Improving reverse logistics with a returns management strategy
February 01, 2014
Let’s face facts: Despite a significant impact on the bottom line, most retailers and manufacturers simply don’t have policies, processes, or infrastructure in place to manage returns.
According to Dr. Dale Rogers, professor of logistics and supply chain management and co-director of the Center for Supply Chain Management at Rutgers University, this fact should not come as a surprise. “The reverse movement of products offers many challenges and opportunities not present with forward logistics,” he says. “And most companies are not there yet. They still need to spend more quality management time carefully examining and constructing their reverse logistics processes.”
Rogers adds that U.S. companies also need to work harder at managing reverse processes once they are established or they will experience a “constant leak of profit.”
In fact, recent research conducted by supply chain technology stalwart Intermec found that more than half of all businesses they surveyed don’t have the capability to determine if returned goods should be discarded, returned to a vendor, or moved back into inventory. The survey also found that 44 percent of distribution center managers consider returns a “pain point” in their operations.
Industry analysts and consultants maintain that the challenge is well worth taking on, especially when considering the payoff.
Plumping up the top line
Reverse logistics—the process of controlling the efficient flow of goods from the point of consumption to the point of origin for purposes of recapturing value—has long been regarded as a critical component of the bottom line. But industry analysts are now saying that with the rate of returns expected to continue on an upward trajectory, savvy shippers can plump up the top line, too.
“Given the substantial positive effect reverse logistics can have on your business, we still find it troubling to see that many ignore this found money,” says Michael Blumberg, a certified management consultant and president of the Blumberg Advisory Group.
Blumberg maintains that a good reverse logistics strategy can cut operational cost while increasing sales and securing customer loyalty. “Not having a clear planning process is pure insanity,” Blumberg says. “And it happens because many shippers don’t understand the market opportunity and its dynamics.”
Steve Dollase, supply chain president at Inmar, an intelligent commerce network, agrees. He says that logistics managers need to consider the entire product lifecycle before returns begin. “Products find their way to the reverse supply chain for many reasons, and an effective strategy must consider these factors to most effectively affect the top line,” he says.
Dollase offers the following tips that are focused on how to better manage returns that are discontinued, damaged, or consumer generated:
Turn failures into successes. The sad reality is that up to 90 percent of new products fail. Every product launch plan should be accompanied by an exit strategy that is coordinated with retailers. A component of this strategy can include tactics to increase sell-through of discontinued products.
Data from product returns can also be leveraged to improve replenishment planning for new products or inform promotion strategies such as targeted digital promotions to move discontinued items off the shelves. Transporting these products quickly to secondary markets can also generate revenue while preserving valuable shelf space for higher profit-producing products. Data can also be leveraged to inform redistribution of excess returned inventory to stores where the product will sell.
>If it’s broken, understand why and fix it. Consumers are understandably reluctant to buy damaged and expired goods. The harm to the top line comes not only from lost sales, but from brand degradation. The result is a negative effect on top line sales if the cause is not identified and corrected.
Repair and refurbishment of returned products can also help to generate revenue, and lower priced refurbished products may appeal to segments that would not purchase a product at full price. Data from failure analysis and product returns can be used to inform a host of changes, including product design, manufacturing, packaging, promotion and even pricing—all of which can lead to improved top line revenue.
A return can be a future sale. Consumers are known to change their minds, and today’s consumers believe that they’re entitled to do so. When they do return a product, whatever the reason, the ease of the return process and how they are treated have a huge impact on repeat sales.
Many retailers have recognized this reality and have adjusted their returns policies to be hassle free. Some retailers even encourage returns and have made return shipments as simple as possible. Customer and brand loyalty contribute directly to the top line, and data from customer returns can help inform this strategy.
“A reverse logistics strategy is much more than simply figuring out how to be more efficient in shipping and processing returns and cutting costs,” concludes Dollase. “Today it’s about driving top line sales and long-term brand loyalty through a more holistic view.”
Reverse lessons learned
Curtis Greve, principal at Greve Davis, a reverse logistics consultancy, observes that when retailers, service providers, and manufacturers convene to discuss the latest trends in reverse logistics, the focus inevitably turns to consumer electronics returns.
It’s always a hot topic, says Greve, because this category has the greatest potential while facing the greatest risks. Furthermore, managers in all product sectors can profit by examining this sector.
“The biggest issue affecting consumer electronics returns is the combination of rising costs and lowering price points,” says Greve. “Everyone is feeling this compression, and the service providers are stuck right in the middle. It’s a tough market, and many retailers and manufacturers are trying to figure out how to improve recovery rates and reduce processing costs.”
Many experienced retailers and manufacturers fail to examine the total net recovery value and don’t think about the time requirements, Greve contends. He says that they should instead focus on total liquidation revenue and yield rate. Companies that do this have a big opportunity to dramatically improve profits.
Shippers operating in the global consumer electronics reverse logistics world must know their “net recovery value,” says Greve.
A diagram of the Net Recovery Value (NRV) looks like this:
NRV=Total Liquidation Revenue + Recycling Revenue – Repair Costs – Processing Costs – Transportation Costs – Cost of Parts
“Take a look at your last quarter’s results,” Greve advises. “Having a defined time period where you use actual costs and revenue is critical.” Greve also suggests that shippers calculate their NRV for all products liquidated, including anything sold “as is.” Then they should next figure out NRV for products that are “repaired and liquidated” versus products that are sold “as is.”
“After logistics managers have gone through this exercise, they will have all they need to make adjustments to their reverse logistics program, and they will be better prepared for the peak season,” says Greve.
David Griffith, senior vice president at Neovia, formerly Caterpillar Logistics, concurs that consumer electronics and other consumer package goods represent the greatest challenges in the reverse loop.
“The planning horizon is much smaller and the order profiles are more fluid,” says Griffith. “Season forecasts should be used to partner with suppliers on a long season buy. We learned a lot by examining this sector. Cell phones, for example, go through three selling seasons a year—the aftermarket implications are huge.”
How a shipper deals with allocation of costs and the repurposing of products varies widely, says David Vehec, senior vice president of retail at third-party logistics giant Genco. He maintains that a “focused triage” and refurbishment solution has benefits across commodities.
“The purpose of reverse logistics is to mitigate loss,” says Vehec. “Products that can be resold in their existing condition or through a refurbishment process can deliver additional value for shippers.” And when all costs are factored for the handling, shipping, promotion, allowances, and product devaluation, he adds, the focus is on recovery of lost value. “Time is the enemy, especially in the case of consumer electronics.”
For Alan Amling, vice president of global logistics and distribution marketing at UPS, the reverse objective will only gain more importance as e-commerce gathers momentum.
He notes that the 2013 UPS Pulse of the Online Shopper study indicates that returns volumes are only growing, with 62 percent of consumers stating they had returned or exchanged an item over the past year—versus 51 percent in 2012.
“More importantly,” says Amling, “when consumers have a positive returns experience, it can drive sales dramatically. As we have recently learned, 81 percent of online shoppers surveyed said that they would complete the purchase if they could return the item to a store or have return shipping.”
Compounding the impact made by increasing returns from e-commerce and the short life span of consumer products, are environmental concerns, says Amling. “Consolidation of end-to-end reverse logistics processes partnerships between 3PL providers can help here,” he says, “but in this dynamic industry, one must always be ready for change.”
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