Posts Tagged ‘manufacturer returns’

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.

Hi-tech manufacturers are under growing cost pressure from rising costs of rare earth metals.  Many of these metals you have heard of such as gold, silver, and platinum.  Some of these metals most of our readers have never heard of such as palladium, ionium, gallium, and other “ums”, all of which are used in cell phone, TVs, and PCs. The reserves for many of these metals will be used up over the next 20 years.  To add to the inflation risks, 97% of these metals come from China.

In addition to the dramatically rising costs of metals, manufacturers are also facing increased costs and potential liability from product disposal.  There are 17 states that have laws on the books that outlaw throwing e-waste in their landfills.  In addition to these 17 states there are a number of other states that have similar laws working their way through their legislatures.  All of this is in an attempt to do something to reduce the 400 million units of e-waste that are landfilled every year in the US.

This can have a significant impact on electronic manufacturers. When states, such as Rhode Island, decide they want e-waste cleaned out of their landfills, they charge the manufacturers. To be clear, consumers threw these items in the landfill, not the manufacturer.

The question is what can a manufacturer do to control the rising costs of metals and reduce the risks of having to clean up a landfill after their customers have finished using their products?  The answer is to rethink the manufacturing process by incorporating reverse logistics processes that harvest parts and recycle returns and end of life goods.

Some wonder if trying to develop these capabilities are worth it. We argue that it is not only worth it but the way of the future.  Did you know that one ton of mobile phones has more gold in it than 17 tons of gold ore?

Think about this – According to the Electronic Takeback Coalition every year there are about 1.2 billion cell phones sold worldwide. At any one time there are over 4 billion mobile phones in use around the world. Assume that for every phone purchased there is one that is thrown away. That is 1.2 billion cell phones or about 200,000 pounds of waist created every year.  If the manufacturers were to extract just the gold, silver, palladium and copper from just one ton, or 6,000 of these phones, the metals alone would be worth over $48,000. That’s about $8 of value per unit at 2011 metal prices.

If only 50% were recycled and used in the manufacturing process, mobile phone manufacturers would be reusing $4.8 billion dollars of gold, silver, palladium and copper. This doesn’t include a number of other rare earth metals that could also be extracted and reused. In addition, the manufacturers would also greatly reduce their carbon footprint and their risk of liability from their goods going to a landfill.

This is just one example of the impact the integrating reverse logistics into the manufacturing process could have for a manufacturer.  The same is true and impact greater for PCs, TVs, and other hi-tech electronics.  The only question is why aren’t the manufacturers adopting this? Now that is a great question. The answer is that manufacturers have to rethink how they source their materials and manufacturer their products.

Note to Apple, Nokia, Google, Sony, Samsung, and others – do the right thing…profitably.

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.

When a manufacturer and retailer meet to discuss the selling of product, often the subject of returns comes up. The management of customer returns is as much a part of selling most products as shelf space allocations or package design. The methods that can be used to reduce the number of consumer returns are less often discussed than the policies and procedures used to govern them. This is unfortunate because the best way to reduce the cost of returns is to reduce the number of items that consumers present for return. This can and should be accomplished by education, precise, easily understandable instructions, and a common sense approach to meeting the needs of consumers. The practice of producing ever more strict returns policies will only turn off customers and, in the end, reduce sales. Retailers have proven this over and over again.

Let’s look at a few best practices that a manufacturer can use to help consumers avoid the need to make a store return.

• Helpful packaging, if the item needs to be assembled, let the picture on the carton be one that shows the whole unit, after assembly, in a clear way, hopefully from more than one angle. If the loaf of bread that the bread maker produces is round, don’t show a picture of a rectangular loaf of bread on the package.  Remember to use the package as your first line of defense against returns and your first opportunity to educate the consumer about your product.

• Instructions and package inserts, be certain that they are accurate and easy to understand. Do not let the engineers write, proofread, and approve the instructions. By all means try them out on executive assistants, spouses, warehouses workers or even an executive or two. Make sure that there are pictures that accurately reflect how the pieces fit together and how the unit will look at various stages in the assembly process.If it is a consumer electronic product, be certain that all the connecting wires or ends are color-coded and that the wires are bundled when possible. If it is possible to label parts or wires with a letter or number, by all means do so. Regular folks find that to be of great assistance in assembling a product. Note those facts in the instruction manual. All instructions and inserts should be written in multiple languages.  Use a brightly colored insert to ask consumers to call your 1-800 technical support line before returning the product to the retailer as well as printing it in multiple places in the assembly instructions themselves.

