Posts Tagged ‘returns management’

Negotiating returns privileges are often overlooked by many manufacturers and retailers.  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:

1. The manufacturer / OEM generally pays for freight directly or indirectly for returned assets, whether the goods are consumer returns or recalled items.
2. Retailers typically deduct the cost of returns, including charges for inventory, processing and freight, from any outstanding payables they have with the manufacturer.
3. Liquidators, meaning buyers of product on the secondary market, generally provide their own transportation and pay FOB shipping point.
4. Hi-tech manufacturers, in general, will not pay consolidation or handling fees, but will be much more strict when it comes to enforcing terms and conditions for returns.
5. Goods returned that do not comply with vendor agreement terms and conditions are generally not returned, nor credited in any way.
6. Manufacturers of commodities will pay handling fees but will expect compliance and support where customer abuse is evident.
7. Often, off shore OEM’s have no place to receive and process returns. These OEM’s will 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.
8. Consolidation fees are paid on a percent of wholesale cost or a flat dollar amount per unit for higher priced items.
9. The basis for the consolidation fees should be the cost of processing returns, not including transportation.
10. 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. If you need help negotiating your companies returns terms and conditions or if you’d like benchmarking information for your categories, contact Greve-Davis.

Setting up a return center operation is significantly different from a typical warehouse operation. First, unlike a warehouse, you don’t have a purchase order that will tell you what you are going to be receiving. Second, goods received must be sorted based on condition, SKU, and return point. Return point is where the goods are going to be shipped. This often requires different items to be sorted together, unlike a warehouse where only like items are stored together. Many items, such as laptops or recalled merchandise must be inspected for condition and sometimes repackaged and/or repaired. Other items will be recycled or put on a pallet that is going to charity.

All of these different functions must be built into the return center process flow correctly to ensure there are no bottlenecks and to ensure an efficient process flow that minimizes touches. A poor process design can result in excessive processing costs and create more damage to the product. The return center process flow, illustrated on this page, shows the typical layout of a “typical” return center.  Before we get into the nuts and bolts of how a return center operates, there are a few things to keep in mind.

First, a return center is NOT a warehouse or distribution center.  That is to say, the purpose of a return center is not to store returns.  Return centers are processing facilities.  They are used to receive, sort, test, repair, package, consolidate and ship recalled goods or customer returns.  They are flow-through facilities not storage locations.

Return centers cannot be designed to hold returns due to the variability of the returns. While one can predict certain things at a high level, it is virtually impossible to predict any granular detail of inbound receipts for a return center.

The second reason why return centers are not holding facilities is that returns lose value the longer they are held.  Returns are not like fine wine. They do not improve or increase in value with age. In fact, many returns tend to lose about ten percent of their retail value for every month they are held.  You must move returns through the return process to their final disposition as quickly as possible.  Every day returned inventory sits in your facility, it could lose up to one half of one percent in value. Because of these drivers, a good return center will turn their inventory twenty-five to thirty times a year or more.

The physical flow of product through a return center is somewhat uniform across industries.  The following chart outlines the flow of product through a centralized return center by area and function:

                Area                                      Function

Setting up the proper return center process is critical to the financial results of a reverse logistics pipeline. A well thought out process will ensure efficient use of manpower and will help every company maximize the value of the goods flowing through the reverse logistics pipeline. If you have any questions about setting up an efficient return center operation contact Greve-Davis.

According to an article written by J. Andrew Peterson and V. Kumar and published in the Spring 2010 edition of MIT Sloan Management Review, product returns cost companies over $100 billion or approximately 3.8 percent of profits every year.

When executives realize how returns impact sales, many will do what seems to come naturally and that is to reduce the volume of returns by tightening up their customer return policy.  Many go so far as to institute anti-customer strategies such as restocking fees, reducing the time frame in which goods can be returned, or complicating the return authorization process.   While these tactics may be effective in the short run, most of these measures have a detrimental impact on sales and are more costly than the product return over the long term.

In their study, Petersen and Kumar analyzed six years of customer purchases and subsequent returns for a nationally known catalogue retailer. They found that a lenient return policy does NOT reduce profits but in fact promotes greater profits.  They found that even with a higher return volume, the impact on the bottom line was positive. The Peterson-Kumar study results seem counter intuitive to what many think when looking at returns.  Because of the huge financial impact of returns and the obvious impact on a company’s bottom line, many companies attack the problem by restricting customer return privileges, which has been proven, time and again, not to work. In fact, this tactic is an unhealthy business practice.  What many retailers find, much to their subsequent regret, is that when customer return privileges are restricted, sales are restricted, providing marketplace competitors a clear advantage.

