Outsourcing helps Service Merchandise manage returns

By Staff -- Logistics Management, 6/1/1998

For retailers, managing returned goods can be a costly headache. That's because consumers are a fickle lot, returning items because the color didn't match their bathroom towels or the clock they bought ticked too loudly. In addition, retailers also frequently must return out-of-season or obsolete stock, goods damaged in transit, and items that have not been sold within a certain timeframe.

Many retailers opt to keep the entire process in house. Others, though, find that outsourcing is an efficient, cost-effective means of keeping the returned-goods monster under control. One such company is Service Merchandise, based in Brentwood, Tenn. Service Merchandise sells a wide variety of consumer goods, including jewelry, furniture, kitchen items, and home electronics from 385 stores in 35 states. The company also has a mail-order business.

All product returns are handled at a returns-processing center operated by Service Merchandise in Bowling Green, Ky., reports Paul Minor, director of transportation. Volume at the returns center averages between 30 and 40 million pounds annually, which represents a lot of inventory costs and lost revenues.

About two years ago, company managers recognized that a more organized approach to managing returns offered the potential for significant cost savings. The logistics department, though, was unable to dedicate full-time resources to the project. The solution? Service Merchandise turned to a third-party logistics service provider to manage this aspect of its business.

"This is our first venture into outsourcing," says Minor. "It's a small, controllable piece of our total tonnage, and we wanted to give it to someone whose core competency was reverse logistics. It seemed like the perfect place to start a third-party relationship."

That someone turned out to be Menlo Park, Calif.-based Redwood Systems. Though Service Merchandise retains control over some aspects of returns management, including carrier contracts, rate negotiations, and freight payment, Redwood handles customer service and operations.

The third party operates a customer-service center for Service Merchandise with a toll-free number. When a store needs to return something, an employee calls to get authorization. Redwood also provides the stores with specific instructions for packaging, shipping, and documentation.

Based on cost and volume guidelines established by Service Merchandise, the third party arranges transportation to the Bowling Green facility using pre-approved carriers. "Our volume guidelines are based on the number of skids and on the storage space available in the stores," Minor explains. "We want the largest shipments possible so we can reach better weight breaks." Redwood analyzes individual store and regional demand, costs, and routing efficiencies to determine the best way to bring the merchandise to the returns center.

Service Merchandise and Redwood Systems have an unusual gain-sharing agreement that encourages the third party to manage the reverse-logistics process aggressively. "We know our cost per hundredweight to handle returns. If [Redwood] can beat that, then we both share the savings," says Minor.

Overall, the experience has been satisfying, Minor notes. Transportation costs are down, merchandise is more closely tracked, and the returns process has become much easier for store personnel. Although he feels comfortable outsourcing much of the reverse-logistics program, Minor believes that it's still important for shippers to retain some control. "Just because you use a third party doesn't mean you abdicate responsibility," he says. "I think your level of success [in a reverse-logistics program] is directly tied to your level of control."