Reverse logistics may never receive the investment and attention afforded forward distribution, but it gets a lot more respect today than in the past. This shift in attitude is due largely to an increased understanding of the costs associated with returns and of the opportunity to reduce those costs and improve recovery values through better management and automation. It also reflects a growing corporate emphasis on after-sales service and the need to satisfy customer demands for rapid replacement or repair of products and parts.

There is no question that the cost to industry of product returns is high. In the U.S. alone, the outlay for reverse logistics adds up to around $100bn each year, according to Aberdeen Group, a research and analysis firm based in Boston. This actually is a conservative estimate, Aberdeen says, because reverse logistics costs typically are spread throughout the organization or hidden among various business functions.

Isolating these expenses and achieving better accountability are issues being addressed by many manufacturers. "Over the past two to three years, we have seen an uptick in the number of corporate vice presidents that have 'reverse logistics' or 'returns management' in their titles, particularly in the high-tech area," says Warren Sumner, vice president of products and marketing at ClearOrbit, Austin, Texas. "This was one of the first indicators that some companies were beginning to not only focus on cost cutting in this area, but also were looking for opportunities to recover assets and recapture value." ClearOrbit's Enterprise Returns Management (ERM) solution helps companies both reduce costs and maximize value recovery by automating the key business processes associated with product returns, he says.

Click Commerce, Chicago, has seen a similar organizational trend. "Many of our customers have created completely separate returns management groups with their own profit-and-loss statements, particularly in the last year or two, says Jim Schoessling, general manager of supply chain solutions. Click Commerce has a reverse logistics  solution for after-market services and post-sales support, including warranty management. "A lot of the same customers we work with on the fulfillment side are now putting a more strategic focus on the returns and services side," he says. "So we often are working with the same companies on both their forward and reverse supply chains."

Aberdeen's research identifies senior-level oversight as "the top strategy for improving reverse logistics" among best-in-class companies, with 92 percent having a senior service director or executive that oversees all aspects of the return, exchange, repair and refurbishment of products and parts. These same best-in-class companies reclaim, on average, 64.3 percent of initial value from returned products or parts and they have the lowest number of products returned for repair or replacement within the initial warranty period. "Reverse logistics is rapidly emerging as a core driver of competitive advantage and financial performance among leading manufacturers," Aberdeen concludes in its report, Revisiting Reverse Logistics in the Customer-Centric Service Chain.

It also is becoming a key competitive factor for retailers as consumers increasingly consider a seller's return policies in their purchasing decisions.

Newgistics, whose Intelligent Returns Management solution is used extensively in the retail sector, says its customers have return rates running from 10 percent to as high as 30 percent. "The way a company manages those returns and interacts with customers during the returns process can have a profound impact on future business relationships," says Kenneth Johnson, senior vice president of sales at the Austin-based company. "If you do a good job managing returns, you can improve your customer retention rates and, ultimately, sell more of your products."

Additionally, many retailers are starting to offer warranties right at the point of sale, particularly on hard goods and electronics, notes Schoessling. "Those warranty providers are creating a returns business in and of themselves," he says. Managing warranty returns can "become a huge pain point," he adds, since there may be multiple warranties covering different components, particularly with certain electronic products. "If it is a product with multiple components, like a TIVO or a computer, you might have the hard drive warranted by one company and the memory warranted by another," he says. "Then there is the front-end warranty to that customer, so it becomes very complicated."

Automating this process with applications that can validate and track warranty claims and make sure that each channel is correctly billed for services is a best practice for any company involved in processing warranty returns, says Aberdeen. Such systems "can go a long way in minimizing claims processing time and reject rates, and help firms better manage costs." 

