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.

In today’s Podcast Curtis Greve shares three tips that can help improve returns processing; improve relationships with key vendors, suppliers, and liquidators; and increase the bottom line contribution of your reverse logistics program.

Do you know how to eat an elephant?  One spoonful at a time.  Curtis will share his experiences and time tested best practices that will help you improve, one step at a time.

Like Alan Weiss says “If you improve 1% everyday, in 70 days you will be twice as good.”  Here is three percent to help get you started.

The Reverse Logistics Podcast

Your host is Curtis Greve.

Today I am launching my new web site under the new company name of Greve Consulting, formerly known as Metreks.  The focus of my practice is to help companies develop their returns management, aka reverse logistics capabilities.  Viewers will find a lot of useful information on returns including the Reverse Logistics Podcast, which will feature industry leaders from the world of reverse logistics, and my blog which is packed with articles and information to help service providers, manufacturers, retailers, and liquidators make more money.

Register to get the blogs sent to your desktop automatically or save www.GreveConsulting.com as a favorite on your browser.  Your comments, questions, suggestions and feedback are encouraged.  I will use your feedback to improve the value delivered from the site.

Check in from time to time to see what is new.  For example, you might want to check out The Cost of Doing Nothing.  This is a form you can fill out to find out how much opportunity you and your company have in developing your reverse logistics capabilities.

Whether you call it returns management or reverse logistics, it’s all about improving returns and maximizing profits.  I hope you enjoy the new site and get a lot of value out of GreveConsulting.com.

Reverse logistics, or returns management, is often an overlooked link in a company’s supply chain. For the majority of supply chain executives, the returns processing department is that dirty, disorganized part of the warehouse that they don’t even like to walk by, much less do anything about. It is difficult to get excited about reverse logistics because returns aren’t pretty and the impact on the company is not clear.   It is hard to overcome “ugly and confusing” without a significant reason to do so.

However, according to a February 2010 study by The Aberdeen Group, companies that were considered best-in-class in returns processing averaged a 93% customer satisfaction rating. This was 12% higher than the lower 80% of companies surveyed.

The lesson is clear. Focusing on returns processing, aka reverse logistics, pays off in better customer satisfaction and that will directly increase earnings.

The National Retail Federation reported the rate of return for 2009 was over 8% of total sales. That same survey reported that 58% of retailers that participate used a manual system to track returns.  For manufacturers, the picture isn’t any better.  Again, the 2010 study by The Aberdeen Group reported that the cost of processing returns for hard goods manufacturers can range from 9.0% to 14.6% of sales.  Just like their retail counterparts, over 60% of the companies had no tracking system and called out the need for visibility as the major gap in their reverse logistics program.  Both retailers and manufacturers rated returns management as “very important”, yet in many companies, reverse logistics is virtually ignored.

Look at the implications of these two studies from the  reverse point of view.  Returns average over 8% of total sales, cost anywhere from 9% to 15% of sales to process, impacts customer satisfaction by as much as 12%, yet virtually ignored by executive management around the world. The question is “Why?”

Why would top leaders, captains of industry, ignore a function that could improve customer satisfaction by 12% or more. Why would companies known for their controls and discipline allow 8% of their inventory go to waste and fall off the grid? Why would corporations known for their ability to focus their team and execute strategy ignore a process that costs 9% to 15% of sales?

The answer is perspective and resources. Perspective can be difficult because few look at returns process or think reverse logistics pipeline. A CEO may see that their return rate is up from 8% to 10% during Christmas, but few have visibility to the total cost of processing those returns.  Every senior executive understands the importance of communications when interacting with customers who are returning a product but few look at the return policies and associated procedures to see if they are causing customer dissatisfaction or creating trouble with their suppliers.  Often when companies do take a look at the reverse pipeline, they are reluctant to commit resources to improve the processes.  Even if they did focus their talent and resources on returns, most companies don’t know where to begin or have the valuable experience to address the issues with improvements that will put money on the bottom line.  For many, the result is that reverse logistics gets ignored and neglected.

If your company hasn’t examined their reverse logistics processes in over the last couple of years, or if you are a senior executive asking yourself basic questions like “I wonder how we handle returns?” you have a big opportunity to increase customer satisfaction, reduce expenses and drive profitability sitting right under your nose.

As the first quarter is coming to a close many companies are happy to see the volume of returns slow down to a more reasonable rate. Some are happy to be finished with processing peak volume while others are wondering how they will ever get caught up.

There is one truism about returns, regardless of whether you are talking expensive hi-tech gear or a plastic toy and that is that returns don’t get better with age.  In fact, for hi-tech equipment you can count on loosing 10% in value about every 30 days.  What this means is that you must have a strategy to turn your inventory in less than 30 days in order to maximize the value of the goods in your reverse pipeline.