Easing Return Policy – A Real World Example

In the fall of 2010, Best Buy realized that restricting returns did have a negative impact on sales.  This strategy drove Best Buy customers away. For a number of years, Best Buy had one of the most restrictive returns policies in the U.S. retail market.  They would not accept some returns after specific time periods and would often charge restocking fees when purchases were retuned within the prescribed time after the initial sale.  The result of this policy contributed to disappointing sales figures in November of 2010 and a warning about fourth quarter results that pulled the rug out from under their share price.

However, Best Buy didn’t sit back and hope for miracle.  Immediately following their poor numbers, they announced an easing of their customer return policy and eliminated many of their restocking fees.  This all took place just a few days before Christmas of 2010. Best Buy’s turn around on returns had a positive impact on customers, sales, and Best Buy’s stock price.  Customers responded positively to this easing of the return policy and purchased at Best Buy because the risk of making a bad purchase was limited.  This is a clear illustration of the link between a company’s return policy, their sales, and the company’s stock price.

Return Policies Limit Customer’s Risk

To a customer, the return policy is really about limiting their risk.  For the majority of buyers, the return policy is not about taking advantage of the retailer.  It is about spending money on an asset with some assurance that if the item does not satisfy their need for any reason, they can return it and spend their money on a different item that will satisfy their need. If many executives looked at their return policies with this in mind, they would discard old return policies and rewrite them with their customers’ needs, fears and concerns in mind.

The study conducted by Drs. Petersen and Kumar found that when return policies are less restrictive, customers tend to make more purchases because their risks are diminished. The study also found that the returns process provides the seller with a critical opportunity to improve their relationship with their customers. In fact, this study also found that the more a customer returns, the more they buy! 

Updating Return Policies Can Reduce Return Rates and Improve Customer Satisfaction

Every retailer and manufacturer today has the same return policy in place, for the most part, that they had a decade ago. To make matters worse, every company I know of has the same return policy and requires the same actions by the customer regardless of what item was purchased. There is a tremendous opportunity to developed tailored return policies and procedures that will reduce customer return rates and improve customer satisfaction.

Consider the fact that the “no fault found” rate of personal computers for manufacturers processing returns directly from the customer is less than half the “no fault found” rate for the same items returned to a retailer. Why? The manufacturers have developed sophisticated call centers and used other methods to help the customer problem solve. They have also developed different scripts and procedures based on complexity of the product and price point.

Retailers and manufacturers would be well served if they would collaborate with each other, leverage each other capabilities and develop more sophisticated returns procedures. The results would be reduced returned rates and improved customer satisfaction.

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.

For years, according to the NRF, the average customer return rate for retailers has been 8.1% of sales. This varies greatly depending on the merchandise sold. For example, department store returns can be as much as 25% of sales compared to automotive retail return rates can be as low as 3%. Internet returns can also be significantly higher as well.

Retailing has gotten much more sophisticated over the past decade with the growth of internet sales, improvements in merchandising techniques and inventory management. However, retailers have not changed their customer returns policies and processes in the past 20 years. Retailers have the same basic return policy for every item regardless of how it was purchased or the complexity of the item.

There is a significant opportunity for retailers to improve their return policies and procedures that will reduce the amount of returns and improve customer satisfaction. 

Retailers have focused a tremendous amount of resources on improving their supply chains and retail sales channels and now it is time to focus resources on addressing their return policies and procedures to address todays consumer returns. Just as sales and merchandising techniques are different for brick and mortar stores compared to internet sales, policies and techniques for handling consumer returns should be tailored to address the different drivers behind consumer returns.

Retailers can develop policies and customer interaction procedures that can reduce consumer returns by 10% to 20%. We are not talking about restricting policies and saying “NO” to customers nor should retailer simply revise their return policies to restrict consumer returns.

