Servicizing will drive significant change in reverse logistics and sustainability. To learn more about what servicizing is and how it will impact reverse logistics listen to Curtis Greve’s presentation on the subject. To listen and view the presentation click here.
We are pleased to officially launch RLSC, the Reverse Logistics & Sustainability Council. RLSC is an organization built by reverse logistics and sustainability professionals for reverse logistics and sustainability executives around the world.
RLSC‘s goal is to provide valuable content and thought leadership to the reverse logistics and sustainability industry. It doesn’t stop there, however. We are building a community of professionals that will work together to move the industry forward.
Let’s face it. Not much has changed in reverse logistics over the past 15 years. There are a lot more regulations, many more service providers, and sustainability has exploded onto the scene, but the “reverse logistics industry” is still plodding along, seemingly unaffected. We want to do something about that.
It is time for reverse logistics to be recognized as a strategic discipline critical to every company’s supply chain and sustainability efforts. To do this, reverse logistics and sustainability executives have to come together and work with each other to address common issues and challenges that we all face. Before RLSC it was difficult for most people to even get their hands on the latest research, benchmarking information, or come up with a list of possible service providers. Now, RLSC Members have a single source to get the answers they need.
RLSC‘s role in this is to aggregate information and present industry experts and thought leaders to reverse logistics and sustainability executives. This is accomplished by providing access to resources, industry experts and information on ReverseLogistics.com, through RLSC‘s webinars and at RLSC Conferences.
We’ve all been to those other industry events that seem to have the same old speakers, the same sad sales pitch, and the same old worn out subject matter. Everything costs more money and seems to have no real value. RLSC is different. Once you are a member of RLSC, there are no additional costs to access any information on our site, or use any of our services, like posting RFPs, Job Openings, or publishing a white paper or press release.
RLSC is fortunate to have an impressive Board of Advisors to guide us. In addition there are a number of ways for you, the Member, to tell us what you want. RLSC also has a number of ways for service providers, consultants, academics, and others to share their knowledge, content, services and programs. RLSC is building a networked community of industry thought leaders that will drive our industry forward.
Retailers, manufacturers, and extended warranty providers can join RLSC for free. Become a member of RLSC and access the world’s largest information repository dedicated to reverse logistics and sustainability.
Retailers and manufacturers often avoid dealing with their product returns until it is clogging up their warehouse or write offs hit their P&L. When their “returns problem” gets big enough to force action, they will attempt to deal with the problem quickly and as cheaply as possible. These action often result in more costs and seldom results in a real solution.
A number of studies have shown that developing an efficient reverse logistics solution can IMPROVE a retailer or manufacturer’s bottom line by as much as 3% of total sales. However, lack of experience, dedication of resources, and bad assumptions by executives responsible for addressing the returns issue result in more costs and insures the company will take another big financial hit in the future.
The key to developing a sustainable reverse logistics solution that efficiently and economically deals with product returns is to avoid buying into the five bad assumptions or myths about product returns.
The five myths about product returns are:
Myth #1 – Returns are junk.
This is the biggest and most pervasive myth about returns. Returns are not junk. In fact, studies have found that only about 20% of returns are actually defective. The other 80% are functional and are often valued at 75% to 95% of original value. Even defective returns have value if processed properly. If you look at the reasons consumers return their purchases, the number one reason is buyer’s remorse. Thinking returns are just junk can cost a company a lot of money.
Myth #2 – When processing product returns, take your time, there is no hurry.
Key to maximizing the value of returns is to process returned goods as fast as possible. Best-in-class returns operations will turn their inventory anywhere between 24 times to 50 times per year. Companies without a true reverse logistics process ignore product returns, leaving the product in the back of a warehouse or in a store until forced to do something with inventory.
Returns are like bananas not like wine. They don’t get better with age. On average, returns lose 10% of their value every 30 days. Putting off processing returns is tantamount to burning money in the back of the building. Delays in processing causes issues in reconciling claims, a source of internal shrinkage, increases damage to the returned product, and reduces the value of any product that could be liquidated on the secondary market.
Myth #3 – You do not need dedicated reverse logistics leadership.
There are a number of companies that assign responsibility for returns management to a mid-level manager that already has a full time job. Returns management is a function that requires executives to work with buyers, operations, sales people, accounts payable, and systems. Asking somebody to figure out how to run returns and do their normal job is simply ensuring that returns will get the short end of the stick. Product returns can be from 6% to 20% of a retailer or manufacturers total inventory. With this much inventory at stake, it is worth dedicating resources to properly processing the goods.
