The 5 Myths About Product Returns
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.
Outsourcing Reverse Logistics
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:
- To get reverse logistics expertise quickly and with less risk
- To achieve greater flexibility and faster speed to market
- 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.
Reverse Logistics Best Practice – Freight Claims
Carrier claims for returned goods are a little more tricky than normal claims because of the trouble in valuing the goods shipped. Traditional carrier claims are based on known items on a manifest, each with a market driven value. In the world of reverse logistics, the shipper often does not exactly know what is in the “returned box” to begin with and the value could vary greatly depending on the SKU, product profile, condition and age of the item. If left to the traditional means of calculating freight claims, neither the carrier and nor the shipper will have a reliable way to value freight claims because the relative value of the inventory is almost impossible to determine, once the item is lost or destroyed.
Correct 
values could be dramatically different and there are a host of issues that impact the real value of the returned goods for which a claim is filed. Examples of some of the problems in valuing returned assets are if there are missing components, or if the item has been tampered with, or if the item has been abused and is broken beyond repair. These are common finding in processing returns but if an item is missing or if the carrier smashes the case containing the item, figuring out these variables ends up being nothing more than a guess. Collecting on claims filed can almost be impossible, at times, because of these variables.
The best, easiest and most straight forward method to file freight claims is to establish an “average value per case”. The average value per case is based on the budgeted units and total value of the goods that are to be processed. No company can really peg the value of any item that is going to be returned in the future. Using a logical method to calculate an average value per case is a fair, acceptable way to base reverse logistics freight claims. Once an average value is determined, the process used to calculate the average should be reviewed with the carrier and the average value to per case should be included in the carrier contract and reviewed on an annual basis.
A word of caution, however, if the value of an individual item is significant, traditional freight claims processes should be used. The level of detail concerning the returns goods is much greater using this method and you must ensure the proper processes for identification at the point of origin are in place. In order to file “normal” freight claims, an exact list of items shipped will need to be recorded, tracked, and received at a detailed level for each shipment. You must also ensure that the proper documentation noting the value of the shipment is made, prior to shipping. If this level of detail is not possible, using an average value per case is probably the best method.
The Five “Rights” of Reverse Logistics
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.
Reverse Logistics Podcast #10 – Three Big Business Opportunities
This podcast is a recording of a presentation Curtis Greve made at the June 2010 GBQ Redbank Executive Breakfast Series in Columbus Ohio. In this presentation Curtis discusses the threats and opportunities posed by three external drivers every company will face in the next five to ten years:
- Dramatic increases in transportation costs and the resulting changes that will be required in supply chain networks
- Reverse logistics networks and how companies can increase their bottom line profits by as much as 4% or more
- Continued demand for development of sustainable solutions and how sustainability can dramatically increase profits
Curtis points o
ut that most companies will agree these three drivers are going to happen. Business executive also realize that these elements will have a negative impact on their business if they don’t address the situation, yet few are doing anything about it. How a company deals with these inevitable changes will determine if they will thrive or if they will find themselves at a significant disadvantage that could result in their ultimate demise.
The Reverse Logistics Podcast
Avoid Disaster When Outsourcing Returns
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.
Reverse Logistics Best Practice – Ask Why
For most companies, the cost of processing returns impacts the bottom line directly. If they can save a buck in processing costs, their earnings will increase a buck. For reverse logistics processors, saving a dollar in processing costs will either fall to their bottom line or worst case improve their value to their customer. Many returns processors rely on their ability to develop process improvements to keep the business and get their customers to pay them additional fees.
If you are looking to reduce returns processing costs or wanting to find ways to increase profits, try this best practice to reduce the cost of returns. The following process has historically been a great source of savings. It starts by flow charting the process of top twenty sorts within the returns facility. Just focus on the top twenty. In the vast majority of return centers, the top twenty items impact 80% of the costs of the facility. When flow charting out the processing path of each item, be sure to write down every detail of what happens to the item from the time it enters the four walls of the facility through to final shipment. Flow chart each item, category, or sku separately.
Once you have 
the flows documented, lay them out and then start looking for functions that can be combined, differences in processing requirements from one item to the next, and steps that can be eliminated. It is very helpful if you place people onto the chart, by name. You will then be able to see where some people do very little, work stations should be moved, and other opportunities to combine steps that may not be seen by observing the actual operation. After you have all the pieces to the puzzle in front of you, start experimenting with the flow of goods. Play what if games and see what the impact would be. Many of the best design and flow improvements come from drawing the existing flows and process on butcher paper and then brain storming about how the flow could be changed and improved.