• Have an 800 technical support line.  The number should be on all instructions and box inserts that are available to the consumer. In large, clear fonts specify that customers must call the technical support line before returning the item to the retailer. The support line should be staffed when your customers are most likely to need it. That means evenings and weekends. This is the time when most of your customers will be assembling your products. It is always amazing to me when I see a support line open from 9:00am to 4:30 pm, Monday thru Friday. Make sure that the people who answer the phone can plainly speak the language. I know that overseas call centers are a popular means to control costs but when your customers are calling your help line they are generally already frustrated with your product. Do you really want to give them another reason to be upset with your company? Call the help line yourself, on different days of the week and at different times of day and night to see what kind of service you get.

To summarize, look at the ways to reduce store returns that have the most positive effect on consumers.  You will quickly see that making effective use of your packaging, instructions, inserts and 1-800 tech support lines are the most cost effective method of improving customers satisfaction and reducing product returns. These methods are time-tested ways to make the sale stick and keep customer returns to a minimum.

When the manager of a 3PL or aftermarket service provider looks at the logistics world, why on earth would he or she want to get into reverse logistics? It is the opposite of traditional or forward logistics. It is like flushing things up the pipe, not a natural thing to do. Reverse logistics providers deal with unusual problems. Nothing is in a new box. Everything is “broken” or “unwanted”. The service offerings seem unrelated and fragmented. There are no beautifully cubed out truckloads riding on pallets. Yet reverse logistics is becoming an ever more important link in the supply chain. 3PL’s and aftermarket service providers would be wise to think about the possibilities. Some would argue that the changing supply chain landscape makes adding a strong, state of the art, reverse logistics offering a survival move, not just a strategy to add incremental revenue.

The cost of fuel and the lack of qualified commercial drivers are causing the buyers of 3PL and aftermarket services to include reverse logistics more and more into their planning. The rise of sustainability initiatives and the confusing morass of state level end-of-life regulations for Consumer Electronic manufacturers are a big cause for concern.

These are all important factors. However, in the future the largest driver behind the need for reverse logistics and the least understood, is the coming shortage of rare earth minerals. This shortage will force manufacturers to examine their entire supply chain to uncover ways to reclaim, not only the parts, but the minerals and metals as well. This process will compact and shorten the supply chain and those 3PL’s and aftermarket service providers who can’t provide this service in an integrated way run the risk of becoming as extinct as dinosaurs.

 

Minerals – Years of Reserves Left

Hafnium – 5 to 10 years of supply

Indium – 5 to 10 years of supply

Platinum – 10 to 15 years of supply

Silver – 15 to 20 years of supply

Antimony – 15 to 20 years of supply

Tantalum – 20 to 30 years of supply

“Earth Audit” by David Cohen – New Scientist – May 2007

In the future, we believe, we will see many more distribution centers that have reverse logistics centers co-located within them. These facilities will handle the reverse logistics function of maximizing the value of the returned product through product disposition management. Cleaning, parts and raw material harvesting, refurbishing, product liquidation, recycling, repackaging, repair and remanufacturing will all occur alongside the much less complicated process of shipping products to customers.  These high end, technically complex processes will command a higher margin than simply shipping pristine cases to customers.

Todays distribution and reverse logistics network was built on the foundation of fuel prices at $2.00 per gallon and on the concept of unlimited natural resources. We now know that foundation was built on shifting sand. Fewer miles must be driven and raw materials must be recovered and reused at a much higher rate in order to provide electronics at an affordable price. The challenge for 3PL’s and aftermarket service providers is to understand what these changes mean to their customers and how they can develop their capabilities in order to deliver cost effective services that will meet the future demands of their customers.

Many executives go out of their way to avoid product returns. In many companies, if you want to take a nap, just go lay down in the returns area and enjoy a peaceful rest. Ok, that may be a bit of an exaggeration, but not by much.

Executives regularly skip by the returns department during their facility tours because of flawed thinking. They most likely believe in one or more of the 5 myths of product returns.  Once they realize the impact of returns, and the truth about product returns is separated from the myth, they will never avoid the returns area again.

The 5 myths about product returns are:

Myth #1 – Returns are junk.

This is the biggest and most pervasive myth about returns.  Returns are not junk.  In fact, studies have found that only about 20% of returns are actually defective.  The other 80% are functional and are often valued at 75% to 95% of original value. Even defective returns have value if processed properly. If you look at the reasons consumers return their purchases, the number one reason is some version of buyer’s remorse. Thinking returns are just junk can cost a company a lot of money.

Myth #2 – When processing product returns, take your time, there is no hurry.