Myth #4 – Managing returns is much easier than running a distribution center.
Often, companies will take a second shift supervisor and put them over their “reverse logistics operations.” The theory is that running a distribution center is much more complicated than running returns. If you believe this, you could not be more wrong. In a DC, you receive, put away, pick, and ship orders that are composed of small, medium, and large containers. Somebody created a PO, notified the facility it was on the way, and when it arrived it was received on an invoice. When orders are received, you generally go to the same location, pick the item, load it on a trailer and off it goes. There are clear standards for receiving, picking and shipping and most companies have a WMS that drives the process. The manager’s job is simply to staff the operations properly and keep them trained and happy.
Processing returned inventory is much more complicated. First, you do not know what you are going to receive until you unload the truck. Nobody orders returns. When product returns are received, each item has to be inspected, and based on it’s condition, it could be handled one of six ways. When shipping, a return authorization request usually has to be provided by the OEM, and most of the product is not in the original carton or packaging which complicates everything. Returns processing requires dedicated, intelligent, leadership that is creative and has a broad set of skills. A common mistake company’s make is to try to save a couple of pennies by not investing in leadership for the product returns management.
Myth #5 – You can use your WMS to process returns. You don’t need special returns software.
Companies around the world lose a lot of money because they don’t want to invest in a returns management application (RMS). They think they can use their existing WMS system to process returns. However, there are so many differences (See Myth #4), that they end up doing a bulk receiving in the WMS and stacking the returned goods in a corner of their warehouse. Once the product is in the warehouse, it has to be manually inspected and prepared for shipping. Every company’s we’ve worked with that was using their WMS for returns was shocked to learn how much money they had lost because they tried to save money by using their WMS that was not built to process returns.
Returns have a big impact on a company’s bottom line.
According to the NRF, the average retailer’s return rate is 8.12% of sales. According to a study done by the Aberdeen Group, the average manufacturer spends between 9% and 14% of sales on returned product. Managing returns can have a big impact on a company’s bottom line. A first step toward improving the bottom line contribution from managing product returns is to stop believing in the 5 mythes of product returns.
If you would like to learn more about how you can find hidden profits by improving the way you manage returns, or you would like to benchmark your reverse logistics process, contact Greve-Davis.
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:
- The manufacturer / OEM generally pays for freight directly or indirectly for returned assets, whether the goods are consumer returns or recalled items.
- Retailers typically deduct the cost of returns, including charges for inventory, processing and freight, from any outstanding payables they have with the manufacturer.
- Liquidators, meaning buyers of product on the secondary market, generally provide their own transportation and pay FOB shipping point.
- 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.
- Goods returned that do not comply with vendor agreement terms and conditions are generally not returned, nor credited in any way.
- Manufacturers of commodities will pay handling fees but will expect compliance and support where customer abuse is evident.
- 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.
- Consolidation fees are paid on a percent of wholesale cost or a flat dollar amount per unit for higher priced items.
- The basis for the consolidation fees should be the cost of processing returns, not including transportation.
- 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:
|Inbound Receiving||Unload inbound trucks; receive pallets and small parcel shipments.|
|Scanning||Enter units into the returns management system or manually record each unit. This is the point of transferring ownership and where product is added to the return center inventory and the time to reconcile physical units to financial charges.|
|Primary Sortation||High volume units are sorted to pallets according to final disposition such as return to vendor, liquidation, etc.|
|Repair Area||Designated items are tested and repaired. Units that cannot be repaired are scrapped and recycled while usable parts or rare, earth minerals are collected, saved, and used to repair or manufacture other units.|
|Flow Rack Sortation||Flow rack or shelf sort area for small cube items. Product sorted by final destination address.|
|Bulk Storage||Area for large items that are too big for fixed rack area. Product will be sorted by final destination address.|
|Fixed Rack Locations||Lower level slot locations are used to sort case pack items. Upper level used to re-warehouse full pallets from fixed and flow rack areas.|
|Recycling Area||Area where products are sorted, broken down and prepared for shipment to recyclers.|
|Dumpster||Trash compactor / bailer for packaging and product disposal.|
|Outbound Shipping||Area where product is staged for shipping. Outbound manifests are reconciled to shipments and shipments are loaded on outbound trailers.|
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.
