Posts Tagged ‘vendor agreements’

Negotiating returns privileges are often overlooked by many buyers and sellers.  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 defective or recalled.
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.
4. Hi-tech, market dominating manufacturers will not pay consolidation or handling fees and will be much more strict when it comes to enforcing terms and conditions for returns.
5. Goods returned that do not comply with previously agreed to 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 often 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.

Last week at the Reverse Logistics Association conference in Bentonville Arkansas, there was much discussion about the future of vendor return agreements.  These are agreements between retailers and manufacturers that will govern returns privileges and related fees.   So what can manufacturers expect in the future.  In a word: “Simplicity”.  Retailers are dealing with more and more vendors with more complex returns requests.  With the push toward sustainability, more regulations coming, and the continued growth in off shore manufacturing with no domestic facilities, the need for simplicity is understandable.

So what will the future options be?  Manufacturers will be given two choices:

1. The retailer will ship returns to them.
2. Retailers will dispose of returns as they wish and pass on any additional costs that are incurred.

Fees for these two options will vary depending on the choices made and the retailers will expect the same amount of credit for the goods themselves from the vendor regardless of the choice made.  Manufacturers should consider the variables and options involved carefully.

If a manufacturer goes with the second option and retailers will  dispose of the goods as they wish, which gives the retailer the option to liquidate the product, keeping all the proceeds; or dispose of the product and charge additional disposal fees if incurred.  Like many things, the devil is in the details and both retailers and manufacturers should carefully variables and associated charges.  If both retailers and manufacturers work together, they both could find opportunities to reduce handling, transportation and disposal costs.   For example,  if a manufacturer is going to dispose of the returned goods when they receive them, they might want to work with the retailer to dispose of the goods at their returns facilities and save the extra leg of transportation and handling.

If accountability is a concern, manufacturers should work with their retail partner to negotiate a damage or swell allowance.  How these allowances will be set and confirmed should be clarified and agreed to but again, additional transportation and handling can be avoided.

When negotiating return agreements with retailers, the manufacturers should keep the following points in mind:

If you want to have the product sent back, leverage a return authorizations and condition requirements in order to get a lower consolidation fee.

If returned goods are liquidated by the manufacturer, work with your liquidation partners to coordinate shipping returned goods directly from the retailer to the liquidator, saving two legs of transportation and additional handling.

If you are going to allow retailer to do what they want it the product, ensure agreement is made on fees and related liability.

If you are going to negotiate a swell allowance or a similar off invoice credit, get agreement on how the allowance is going to be calculated, how it will be verified, and how often it will be adjusted.

One thing that will not change is the need for manufacturers to have an exit strategy for their goods.  Thinking through an “exit strategy” for merchandise is an important concept for every manufacturer, regardless of what they sell or to whom they sell it.  Developing a well thought out exit strategy for returned goods will significantly impact  retail customer satisfaction.  Developing an exit strategy for both customer returns and recalled goods will make a manufacturer easier to do business with, help avoid additional liabilities, and will ensure they maximize the value of goods in their reverse logistics pipeline.

Negotiating returns privileges are often overlooked by many buyers and sellers.  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, required condition, disposition and where the actual product will end up.  Usually, it’s a matter for negotiation and there is not one set of rules to go by when working out the critical details. That being said, there are some guidelines or expectations that one can use as a starting point for negotiating return privileges.  Those guidelines are:

1. The manufacturer / OEM generally pay for freight directly or indirectly for returned assets, whether defective or recalled.
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.
4. Hi-tech, market dominating manufacturers will not pay consolidation or handling fees and will be much more strict when it comes to enforcing terms and conditions for returns.
5. Goods returned that do not comply with previously agreed to 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 often 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.