Anyone who has ever worked with me will tell you that I am a gadget guy.  I love technology and pride myself on being an early adapter.  I have also spent the last quarter of a century in the field of reverse logistics.  These two passions give me a unique appreciation for how companies deal with defectives, returns, and customer support.

A few months back my wife bought me a Kindle and it has been fantastic.  It is one of the best new gadgets to hit the market in the last ten years and many believe it will ultimately make traditional brick and mortar book stores obsolete.  For me, it already has.  While on a business trip last week, however, I was going to use it and the only thing that would come up on the screen was “Your Kindle Needs Repair Please Call Amazon Customer Service at 1-866-321-8851.”

Being addicted to reading, it was critical for me to get this resolved immediately.  I called the number and expected to have some operator walk me through a diagnostic maze that would hopefully reset everything back to what it was.  I must admit, I was not expecting this call to go well and was ready for a fight. However, when I reached Technical Support the response was much different than I had anticipated.

“Sir, I’m sorry you are having trouble with your Kindle.  I am going to overnight a replacement to you right now.  You will receive it tomorrow. Please put the defective one in the box with the shipping label on it and return it sometime in the next 30 days.  I will send an email with these instructions and my phone number if you have any questions or issues.  Sir, please be sure to return the old Kindle within 30 days or we have to charge you for the replacement.” I had two emails within minutes.  One was almost an apology with instructions and the other was shipping information.

I was blown away.  No hassles, no questions, no push back, just great customer service.  Studies have found that customers who find the returns experience unpleasant do not come back 85% of the times.  Studies have also found that customers who find the returns experience pleasant will return to shop again 95% of the time.  As for me, Amazon has a fan who will not only be a loyal customer for years to come but will tell everyone they meet about their great customer returns process.

Is your customer returns experience at the same level as Amazon’s?  If not, you have an opportunity to dramatically improve customer satisfactions which will lead to more sales and profits.

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.

For manufacturers of seasonal goods, the biggest challenge when it comes to processing returns is dealing with seasonal peaks in volume.  Companies that provide seasonal products can get as much as 80% of their returns within a 30 to 60 day window.  Many online retailers and catalogers face the same challenge.  High seasonal sales means high return rates in a compressed period of time.

When designing a returns processing facility, the size of the facility and fixed assets employed is setup to accommodate roughly 80% of peak volume.  While this works well for most companies that have small spikes in their rate of return, for manufacturers of seasonal products, online retailers, specialty retailers, and catalogers this approach would result in having a lot of excess space and equipment for nine or ten months out of the year.  The annual costs would be prohibitive and a waste of money.

For companies that must process big spikes in returns volume, there are two options that will be much more cost effective.  The first option is to outsource part or all of the processing during the peak returns period.  If you are thinking about this option, there are a few things to keep in mind:

• Ensure processing requirements are documented in detail and given to the third party processor prior to any pricing or contract development
• The documented processes should become part of the contract as a defined scope of work
• The scope of the project must be clearly defined with estimated inbound volumes, outbound volumes by processing category, pricing, approval processes, start and end dates
• The third party must guarantee a minimum amount of processing space and storage space at a specific location
• Pricing should be a flat monthly rate for fixed expenses such as rent, utilities, etc, plus a cost per unit for each disposition – scrap, refurbished, new, clean, or what ever the various conditions of the goods you expect to receive
• Expectations for “A stock”, “B stock”, “Scrap”, and overall yield rates should be clearly stated and pricing should be based on these expectations
• Startup costs and decommission costs should be clearly specified
• Productivity incentives and penalties based based on volume adjusted budgets should be included in the contract
• A clear change order process must be documented to address any unanticipated processing requirements that may be outside of the scope of the agreement
• Ensure appropriate insurance coverage is in place for the inventory that will be processed
• Avoid any lean provisions that might impact how processed inventory is handled, this includes specifically baring the third party from holding merchandise over payment disputes etc.
• Develop a communications plan that will provide direction to customers, vendors, suppliers, and internal team members

The second option to consider is to set up and operate temporary return centers yourself.   In order to seriously consider setting up a temporary facility and operating it internally, you must have the infrastructure to support the operation and the management that can focus exclusively on the temporary operation.  Once you determine you have the internal support needed and the leadership, you will want to ensure you keep the following in mind:

• Define capital assets and personnel that will be required for each week the temporary facility will be open
• Define lead times and availability for both, in detail
• Identify sources for fixed assets and facility labor
• Develop contingency plans for space, equipment, temporary employees and management in case volumes are significantly higher than anticipated
• Identify SPOC (single point of contact) to plan, oversee and report on the project
• Ensure lead times for identification and contracting of temporary space, equipment, and employees are sufficient
• Identify mile stones from the start of planning to decommissioning
• Establish weekly meetings/calls to communicate progress in planning, startup, processing, and decommissioning of the temporary facility
• Define “Red Flag” process that will be used to communicate issues during the event
• Develop a communications plan that will provide direction to customers, vendors, suppliers, and internal team members