Strategy?  Many executive responsible for returns processing never think “strategy”.  They just kind of know what is going to happen and they hope they survive.  As the old wise man said “Hope is not a strategy.” Without a well thought out plan, that is flexible, the chances of maximizing the value of the inventory flowing through your reverse pipeline is slim.  What is the “Value of Inventory” in a reverse logistics pipeline?  Here is a simple formula that captures the idea:

Returned Asset Net Value = (Original Value X Recovery %) – Total Cost to Process

So why does the value drop on returned items so quickly?  First, goods flowing through the reverse pipeline are handled an additional 8 to 10 times which adds a lot of wear and tear on the items.  Second, returned goods generally aren’t packaged and transported with the same high quality outer packaging, pallets, and protection like similar new goods.  These goods are often shipped without packaging at all and are not stacked on neat pallets, with standard Ti-Hi arrangements that help secure the freight during transportation.  As a result, this stuff get beat up.  Many manufacturers will tell you that a lot of their returns are fine when they enter the reverse logistics pipeline in the back of their customer’s store, but by the time they receive and finally process the goods, it is barely recognizable in some cases.

Another factor is obsolescence caused by technology improvement and age.  For example, a few years ago one of my facilities was receiving Apple iPods.  We were processing these iPods and selling them on the secondary market for about 50% of original value.  Right in the middle of the returns season, Apple introduced a new iPod that was much improved over the previous model we were handling.  Overnight, the value on the secondary market dropped from 50% to 30 % of original value.  The asset recovery buyers knew that in 60 days their current market that justified paying 50% on original retail would drop dramatically as demand for the newer model grew.

It is for these reasons that when it comes to reverse logistics timing is everything.  However, in order to get the most out of returned assets, a strategic plan of action must be developed that addresses the following key variables:

• Volume - Peak returns volumes can be between 30% to 150% higher than an average month and can include additional recalled items, return to stock goods and other asset profiles not normally processed.  Estimated volume, type of returns, profile of the assets and disposition are critical pieces of information to know in order to properly plan.
• Space – temporary space will be needed to handle higher inbound volumes at the start of the season and then used for holding outbound surges as the volumes are processed.
• Labor – additional shifts will be needed which will require hourly labor and additional management. Many often forget they will need more trained supervisors, who will require more time to get up to speed.
• Disposition Partners – Communicate expectations to liquidators, recyclers, and others you ship to so they understand your plans and the volumes they will need to be ready to receive.  A word of caution on dealing with liquidators: don’t expect a liquidator who barely pays for product in normal times to be able to pay three or four times as much during the first quarter when their sales are down.  You will need to qualify, inspect, and select other buyers to keep your asset recovery product flowing.
• Red Flags – Develop metrics to be used to monitor inbound, processing, and outbound activities.  Have a plan of action if the key metrics get out of tolerance.  For example, you might track inbound trailers in your facility and set a metric of 12.  If you see there are more than 12 trailers coming in, the action will be to rent one storage trailer from company X for every trailer over 12.

Remember, the biggest difference between a normal distribution center and a reverse logistics operations is that in the latter, you don’t know what you are going to get until you open the door.  In a warehouse, you have somebody placing orders and you know how much you are going to receive and when it is going to get there.  Not so in a return center.  The key to building a good plan to deal with returns is to build in flexibility.  You have to be able to increase or decrease each component based on what is going to come in the door and you won’t know that until it gets there.  Simply hoping the flow is smooth and things work out is asking for trouble and will cost money.

Reverse logistics is like other functions in a supply chain.  In order to optomize performance you must have a goal but like the old saying goes “A goal without a plan is just a wish.”  For the average company, returns are over 8% of assets and the average company spends between 9% & 14% of revenue on these returned assets.  That is a lot of money to leave to chance.  Developing a strategic plan of action focused on maximizing the value of all assets flowing through the reverse pipeline is crucial to your companies success.

In today’s podcast, Curtis Greve talks about Disposition Management and why it is the key to maximizing the value of assets flowing through your reverse logistics pipeline.

There are only six possible dispositions for any item in a return center, whether it is a can of soup or an expensive computer.  Do you know what they are?  Do you understand how the disposition of the item impacts the value received for an asset and how that determines the cost of processing?  You will after you listen to this podcast.

RLP #1 – Disposition Management

The Reverse Logistics Podcast

Your host is Curtis Greve.

The leading reverse logistics academic program is threatened by Nevada state budget cuts. Under the direction of Dr. Dale Rogers, the University of Nevada, Reno has built one of the best Supply Chain Management Programs in the country.

The program and Dr. Rogers has been recognized around the world for their quality and contributions to the supply chain management field. Organizations such as CSCMP, RLA, IWLA, and WERC have all recognized Dr. Rogers and his program for their thought leadership. In addition, to their leading programs UNR boasts of many graduates who are leading executives in their field throughout the world.

In spite of all of this, Dr. Rogers and his entire program is in jeopardy of being cut. Unbelievable but true! The SCM program, and maybe even the College of Business, could be casualties of the state budget crisis. This crisis means that the university can revoke the tenure status of faculty that are part of a discontinued program. That means that all of us in the SCM program: Dr. Carter, Dr. Lemke, Dr. Amato, and Dr. Rogers, may be forced to leave the university.

