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
The system used to process returns is the critical component of a reverse logistics process. The returns system will determine if a company is going to maximize the value of returned assets or if they will needlessly throw money in the trash, literally.
For many companies, if you had to draw a picture of a car that would represent their reverse logistics process, it would look like Fred Flintstone’s car. For other best-in-class organizations, the car would look like a Ferrari. The question is “what differentiates a Flintstone from a Ferrari?” The answer is the returns management system (RMS). There are not many supply chain executives who have any experience with returns and even fewer IT executives. It is this lack of experience and knowledge about reverse logistics that leads to poor decisions when it comes to building or buying a reverse logistics system.
In this four part series, we will help the uninitiated understand what to look for in a quality returns system. We will describe critical capabilities needed in a state of the art RMS. We will explore what differentiates a state of the art reverse logistics systems from lesser “returns processing systems”. In this first part of our series, we will talk about the receiving process. In the second part of the series we will discuss processing requirements to disposition assets, drive repair practices, as well as direct and monitor physical processing. In part three we will cover the processes that drive shipping, financial transactions, and quality assurance. The last of our four part series will discuss visibility requirements and key reporting capabilities that will be needed.
The Receiving Process
The receiving process of an RMS should accomplish two primary functions. First, the receiving process should identify and credit the “sender” of the assets for what they shipped to the processing facility. Second, the receiving process adds the value of the returned asset into the “inventory” of the returns processing facility. Before an item can be refurbished, repaired, repackaged, recycled, or sold, it has to be properly identified and recorded in the processing facility’s inventory. In the world of returns it isn’t “garbage in, garbage out” that you worry about. You worry about good inventory in and garbage out. That costs money.
To ensure this doesn’t happen, you must have a quality receiving process at the front end of your RMS. The RMS should drive a process that answers the following questions as goods are received:
- When did the item arrive at the facility?
- Where did the item come from?
- Who was the shipper?
- Is there any damage and should a freight claim be filed?
- What is the SKU / Model number / Serial number or other identifying number for item identification?
- Is the asset “hazardous” or some other regulated classification?
- What is the condition of the item? (New, defective, damaged, damaged beyond repair, in original packaging, etc.)
- What quantity is received?
- What is the value of each item received?
- What is the total “inventory” of the shipment that has been received?
Once this information is collected for each shipment, the process of crediting the sending customer/store/plant can take place. One of the critical differences between an Returns Management System and a Warehouse Management System (WMS) is that most WMS’s rely on processing receiving against a PO. In the returns world, there usually isn’t a PO or similar document and the condition of what is received can vary greatly. The condition of the individual item determines how the asset is valued and how the item flows through the process.
An important back office function relies on the RMS receiving process. That is the reconciliation of what the sender says they shipped versus what was received. One of the challenges that exists in the world of returns is that most of the customers, stores, plants, or consumers are not properly equipped to determine the condition of the item they are returning. They have no way to determine the condition and the value of the returned asset based on the condition. The accuracy of goods shipped is not reliable and the preparation and packaging of the item is not sufficient to prevent significant damage during shipment. These issues cause differences in valuation and drive the need for a back office reconciliation process.
Identifying the item, determining the condition and valuing the item is the critical capability of the RMS receiving process. Once this information is gathered, the process of inspecting, refurbishing, repairing and dispositioning the assets can take place. It is at this point in the process that the value of the asset is determined. Without a well thought out receiving process, the value of the returned assets could be lost when the item is received in the returns facility, before the process really gets started.
Carrier claims for returned goods are a little more tricky than normal claims because of the trouble in valuing the goods shipped. Traditional carrier claims are based on known items on a manifest, each with a market driven value. In the world of reverse logistics, the shipper often does not exactly know what is in the “returned box” to begin with and the value could vary greatly depending on the SKU, product profile, condition and age of the item. If left to the traditional means of calculating freight claims, neither the carrier and nor the shipper will have a reliable way to value freight claims because the relative value of the inventory is almost impossible to determine, once the item is lost or destroyed.
Correct values could be dramatically different and there are a host of issues that impact the real value of the returned goods for which a claim is filed. Examples of some of the problems in valuing returned assets are if there are missing components, or if the item has been tampered with, or if the item has been abused and is broken beyond repair. These are common finding in processing returns but if an item is missing or if the carrier smashes the case containing the item, figuring out these variables ends up being nothing more than a guess. Collecting on claims filed can almost be impossible, at times, because of these variables.
The best, easiest and most straight forward method to file freight claims is to establish an “average value per case”. The average value per case is based on the budgeted units and total value of the goods that are to be processed. No company can really peg the value of any item that is going to be returned in the future. Using a logical method to calculate an average value per case is a fair, acceptable way to base reverse logistics freight claims. Once an average value is determined, the process used to calculate the average should be reviewed with the carrier and the average value to per case should be included in the carrier contract and reviewed on an annual basis.
A word of caution, however, if the value of an individual item is significant, traditional freight claims processes should be used. The level of detail concerning the returns goods is much greater using this method and you must ensure the proper processes for identification at the point of origin are in place. In order to file “normal” freight claims, an exact list of items shipped will need to be recorded, tracked, and received at a detailed level for each shipment. You must also ensure that the proper documentation noting the value of the shipment is made, prior to shipping. If this level of detail is not possible, using an average value per case is probably the best method.
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.