‘Tis the Season for Returns — Is Your Reverse Logistics Strategy Up to the Task?

Stephen DeAngelis

December 17, 2010

As you open the plaid socks and matching tie given you by your Uncle Fergus this Christmas, your first thought might be: “Bless him, it’s the thought that counts.” Your next thought might be: “Will I be able to exchange these?” Although no store relishes the thought of returned merchandise, Kohl’s not only bites the bullet but uses its liberal returns policy in its advertising as a way of differentiating itself from the competition. Atul Chandra Pandey, Industry Head – Enterprise Applications Integration and Service with Infosys Technologies, notes that “customer service is becoming central to organizational thinking” and that “supply chain execution – especially reverse logistics- can play a central role in creating differentiation” [“Creating a differentiated customer experience through reverse logistics,” Supply Chain Matters, 23 June 2010]. He continues:

“One of the key areas of focus in this renewed thrust on customer service is to leverage reverse logistics which traditionally has been a cost function and often not seriously attended to. The recent economic downturn drove organizations to rethink the entire value chain and look at every opportunity to squeeze costs and retain customers. Reverse logistics provides critical link in connecting sales & marketing and customer service chains and provides significant opportunities for reducing customer pain and increasing satisfaction, controlling costs, and gaining deeper visibility into customer choice and preferences.”

Fellow blogger, Derek Singleton, started me thinking about returns and reverse logistics when he pointed me to a blog that he posted on the subject [“How to Get Value Out of Your Returns,” The Software Advice Blog, 15 December 2010]. Singleton writes:

“As businesses gear up for the holiday shopping season, the focus is squarely on stocking shelves. Right now every business is scrambling to meet increased demand and maximize sales. But focusing purely on sales ignores what’s just around the corner – the returns season. Just as businesses recover from the post-holiday hangover, the returns will start pouring in. From January to March, returned gifts will inundate the supply chain. To minimize costs, these returns will have to be handled efficiently. Curtis Greve, principal at Greve-Davis consultancy, estimates that retailers and manufacturers lose 7-13% of sales revenues handling returns each year. This amounts to handling costs of over $40 billion annually. According to Greve, efficiently handling returns can add as much as 5% to the company’s bottom line.”

Those are pretty impressive statistics. Bill Morrison, CFO of GENCO Marketplace, a liquidator of returned merchandise, claims that “many companies ‘leave millions of dollars on the table’ by failing to make the best use of excess inventory” [“Happier Returns,” by David M. Katz, CFO Magazine, 1 February 2010]. As Singleton notes, “For retailers and distributors operating at narrow margins, this is a big deal.” His conclusion: “”The high cost of processing returns points to a simple fact: managing returns is just as important as managing sales.” He continues:

“In order to effectively manage returns, businesses need an efficient reverse logistics operation. Reverse logistics recaptures value from returned and excess inventory by sending it back through the supply chain for resale, reuse, or recycling. When the concept of reverse logistics first surfaced in the 1980’s, it received little attention from the business community. The general perception among businesses at the time was that returns carried little to no economic value. Today, however, it is understood that there is high cost to doing nothing about returns. A laggard economy and narrowing profit margins has drawn attention to reverse logistics. It is now viewed as essential to any supply chain management solution. When used properly, reverse logistics can increase customer satisfaction, reduce waste, and recover lost revenue.”

Shibesh Banerji, principal consultant at Tompkins Associates, believes that the term “reverse logistics” doesn’t sufficiently describe the nuances involved in the process. He notes that reverse logistics is more than simply putting the normal supply chain in reverse. For that reason, “Banerji and his colleagues prefer the term service supply chain to represent the scope of reverse logistics” [“Reverse logistics: Learn from your returns,” by Lorie King Rogers, Modern Materials Handling, 17 September 2010]. I’m not sure that term captures the nuances any better, but Banerji’s point is nevertheless well made. Singleton goes on to provide some recommendations about how to increase value in the reverse logistics supply chain. He writes:

Unlocking Value From Your Returns – Best Practices — Unlocking value from returned inventory is easier than you think. We have compiled a list of best practices, and the companies making them work, to help you in the reverse logistics process. Best practices for reverse logistics include:

• Investing in reverse logistics systems;
• Outsourcing logistics operations;
• Accessing secondary markets;
• Offering recycling services; and,
• Preventing returns in the first place.”

Since Singleton works for a company that profits from recommending software solutions to companies, it should come as no surprise that he recommends selecting the right software as one of the ways to improve the reverse logistics supply chain. He writes:

“When quality management decisions are combined with an optimal IT infrastructure, reverse logistics operations run at maximum efficiency. Several software companies are now offering end-to-end solutions specifically designed for reverse logistics. These solutions are out of the box configurable and can be integrated with existing software systems. Businesses that implement reverse logistics systems are able to decrease operation costs and return cycles. To fully understand the benefits of reverse logistics software, consider the case study of Tellabs, the world’s largest provider of telecommunication services and equipment. Tellabs implemented Click Commerce’s return management software and now processes over 90% of returns requests automatically. Implementing the system led to an 88% reduction in return cycle times and decreased in-transit inventory by $1.76 million per month. Clearly, a software solution can deliver tremendous cost savings and streamline reverse logistics operations.”

