Diminishing returns
If you`re a reverse logistics specialist, you`re sure to be asked to gather information that will help clients reduce returns in the future. You`ll also have to master intricate and complex product-returns processes that vary from industry to industry.
By Toby B. Gooley, Senior Editor -- Logistics Management, 6/1/2001
Anyone who's used to sending unwanted items back to catalog companies might think that reverse logistics - managing the flow of returned goods from end users through final disposition - is no big deal. Just make a phone call, pop it in a box, stick a label on it, and mail it, right?
In reality, behind every returned-goods transaction are complex inventory control, information management, cost accounting, and disposal processes. And logistics managers in several industries face special requirements that make reverse logistics a real challenge.
"Reverse logistics by its nature is a specialized deal," says Dr. Dale Rogers, professor of logistics at the University of North Florida and executive director of the Reverse Logistics Executive Council . "Recycling, remanufacturing, and refurbishing can be very specialized. How much you can reclaim in pharmaceuticals or health and beauty aids is very different from the situation with auto parts or electronics."
Despite that specialization, says Rogers, there are "overall truths" in reverse logistics. No matter what the product is, how it's sold, or who the customers are, every company must focus on recovering the greatest value possible from returns, maintaining customer loyalty, controlling costs, and harvesting information that will help it reduce returns in the future. Here's a look at how four industries with specialized requirements do just that.
Pharmaceuticals. Perhaps no other business is as regulated as the pharmaceuticals industry when it comes to returns. The returns process is controlled in part by the U.S. Drug Enforcement Agency (DEA), and facilities that handle returned medications and drugs must be licensed and are subject to audits, says Kevin Sheehan, president and CEO of the Dallas-based returns-management company USF Processors . Controlled substances must be tracked "down to the individual pill or milliliter," he reports. "We have to open each container and literally count each controlled-substance pill by hand." (For products that are not under the DEA's purview, processors may estimate the amount of liquids or pills.)
If there is any discrepancy between what a pharmacist says was shipped and what the returns-management company received, the parties involved must follow a detailed reporting procedure and may be subject to fines. "If a pharmacy tells us it shipped five pills and we only received three, we have to report it," says Brian Stenz, president of Return Logistics International of Gulf Stream, Fla.
It's no surprise that security is a top priority for these companies. Employees in this labor-intensive business must be carefully screened and their activities monitored. USF Processors, which serves more than 20,000 pharmacies, has bank vault-type storage within specially secured areas of its returns handling facilities for narcotics. Some medications are so regulated that they must be disposed of by witnessed and documented incineration.
Electronics. In the electronics industry, redeployment of assets and cost recovery are the top priorities, says Ho Kim, president and CEO of Kirus , a software company in Irvine, Calif., that specializes in reverse logistics for high-tech manufacturers. Several factors make that difficult to achieve, he says. For one thing, vendors must maintain certain levels of inventory so they can immediately replace or repair problem equipment. But electronic and computer parts can lose up to 3 percent of their value each week while they sit in inventory, he explains, so getting the maximum value from each returned item can make a big difference to a company's bottom line.
Managing returns is so critical to electronics makers that computer maintenance company DecisionOne Corp . has changed its focus from repairs to returns management, reports Louise Rossi Leeds, director of business and engineering development for the Malvern, Pa.-based company. DecisionOne's customers set their own rules for deciding whether to repair, disassemble for parts, redeploy, or scrap returned items.
DecisionOne processes about one million returned items each month at its seven processing facilities. The company relies on Kirus software to track each item by serial number and match returned goods with the appropriate disposition in accordance with the customers' policies. The decision-support software also provides an electronic link among all parties in the returned-goods cycle. "Maximizing asset utilization and value is not a 'four walls' issue," says Kim. "It's a supply chain issue."
With so much at stake, Rossi Leeds says, electronics manufacturers are understandably eager to minimize return rates. DecisionOne uses the Kirus software to identify patterns of failure or customer behavior that affect product design, customer service, and technician training, she says. "Our customers are as dependent on us for gathering and conveying accurate information as they are for us to handle their product in a timely and accurate way and make the repair, scrap, or redeploy decisions."
Grocery. Returned grocery items present several challenges to logistics managers. First of all, there are sanitation and health concerns. Final disposition of food products depends on whether or not they are safe to eat. Grocers also carry a wide variety of products in addition to food, so they must manage each category of returned goods differently. In addition, inbound shipments typically include some damage, so the number of returns for a grocery chain can be daunting.
To cope with the high volume of returns, the industry has developed a standard methodology for handling "unsalables," says Sheehan of USF Processors. Those guidelines, which address handling of returned products and create a framework for managing related financial transactions between manufacturers and retailers, require the manufacturer to pay for the value of the product as well as the cost of forward distribution, removing the product from the store shelf and moving it to a reclamation center, and processing at the reclamation facility.
Doesn't the grocer bear some responsibility for damage? Yes, says Sheehan, but the nature of the high-volume food business leads manufacturers to try to strike a balance between minimizing damage and minimizing distribution costs. "We in the grocery industry believe that responsibility for the product's ability to withstand the rigors of distribution should be pushed up the chain to the manufacturer," he says. Yet problems are not simply accepted as inevitable. Returns processors accumulate data that help the processor, the grocer, and the manufacturer find out why a product is not reaching the consumer and identify ways to improve the situation.
An important "side effect" of reverse logistics in the grocery business is that food retailers and manufacturers end up donating unsaleable but usable food to charities like America's Second Harvest, which supply food to homeless shelters, food banks, and soup kitchens. USF Processors and the manufacturers it serves donate about 70,000 pallets - more than 3,000 truckloads - to charity each year. "The centralized reclamation process allows that to happen," Sheehan notes. "If disposal were handled strictly at the store level, most of those products would find their way into a Dumpster."
Distributors. Sometimes specialized requirements in reverse logistics arise because of the nature of the sales channel. This is the case with distributors, which act as middlemen between manufacturers and their customers. Distributors provide a value-added service for customers by stocking related product lines from multiple manufacturers, filling orders, and offering convenient delivery of a mix of products. They also handle product returns, and that puts them in a challenging situation, says Dave Hommrich, CEO of Pittsburgh, Pa.-based ReturnCentral . Hommrich's company has developed an Internet-based software product called ReturnMatrix that helps distributors handle their "double-sided" responsibilities to their suppliers (the manufacturers) and the end users.
"Not only do [distributors] have to manage outward-facing returns policies with their own customers, but they also have a plethora of manufacturers to deal with," Hommrich observes. That dual relationship can be very costly, he adds. Terms regarding returns are written into the sales contract between manufacturers and distributors. But if a distributor doesn't have the technology to implement specific "rules" that govern when, why, and how something can be returned for each of its suppliers, it can end up with a "one size fits all" returns policy that inevitably raises its costs. A distributor also can be stuck with enormous amounts of returned goods for multiple manufacturers in its own warehouse, he notes. "If they had a choice, distributors would send returned goods to the manufacturer every time," Hommrich says. "But they can't, so ideally the returns policy they set for the retailer should mirror the policy set by the manufacturer and the distributor."
Because so many parties are involved, one of distributors' biggest headaches is ensuring that customers provide enough information for them to allocate products to the correct manufacturer and accurately calculate debits and credits. By managing returns online using tools such as screens that force customers to enter required data, Hommrich believes, distributors can consistently collect the information they need to keep track of the complex relationships they manage.
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