There and back again

There are unique procedures and considerations when managing reverse logistics--returned goods, recyclables, and repairs--across international boundaries. Here's what shippers need to know.

By Toby B. Gooley -- Logistics Management, 4/1/1999

Most of us think of logistics as a one-way street. Products are manufactured, packaged, stored in a warehouse, sold, and then shipped off to the customer ... end of story.

Yet for many logistics managers today, that's not the end of the story. In addition to managing outbound goods, they also are responsible for reverse logistics--the flow of returned goods and packaging, including customer service and final disposition of returned items.

Whether goods and materials are being returned for repair, refurbishing, recycling, or resale, reverse logistics has its own unique considerations. And when companies need to manage returns across international borders, reverse logistics becomes an even more complex process.

That complexity--not to mention the cost of freight, which often outweighs the benefits of taking the item back--discourages many companies from bothering with international returns, says Kevin Sheehan, president of Dallas, Texas-based Processors Unlimited. His company, which recently was acquired by USF Logistics, manages reverse logistics at 45 processing centers nationwide.

Yet sometimes there are compelling reasons to become involved in reverse logistics internationally. In some instances, a returned product can be sold to recover some of the costs incurred, says Dale Rogers, professor of supply chain management at the University of Nevada-Reno. "If you can recover some asset value out of the refurbished product above the cost of transportation, it may make sense to ship it outside the country," he says. And if a company imports items into the United States and they are returned by the end customer unused, he adds, it may be possible to resell them in a third country and claim a refund on the original import duties under duty-drawback regulations.

There are many other factors that affect a company's decision to handle returns internationally, including customer goodwill, the desire to keep name-brand products out of secondary sales channels, and environmental concerns. Here's a look at why three shippers made that decision and how they manage international returns.

Continuous Cycle

Witco Corp., a global manufacturer of specialty chemicals based in Greenwich, Conn., for example, faces several challenges when managing returns of reusable stainless-steel totes from customers in Canada. The company must keep track of the individual containers, which are shipped with chemicals inside, emptied by the customer, and then returned for cleaning and reuse. It also must ensure compliance with both U.S. and Canadian transportation law because the totes often contain hazardous chemicals and residues. Finally, Witco must prepare proper documentation to allow the totes to clear customs on both legs of the round-trip journey.

With a large number of containers moving back and forth between the two countries, the potential for confusion and error would appear to be great. But the $1.9 billion company maintains tight control over its equipment with the help of its third-party service provider, CF Reverse Logistics, a division of Consolidated Freightways.

About three years ago, Witco hired CF to track, monitor, and arrange the return of the reusable equipment, reports Sheldon Ellis, Witco's international logistics manager. Customers call a toll-free number to notify the company when the empty totes will be ready for pickup. "All they need to do is tell [CF] the tote number," Ellis says. Because CF tracks the totes by identification number from the time they leave the manufacturing plant, the carrier knows where "home base" is for each container, he explains. CF picks up the empty tote, then follows Witco's routing guidelines to ship it back to its point of origin.

Rather than ask customers to create export documentation for the containers they use, Ellis has CF prepare most of the necessary paperwork. A customs broker selected by Witco clears the totes at the U.S. border. No duty applies, because the containers themselves are not being bought or sold.

Cross-Border Recovery

A more complex operation is necessary when international reverse logistics involves "asset recovery"--getting as much value as possible from returned goods. Asset recovery may include repairing, refurbishing, repackaging, and/or reselling merchandise through discount channels.

Thomson Consumer Electronics ships recoverable items from the United States to Mexico for refurbishing. The manufacturer used to collect goods returned from retailers at a facility in El Paso, Texas. There, employees would evaluate whether or not the goods were recoverable and forward repairable items on to Mexico. A significant percentage of the items received in El Paso were unrepairable, obsolete, or of such low value that the cost to ship them there outweighed the benefits of repairing them.

Today, Thomson is working with third party GENCO Distribution System to make its returns program more cost-effective. GENCO now sends inspectors to the retailers' returns-processing centers. Following guidelines established by Thomson and the retailers, they identify which items should be sent to Mexico for refurbishing and which would be more economically disposed of in the United States. The inspectors also verify that packaging and paperwork are correct before shipment. The manufacturer saves money because "we only ship the items that are wanted at the refurbishing facility," says Curtis Greve, GENCO's executive vice president, operations and systems. "They're not paying freight for unwanted items."

The fact that these products are crossing international borders creates some special concerns, says Greve. For one thing, many of the returned items were not manufactured in the United States. To comply with customs regulations in both the United States and Mexico, the country of origin for each item shipped must be declared.

Furthermore, the very nature of the returns process means that the content of each shipment is unpredictable. For example, a truckload of returned goods from various Chicago-area retailers might include dozens of different products. Each would be a separate line item on customs documents--a situation that has the potential to complicate documentation, slow the clearance process, and invite customs inspections, says Greve.

To avoid such problems, GENCO sorts items by stock-keeping unit (SKU), then repacks like products in palletloads prior to shipment to El Paso. That allows GENCO to ship to the border in efficient, cost-effective truckloads, says Greve. It also smooths the customs-clearance process, he adds. "Because we ship different SKUs each on a separate pallet, not 30 different SKUs all mixed up in a truck, it makes the paperwork simpler and makes it easier for customs to verify what's in there," he explains. When the pallets arrive at the refurbishing facility, moreover, they can go right to the appropriate repair station.