Telmar Network Technology, a telecom equipment and services provider, has a complex warranty program that includes OEM warranties on new products that it distributes as well as its own warranties on products that it refurbishes and sells. It uses ClearOrbit's ERM solution to support its reverse logistics program. "When these products come back under warranty for service, it is very important that we be able to tell that we did in fact sell this product," says John Hahn, chief information officer. When a product is sold, he explains, "the last step that happens before it gets shipped out the door, is the ship-confirm we do through ClearOrbit, which captures and stores the serial number. So when a unit comes back, we can scan the serial number and know whether we sold that product or not." ClearOrbit manages the entire process, "from the time the equipment is received into our repair depot until it is sent back to the customer," Hahn says. "If we had to do everything we do in ClearOrbit directly in our ERP system, which is Oracle, it would be extremely difficult and very costly. We think going with a best-of-breed solution and integrating it to the enterprise platform we have created in Oracle 11i is our most important best practice."

Wait, There's More Pain

Warranties are only one of many challenging issues around reverse logistics, "which remains quite a painful process overall," says Joe Dunlap, a partner in the supply chain practice at Accenture, New York. "Forecasting the level of returns, for example, is notoriously difficult," he says. While certain industries have some stability in the level of returns, most have a very difficult time planning for staffing and other support functions. This difficulty is multiplied many fold when a company is hit with a totally unpredictable event like a major recall, he says.

Additionally, says Dunlap, there is a lack of uniformity in terms of how products come in, "even if you instruct customers on how to pack and label products." Adding to the challenge, he says, is that most companies lack standard policies for governing the disposition of returns.

Such policies need to be part of a robust gate-keeping function that gathers information and applies rules-based processing as early as possible in the lifecycle of a return. By automating certain decisions upfront, companies can direct products to the right place in the beginning, avoiding unnecessary delays and transportation costs. Plus, for products or parts with little or no value, the return may be avoided altogether.

Capturing the necessary information is often done through use of a returns management authorization or RMA. "If a cell phone is being returned, having the customer explain that the reason is because the phone is three years old and he is switching providers would result in that phone being treated differently and probably going to a different location than if the phone was broken or if it was a new phone but not the right color," says Phil Corwin, director of marketing at UPS Supply Chain Solutions, Atlanta. The customer can then be sent return packaging or emailed a return label with the appropriate address and barcoded information.

Having a system that can automatically capture this information is critical, says Lee Norman, senior manager of enterprise returns management at ClearOrbit. "With manual processes, critical data on the reason for the return is often 'lost in translation' as it moves through the various stages of the reverse logistics chain," he says. "As a consequence, perfectly good units are often scrapped or disassembled for component re-use, even if the problem prompting the return was not at all related to product performance. By ensuring the return reason travels with the unit throughout the lifecycle, the highest value of the unit can be recaptured and any subsequent repair or refurbish operations can be made dramatically more efficient."

On lower-end products that do not require an RMA, best practice is to collect this information in the receiving process from coding that the customer provides on the return slip.

It is important to share this information with other parts of the organization. "Making this data visible throughout the design stream results in unprecedented opportunities for designers and engineers to incorporate improved functionalities and capabilities into the product development lifecycle," says Norman. "For example, if a disproportionate percentage of returns are deemed 'No Trouble Found', and the attributable root cause is poor packaging or instructions, those areas can be addressed without making wholesale and expensive product design changes. By automating data capture, many companies could leverage valuable customer data to build better, more marketable products-which would result in fewer returns."

Stopping returns before they happen is receiving more focus in reverse logistics programs, says Corwin. "We see a lot more investment going into customer assistance aimed at preventing returns," he says. This is especially true of electronic products but also applies to products requiring any level of assembly, he says. "Customer support has improved significantly to help customers get over any initial problems they might have with a product that would cause them to want to return it. The idea is to save the sale at that point. So now when you buy anything from shelving at a home improvement store to toys to electronic tools you will be given an 800 number to call if you have any problems before you return it to the store."

Easy & Convenient

When a return is necessary, especially in the retail sector, it should be as easy and convenient as possible for the consumer, says Johnson. Newgistics provides a pre-paid SmartLabel that enables consumers to mail the package, either from home or at any postal box or location. These labels all have a zip code assigned to Newgistics, which picks up the packages from bulk mail centers, does some initial sorting and consolidation and delivers them to retailers' return centers.

