 90 – 120 days, document what went well, what you got right, what you want to make sure you repeat next year
- F – Failures: For the previous 90-120 days, document what went badly, what problems occured that you want to avoid next year, what actions do you NOT want to replicate next year
- S – Strengths: Looking at your current state, document where are you in great shape, what are the best things about your operations, what can you leverage going forward to build on to achieve your goals the rest of the year
- W – Weaknesses: Looking at your current state, record what gaps exist in your programs, what short falls should be corrected in order to avoid catastrophe the rest of the year
- O – Opportunities: Looking at the rest of year, note what is happening internally and externally that you can leverage to improve results and what actions you will take to ensure you make the most of the opportunity
- T – Threats: Looking at the rest of the year, analyze major events that will take place must prepared for, what internal threats to performance and results do you see, what external threats are out there that you need to act to avoid over the next few weeks
- Once the SF-SWOT analysis is complete, publish the results and conduct strategic planning meetings with the purpose of developing action plans to address the findings outlined in the analysis.
While the first quarter is the critical season for the majority of reverse logistics programs, taking time to review what happened, document lessons learned, and plan the rest of the year are critical disciplines that every reveres logistics executive must follow to ensure asset values and bottom line contributions are maximized. A goal without a plan is nothing more than a wish and hope is not a strategy. There are many things that are unknown when planning for returns but there are many opportunities that can be leveraged, threats that can be avoided, and lessons that can be learned if you take the time and put the effort into it.
One of the biggest values that a company can receive from returns processing is that it turns trash to cash. That is to say returned product and goods that didn’t sell, are processed and are ultimately exchanged for cash that is used to buy new goods.
Many companies take the refund process for granted and never think about the related cash cycle. What they are doing by default is allowing others to keep their cash for free. A great exercise you can use to see if this is happening in your company is to complete a diagram of return items. Note the path the items takes from the time the customer is refunded until you receive payment for the item after final disposition. Document the stops, the dwell time, and the steps required to move the product down the line to when your company receives payment for the returned items.
To start off, select the top five or six items, in terms of dollars returned, for your analysis. Be sure that the average dwell time is recorded for the various items at each location. Once you’ve charted the path and noted the dwell time for each stop along the way, you will have the total days for your returns cash cycle.
If you have never done this, you will see obvious gaps and delays that can be eliminated, as well as illogical processes to eliminate. You will also see where some of your suppliers, liquidators, recyclers, or vendors are unknowingly taking advantage of the process. Once the cash flow and the returns process flow has been streamlined, you can put together a coherent returns process that your suppliers, liquidators, and other partners can internalize and comply with, resulting in better vendor relations and improved cash flow.
One company I worked with went from over sixty days out to less than forty days between the time they refunded the customer until they received credit from the OEM. The impact was to improve their cash position for 8% of their sales by twenty days. Imagine the impact this could have on your organization.
According to a study conducted by The Aberdeen Group, companies whose reverse logistics capabilities rank in the top twenty percentile are realizing more than four times the decrease in year-over-year costs per return, compared to the lower eighty percentile. In short, the best keep getting the better and the rest are falling farther and farther behind.
At first blush, this seem counter-intuitive. Shouldn’t those with the highest cost per unit be able to reduce cost more then those that are best-in-class? So what is the key to reducing the costs of processing returns?
There are two best practices that will enable your company to significantly reduce the cost of processing returns starting this week. (This is assuming you are in the bottom 80%.) That’s right, you could start saving money this week.
First, you must have a dedicated, talented, executive permanently assigned to manage your companies reverse logistics pipeline. I told a client this one time and he said “We don’t have a reverse logistics pipeline.” I replied, “You do, you just aren’t managing it. It is managing you.”
Today, the total cost of returns can cost from 9% of sales to 15% of sales. A function that can impact your corporate financial to this degree deserves the dedicated focus. Whether you assign a top talent internally or you outsource the oversight and management, make returns somebody’s job and you will see instant payback. If they need to get educated on reverse logistics, get them trained. If they are trained but aren’t making an impact, make a change. The point is to get the right leader dedicated to driving improvements that will put your company in the top twenty percentile.