Key to maximizing the value of returns is to process returned goods as fast as possible.  Best-in-class returns operations will turn their inventory anywhere between 24 times to 50 times per year. For those companies that are not best-in-class, their managers think you can put off processing returns for a while. They will use the returns staff as flex staff for everything else. It’s not unusual to see the returns area go unmanned until the end of the month or longer.

Remember, returns are like bananas not like wine.  They don’t get better with age.  On average, returns lose 10% of their value every 30 days. Putting off processing returns is tantamount to burning money in the corner of your facility.

Myth #3 – You do not need dedicated returns management.

There are a number of companies that assign responsibility for returns management to a mid-level manager that already has a full time job.  Returns management is a function that requires executives to work with buyers, operations, sales people, accounts payable, and systems.  Asking somebody to figure out how to run returns and do their normal job is simply ensuring that returns will get the short end of the stick.

Myth #4 – Managing returns is much easier than running a distribution center.

Often, companies will take a second shift supervisor and put them over their reverse logistics operations.  The theory is that running a distribution center is much more complicated than running returns. If you believe this, you could not be more wrong.  In a DC, you receive, put away, pick, and ship orders that are composed of small, medium, and large containers. Somebody created a PO, notified the facility it was on the way, and when it arrived it was received on an invoice.  When orders are received, you generally go to the same location, pick the item, load it on a trailer and off it goes.  There are clear standards for receiving, picking and shipping and most companies have a WMS that drives the process.  The manager’s job is simply to staff the operations properly and keep them trained and happy.

Running a returns center is much more complicated.  First, you do not know what you are going to receive until you unload the truck.  Nobody orders returns.  When product returns are received, each item has to be inspected, and based on it’s condition, it could be handled one of six ways.  When shipping, a return authorization request usually has be provided by the OEM, and most of the product is not in the original carton or packaging which complicates everything. Returns processing requires dedicated, intelligent, leadership that is creative and has a broad set of skills.  A common mistake company’s make is to try to save a couple of pennies by not investing in leadership for the product returns management.

Myth #5 – You can use your WMS to process returns.  You don’t need special returns software.

Companies around the world lose a lot of money because they don’t want to invest in a returns management application (RMS).  They think they can use their existing WMS system to process returns.  However, there are so many differences (See Myth #4), that they end up doing a bulk receiving in the WMS and stacking the returned goods in a corner of their warehouse. Once the product is in the warehouse, it has to be manually inspected and prepared for shipping.  Every company’s we’ve worked with that was using their WMS for returns was shocked to learn how much money they had lost because they tried to save money by using their WMS that was not built to process returns.

Returns have a big impact on a company’s bottom line.

According to the NRF, the average retailer’s return rate is 8.12% of sales.  According to a study done by the Aberdeen Group, the average manufacturer spends between 9% and 14% of sales on returns.  Managing returns can have a big impact on a company’s bottom line.  A first step toward improving the bottom line contribution from managing product returns is to stop believing in the 5 mythes of product returns.

Reverse logistics is the part of the supply chain that is often outsourced to third party service providers (3PL’s).  Many companies that have best-in-class supply chain functions outsource reverse logistics.  If these industry leaders can run very complex global distribution networks, why don’t they operate their own return centers?  For the last two decades, we have worked with Fortune 500 Companies who have outsourced their reverse logistics to 3PL’s and we have found they do so for one of three reasons:

1. To get reverse logistics expertise quickly and with less risk
2. To achieve greater flexibility and faster speed to market
3. To create a protective barrier against outside forces and limit potential liabilities

Many companies outsource reverse logistics because they do not have the expertise within their management ranks to run the area, or they don’t want to use these resources on the function under consideration.  Retailers, for example, want their top executives working on ways to improve traditional core supply chain functions, or store operations, or merchandising systems.  Manufacturers want their top talent running manufacturing plants, working with customers, managing imports, managing parts or just about anything other than focusing on returns.

Reverse logistics is more often treated like the red headed stepchild of the supply chain.  No one wants to deal with returns.  When I first got involved with returns, Lee Scott, now retired Walmart CEO and then VP of Logistics had to promise me that I would not have to spend any more than two years running reverse logistics for Walmart before I would agree to take the position. That was over 25 years ago and for me it became a career.  The point is that reverse logistics is outsourced because there is no internal expertise and/or the company is unwilling to invest in the team and technology needed to develop reverse logistics.

This is the main reason why retailers and manufacturers outsource their returns processing functions.  A qualified 3PL can have a significant impact on a company simply because of their experience in returns.  They can also help leap frog the competition by leveraging systems, liquidation networks, and by sharing best operations practices that will reduce the processing costs.

The key, however, is to outsource to a firm that is experienced and has a broad view of the issues.   Many 3PL’s claim they “process returns”, few actually do and fewer still have any idea about what happens upstream or downstream from the actual returns processing function and how they must be coordinated to achieve maximum results.