We recommend developing sophisticated policies and procedures that will improve customer satisfaction with items purchased. When done properly, this will result in reduced return rates, improved customer satisfaction, improved vendor relations, and increased profits. Policies and procedures should be augmented based on:

• Sales channel
• Complexity of item sold
• Manufacturer capabilities to provide customer support

There will always be returns because of actual product defects and buyer remorse. The opportunity is to assist customers who really want to solve their problem. Our experience has found that 10% to 20% of consumers want the item they purchased and they would not return the item if they could get help in resolving their issues. Research has found, for example, that “No Fault Found” (NFFs) for consumer electronic returns for items returned directly to retailers is two to three times higher than consumer returns that are directly returned to the manufacturer. Why? The manufacturer have tailored consumer returns policies and procedures that assist the customer and help them solve their problems.

The incremental cost of revising these policies and developing sophisticated customer support is a fraction of the cost of a returns processing and the impact on customer satisfaction. If you’d like to learn how your company can tailor your returns policies and procedures that result in reduced return rates and improved customer satisfaction, contact Greve-Davis.

Third party service providers (3PLs) have a tough job. They have a customer who hired them primarily because they couldn’t do the job themselves. They have to worry about keeping the parties upstream and downstream happy and inline. They are held to high standards and act as a surrogate insurance provider, protecting their customer from issues with inventory shrink, damage, workers comp, and productivity.

If things go wrong, the 3PL pays. If things go right, everybody is happy and the 3PL makes a profit. My 15 years working for a 3PL taught me that there are many things that can go wrong and there are a few things that must go right to make money. Over time we had to develop some key disciplines to make sure we kept our customers happy and to made money.

When I started with Genco, our revenue was about $34 million per year and when I left it was over $850 million. However, if you charted our success it wouldn’t be a straight line.  In fact, it would look more like a saw tooth. The one thing we were good at was learning from our mistakes and putting in controls and disciplines that helped prevent us from making similar mistakes in the future.  There were 5 key disciplines we put in place that enabled us to be successful and retain our customers over time.

The 5 keys to running a sustainable, profitable 3PL are:

1. Contract Terms: For a 3PL, the contract with the customer is the most critical document. Get the contract right and you have a chance to succeed. Get it wrong and you are doomed. When negotiating, I broke down the contract into two categories.  On the one hand, there will be service level agreement (SLAs) that protect the customer and sets the standards of performance for the 3PL. Often customers will try to set SLAs extraordinarily high. The 3PL must be realistic and agree to terms they know they can achieve. The key here is to have data and experience in hand. Don’t guess and if you make assumptions be sure those are included in the contact and a mechanism for SLA adjustments are included. This is critical especially for key metrics such as volume, timing, and product condition.

On the other hand, there are other various terms that provide for other factors that will have a financial impact on either the customer or the 3PL. Thing such as gain sharing, health insurance increases, building maintenance expenses, out of scope work, and other non-operational events can cost a 3PL big time or provide for nice profits if properly addressed. One key point to remember is to build in flexibility for anything the 3PL cannot control, and there are many.

2. Key Indicators: One of the keys to our success was when we established key operating indicators for each operation. As the adage goes, you can’t manage it if you don’t measure it. You need to track key metrics that are in alignment with the contract. This needs to be tracked on a daily, weekly, monthly, quarterly, and yearly basis. You must track the critical metrics, not just the contracted SLA’s. Every operation has problems. The key to being a successful 3PL is to have a mechanism in place that recognizes there is problem before it is to late.

3. Customer Communication: 3PLs should have a formal communications plan with their customers. Typically, this means meeting with their customer on a quarterly basis. You must have a standard agenda for these meetings that focuses on the SLAs, what happened in the previous quarter, the plan for the next quarter, and a year to date financial review. This should be an interactive discussion with plenty of time for open discussion.

You should also have a significant amount of informal communications. This includes regular email updates, week calls to check in, and coordinating facility visits when the customer is going to be in the facility.

4. After Action Reviews: The best way to build excellence across every facility is to get into the habit of conducting After Action Reviews. Every time there is a major event, such as peak season, a major recall, or a major incident in the facility, immediately after the 3PL team sits down and talks about what went right, what went wrong, and what should be done differently the next time. Notes should be taken and sent to key team members across the company. This often results in changing policies, setting up hotlines, or adding a metric to the Key Indicator report. The key for conducting After Action Reviews properly is to make sure you get all the right people in the room and the review is held as soon as possible after the event.

5. Cross Selling: There is an old saying that “Happy Customers Buy More Stuff.” This is a key growth strategy for a 3PL. In practice, it is simple. Anytime you have a “good meeting” with your customer, ask them what else is going on in the company and how you can help. You’d be amazed how many times I met with customers and when I asked this I was told about an opportunity that resulted in new business. I’ve been in a number of meetings where my customer said “You know, I didn’t even think about talking to you about that. I’ll make sure you get to bid on that.”