Next, develop metrics so you can measure what you’ve received, how much is in process, how much you’ve shipped, and quality of the process. Avoid falling into the trap of “we don’t have a system.” Sure a system would be better, but you can save a lot of money by tracking it the old fashion way. You don’t need a system to measure performance and you don’t need to let any excuses stop you from doing some level of measurement. You don’t measure it, you don’t manage it. You measure it, you manage it, the costs decrease.
If your company is not doing anything to improve returns and you don’t have the budget to invest in systems or facilities, simply putting a smart executive in charge and having them develop basic metrics will put significant dollars on your bottom line.
As the first quarter is coming to a close many companies are happy to see the volume of returns slow down to a more reasonable rate. Some are happy to be finished with processing peak volume while others are wondering how they will ever get caught up.
There is one truism about returns, regardless of whether you are talking expensive hi-tech gear or a plastic toy and that is that returns don’t get better with age. In fact, for hi-tech equipment you can count on loosing 10% in value about every 30 days. What this means is that you must have a strategy to turn your inventory in less than 30 days in order to maximize the value of the goods in your reverse pipeline.
Strategy? Many executive responsible for returns processing never think “strategy”. They just kind of know what is going to happen and they hope they survive. As the old wise man said “Hope is not a strategy.” Without a well thought out plan, that is flexible, the chances of maximizing the value of the inventory flowing through your reverse pipeline is slim. What is the “Value of Inventory” in a reverse logistics pipeline? Here is a simple formula that captures the idea:
Returned Asset Net Value = (Original Value X Recovery %) – Total Cost to Process
So why does the value drop on returned items so quickly? First, goods flowing through the reverse pipeline are handled an additional 8 to 10 times which adds a lot of wear and tear on the items. Second, returned goods generally aren’t packaged and transported with the same high quality outer packaging, pallets, and protection like similar new goods. These goods are often shipped without packaging at all and are not stacked on neat pallets, with standard Ti-Hi arrangements that help secure the freight during transportation. As a result, this stuff get beat up. Many manufacturers will tell you that a lot of their returns are fine when they enter the reverse logistics pipeline in the back of their customer’s store, but by the time they receive and finally process the goods, it is barely recognizable in some cases.
Another factor is obsolescence caused by technology improvement and age. For example, a few years ago one of my facilities was receiving Apple iPods. We were processing these iPods and selling them on the secondary market for about 50% of original value. Right in the middle of the returns season, Apple introduced a new iPod that was much improved over the previous model we were handling. Overnight, the value on the secondary market dropped from 50% to 30 % of original value. The asset recovery buyers knew that in 60 days their current market that justified paying 50% on original retail would drop dramatically as demand for the newer model grew.
It is for these reasons that when it comes to reverse logistics timing is everything. However, in order to get the most out of returned assets, a strategic plan of action must be developed that addresses the following key variables:
- Volume - Peak returns volumes can be between 30% to 150% higher than an average month and can include additional recalled items, return to stock goods and other asset profiles not normally processed. Estimated volume, type of returns, profile of the assets and disposition are critical pieces of information to know in order to properly plan.
- Space – temporary space will be needed to handle higher inbound volumes at the start of the season and then used for holding outbound surges as the volumes are processed.
- Labor – additional shifts will be needed which will require hourly labor and additional management. Many often forget they will need more trained supervisors, who will require more time to get up to speed.
- Disposition Partners – Communicate expectations to liquidators, recyclers, and others you ship to so they understand your plans and the volumes they will need to be ready to receive. A word of caution on dealing with liquidators: don’t expect a liquidator who barely pays for product in normal times to be able to pay three or four times as much during the first quarter when their sales are down. You will need to qualify, inspect, and select other buyers to keep your asset recovery product flowing.