When you are selecting a 3PL, it is important to do your homework and select a provider that has real experience providing reverse logistics services in your market.  Can they help you improve the product flow upstream so you can process more efficiently and maximize the value of the returned assets downstream?  Do they understand the impact of returns on customers, suppliers, stores, DC’s, and how they effect the financial well being of the company?  Do they have existing operations repairing product that is similar to your returned items.

WARNING: Watch out for the 3PL who wants you to be the first.  Often 3PL’s who repair phones will spin their experience and try to convince a TV manufacturer that they really can process, test and repair TV’s because they have been in the consumer electronics repair business for years.  In reality, they have never fixed anything other than cell phones and they are looking for a customer to fund their technical development.  Buyer be ware.

Lack of on point experience is often why companies outsource reverse logistics, but speed and flexibility also drive many to outsource.  Companies outsource reverse supply chain functions not because they don’t have the leadership or experience but because they need a solution fast and going to a 3PL with the focus, motivation, experience, existing technology, capital resources and staff can get things up and running much faster than the company could do it on their own. A quality 3PL will be able to start up a new reverse logistics operations within six months.  Most companies who decide to develop reverse logistics internally will take at least twice that long.

The third reason companies outsource supply chain functions, including reverse logistics, is to have a layer of protection and minimize their risk.  Many companies outsource operations to avoid unwanted attention from labor unions. It is against the law for companies to fire employees who attempt to organize a labor union, however, a company can fire a 3PL and replace them with another if the 3PL doesn’t meet performance metrics.  This is true even if the 3PL did not achieve it’s goals because of a strike or other union activities.

Companies also outsource to cap and control other risks and liabilities such as inventory shrinkage, workers compensation expenses, medical benefit costs and other “non-controllable” expenses.  Companies protect themselves by either negotiating a fixed fee arrangement for multiple years or with some form of variable pricing.  This enables companies to limit these risks by negotiating caps within their outsourcing agreement.

Outsourcing reverse logistics is often the best way to develop returns processing capabilities for many manufacturers and retailers.  You will need to employ experienced resources to help select the 3PL and negotiate an acceptable contract. However, with in six months you will have a best-in-class reverse logistics process that maximizes the value of returned assets, with limited risks and controllable costs.

The best way to reduce the financial impact of returns is to reduce the amount of product that is returned by your customers.  Figuring out ways to actually reduce customer return is usually the first thing executive bring up when discussing what to do about the negative impact of returns, but it is usually the last thing they try to do anything about.

When faced with the challenge of actually reducing consumer return rates, the natural reaction for many executives is to tighten the customer return policy.  While this does reduce the amount of goods returned, it also greatly reduces total sales.  In fact, a study conducted by MIT Sloan found that a lenient return policy does tend to increase the volume of items returned but the ratio of returns to sales actually drops.  Customers see a lenient return policy as a way to mitigate the risk of buying so they buy more and return more items but much less as a percentage of total purchases.

If you look at other examples of companies that have adjusted their customer return policies over the years, the conclusions are clear.  Restricting customer return policies does much more to reduce SALES than it does to reduce the percentage of good returned. If reducing customer returns is the goal, the answer clearly is not to tighten up your customer return policy.  There are more effective steps that can be taken that actually will reduce customer return rates and they all happen to be much more customer friendly, which promotes sales.

The reasons for return at a high level are generally the same. Across every industry, regardless if the product is industrial or consumer goods, the most common reason for return is some form of customer remorse.  According to the National Retail Federation, United States consumers return over $194 billion in 2010.  Of this, $17.7 billion was from fraud and abuse.  Other studies have found that only 20%, or $40 billion of consumer returns is actually defective.

Clearly, the steps one would take to reduce the 20% of returns that are defective would be completely different than actions taken to reduce fraud and abuse.  If you treated the other 70% of customer who return goods like they were perpetrating a fraud, you would eventually go out of business.  The biggest opportunity to have a real impact on return rates is to focus efforts on reducing this 70% group of valued customers.

The first step in reducing the return rate is to identify the top 20 items returned by dollar value.  Once you have the top twenty identified, organize them by category or some other appropriate.

For complex items that require instructions and/or user guides to operate, get a copy of the instructions / user guides and read them.  You will be surprised how poorly many of them are actually written.  Take a new item home and ask your spouse to put the item together or use it.  Do not help them just observe them and take good notes.

Next, look at the trouble shooting section.  Where is the trouble shooting section?  Is it easy to find?  Is it easy to read?  Does it make sense?  Again, take good notes.

