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.

The third party logistics business is nothing if not unique.  Providing third party reverse logistics services is an even stranger world to live in.  For some reason, companies don’t view outsourcing reverse logistics services like they do any other supply chain function.  Don’t believe me?  When was the last time you knew somebody who had trouble with a carrier, fired them and swore “Never to outsource transportation again!” 

But in the world of reverse logistics, there are plenty of people who tried outsourcing returns once and got burned so the company just reverted to the old process and never looked back.  There are a number of companies that tried outsourcing reverse logistics but either picked the wrong third party or the wrong manager to set up the internal support systems.  In both cases, everyone found themselves in a bad position and were happy to go back to the old way of processing returns.  When it comes to returns, failure often means never trying it again.

Going backwards seems to be too often the norm when it comes to returns.  However, if at first your don’t succeed, companies should ask themselves – “Why did we fail?”  Experience has shown there are usually a few things that both third party service providers and the executives did not do that could have made the difference.

First, the company outsourcing returns must realize there is one big difference between a returns processing center and a distribution center.  In a distribution center, you know what your are going to get, how much is going to come in, when it is coming and when it is going to ship.  In a returns center, nobody knows what your are going to get, how much is going to come in, when it is going to get there or what condition it is going to be in when you get it.  Nobody in the company can accurately predict asset returns nor can any third party service provider, at least to any reliable degree.  Because of these unknowns, third party return center agreements must be structured in a manner that is flexible. Inflexible plans, budgets and pricing will lead to trouble.  The structure of a reverse logistics outsourcing contract must be flexible.  The contact should provide a basis to adjust costs and pricing based on variability of unit volume, item condition, and preferred disposition.

The second tip to avoid conflict between the service provider and the outsourcing company is to clearly define all the assumptions made when developing budgets, pricing, incentives, physical facility attributes, and manpower plans.  In addition to detailing out these variables, there must be clear language about what is to happen if these assumptions are incorrect.  One thing you can be sure of is that the assumptions will be incorrect. The parties must agree on the tolerance level for each assumption and the process to make any adjustments in pricing, cost, or other areas that might be impacted.  It is for this reason that having a clearly defined change order process is critical.

If an organization outsources reverse logistics services to a third party logistics company, they may not see cost per unit they were expecting, but they will have an agreement that focuses on customer satisfaction and that promotes maximizing the value of goods flowing through the reverse logistics pipeline.  In the end, this is the most valuable contribution a returns process can make to an organization.

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.

Many companies that undertake development of their reverse logistics capabilities, aka returns processes, often find an unexpected benefit that can drive significant dollars to the bottom line. What’s that benefit? The ability to support guaranteed sales agreements.

Guaranteed sales agreements are buying deals between manufacturers and retailers, or similar B2B relationships, where the party selling the goods, agrees to take back any unsold units over an agreed to amount, after an agreed date.   An example of this would be if the maker of a hot new toy were to make a deal where the retailer to buy one million units for the Christmas season, but the retailer can return the unsold quantity over five hundred thousand units, after the first of January.

Manufacturers like this idea because they get a big sale and they have product on the shelf.  If it is a hit, they  maximize sales and avoid out of stocks.  The retailer’s love the idea because they have hedged their bets.  If the item is only half as hot as the seller said it would be, they are protected and can return the unsold portion.  The buyer has protection against excess markdowns if the sales are lite and he has plenty of product if sales are strong.

The special returns process used for unsold goods under a guaranteed sales agreement is call the “recall process”, “marketing returns”, “merchant returns”, or similar name.  Regardless of what you call it, it is the returns process used to remove unsold goods from the buyer’s supply chain and return it to the sellers supply chain.

Many companies do not take advantage of guaranteed sales options because they do not have a well developed reverse logistics program to handle the flow of goods coming back.  Companies depend on the recall process embedded in their reverse logistics program to ensure compliance through out the chain. With a well defined recall process, the parties have control and the checks and balances in place to ensure that both the retailer and the manufacturer can properly control and account for the goods flowing back to the original manufacturer.

Today, many leading retailers and manufacturers rely on the recall process to hedge their bets and maximize profits. The volume of “recalled goods” flowing through a return center, can be 50% or higher of total volume in the reverse pipeline.  In weeks following Christmas, recall goods can be as high as 90% for some.