An increasing number of companies are turning to third-party logistics (3PL) providers to manage their reverse logistics challenge. That is the subject to which Singleton next turns. He writes:

“Handling the execution of returns is the most difficult part of running an efficient reverse logistics operation. If running in-house logistics is cost prohibitive, then it’s best to contract out with a third party logistics (3PL) provider. 3PL providers are great for managing a business’ transportation logistics and usually help accelerate the return cycle. 3PLs are also great for improving product visibility since most offer automated tracking services. Automated tracking provides real-time monitoring of product status and location. This helps plan ahead for inventory fluctuations. The auto parts giant Mopar, the service wing of Chrysler, was able to improve their logistics operations by working with UPS. To enhance Mopar’s logistics operations, UPS used barcode technology to track returns in a centralized database. This allowed Mopar to plan ahead for inbound products and respond with staffing changes to manage the influx. It also significantly reduced travel times, enabling faster resale of the product. Today, the average shipping time for a return from China to their Michigan headquarters is only 3-4 days.”

How you handle a returned or damaged product often depends on what the nature of the product. As Katz writes:

“One common error [companies make] stems from a failure to distinguish between different types of distressed merchandise. Customers are often flummoxed by electronics and appliances, for example, and often return perfectly functional iPods, cell phones, or vacuum cleaners in the mistaken belief that the products don’t work. In such cases, manufacturers might do well to test the products, spruce up the packaging, and sell them “as new” instead of liquidating them immediately, recycling them, or simply disposing of them. On the other hand, companies might want to liquidate seasonal apparel or other lesser-value items as-is and as soon as possible.”

Finding a market for damaged or returned merchandise is important in maximizing value and minimizing loss. That is why Singleton recommends that secondary markets be assessed for the value they can add. He writes:

“The secondary market, valued at $300 billion, is where products wind up after businesses sell liquidated inventory to resellers. The secondary market includes outlet stores, discount stores, such as Big Lots, and flea markets. Many businesses have avoided the secondary market because of concerns that it hurts brand image. Businesses that opt out of this market miss an enormous source of revenue potential. Instead of liquidating product for someone else to sell on the secondary market, businesses should sell on the secondary market themselves. Electronics companies have been quick to tap in to the secondary market by offering repaired and refurbished products at steep discounts. Dell features a Dell Outlet center on their website that offers shoppers the option buy used. By offering used computers at a fraction of the cost of new products, Dell recovers value from a returned item and taps in to the vast secondary market. Online retail is an easy way for retailers and manufacturers to gain access to this market. Reselling products online is easy and nets more revenue than liquidating.”

In an informative 10-minute video, “Tim Konrad, senior vice president of Genco Supply Chain Solutions, cites some innovative techniques that retailers and manufacturers can employ in order to boost the recovery value of product coming back to stores.” You will have to register to view the video, but registration is free. The final reverse logistics topic covered by Singleton is recycling. He writes:

“When the product cannot be reused or resold, disposal may be the only option. Any time that a product is disposed of, it is critical to minimize the environmental impact of disposal. This means responsibly disposing of hazardous materials and salvaging raw materials for reuse when possible. Today, its no secret that socially responsible business practices are good for company image and the environment. In this day and age, going green can bring in little cash as well. The proliferation of consumer electronics has produced a significant amount of electronic waste (‘e-waste’). It is particularly important to properly dispose of e-waste because of the presence of hazardous materials. Hewlett-Packard (HP) has made the recycling of e-Waste simple for consumers. HP provides consumers with drop locations for batteries and ink jet cartridges and offers return services for old computers. This service makes HP customers feel environmentally responsible and generates revenue from salvaging valuable recyclables.”

As Lorie King Rogers notes in an article cited above, “The best practice in reverse logistics is to prevent product from coming back in the first place.” Singleton agrees. He writes:

“The easiest way to reduce returns handling costs is to prevent the return in the first place. One way to prevent returns is to produce a high quality product that is unlikely to be returned by the customer. It is also a best practice to provide quality customer service to fix problems with or near the customer. Solving the problem close to the customer is not only good for customer satisfaction, it eliminates unnecessary handling costs. Apple manages returns avoidance by providing professional troubleshooting at their Genius Bar. When a customer has a problem that can’t be fixed at home, they can take it to an Apple ‘Genius.’ At the Genius Bar, the priority is to fix the problem in the store rather than send it off to a repair center. This saves customers from having to wait for repairs and it saves Apple the cost of sending the product to a repair center.”

You can download a pdf copy of Rogers’ article, by clicking on this link. It provides more information on this important topic. Singleton concludes:

“Businesses that approach returns through the lens of asset recovery are able to maximize resource use. In order to realize the full benefits of a reverse logistics operation, it is critical to make quality management decisions and use software capabilities.”

Reverse logistics is especially important for any business concerned about the so-called “triple bottom line.” The triple bottom line (sometimes abbreviated as “TBL” or “3BL”) refers to doing business with “people, planet, and profit” in mind. As Wikipedia notes, the triple bottom line “captures an expanded spectrum of values and criteria for measuring organizational (and societal) success: economic, ecological and social.” With the post-holiday returns season just around the corner, it might be a good time for companies to review their reverse logistics processes and see if they can’t squeeze a little more value out of them.