If there is a help line you can call.  Call it.  We worked for a client who sold a household appliance that had to be mounted on the side of the customer’s house.  When we called the 800 number that was on the carton to get help, we got a recording that said their hours were from 9:00 am to 4:00 pm Monday through Friday.  Our client was very surprised when we told them this.  Their target customer installs their item after work or on the weekend, when there was no phone support.  This was a quick fix for them to reduce the rate of return.

If items are in a box, put flyers that provide clear instructions to customers for common mistakes or questions.  Make the trouble shooting information easy to find.  Just because it is trouble shooting information doesn’t mean it should be a lot of trouble to find or figure out.  If instructions and guides are difficult to find, read, or follow, you will see return rates climb.

Packaging and labeling are often overlooked but could be a source of returns.  A number of years back when they first started selling bread makers for the home, the return rates were very high.   In fact, the first model had return rates close to 80% of sales.

The manufacturer was upset, the buyer was mad, and there were a lot of customers where were not happy.  It was a bad situation for all.  We were asked to sample a large group of returned bread makers and determine what the real reasons for returns were.

When we tested the bread makers, less than 5% were actually defective. We then noticed that on the bread maker’s carton was a picture of the bread maker on a nice kitchen counter.  Sitting next to the bread maker was a nice, brown, rectangular loaf of bread.  The problem was that the bread maker make smaller round loafs of bread.  The company changed the pictures on the carton, highlighted the fact that the bread maker made delicious, ROUND, loafs of bread, and sales took off and the return rate dropped dramatically.

For items sold online, check your labeling and the narrative on the net.  Also, according to Dr. Mark Ferguson at Georgia Tech, items sold on the internet that have customer reviews and comments, on average, have 20% fewer returns than other similar items without customer reviews.

There are customer friendly things that can be done to reduce customer returns.  Training sales employees is always a great idea and spending time examining an item’s instructions and packaging can yield surprising results.  Studying why products are returned and figuring out customer friendly solutions will increase your bottom line by reducing returns, while improving customer relations and sales.

Returns are a fact of life for just about every manufacturer in the world.  Some see it as a necessary evil, while other see it as an opportunity to improve customer relations and improve their bottom line. The facts are that returns cost manufacturers on average 9% to 14% of sales.  Manufacturers, however, are often hesitant to invest in their reverse logistics programs.  This is often because the senior leadership team does not understand the actual cost and associated risks.  Once they understand how much they are really spending and the risks of short changing the process, it is not difficult to get support for resources to focus on the reverse logistics pipeline.

In addition to the financial impact of returns, there can be an even bigger impact on customer satisfaction.  In fact, a study completed by the Aberdeen Group in February of 2010 found that manufacturers that were rated best-in-class in reverse logistics had, on average, a 12% advantage in customer satisfaction over their competition.  Another study published in the spring 2010 MIT Sloan Management Review found that focusing efforts to improve and manage customer returns actually increased overall profits, even during tough economic times.  When we say “manage returns” we do not mean reject returns or make it harder for customer to return goods.  This same study found that a lenient return policy actually increased total sales and profits, while a more restrictive policy has a detrimental impact on both the top and bottom lines.

Case in point, during the 2010 Christmas season Best Buy Stores revised their return policies, making it easier to return products and eliminating most restocking fees.  The result was a surge in sales and profits for December.  While Best Buy is not a manufacturer, this shows the impact managing returns can have on a company’s sales and earnings.

In addition to customer returns, product recalls can have dramatic impact on a manufacturer as well. For a manufacturer to have a comprehensive reverse logistics program, the program must include a robust recall process.  In 2009 the Consumer Product Safety Commission ordered 465 product recalls and 433 recalls in 2010.  You can expect more product recalls from this point on as well. The first piece of legislation passed by Congress after the election in November was to give broader authority to order more manufacturer recalls.

So what does all this mean for manufacturers? Simply put, the question is not if one of your products is going to be recalled but when and how many products will be recalled.  Because of the very real possibility of being forced to recall product from the market and the potential for financial liability and damage to your reputation, manufacturers must have a sound plan in place to ensure they have a means to process recalls on very short notice. Johnson & Johnson can certain testify about how recalls can hurt a company.  Between April and September of 2010 the value of J&J stock dropped over 13.5% due to product recalls and the way J&J handled those recalls.

Reverse logistics will have a significant impact on every manufacturer. The question is whether returns will have a negative impact or if it will provide a competitive advantage. Developing and investing in your company’s reverse logistics processes can improve sales, reduce risks, and increase profits.  It takes a long term dedicated commitment to be best-in-class and proper resources but in the end it will be well worth it.