UNR President Milton Glick said in the Reno Gazette-Journal: “We have to make some vertical cuts,” he said. “We will probably eliminate a number of academic programs and probably one or two colleges … It’s better to maintain quality at the university than to degrade the quality of what we do.”

We need to help keep this vital program going. Everyone reading this, who has benefited from Dr. Rogers, the SCM school at UNR, or is better because of their work and their graduates should write and encourage UNR to keep this vital program alive. Write to:

Dr. Marc Johnson

Executive Vice president & Provost

University of Nevada

MS 0005 Clark Administration

1664 N. Virginia Street

Reno Nevada 89557-0005

Email: marc@unr.edu

Dr. Rogers, his staff, and students have helped many companies improve their reverse logistics programs and supply chains around the world. It is time for those of us who have benefited from this program to voice our support. Write today.

According to a recent report by the National Retail Federation on Customer Returns in the Retail Industry 2009, retail return rates dropped from 8.70% in 2008 to 8.04% in 2009.  This is on total retail sales of $2,307 billion for 2009, which was down 3.5% from 2008.  While this shows a decline in return rates for 2009 compared to 2008, the total dollars returned is still 10% higher in 2009 than in 2007.

The relative drop in returns could be caused by a number of factors:

1. Higher percentage of staple items versus luxury items.  In a poor economy people tend to spend less on “nice to have’s” and more on “need to have’s”.  This buying pattern drives down return rates.
2. This study doesn’t include recalled items that were returned into stock or back to the manufacturer resulting from guaranteed sales agreements.  Retailers stocked up, customers didn’t buy and the product was pulled from the shelf and returned to the manufacturer.
3. Consumers in poor economies tend to drop down to a lower price retailers.  People that may have shopped at higher priced mall shops started to going to Walmart, while people that shopped at discounters started shopping at outlet malls, flea markets, or simply doing without.  Generally as you drop down from one level of retail to the next, the return rates are less due to customer expectations and retailer return policies.

One point is clear from this report.  Returns and how retailers and manufacturers deal with those returns will have a significant impact on the bottom line.  According to this report, retailers processed over $185 billion in returns in 2009.  Considering how, according to a recent study by the Aberdeen Group, 93% of companies don’t even measure associated costs of processing returns, there is significant opportunities for improvement for many retailers and their manufacturers.

During January and February, reverse supply chains are maxed out.  Volume can be three or four times greater than during the sunny days of summer.  Many reverse logistics operations get backed up because they cannot ship enough to create the space needed to process more inbound product.  The bottleneck in shipping is usually driven by two primary drivers.  One driver is waiting for shipping authorization and arrangements to another warehouse, like the vendor, or another return center, or back to the factory where the product will be reworked.  The second cause for clogging up a returns facility is waiting for the secondary market buyer to pick up the goods.

Shipping product within a company’s supply chain or to another facility waiting to extend the process, can be slowed down during peak months.  However, while this issue can significantly impact the returns facility,  with focus and discipline, you can get the goods flowing.  To control this, the return center simply tracks outbound shipments waiting for authorization daily and agressively follows up on both the larger shipments and those that are behind in providing authorization or making transportation arrangements.

The second cause of return center inventory ballooning is often caused by the secondary market.  The secondary market buyer, otherwise know as the company that bought your salvage, will often buy goods and then delay making transportation arrangements.  Some asset recovery buyers will go out of their way to avoid picking up goods, that in many cases, they have paid for weeks earlier.  Why?  Because it is the first quarter and their sales have dropped off just like the rest of the retail world.

Remember, the secondary market is driven by two things: Cash and customer demand.  In January and February, salvage buyers are flush with cash and they want the great goods coming from the return center but there is NO demand.

Salvage buyers typically have limited storage and sell product either directly to the consumer or one level above the consumer.  A slow down in consumer demand has a direct impact on salvage buyer’s cash flow and holding capacity.  Salvage buyers have to balance the need for inventory in March and April with the steady drop of cash during the first quarter.  Combined with the fact that most salvage buyers don’t actually pay for goods until they pick them up, salvage buyers will leave product they’ve “purchased” in your return center as long as you will let them get away with it.

There are two thing that can be done to ensure this doesn’t cause you a problem.  First, in the salvage buyer’s terms and conditions, you should specify that product is to be picked up within a specific time limit after they have been notified.  A good general rule of thumb is five business days.  If the buyer doesn’t pick the good up, you have the right to put them back on the market and/or charge them a holding fee.  If you charge a penalty, make sure you have the controls in place to ensure you collect the fee before they are allowed to pick up the goods.

The second thing you should do is to build in a disciplined process where outbound salvage goods are aged and tracked by lot and buyer.  There should be one person responsible for updating the list everyday and one person should call the salvage buyers that are behind in pickup, everyday.  It is best that the person calling the salvage buyer is part of the group that is responsible for selling the goods.  This will give the caller leverage to get the salvage buyer to act.  As in most things, the squeaky wheel gets the oil.  This is an area where disciplined follow through will really pay off.