The best way to get ideas flowing and get the most out of your brain storming session is to ask “Why?” five times. By this we mean ask something like:
- Why does the item have to be received this way with all this information?
- Why do we have to collect all the profile data and causal information?
- Why do we to sort, separate, and segregate the items the way we do today?
- Why are the items packed, prepared, inspected, or processed they way they are today?
- Why do we ship, scrap, recycle, or dispose of the item the way we do today?
If you ask the five “Why’s” for the top twenty items flowing through your returns facility, you will find many opportunities to save time and money. You will also find that the process improvements developed for the top twenty items will apply to most if not all items flowing through your returns facility. The impact of eliminating just one step in the process of one of your highest volume returns will have an amazingly large impact on the financial performance of the facility.
Why ask “Why?” The answer is “To Save Money!”
Reverse Logistics Provides a Valuable Perspective
Someone once said that the only way you can change the way you act is to change your perspective. This is true in in life and in business. One of my favorite stories to illustrate the impact of perspective is the story of a friend of mine named Danny Parker, a Minister at Orchard Hill Church in Pittsburgh.
When Danny was studying to become a Baptist Minister he needed a job during the summer to help pay for school and he wanted to spend the summer working close to a Florida beach. He bought a bus ticket and was soon on his way. On the long ride down to Florida, Danny decided to put his faith to the test and take the first job he saw with a “Help Wanted” sign in their window. Danny was a trusting soul to 
say the least.
As luck would have it, when he got off the bus the first “Help Wanted” sign he saw was for the local porta-potty company. For the next few weeks Danny cleaned porta-potties, by hand. When he told me this story, some thirty years later, he said “I learned two important things that summer. First, there is no job that I am too good to do. We should all be humble regardless of what our job is. The second thing I learned was that most people don’t chew their corn.”
There are many reasons I respect Danny Parker. One is that he is a man of great faith. The second is that he always has a unique perspective on life that everyone can appreciate.
While porta-potties and corn have nothing to do directly with reverse logistics, it does illustrate the point of the value of perspective. Reverse logistics can provide great insight into many aspects of your companies business, if you have resources focused on developing that perspective.
Studies have shown that companies that are considered best-in-class in reverse logistics have, on average a 12% higher customer satisfaction rating than their competition. That is a significant differentiator for any company. Clearly there are a number contributors to customer satisfaction. Reverse logistics is one part of a larger overall program but it’s importance is often overlooked.
A strong returns management program will influence every aspect of the customer experience from improving the package and design of a product, to properly communicating the refund policy, to providing alternatives to help satisfy the customer. However, to apply the lessons that can come from managing returns, you have to work at it and you must have a dedicated team working with operations, sales, merchandising and others.
Reverse logistics must have a seat at the table and a voice in all aspects of the business. Reverse logistics executives are often kept to processing the returns only and have no input in other areas such as vendor agreements, disposition rules or developing a more customer friendly return policy. These leaders could bring valuable information to the table that could provide insights that would have a great impact on the customer.
The key is to take a team approach. For example, too often, the customer return policy and front end process is sole responsibility of Loss Prevention or some other department that is more focused on preventing theft than satisfying customers. As a former internal auditor for Wal-Mart I understand the need for prudent policies to protect against abuse, however, one must remember that the majority of customers that return goods are not thieves. Further, if that customer has a bad experience in returning an item, they will tell nine other people about their customer. Studies have also found that if the returns experience is good, they are twice as likely to buy in the future and tell more people about their p leasant experience.
Before an effective customer return policy can be developed, information on what is returned, why it is returned, and the relative impact of the returns must be analyzed. Do you really want to write a policy based solely on anecdotal evidence provided by somebody whose job is to catch shop lifters? They should be part of the team but not the only voice that counts.
Similarly, a company can’t really decide if an item is a winner until they factor in not only the sales but the return rates, reason for returns, and customer comments. Reverse logistics completes the picture and provides the needed insight to make future decisions that impact what you sell and most importantly, customer satisfaction.
Reverse Logistics Podcast #7- Tips to Improve Returns Processing
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
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