When asked about their reverse logistics programs, many manufacturers reply that they don’t have enough customer returns to justify spending any time on the subject. They look at the amount of actual defective customer returns and conclude that the impact of reverse logistics is simply immaterial to their business. It isn’t worth talking about.
What they often do not understand is that defective customer returns on average accounts for less than 25% of assets that flow through the reverse pipeline. The big mistake that many executives make is that they confuse their customer return rate with the total volume of goods returned. Customer returns is only a piece of the pie.
Another fact that is often overlooked is that for companies that send parts to the field for repair, on average get one out of six parts returned. Parts are returned because they weren’t needed, they ordered the wrong part, or they ordered more than they needed. Components and replacement parts are a big part of many manufacturer’s returns. Processing returned parts is a key component to an economically efficient parts management program.
Product recalls are another major volume contributor to the reverse pipeline. Last year the US Government ordered over 1,000 products recalled off the market. Empirical evidence shows that for every government mandated recall there is at least one non-mandatory recall made by either the manufacturer or their customers. For every manufacturer, the question is not if you will have a product recalled off the market. The question is when will you have a product recalled off the market.
Another aspect of reverse logistics that is often overlooked by many manufacturers is end-of-life strategies and seasonal recalls. These are recalls that are generated when new models are sold or there is a change in season. The product in the field or on the shelf is in great condition, it just didn’t sell and it needs to come out of the market in order to avoid conflicts with new product sales. Many companies such as Walmart require manufacturers to have end-of-life strategies and plans in place to process recalls before they will agree to purchase from them.
To recap, here are four reasons why every manufacturer should focus their resources and efforts on improving their returns processes:
- Defective returns, while only 3% – 6% of sales, are only 25% of the assets that get returned.
- One out of every six parts shipped to a customer or repair technician is returned
- The Government ordered over 1,000 different products recalled off the market in 2010
- Many manufacturing customers require end-of-life and recall processes to be in place before they will buy
Studies have found that ON AVERAGE manufacturers spend between 8% to 15% of sales on returns. When manufacturing executives understand that these returns include much more than simple customer defective returns they suddenly find the time and resources to focus on improving their reverse logistics processes. These efforts often result in increasing profits by as much as 3% to 5% of sales!
Now that is worth talking about.
Ever notice how some companies always seem to struggle with processing returns and managing their reverse logistics programs? The reason so many companies struggle with returns is because it crosses natural internal departmental boundaries. For example, in a retail environment, store operations take the hit on sales when a customer returns an item. The buyer or merchandising will take a hit on margin when that same item is written off. Transportation eats the cost to haul the item from the store and warehouse operations pays for labor to unload, record, and store the item until it is disposed of, at which time the warehouse gets to pay all the disposal costs.
All along the way, no one party is taking responsibility to minimize the overall costs of handling the return, much less making sure company gets the most for the item when it is processed. Due to the nature of returns, from an organizational standpoint, there is a traditional separation of duties and responsibilities that make managing returns challenging.
For these reasons and many more, the most important decision a company can make to improve the management of returns is to put a senior leader in charge of returns management. This does not mean writing a returns management goal for the VP of Supply Chain, or the CFO. This means making reverse logistics somebody’s job. For an organization to have an effective reverse logistics program the organization must invest in leadership. You need someone waking up everyday worrying about one thing – managing returns.
When I was first put in charge of returns operations at Wal-Mart, Lee Scott, then vice president of logistics and eventually Wal-Mart’s CEO, called and asked me to come over to his office. On the way over, I remember thinking he was going to give me a pep talk and tell me how important it was to provide great store service. Much to my surprise, Lee wanted to talk to me about how important it was that I worked with the merchandising group and store operations. Lee told me he wanted me to attend the weekly merchandise meetings and work with store operations to develop store returns processes that would save the stores time and money. He expected me to develop programs to maximize return goods value, improve vendor relations, and contribute to the bottom line. This was all on top of running great operations. This was the first time I realized that I was responsible for more than just running a warehouse operation that happened to be called a return center.
Lee wanted me to work with buyers on vendor agreement language, the invoice office task force on store processes, and work with the transportation department to ensure returns didn’t take up too many trailers that were needed to deliver new goods to stores serviced out of the local distribution center. If a vendor was upset with the volume or condition of goods returned to them, it was my job to work as with that vendor, merchandising and store operations to develop a solution that worked for everyone. I remember driving home from the meeting thinking that this job was much bigger than I thought and that I was probably underpaid.
Always the visionary and thought leader, Lee Scott saw the potential value in the development of a comprehensive reverse logistics program. Lucky for me, I was given the opportunity to focus all my time and energy toward this effort. From 1988 to 1994 I was responsible for Wal-Mart’s reverse logistics program, spending much more of my time working with buyers, vendors, suppliers, store operations, systems and accounting than I did managing the actual operation of the facility.
While I was responsible for return center operations and my team did increase productivity by 130% during that time, the impact on the overall company from working with the related teams as directed by Lee Scott had a much greater impact on Wal-Mart’s profitability. The true significance of this approach was recognized in 1990, when Mr. Sam asked for a special report on Wal-Mart’s returns program be included in the board of director’s quarterly report.
Because of my unique perspective as head of the program, I was able to help the different departments throughout Wal-Mart uncover opportunities and profits they would have missed. It is this unique perspective that crosses internal functional boundaries that enables a company to join the best-in-class organizations and add significant dollars to the bottom line. In fact, a study of reverse logistics completed by the Aberdeen Group in February 2010, identified the establishment of an executive responsible for reverse logistics as a best practice that companies recognized as best-in-class shared.