- Red Flags – Develop metrics to be used to monitor inbound, processing, and outbound activities. Have a plan of action if the key metrics get out of tolerance. For example, you might track inbound trailers in your facility and set a metric of 12. If you see there are more than 12 trailers coming in, the action will be to rent one storage trailer from company X for every trailer over 12.
Remember, the biggest difference between a normal distribution center and a reverse logistics operations is that in the latter, you don’t know what you are going to get until you open the door. In a warehouse, you have somebody placing orders and you know how much you are going to receive and when it is going to get there. Not so in a return center. The key to building a good plan to deal with returns is to build in flexibility. You have to be able to increase or decrease each component based on what is going to come in the door and you won’t know that until it gets there. Simply hoping the flow is smooth and things work out is asking for trouble and will cost money.
Reverse logistics is like other functions in a supply chain. In order to optomize performance you must have a goal but like the old saying goes “A goal without a plan is just a wish.” For the average company, returns are over 8% of assets and the average company spends between 9% & 14% of revenue on these returned assets. That is a lot of money to leave to chance. Developing a strategic plan of action focused on maximizing the value of all assets flowing through the reverse pipeline is crucial to your companies success.
For the last 15 years the Third Party Logistics industry (3PL’s) have been growing at an average rate of 15% annually. More and more companies are outsourcing pieces of their supply chains to 3PL’s. They do this for three primary reasons:
- The function outsourced is not the company’s core competency
- Outsourcing provides speed and flexibility
- To save money
Often, the structure of the agreement between the customer and their 3PL partner is cost plus. This can come in a number of tailored formats but for the most part, the 3PL is paid their cost plus a management fee. While fees vary based on the service provided, costs are suppose to be what the 3PL paid. Here is where many companies overpay. For most, this overpayment could be avoided by asking a few questions upfront and checking the bills a little closer throughout the life of the contract.
As stated earlier, cost plus contracts are set up to charge the customer for actual costs paid for goods and services plus a fee, which is ideally the profit for the 3PL. There are four areas that companies should consider, both when negotiating the agreement with the 3PL and when paying the 3PL’s invoices.
The first area to focus on is benefits. Unless specified in the contract, benefits charged on wages should be the actual cost of the benefits. That means that rebates that the 3PL gets on health insurance and workers comp should be credited to the customer. If you are charged a “standard percentage” and you don’t ever get a rebate, but the language in the contract says nothing other than cost plus, you are being over charged.
If, however, the contract stipulates that there is to be a standard percentage applied to wages for these categories, then the charge would simply be the percentage applied to actual wages. Remember, in many operations hourly wages can be as much as 40% to 55% of total operations costs. If you are charged a couple of extra points over cost of benefits, that could be a lot of money during the life of the contract.
The next area to consider is temporary labor charges. Many temp agencies offer rebates to 3PL’s based on volume over the quarter or year. As the customer, you have the right to see the agreements and call the temp agency to discuss the specific arrangements. If there is a rebate from a temp agency, or from any supplier for that matter, in a cost plus arrangement, you have the right to your share of the rebate.
Many operators also provide systems and systems support. While support typically is based on a percentage of software license cost, the actual systems license costs are much less direct, and in reality are in large part profit. You will hear arguments that the license costs have to cover a lot of R&D, overhead, and other indirect costs you, the customer will never see. Truth is it is profit. You should not pay management fee on this. This is one of those areas that should be addressed up front. If it isn’t spelled out or included as a line item on a budget, you should not be charged a management fee.
The last point to look into is corporate allocation or charges for overhead. Like some of the topics above, unless this amount is clearly defined as a percentage of total costs or something similar, it should be the actual costs. The big mistake that many make, however, is that they pay a management fee on top of a corporate allocation / overhead. In effect, you are compounding the fee paid to your provider.
