Posts Tagged ‘Year End Recalls’

The Reverse Logistics Podcast

Your host is Curtis Greve.

The Reverse Logistics Podcast

Your host is Curtis Greve.

Beginning the first week in January, retail returns rates will increase dramatically as compared to the normal rate of return prior to Thanksgiving.  In addition to the customer returns, seasonal merchandise recalls will also hit peak volume levels.  Just as retail return center volumes peak in January and February, manufacturer’s returns peak in the third week of January and maintain that level through February and March.

Executives responsible for processing returns must make special plans to handle this tidal wave of volume heading their way.  This year, because of the improved economy, return rates are projected to be 12% to 15% higher than last year.  The impact could be significant and companies must prepare.

In order to prepare for peak return season, three critical elements must be included when planning for year end returns.  These three elements are:

• Manpower planning
• Space
• Transportation

The most important part of preparing for peak return season is to determine how many more people will be needed, what shifts they will work, and who will supervise the additional staff.  This often means making arrangements with temp agencies, hiring part time employees and adding to base staff.  In addition to increasing your head count, you must make arrangement for training new workers and adding trained supervision.

Supervision, especially if you are adding new shifts or operating in temporary space, is critical.  You must ensure they are trained in basic supervision and that you have adequate leadership in all areas, on all shifts, for the entire peak season.  Do not short cut your people or your leadership.

Space is a critical element that requires forethought and preparation.  Temporary space comes in two forms.  The first type of temporary space is storage trailers that are parked on the lot and used for storage of inbound or outbound freight.  The second type of temporary space is short term leased buildings.  In general, if additional space is only needed for a “short time” trailers usually make more sense unless there is exaggerated spikes in volumes.  However, arrangements for either trailers or short term space usually must be made at least thirty days prior when needed.  Once product starts flowing and returns are processed at often two or three times normal rates, it is critical to have carriers prepared to provide trailers and drivers as needed to keep the product flowing.

A special word of caution – if you are adding shifts or planning on working on Saturdays and Sundays.  Do not assume that your carriers will pick and deliver trailers during these times.  You must contact your carriers  and outline service level expectations for your new schedule of operations.  In addition, back up carriers must be selected to ensure the flow of goods is not interrupted.

Finally, if you liquidate product and rely on salvage buyers to pick up significant volumes of product during peak season, ensure that you watch them closely and ensure they pick up purchased loads in a timely manner.  Liquidators are notorious for using return centers for free storage of purchased goods.  Seller be ware.

The key to economically processing year end returns is to properly prepare and plan for the two or three month spike in volume.  The critical elements of  peak return season planning are people, space, and transportation.  If your organization has not made preparations for peak season, it is not too late but you need to action now.

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, required condition, disposition and where the actual product will end up.  Usually, it’s a matter for negotiation and there is not one set of rules to go by when working out the critical details. That being said, there are some guidelines or expectations that one can use as a starting point for negotiating return privileges.  Those guidelines are:

1. The manufacturer / OEM generally pay 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.

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.

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

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

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

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

Tis the season to be jolly. Enjoy it because immediately following this jolly time of year is the season for recalls. Roughly 50% of all returns from a retail store in January is product that was never sold. It is being pulled off the market because it was sold under a guarantee sales agreement.

A guaranteed sales agreement is when a retail buyer agrees to buy a lot of product from a vendor but can return unsold product for a full refund. Guaranteed sales agreements helps the retailer minimize their risk and it helps the manufacturer maximize sales. Often the product is pulled from the shelves and sent to the vendor who may repackage the product to remove that Christmas Tree on the side of the box.

After the packaging is complete they will redistribute it to their customers or they may simply hold it for future orders. Some of the more seasonal items will be liquidated on the secondary market. This is especially true for soft lines or product that has a short shelf life.

When negotiating the terms of the recall there are five variables that you need to address.  Below are the five major variables to negotiate followed by a brief explanation of each:

• Item condition requirements for return
• Cost per unit to be used when returned
• Who is responsible for freight from the retailer to the manufacturer
• The consolidation fee for returns being shipped from a return center
• The time window that recalled product will be received

Items conditions usually require each item to be in pristine condition with all price labels and tags removed.  In short, the manufacturer should have the same expectations as the retailer when they received it.  No displays allowed.  Open boxes, damaged items, shrink wrap torn, or any other “violation” results in NO credit being issued for that specific item.

Next, the cost used is to process the return is usually the last cost charged to the retailer.  It is common, especially in some categories to negotiate a percentage of full cost.  An example would be 95% of the last cost, due to wear and tear.  The best advice here is to keep it simple.  The credit equals the number of “pristine” items returned multiplied by the last cost per unit on an invoice.  You don’t have to worry about cash terms as the retailers will simply deduct the amount from the next invoice they owe the manufacturer.

For freight charges, typically the retailer is responsible for freight from the stores to the return center and the manufacturer is responsible for the freight from the return center to their location.  If the product is not going through a return center, split the cost.

For retailers who do use a return center, the norm is to charge a consolidation fee of 1%-2% of the cost of the product to cover the cost of processing the goods and consolidating the shipment at the return center.  However, this often gets negotiated to zero, especially if the retailer is getting full cost credit.  This fee is added to the credit that the retailer will take when they process the total credit for the goods.

Finally, the window of time needs to be established for the goods to be returned.  Keep in mind this is only for returning new goods that were not sold but purchased for the holiday season.  Defective return terms are not impacted by recall terms.  The window of time usually starts on New Years Day and usually runs for 60 to 90 days.  Any product not RECEIVED by the manufacturer during the established time frame will not be accepted and should be returned to the retailer.

Seasonal recalls can be great for both the retailer and the manufacturer but you have to have your terms and conditions clearly spelled out in a written agreement.  Hopefully this Christmas the shelves will be empty due to high sales and there will be little product returned.  Happy Holidays!!