Reverse logistics service providers often struggle to grow sales. Most seem to hit a glass ceiling in terms of total revenue and can’t seem to figure out how to get to that magical next level. Most often, the missing ingredient to the secret sauce is developing and implementing a strategic plan.
Without a well thought out strategic plan, companies do not have focus across their organization, no commitment to invest time and resources in critical areas, and they end up doing the same things getting the same results. Thus, once again they hit ceiling and end up with flat revenue, if they are lucky.
Strategic planning often gets a bad rap, usually from the CEO who thinks the entire exercise is a waist of time. With the wrong approach and the wrong attitude, this will become a self fulfilling prophesy.
However, with the right approach, strategic planning process, implementation plan, and support from the top of the organization, companies can realize unprecedented growth THIS YEAR.
The Right Approach
Strategic planning for reverse logistics must take a different approach in many key areas to be effective. Unlike other companies, reverse 3PLs, liquidators, and repair service providers live in a world where product flow is unknown, requirements change without notice, and investment in capital assets is very risky. Traditional strategic planning tends to force companies to rely on these variable, basing plans on assumptions that could result in disaster. Companies in the reverse logistics space have to build flexibility and contingencies into their strategic plans. They must have identified red flags that will drive action based on real market conditions.
Back in the 1990s there were a number of good sized computer repair companies, for example, that invested a lot of money on capital assets used to diagnose and repair CRT’s. They ignored the market signs and as laptops and flat screens took market share, all their investment in fixed assets and non-transferrable processes resulted in most of them going out of business.
The Strategic Planning Process
There are two types of strategic planning processes. One is high level, very theoretical, and usually results in a very big binder of information that sits on a shelf and is ignored by the entire company until the next strategic planning meeting. The other is very practical and focused on implementation over a three to six month period. This second type of strategic planning focuses on actions and results. Clearly there is only one choice here.
If you use a strategic planning process that is built on theory and not on action, don’t expect any changes to your results. For example, some companies will spend an entire day defining their Mission Statement. Great! Every company has one so every company must need one. I’ve never known a company that made money from their Mission Statement. You might want to spend maybe an hour on this but that’s it. Think about it. Would you make more money focusing on “Mission Statements” or focusing on what your customers are asking for, where their pain is, what is happening in the market, what your competitors are up to, and what you are going to do to take advantage of the real world your people deal with everyday?
The Implementation Plan
Strategic plans can only impact an organization if the plan is implemented. You must have a method to monitor the implementation of the plan. In order to do this effectively, sub-plans must be developed that are measurable and in alignment with the overall strategy. Key management must be directly responsible for developing, executing, and reporting on these sub-plans. The best way to do this is to setup one-on-one update meetings and base a significant part of their incentive or bonus on completing the plans.
Support From The Top
For small to medium size companies to get to the big leagues, the CEO must be driving force behind the strategic plan. CEO’s that do not spend most of their time thinking strategically will never succeed. There have been countless books written about this and management gurus from Peters to Drucker to Covey all agree. The CEO’s job is to focus the company on long term performance, not short term execution. In reality every CEO focuses on a bit of both, but if you show me a company that has had flat revenue for the past few years, I’ll show you a company with a CEO that spends way to much time working on short term issues of the day and not enough time on strategically driving his organization.
The champion of the strategic plan and the implementation process must be the CEO. If at all possible, the CEO should be the person in the organization that meets with sub-plan leaders for monthly one-on-one updates. If the CEO is committed to implementing and driving the strategic plan, it will get done.
One last note on strategic planning. A wise man once said “It’s not a good plan unless it is flexible.” A healthy strategic planning process is one where plans are changed based on real world conditions and what the people responsible for the plans find out during the implementation process. It is not unusual for some parts of the plan to be dropped completely once the team learns more about the topic. Just because something sounded great back in the “Big Strategic Planning Meeting” doesn’t mean it is a good idea once your team digs into details. You must be flexible. Again, this is why the monthly one-on-one meetings with CEO are critical. Issues can be identified and addressed quickly.
The results of a quality Strategic Planning Process will be a turbo charged company with breakout, sustainable results.
If you would like more details on strategic planning and how a reverse logistics service provider can develop a plan that will result in dramatically improved sales and profits, contact Greve-Davis.
The biggest challenge most third party service providers face is growing sales. Whether a company is a traditional 3PL, a repair service provider or a liquidator growth is always a challenge. The largest companies always seem to have an advantage and regularly post 10% to 15% growth year after year, while second and third tier companies seem to struggle with simply maintaining their revenue.