Manufacturers use their recall processes to transition from season to season. This is especially cost effective to companies whose manufacturing is offshore. Many famous name brand manufacturers use guaranteed sales agreements and recall processes to go from having packaging with Christmas trees to packages with Easter Eggs, repackaging the same product but with relatively little additional expenses, minimal time delays, and significantly reduced lead times.

The key to leveraging guaranteed sales agreements for both manufacturer and retailer is a reliable reverse logistics program. For many executives that are the sponsor behind developing reverse logistics processes in their companies, they often don’t realize this until well after they have finished the hard work of developing their returns capabilities.   For them, finally, they get a pleasant surprise for all their hard work and efforts.

Reverse logistics was born from the desire to improve customer satisfaction. As competition increased and the living standard improved after World War II, customers demanded better quality and service.  As a result, people started to return items at a greater rate.  Retailers and manufacturers, seeing an opportunity to gain or keep market share eased their return policies.  For many companies, such as Wal-Mart, this was way to differentiate themselves to the customer.

In the mid 1980′s, when I was responsible for Walmart’s reverse logistics operations, I received a call from Sam Walton’s office.  Mr. Sam wanted a returned item that was an outrageous example of an item that had been returned and money refunded to a customer.  He was going to use it at an upcoming store manager’s meeting.   I went out on the floor and found a Stanley Thermos that we had recently processed from a store. On the bottom of the thermos there was a date stamped showing the date of manufacture – 1954. The first Walmart store didn’t open until 1962.  I grabbed the thermos and the store return tag and sent it over to Mr. Sam’s office.

A few weeks later, at the Wal-Mart Store Manager’s meeting, Mr. Sam held the thermos up and asked the store manager that had given the refund to come up on stage. The nervous manager walked up on stage and stood beside  Mr. Sam.  Mr. Sam shook his hand, thanked him for doing a great job and then praised him for providing such great customer service.  This guy understood that taking back a return wasn’t about a $20 thermos, that had clearly not been bought at Walmart.  It was about customer satisfaction.

All the managers in the attendance got the message.  Over the next few months, the volume of Wal-Mart’s returns increased significantly, as did sales, earnings, and market share, all which were the result of keeping customers happy, one return at a time.  By the way, that same Stanley Thermos is now on display in the Walmart’s Visitors’ Center in Bentonville Arkansas.  The message lives on.

Reverse logistics is all about customer satisfaction.  In a study published by the Aberdeen Group in February 2010, out of the 160 enterprises examined, those companies rated in the top 20% in terms of quality of reverse logistics program had an average customer satisfaction rating of 93% compared to the other firms ranked in the lower 80%, whose average customer satisfaction rating was 81%.

In other words, companies that had well developed reverse logistics programs were ranked significantly  higher in customer satisfaction.  Interestingly, the same study found that for both, the top 20% and the lower 80%, the cost of reverse logistics, as a percent of total service operations costs, were within 1%.  The point being, it isn’t about spending more money to process returns.  The difference is in how and where you spend the money you invest in your reverse logistics program.

Every executive understands the positive impact of improving customer satisfaction.  Sales grow, customer turnover decreases, over all moral improves and earning go up.   This study proves that there is a direct relationship between customer satisfaction and reverse logistics.  Reverse logistics can help both top line and bottom line results through processes  that improve customer satisfaction.

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.

Attention manufacturers, OEM’s, and retailers, you can work together to reduce the cost of transporting returned goods from the retailer to the manufacturer simply by working together.  Most retailers do a lot more business with carriers than do their suppliers, manufacturers, and OEM’s.  As a result, retailers are able to negotiate better LTL, Truckload, and small package rates.

However, many times when it comes to who pays transportation bills for goods moving from the retailer to the manufacturer in the reverse logistics pipeline, the manufacturer end up paying the carrier directly, at a higher rate. This is often the default assumption, but it doesn’t have to be.

If you are a supplier or OEM that does this, I have a great tip for you.  Go to your retail customer and ask them to pay for shipping and bill you.  Of course you will want to see what their transportation rates will be, but for the vast majority of suppliers, they will see a significant savings.

Savvy manufacturers often encourage their retail customers to work with them on this by agreeing on a mark up on the rates paid by the retailer, which is still lower than they would pay with their rates.  With this arrangement the retailers make the spread between what they pay the carrier and what they bill their supplier. This also helps by providing the retailer more volume with their favorite carriers that the retailer can leverage to get better rates in the future on all their freight.  The manufacturers saves big because they can dramatically reduce their transportation costs on returns by using the retailers rates which will be much better than what they can typically get from their carriers.