The reverse logistics 3PL industry is tough and competitive. Once you get a customer to say yes, you can’t afford to fail. If you focus on these 5 key best practices, you will be successful and grow your business. If you have any questions or would like to find out how Greve-Davis can your company grow and succeed contact us here.

RLCON 2013 was held last week in Prague. It was well attended by all the leading consumer electronics manufacturers including HP, Dell, IBM, Acer, Oracle and many others. The caliber and knowledge of the attendees was the best I’ve ever seen at a reverse logistics conference of any kind. It was more like a “think tank” than a traditional conference.  Every session was very interactive with participants sharing their thoughts and ideas. Quademensions Events was able to pull together reverse logistics thought leaders from across the EU.

A few observations to share from RLCON 2013:

• Reverse logistics across the EU has advanced significantly over the last fifteen years. In the mid 1990′s I attended ISTL in Paris and spent two week traveling around speaking with retailers and manufacturers about reverse logistics.  Back then, there was not one company that new anything about reverse logistics. Returns were viewed as a cost of doing business. Product was being destroyed or at best sold on a scratch & dent table in the back of a retail store.  Today, every manufacture has a well developed solution, with a team focused on maximizing the value of returns and minimizing risks when disposing goods that cannot be liquidated or remanufactured.
• A number of 3PLs and software companies have developed reverse logistics capabilities. Much like the US and Canada, OEMs and retailers have leveraged these providers’ expertise and outsource their reverse logistics processes.
•  The biggest reverse logistics challenge most manufacturers and retailers face is figuring out the many complexities of dealing with EU returns across many countries. While the EU has gone a long way to rid business of many of the literal roadblocks faced when moving goods across Europe, there are still significant issues that have to be worked around to deal with returns across Europe.
• The WEEE legislation is the driver behind most reverse logistics processes. The manufacturing sector in particular is acutely aware of the potential liability and leverages their reverse logistics network to minimize the associated risks.

While the EU has advanced significantly, there are still a number of significant opportunities most retailers and manufacturers should implement to increase profits from goods flowing through the reverse logistics networks:

• Most companies have well developed recycling programs, however, many of the products that are being recycled could be sold on the secondary market for a significant amount of money. Liquidating goods extends the useful life of the product which will reduce risks and create significant profits.
• Manufacturers should consider integrating reverse logistics in with manufacturing. Studies have found that over 86% of parts in returned consumer electronics, for example, can be reused in the manufacturing process.  While today, these parts are ground up and recycled, they could be used in manufacturing new goods. The cost of harvesting these parts can be significantly less than the cost of recycling and buying new parts.
• End of life products are largely being ignored and will have to be dealt with in the new future. For example, the majority of households have at least one PC they do not use any longer.  Manufacturers should develop programs to collect these goods direct from the consumers and either liquidate, recycle, or harvest the metals and parts for remanufacturing. The benefits could be significant. Remember, there is more gold in one ton of PCs than there is in 17 tons of gold ore. There is a literal gold mine waiting to be discovered in consumer’s homes. The manufacturers will eventually have to deal with this issue.  The question is whether it will be done proactively in a way that creates profits or reactively that may include government fines and penalties.
• Manufacturers should take steps to reduce return rates by addressing their return policies and leveraging their call centers. Few, if any, companies seem to be taking steps that could reduce their customer return rates by as much as 20% to 40%.  These steps would also significantly improve their customer satisfaction rates.

It is clear that the reverse logistics disciplines across Europe have evolved a great deal over the last decade. Today, they are on par with the US in many ways and are significantly better in other ways. Global manufacturers would do well do encourage sharing best practices within their own company to drive up profits for all.

If you have any questions about this blog post or would like to learn more about what your company can do to find hidden profits in your reverse logistics process, contact Greve-Davis.

Now that the tsunami of Christmas returns is over, retailers and manufacturers are realizing the financial impact of the first quarter “returns season”. For many, the fantastic Christmas selling season is a distant memory and the impact of all those returned and recalled RMAs are hitting the bottom line. The natural reaction is to focus on the cost of processing returned goods. While it is always a good idea to take steps to reduce expenses, companies that focus only on the expense line are walking by dollars to pick up pennies.