Why is this?
Does size really matter to companies that outsource? Do larger 3PLs and service providers have a big advantage simply because of a larger sales force? Is it the software and infrastructure large companies have invested millions into that makes the difference? The answer to these questions is the same – NO.
They key to driving sales in for 3PLs, service providers, and liquidators really has nothing to do with the size of company, the number of sales people on the street, nor the fancy systems or technology used monitor sales efforts. The answer is much simpler and a lot less expensive.
We have worked with several large and small 3PLs for the past five years and we were part of the senior staff of a 3PL that averaged over 10% growth in sales, every year, for 15 years. Looking back, the keys to growth are clear. It comes down to five best practices:
- The Sales Team
You would never pack up your family, get in the car, start driving down the road, and then look at your spouse and ask where they want to go on vacation. However, if you do not have a well develop sales strategy that is exactly what you are doing every day. The best 3PLs have a clearly defined sales strategy that clearly articulates:
- Target markets
- Marketing strategy – speaking, social media, and traditional marketing activities
- Sales growth goals in terms of dollars and percent
- Targeted number of proposals sent to new prospects
- Targeted win rate for proposals sent to new prospects
- Cross selling or customer share expansion strategy
Developing a clear, comprehensive sales strategy is the key to growing a third party service provider.
The Sales Team
For many medium and small companies, the “sales team” is really the owner or CEO. Sometimes they may have a VP of Sales, but in practice this person provides the admin support to the owner so they can go close the deal. Growth in companies where the CEO is the key sales executive is limited to the time and energy available for the CEO to focus on sales.
Companies should look at hiring a strong sales executive as an investment. Depending on the market and the relative sales cycles, it could take six to twelve months for a top sales executive to bring in enough revenue to pay for their expenses. Successful 3PLs know this and invest in top talent, knowing it will pay off in the long run. They also know that there are many “sales executives” that never sell anything. They monitor their individual efforts and results, and cut their loses when it is clear they made a bad hire.
Many companies have a decent strategy and a good sales team but they don’t focus their efforts to ensure they are pursuing the right prospects. If left unchecked, an energetic sales person will go after any business they think they can close quickly. The fact is that the time and money it takes to pursue a prospect worth $300,000 is the same as a prospect worth $15,000,000.
3PLs must provide the oversight and be engaged with their sales team on a daily basis to ensure each sales executive is focused properly. The best sales strategy in the world is worthless if a sales executive is left to go their own way and pursue any prospect that will answer the phone.
Monitoring sales activities is critical to achieving your growth goals. This does not require expensive CRM systems, though a good CRM can help. For years, we had a 20 man sales team and all we used was a simple spreadsheet and email to track their activities.
There are a few metrics you need to establish and these metrics should be used for monitoring purposes as well as incentivized goals for your sales executive. Keep it simple. Use something like:
- Number of leads per month/quarter/year
- Number of proposals per month/quarter/year with annual revenue per proposal
- Track dates of when a proposal was submitted and establish rules on when a proposal that is not won or lost comes off the board
- Number of wins with annual revenue
- Number of losses
A typical 3PL should win about a third of the proposals submitted to a new prospect and about half of the proposals submitted to an existing customer.
Perhaps the most important discipline a service provider or 3PL should have is to make sure that the sales strategy, individual sales goals, incentive programs, and sales reporting metrics are all in alignment. There are many companies that use one set of metrics for long term sales strategies, a different set of metrics for sales activity monitoring, and incentivize the sales team based upon something completely different than any of the above. Everything must be in alignment. Sales executives will focus their activities on what drives their income higher, not on a strategy or a report.
Aligning sales strategy with sales executive goals and incentives, along with a simple monitoring process will establish a self correcting system that will help ensure your company achieves both long term and short term growth goals. This will also help the 3PL leadership team efficiently use their time.
If you have any questions or would like to learn more about how to drive sales and monitor your sales team, contact Greve-Davis.
The world is getting smaller every day and thanks to the internet, many foreign companies are now able to reach the US market. However, many struggle dealing with customer service issues such as developing and administering a return policy, figuring out how to deal with US retailers when it comes to reverse logistics, product recalls, and processing customer returns.