Continents Apart

As Thomson Consumer Electronics discovered, screening returned goods at the source saves an enormous amount of time and money. The benefits of prescreening are even greater when customers are on another continent. The cost of shipping returned items over such distances can be so high that those costs outweigh the benefits of bringing them back to the United States.

That was a problem for 3Com, manufacturer of the popular PalmPilot handheld computing device and other communications products. The company had been shipping items returned by customers in the Caribbean and Central and South America back to the United States, Europe, or Asia via Miami. Often, those items were found to have no defects, so customer error was likely at fault. But the manufacturer didn't find that out until after the items reached the repair facilities, so 3Com had no choice but to pay freight and customs-clearance costs for both returned and replacement items.

That costly process has been replaced with a returns-management system that allows 3Com to screen most returns and repairs in-country while offering customers in Latin America and the Caribbean the same level of service available to 3Com's North American customers. That system is managed by BHP Logistics Services of Humble, Texas, a third-party logistics firm with extensive experience in Latin America.

BHP operates more than 100 parts bank/repair locations in Latin America and the Caribbean for both 3Com and Sun Microsystems. These centers are located such that either replacement parts and/or engineers can reach customers within either two or four hours of the customer's call, depending on the terms of the customer's service contract, says BHP Vice President Rick Foxhoven.

Establishing these centers allowed 3Com to reduce transportation and customs-clearance costs significantly. That's because the engineers, who were trained by 3Com, now can test returned products on site and thus prevent returns of undamaged items. Parts that do require repairs can be replaced with stock from the parts banks. Those that can be repaired locally are returned to stock; items that are not worth repairing can be disposed of in-country, keeping international shipments to a minimum.

Software developed by BHP helps 3Com choose the most economical means of handling returned items. When a part comes back, BHP's employees can tap into 3Com's in-house system, which provides a history of each item by serial number. "We have a history of the part--we know where it was manufactured and when it was shipped to the customer. We tell them what we have, and [3Com] can look at the part and say, 'We've upgraded that part, there's no point in bringing that back,'" says Foxhoven. The ability to track repairs by serial number is especially valuable in countries like Nicaragua, which checks serial numbers to ensure that any repaired items re-entering the country are the same parts that were shipped out originally.

The software also helps BHP provide important cost and country-of-origin information required by customs authorities. "We can go in and extract data about the particular part we're shipping so we can create the commercial invoice. Because we can show the value of the item before it was defective," Foxhoven explains, "it really facilitates the customs-clearance process."

Unique Programs

The companies profiled here all have developed highly customized returns-management programs. Yet these programs have one thing in common: Each company took costly, inefficient practices and replaced them with cost-effective, efficient systems--despite the complexities of crossing international borders. The secret of their success? Careful planning at every step of the process, and a willingness to address the specialized demands of international trade.

Tips From the Pros

Managing returned goods across international borders is a complex and specialized process. Here's some advice from experienced logistics professionals on what to watch out for.

* Documentation. Be sure you know exactly which documents customs authorities in both the origin and destination countries will want. "[Customs] will accept nothing less than what is required," says Cindie Vaughan, manager of CF Reverse Logistics, a third-party logistics service provider. Some governments require special documentation for returned goods--when they leave or enter a country on a temporary basis, for example. "Be aware and ask all the questions" about how your specific circumstance affects documentation, she advises.

* Regulatory controls. When highly regulated products such as pharmaceuticals and foodstuffs cross borders because of quality problems or their expiration date has passed, they inevitably raise red flags with customs and other authorities, says Kevin Sheehan, president of Processors Unlimited. "There are laws in most countries about the quality of the products that can be brought across their borders," he explains. These laws can be in conflict--such as when salvaged pharmaceuticals are shipped to Europe, but they are rejected by customs authorities because national laws prohibit entry of pharmaceuticals within six months of their expiration date. It's vital, therefore, that shippers thoroughly research relevant laws in the destination country prior to making a commitment to ship regulated goods.

* Valuation. When companies import returned goods, they usually prefer to declare a used item's resale value, which can be considerably lower than its value when new. But customs laws in some countries may require shippers to use the item's original value, says Dale Rogers, professor of supply chain management at the University of Nevada-Reno. It's important to straighten that out before shipping, he says, since customs authorities are "judge, jury, and executioner when it comes to valuation questions."

* Barriers to immediate replacements. Before promising immediate replacement of parts to customers overseas, shippers should be sure there are no regulatory barriers to providing that service, says Rick Foxhoven, vice president of BHP Logistics. Some countries, such as Peru, Colombia, and Ecuador, require pre-shipment inspections of all commercial shipments--even replacement parts--prior to export. These inspections are carried out by agencies appointed by the importing nation's government, Foxhoven explains. Inspections can delay emergency shipments, he reports, so shippers must take that into account when establishing repair-and-replacement services for international customers..

* Cultural differences. Shippers in the United States have many options for handling returned goods, including resale in secondary (discount) markets, export to a third country, and destruction in landfills or by incineration. But cultural differences may limit a U.S. manufacturer's options when dealing with a customer overseas, says Sheehan of Processors Unlimited. For example, U.S. manufacturers often include an allowance for damaged merchandise and expect the customer to dispose of those items. That's not acceptable in the food industry in Europe, Sheehan says. "Distributors and retail stores are encouraged to recycle whatever way they can. Their reverse-logistics process is built around recycling as the primary avenue for disposing of merchandise. It's a lot different from the typical bill-back or resell situation here."