Most experienced supply chain executives throw out charges associated with corporate allocation / overhead right from the start. You should have one fee to negotiate. Don’t allow yourself to be put in the position of negotiating two, three or four fees depending on the activity. This is a tactic used by some 3PL’s to simply make more profit.
There are many areas that companies must watch out for when negotiating and managing their 3PL agreements. Hopefully you have these four critical components in control. If you aren’t sure, at least you know where to start looking.
There are only six possible dispositions for any item in a return center, whether it is a can of soup or an expensive computer. Do you know what they are? Do you understand how the disposition of the item impacts the value received for an asset and how that determines the cost of processing? You will after you listen to this podcast.
The Reverse Logistics Podcast
In a recent benchmark study of 175 companies, the Aberdeen Group found that among companies that measure the cost of their reverse logistics costs, between 9% and 14.6% of their revenue was spent on reverse logistics. However, according to the same study 93% of the companies surveyed were not even aware of the impact reverse logistics costs had on their companies bottom line. The study also found that best-in-class high tech firms spent over 3.7% of their revenue on warranty claims.
Today, many companies are looking to cut where ever possible, but they are missing significant opportunities to improve their bottom line by developing their reverse logistics capabilities.
The impact of reverse logistics and opportunities for improvement for consumer goods manufacturers and retailers is significant. Many companies will spend a lot of time and resources trying to get meager improvements out of their already optimized supply chain, while ignoring the costs associated with returned goods. If you are a supply chain executive who isn’t sure how your reverse logistics supply chain works or how it impacts your company, you have a big opportunity sitting in the dark recesses of your facilities.
What would be the reaction of the senior staff if they knew that between 9% and 14.6% of revenue is spent reverse logistics, but nobody is managing it? More importantly, how much of that money could drop directly to the bottom line if it were managed and resources were focused on improving the processes?
If your company is not focusing resources on reverse logistics, or not working to implement best reverse logistics practices, you have an untapped opportunity to dramatically improve your bottom line. Reverse logistics improvements will not only improve earnings but will have a dramatic impact on customer services and vendor relations.
If you are in the dark when it comes to how much it costs to process returns, you have a big opportunity waiting for to be discovered. Like Dr. Drucker said “If you don’t measure it, you can’t manage it.” If your company is part of the 93% doesn’t track reverse logistics costs, you have an opportunity to not only improve earnings but develop a significant competitive advantage over your competitors.
Many Third Party Logistics Companies (3PL’s) churn through customers, repeating the same expensive customer churning cycle, year after year, customer after customer. For these 3PL’s it is like Hyde says “One day you’re in, and the next day you’re out.” There are companies that have the reputation in the market of changing their supply chain service provider every two or three years, when the contract expires. Churning through providers is bad for companies and 3PL’s alike. Anyone involved in this churn cycle will agree there are costs to changing providers and it is usually painful for everyone involved.
So what do some 3PL’s do that enable them to keep their customers for decades, while others can’t seem to keep their customers for more than a two or three year contract term? So, why does it happen? Obviously there are some 3PL that just do a bad job and deserve to get fired. However, there are many 3PL’s that do a great job, only to get an RFP package in the mail from their customer. Why?
There is a three stage cycle of communications that a company and their 3PL repeatedly go through that determines whether their relationship will continue or if a bid package will be sent out. If the cycle is recognized and acted upon, a 3PL could have extended relations with a company for years to come. If any part of this cycle is ignored, it will eventually result in a change in operators.
The first stage is “Setting Expectations”. In a new operation this is when the company outsourcing clearly expresses their goals and expectations to the 3PL. Likewise, the 3PL makes commitment on the service that is to be provided, typically supported with level of service metrics, and other measurable performance data. In the beginning of the relationship, these terms are captured in a contract. Ongoing however, as exceptions, special projects and changes occur, each party must ensure both expectations and deliverables are communicated verbally and in writing. The expectations and deliverables must be mutually understood and agreed to prior to any substantive action taking place.