The real opportunity to reduce the impact of returned goods is to improve the recovery rate on inventory that flows through the reverse logistics pipeline. The key to improving the recovery rate is to improve the disposition of the goods returned. By improving the disposition of an item, we mean processing an item in a different way that results in receiving more money for the item.

For example, let’s say an item comes back from a customer and the reverse logistics management system (RMS) is configured to destroy the item. If all the terms and conditions for processing this item can be adjusted so this item can be liquidated or returned upstream for credit, the impact on the bottom line can be significant. This recovery rate can go from costing money to dispose of the item to receiving money from liquidating or returning the item.

The chart to the left illustrates the impact of improving product disposition has an the recovery value of an item. It is clear that while reducing the cost of processing an item from say, $0.53 per item to $0.52 per item is helpful, the impact of improving the disposition of an item from recycling for pennies on the dollar to returning the item up stream or putting the item back in inventory is much greater. Instead of just saving a penny on processing, you can recovery the full cost of the item.

Most retailers and manufacturers never look at how items are set up within their RMS after the system is installed or the item is added the first time. Items are set up and forgotten unless the price is changed or the item is deleted.  Taking the time to analyze how items are dispositioned can often result in dramatic improvement of the amount of money recovered.

The best way to identify “items of opportunity” is to start by categorizing products by their disposition. After this is done, start working you way from the bottom of triangle up to the top.  What are you throwing away? Why are you throwing it away? Can it be donated, recycled, liquidated or returned to the vendor? Can it be repackaged and/or put back into stock? You get the idea.  The goal is to push every SKU up the recovery value arrow.

Once you have identified an item of opportunity, you will need to review the terms and conditions associated in the purchase agreement. You may need to renegotiate the returns terms and conditions. This may be as simple as talking to a OEM supplier over the phone. For some, it may require significant negotiation. Don’t let the extra effort of negotiating stop you.  This can often result in a successful outcome, especially if you have good industry benchmarking information to bring to the table. The Robinson-Patman Act prevents companies from discriminating between companies on issues like this. If one retailer, for example, is allowed to liquidate product and your companies agreement requires you destroy the product, you are in a great position to negotiate.

Improving the disposition of a SKU will dramatically improve the recovery rate on returned product. This can also reduce other potential risks and liabilities, like those associated with disposing of an item improperly.  Reviewing item disposition is well worth the time and effort, and will dramatically reduce the negative impact of product returns and recalls on the bottom line.

Today, every third party service provider (3PL) is looking for ways to increase margins and increase the cost of change for their customers.  They want to figure out ways for their customers to be as loyal to them as they are  to their customers.  One way is to develop additional services and many consider developing reverse logistics capability.

If you are a 3PL executive who is considering this, there are a few things you need to keep in mind.  First, the priorities in returns are completely different than normal forward logistics.  Timing is not as critical but having the ability to profile each individual SKU as it is received into a facility is much more critical.  Every item can be handled one of six ways and you must know how to determine the disposition and what characteristics drive that disposition.

Returns processing could require a basic understanding of repair techniques, parts management, liquidation, and recycling.  The degree of each required depends on your customer and the category of product you will handle. While a basic understanding is needed, many 3PLs outsource some of the more complex internal services, such as electronics repair and testing, recycling, and transportation.  Your customers only want one throat to choke but, depending on the customer and the product being processed, they may not care if you outsource some of the minor functions. Be careful, however, the customer will hold you liable if there are any problems with a sub-contracted service provider.

Finally, your WMS system will not work in reverse.  WMS systems are built to move boxes for the most part.  A reverse logistics system is built to disposition returned goods and is guides operations through a very complex system. Your WMS provider may tell you it can do the job when it comes to processing returns, but do your homework and make sure it can handle all the complexities of product disposition management.  In all likelihood you will need specialized reverse logistic software to manage the process, product flow and disposition.

It is possible to put together a virtual reverse logistics solution for your customers but your customers will expect a certain amount of expertise.  Time has shown that companies that simply offer to be the 4PL manager without any real value additive services are quickly by passed by the “real” service providers.

Does the development of reverse logistics capabilities make financial sense for most 3PL’s?  It depends on the 3PL.  For the most part, fees in the reverse world can be twenty to forty percent hire than traditional distribution and transportation profit levels.  It really comes down to the needs of your customer base, internal capacity to take on developing new services and your appetite for investing in a development process. However, if you are currently serving a customer who needs help processing returns, you are half way home and should consider developing your company’s reverse logistics capabilities.