This process enables Newgistics to let the retailer know exactly what is coming back soon after it enters the mail stream so that it can fine-tune its staffing plans. Additionally, says, Johnson, "it allows the retailer to communicate with customers about the return. So if a company segments its customers by type, as most retailers do-first-time buyers, VIP customers and so on-it can dictate a nice message based on the type of customer and what they have returned to incent this customer to come back and buy something else.

Communication with the customer also allows the retailer to reduce calls coming into its service center by letting the customer know the return was received and setting the proper expectation about when it will be credited, Johnson adds.

Leading retailers are enhancing the convenience to consumers by allowing them to return items ordered online or through catalogs to brick-and-mortar outlets. "We think this is a best practice, but some retailers are not able to do this because their systems are not integrated sufficiently to allow it," says Johnson.

Based on the nature of the product and of the return, there are many paths a returned product can follow. After inspection, it may be lightly refurbished, repackaged and returned to inventory. It may be repaired or mined for parts or sent to a secondary market for resell. If sent for disposal, environmental compliance issues may come into play. In any case, speed is important in order to realize the maximum value from the asset.

"If an item has resell value, companies want to convert that asset to cash as quickly as possible because the longer they hold it, the more its value will depreciate," says Schoessling. In the case of electronic products, that depreciation can be as much as 3 percent a week, "but a fast turnaround is also important for fashion items," he says.

With the growth of online secondary markets, solutions providers are making it easy for clients to integrate this option. Click Commerce has a number of clients that make telecommunications equipment and it provides a trading exchange for those products as part of its solution. "We also have customers that will engage us to integrate to another secondary market," Schoessling says. "I think there is a lot more of that to come."

GENCO, Pittsburgh, is a third-party logistics provider specializing in reverse logistics and asset recovery. It operates 30 returns centers across the U.S. and Canada. It also has an online marketplace available to its clients. "This is a competitive online environment where people can buy pallets or multiple pallets of goods," says Tim Konrad, president of reverse logistics. Between the marketplace and other liquidation strategies, GENCO now sells about $3m in products per day, he says. "This includes products we cannot sell in the North American marketplace based on instructions from our customers, so we need to find buyers outside the boundaries of North America." 

Central and Separate

Centralizing and separating returns management from the forward supply chain is a best practice that many companies use to improve efficiency and avoid competing priorities. "Trying to do returns and forward distribution in the same facility is like having a fire hose with coronary artery disease," says Konrad. "A distribution center operates like a fire hose, blowing things out, and it just doesn't work to try and send product back up that hose."

Centralizing returns management also helps companies get a better grasp of the true cost of returns, Konrad says. GENCO uses a proprietary economic model to help companies identify and calculate these costs. "When we are able to extract that information, it really opens some eyes in terms of what their total costs are," he says.

Often GENCO is able to save companies money by taking over all or part of their reverse logistics operations, he says, noting that the company is able to use its many facilities and service options to customize programs that meet individual needs. "Our software is very flexible in terms of functionality and we upgrade it very often," he says. "I think of it as a a control board with about 30,000 toggle switches that can be turned off and on based on the requirements of the customer."

UPS Supply Chain Solutions also is a returns management outsourcing partner for many customers, particularly in the area of service parts. "In service parts work, we often take care of everything," says Corwin.

This includes bringing the part to a returns center, diagnosing the problem and either repairing it or sending it to an outside repair or disposal location and getting the repaired product or a replacement back to the customer. "Throughout the process, there is a lot of information that we capture and pass back to the customer," Corwin says. This includes the serial number, the results of diagnostic tests or of visual inspections, and when the part has been repaired and logged back in as available inventory. "A lot of the technology that is used isn't necessarily the most complex, but capturing these critical pieces of information helps our customers maximize the economic value of returns and keep their customers happy, and those are the key things."

RESOURCE LINKS:

Aberdeen, www.aberdeen.com

Accenture, www.accenture.com

Click Commerce, www.clickcommerce.com

Clear Orbit, www.clearorbit.com

UPS Supply Chain Solutions, www.upsscs.com

GENCO, www.genco.com

Newgistics, www.newgistics.com