The second stage of communications is “Ongoing Updates”. Again, this is a dialogue of sorts between the solutions provider and the company that has outsourced to them. It is not simply reporting metrics. This is where many 3PL’s drop the ball. This is where you have ongoing communications about what is going on in the operations on a day to day basis. At a tactical level, there is generally a manager talking to a single point of contact every day about operational issues. Just as important, there is a strategic conversation that must take place, at least monthly, between a senior executive from the 3PL and the executive decision maker. These strategic discussions will ensure alignment between the two entities and it will also ensure expectations are clearly understood and performance is explained.
The third stage of communication is “Exception Management”. This is often the most important stage in communications between a company and the 3PL. Remember, companies outsource either because they don’t have the internal core competency required or because they want to focus their energies and resources on other critical parts of their business, or both. Put simply, companies pay 3PL’s to lose sleep over their operations so the company’s executives don’t have to. 3PL’s get paid provide a level of expertise, identify issues before they get out of control and to do a really good job of managing the exceptions and minimizing the impact of operational issues.
In any complex operations “stuff” is going to happen. It is how a 3PL deals with these irregularities that separate best in class from the rest of the crowd. A top quality service provider will be the one who identifies the issue or problem and informs the customer. Not only are they the first to tell the customer, they do so with a plan in their pocket and recommendations for action at the ready. Solution providers should be expected to act as a red flag mechanism, supported by a proactive team that will take steps to minimize risk and maximize profits.
Communications is key. In the market place, a solutions provider is only as good as their ability to communicate in each of the three stages of communications.
As a consultant that specializes in strategic planning and supply chain management, I’m often surprised at how little strategic planning focuses on the supply chain. Like Napoleon said, “An army travels on it’s stomach.” He was not talking about food as much as he was talking about the importance of the supply chain that delivered the food. Today, a company’s survival depends on their supply chain. However, there is little planning that focuses on significant changes that impact that vital part of the business. In fact, for the last few years there has been one obvious glaring omission in just about every strategic plan that I’ve read.
The glaring omission is the lack of any planning around the impact doubling fuel prices will have on the supply chain. Nobody will argue that fuel prices are going to double over the next five years but there is hardly a company that has taken any steps or developed any plans that address this impending change. We aren’t talking about just the impact on transportation but on the size and shape of the entire supply chain and supporting networks.
Today, for example, many supply chain networks are based on a network of major facilities in three or four locations in the US. Typically they import goods through the Port of LA and ship containers to DC’s on the West Coast, Midwest, Southeast, and Northeast. Ever so often you’ll see a facility in Dallas Metro area and maybe in the Northwest. This network was designed based on a number of factors that have not been altered in the last twenty years. These factors include dated demographic information, along with “traditional” facility fixed costs and typically, today’s transportation costs, using today’s fuel prices.
Few company look at what happens to this network model when they account for population shifts, reduced real estate prices and building costs, and doubling of fuel costs. That’s the strategic analysis that every supply chain should conduct. The company that completes this analysis and leverages the results in the market will have a significant competitive advantage. The survival of some companies will depend on resulting supply chain network realignment.
According to a study conducted at the University of Nevada, Reno by Dr. Dale Rogers, the impact on a supply chain will be significant. Dr. Rogers study showed that a three or four DC network will probably be replaced by a network of 15+ smaller DC’s located in markets not normally considered supply chain hubs.
The implications of this shift include fewer build to suit million square foot facilities, facilities with significantly less material handling equipment, and smaller, leased facilities with more generic systems . Flexibility will be key to the future supply chains. The higher total facility fixed costs resulting from more square footage under roof, will be more than off set by the total reduction in transportation, powered by $5 per gallon fuel.
Strategically, every company with a supply chain and certainly every supply chain solutions provider should seriously consider the impact that the oncoming increase in fuel prices will have on their business. It is coming, be ready. To paraphrase President Eisenhower, it isn’t the plan that is important, it’s the thought process that goes into it that makes the difference. Think about the impact of rising fuel prices on your supply chain network.