Whether a company in China is selling goods to a retailer or direct to the consumer via the internet, they often face big hurdles when it comes to the reverse supply chain. Just as US companies face big cultural differences when going to China or India, the same is true for Chinese and Indian manufacturers and online retailers selling in the US. Large companies such as Alibaba, DHGate, and Ally Express have significant challenges when it comes to providing after sales support to their US customers.
APAC companies working to break into the US market or increase sales should consider developing tailored programs that provide reverse logistics services to their US customers.
A reverse logistics program should include:
- A competitive returns policy
- A solution for customer returns and product recalls
- Returns terms and conditions that would be included in the original purchase agreement
- Disposition management capabilities that will protect their customer, maximize the recovery rate on returned goods, and protect their brand name
Selling product in the US is often the easy part of doing business. The challenge is to provide after sales support that will improve customer satisfaction and ultimately lead to increased sales. If you would like to learn more about how to set up comprehensive reverse logistics capabilities in the US and Canada, 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.
Managing returns is a business function that most companies prefer to ignore. Unfortunately, dealing with returns is a fact of life for every retailer. To effectively manage a reverse logistics supply chain, you must understand that there are a number of important support areas that have a significant impact on the cost of processing assets that flow through the reverse logistics pipeline.
One of the most high-impact support areas is the transportation department. Over the next ten years, transportation expenses will increase more quickly and impact reverse logistics more extensively than any other support function in the reverse logistics ecosystem. Factors such as rising fuel prices, truck driver shortages, and increased regulation will force transportation executives to rethink their reverse logistics network in light of the new cost reality.
These recommendations are the result of working with many companies around the world for more than twenty-five years and helping them improve their reverse logistics processes. These best practices address errors in design that companies initially made at the onset of processing returns.
The time to develop a returns handling process—devoting resources to returns management—is BEFORE a company begins to receive returns in a critical mass. In the early stages of returns-processing development, companies typically look to the vice president of transportation formulate a process that moves returned assets from point A to point B. Transportation executives, who are largely unfamiliar with reverse logistics processes, would naturally turn to models applied to managing forward transportation of goods. They might think that, compared to the volume of goods and the complexity of managing transportation for new goods, developing unique cost models for the transportation of used goods is not worth the extra time and effort. . Thus, the existing infrastructure, processes, and costing systems that are used for outbound transportation are foolishly used for returned goods. Therein, lies the problem.
Transportation, in the world of reverse logistics, must be designed with unique, different terms and conditions (Ts & Cs) than typical forward transportation. Just as driving your car in reverse requires a different approach and posture than driving your vehicle forward, transportation agreements that govern moving goods through a reverse pipeline require different terms, conditions, and controls to properly manage transportation and its related costs.
Managing transportation costs is one of those often-overlooked areas when designing reverse logistics processes. Very often, the internal traffic department is completely excluded from the discussion or folded into it at the back end. Excluding transportation as an integral piece in developing reverse logistics solutions always results in higher costs.
While moving products in reverse, the control mechanisms that exist in the forward supply chain either don’t exist or are in the wrong location within the supply chain infrastructure. For example, a retail company may have great LTL rates for goods shipped from their distribution centers to their stores. The pallets are weighed and put on the appropriate trailer along with the manifest and other shipping documents that have been efficiently produced by the transportation system or warehouse management system. When the truck arrives at the back of the store, the receiving manager simply signs for load and verifies that everything on the manifest is received. Now, let’s reverse this.
The store moves all the returned, defective, and recalled goods from the customer service desk to the stock room. Here, it is recorded and prepared to return to the company’s return or distribution center. If you used the same transportation processes and controls as the forward process, the store would first have to weigh the shipment before it is loaded onto a truck.
This is where the problems start. Stores usually do not have a scale in the back of the store to weigh a pallet. For those executives who don’t work with transportation terms, traditional carrier contracts are based on a cost-per-one -hundred pounds shipped, commonly referred to as cost per hundred-weight (CWT). CWT is the unit of measure for charging and transporting products. This is the common basis for carrier contracts used since the 1800s. Using this standard, the trucking company charges its customers a negotiated dollar amount for every one hundred pounds of product shipped. In returns processing, calculating transportation costs in this way poses a significant problem. Assume for a second that you actually do have a scale at store-level to weigh the pallet. Once weighed, a proper shipping manifest that lists all the items in the shipment must be produced. Again, these manifesting systems typically only reside in the distribution center, not in the store.
Assuming the same systems, processes, and agreements that are used going forward is not a best practice in reverse. In fact, it is not even practical. Not only will this not work efficiently, it will cost a lot more money. Using a traditional transportation processes to move assets through the reverse logistics pipeline results either in losing control, inflating transportation costs or both.