Whether you choose to outsource seasonal returns’ processing or set up a temporary solution and manage it yourself, one of the best things you can do is to conduct an “After Action Review” within 30 days after decommissioning.  This meeting should include everyone who had anything to do with the temporary facility and notes should be taken and sent to everyone to ensure they improve the process the following year.  Whether you are going to outsource or do it yourself, the key to handling seasonal returns processing successfully is to “Plan Your Work and Work Your Plan.”

This podcast is a recording of a presentation Curtis Greve made at the June 2010 GBQ Redbank Executive Breakfast Series in Columbus Ohio.  In this presentation Curtis discusses the threats and opportunities posed by three external drivers every company will face in the next five to ten years:

1. Dramatic increases in transportation costs and the resulting changes that will be required in supply chain networks
2. Reverse logistics networks and how companies can increase their bottom line profits by as much as 4%  or more
3. Continued demand for development of sustainable solutions and how sustainability can dramatically increase profits

Curtis points out that most companies will agree these three drivers are going to happen.  Business executive also realize that these elements will have a negative impact on their business if they don’t address the situation, yet few are doing anything about it.  How a company deals with these inevitable changes will determine if they will thrive or if they will find themselves at a significant disadvantage that could result in their ultimate demise.

The Reverse Logistics Podcast

Your host is Curtis Greve.

The third party logistics business is nothing if not unique.  Providing third party reverse logistics services is an even stranger world to live in.  For some reason, companies don’t view outsourcing reverse logistics services like they do any other supply chain function.  Don’t believe me?  When was the last time you knew somebody who had trouble with a carrier, fired them and swore “Never to outsource transportation again!” 

But in the world of reverse logistics, there are plenty of people who tried outsourcing returns once and got burned so the company just reverted to the old process and never looked back.  There are a number of companies that tried outsourcing reverse logistics but either picked the wrong third party or the wrong manager to set up the internal support systems.  In both cases, everyone found themselves in a bad position and were happy to go back to the old way of processing returns.  When it comes to returns, failure often means never trying it again.

Going backwards seems to be too often the norm when it comes to returns.  However, if at first your don’t succeed, companies should ask themselves – “Why did we fail?”  Experience has shown there are usually a few things that both third party service providers and the executives did not do that could have made the difference.

First, the company outsourcing returns must realize there is one big difference between a returns processing center and a distribution center.  In a distribution center, you know what your are going to get, how much is going to come in, when it is coming and when it is going to ship.  In a returns center, nobody knows what your are going to get, how much is going to come in, when it is going to get there or what condition it is going to be in when you get it.  Nobody in the company can accurately predict asset returns nor can any third party service provider, at least to any reliable degree.  Because of these unknowns, third party return center agreements must be structured in a manner that is flexible. Inflexible plans, budgets and pricing will lead to trouble.  The structure of a reverse logistics outsourcing contract must be flexible.  The contact should provide a basis to adjust costs and pricing based on variability of unit volume, item condition, and preferred disposition.

The second tip to avoid conflict between the service provider and the outsourcing company is to clearly define all the assumptions made when developing budgets, pricing, incentives, physical facility attributes, and manpower plans.  In addition to detailing out these variables, there must be clear language about what is to happen if these assumptions are incorrect.  One thing you can be sure of is that the assumptions will be incorrect. The parties must agree on the tolerance level for each assumption and the process to make any adjustments in pricing, cost, or other areas that might be impacted.  It is for this reason that having a clearly defined change order process is critical.

If an organization outsources reverse logistics services to a third party logistics company, they may not see cost per unit they were expecting, but they will have an agreement that focuses on customer satisfaction and that promotes maximizing the value of goods flowing through the reverse logistics pipeline.  In the end, this is the most valuable contribution a returns process can make to an organization.

Today, every 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 comes in 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.

Finally, your WMS system will not work in reverse.  Your WMS provider may tell you it can but you will need Reverse Logistic Software to help manage the 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.  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 that may not see any real profits for eighteen to twenty-four months.

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 today’s podcast Curtis Greve explains the basics of the secondary market and liquidation.  According to Dr. Dale Rogers, the secondary market accounts for over 2.25% of GDP.  The secondary market is much bigger than most think and a great opportunity for many companies looking to develop additional sources of revenue and working to reduce their carbon footprint.

With imports growing, economic pressures increasing, and shareholder demands for more sustainable business practices continuing to build, developing liquidation capabilities is an effort that is well worth any executive’s time and attention.

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.