Most often, manufacturers and retailers ship customer returns and recalled product in LTL quantities. The standards and methods employed in moving product forward are often built into the process when the carrier contracts are negotiated, thus ensuring poor controls and inflated costs.
While the aforementioned CWT standard for forward distribution of product does not work for transporting returns. As previously mentioned, the problem is that the vast majority of reverse logistics networks do not have a way to verify the weight of a pallet of returns at the point where the pallet is created. When this happens, the company shipping the returns must rely on the weight reported by the carrier to determine how much is to be paid for transporting the load of returns. This lack of verification and control can lead to many problems, the largest of which is paying too much in freight charges. In addition, products are generally not returned in nice new cartons or in over-wraps that will hold up well during shipping.
Standard methods used to identify inventory and to file freight claims are also compromised. Odd-sized items such as ladders, power tools, and knockdown furniture are problematic. To top it all off, literally, in an effort to maximize a trailer’s cube utilization, carriers will often double-stack pallets of returns, which causes a significant amount of damage and loss of recovery value.
Transporting returned goods that are later re-classified as hazardous materials can be complicated and very costly. The largest lawsuit ever brought against a business by the State of California was one involving the transportation of returned goods from a retailer’s stores to its return center. The products shipped were widely used consumer goods that the majority of the world uses every day—nuclear waste. The State of California took exception to the retailer using the long-standing practice of shipping returns to their return center as non-hazardous product. At the returns facility, the products were reclassified as hazardous and processed for appropriate destruction. The State of California said no! The State ruled that products such as shampoo and household cleaners were, in fact, “hazardous.” The requirements for shipping returns classified as hazardous material are much more complicated. The liability is exponentially larger. The cost of transportation is three to four times higher than non-hazardous shipping charges. Because of the complexities of moving hazardous goods out of the primary stream of commerce, manufacturers of particularly dangerous products utilize special reverse logistics transportation services. Manufacturers of car batteries, pool chemicals, and pesticides have well-developed transportation procedures that should be followed. Transporting hazardous products using homegrown processes and systems is not worth the risk.
In general, the best transportation contract for palletized returned goods is often not based on CWT but on the space the pallet of goods takes up on the trailer. Instead of negotiating a cost based on weight, write a contract based on the cost of space for one pallet on the trailer. Buying space on the trailer will actually discourage carriers from double stacking pallets, which can cause significant damage to returned goods that aren’t packaged in their original cartons. Reducing the freight damage to returns will increase the assets recovery rate, which will fall directly to the bottom line. Carriers don’t exactly love this method but they will eventually agree to this pricing method as long as they have the protection of a maximum weight per pallet, limited liability for claims which we will discuss later, and a piece rate for those odd shaped items referred to above.
You must be prepared to help convert CWT rates to a rate per pallet. It is simple and straightforward; but it is so foreign to carriers that they often need help calculating the rate. To calculate the rate per pallet, you will need the following:
- Average of pallets per trailer
- Average weight per pallet
- Average cube per pallet
- Carriers proposed CWT
Once you have these variables, work with the carrier to develop a cost per pallet. You will want to plan quarterly internal reviews of your assumptions and rate reviews with the carriers. These reviews will give both parties a way to mitigate any risks from any incorrect assumptions and changing variables. After a year or so, you may want to reduce the number of rate reviews to once, annually.
Transportation Based on Space
Setting up transportation based on space will give your employees who prepare the returns for shipment an opportunity to control transportation costs by insuring they “stack it high and tight”. A key, measurable metric is quantity per pallet. An expected minimum should be established for the average quantity of product returned on a pallet. An example of palletizing instructions is: each pallet should hold an average of three hundred units, be at least six feet but no taller than eight feet high, and should not extend beyond the dimensions of the pallet itself. As the product is received or shipped, depending on the control points within your specific reverse pipeline, tracking the average units per pallet provides an easy way to minimize the cost-per-unit for transportation. Shipment inspections and feedback to the shippers will ensure proper pallet stacking and height. Negotiating reverse logistics carrier rates based on space makes accounting and verification of the freight charges simple and straight-forward. This method will eliminate the need for tare weight calculations and any debates on hub readings or other weight disputes.
If you have any questions on how to figure out how to manage and/or reduce reverse logistics transportation expenses contact Greve-Davis.