Relieving The Holiday Hangover

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Retail madness doesn't stop at year's end—it just reverses direction. A medicine chest of reverse logistics remedies helps alleviate retailers' inventory headaches.

For some holiday revelers, the period between Christmas and New Year's morning is a time for eating too much, hopping from party to party, visiting seldom-seen relatives, and overspending on gifts. By January 2, though, most celebrators are ready to get back to business as usual.

That is, unless they're retailers or retail vendors. In the weeks after the holidays, the companies that sell all those gifts we lugged home from the mall will be nursing a collective holiday hangover that's likely to last until Valentine's Day.

Just as the gift-buying frenzy dies down in late December, customers start lining up at service desks and shipping counters to return or exchange the gifts they don't want or can't use. Those lines signal the high season for reverse logistics.

"Through the holidays, outbound shipping volume increases," says Doug Pasquale, senior vice president, supply chain solutions for Brightpoint, an Indianapolis-based third-party logistics (3PL) provider serving the wireless industry. "Post-holiday, inbound volumes spike with returns."

That spike doesn't mean that retailers see merchandise coming back at a higher rate at the end of the holiday season. "As a percentage of sales, returns volume remains low," says Michael Janecek, warehousing and logistics manager at The Land of Nod, which sells children's products through its Web site, catalog, and stores in the Chicago area and Seattle.

But even as the percentage holds steady, higher sales volume late in the year results in a corresponding jump in returns. "Our biggest challenge is keeping up with the sheer volume," Janecek says.

Liberal return policies aimed at keeping customers happy ensure that retailers, vendors, and their service providers will process a steady flow of holiday gifts returned in all conditions—from the Barbie doll never removed from her box to the remote control plane that won't fly. Whatever shape it's in, each item requires attention and an action plan.

SAVING THE SALE

At Musician's Friend, a direct retailer of musical instruments, equipment, and accessories, about 80 percent of products come back in perfect condition, and more than half come back due to "customer remorse," says Galen Erickson, vice president of fulfillment, who runs the company's warehouse in Kansas City, Mo. "For example, the husband buys a $1,200 guitar, the wife balks, and he sends the guitar back."

Another three percent of customers who call for return authorization claim the warehouse shipped the wrong item. But many of these "errors" are further instances of cold feet, Erickson says.

"An audit of those claims shows 65 percent of the items supposedly picked wrong were actually right," he adds. "But we don't give customers a hard time. We want the returns transaction to be guilt-free for them."

The first strategy for managing the reverse logistics chain at Musician's Friend is to keep products from entering it at all. Call center representatives try to persuade customers to keep their purchases, sometimes by offering a discount, or they encourage customers to make an exchange. A resident expert might save the sale by explaining how to use complex equipment the customer couldn't figure out.

Less-specialized retailers, however, usually take products back with little discussion. Some stores and e-commerce businesses put undamaged returns right back into inventory.

Holiday-specific items sold at The Land of Nod, such as Christmas tree ornaments or Hanukkah playsets, become much less compelling once the season is over. "But we go forward and resell many products that might be returned after the holidays," Janecek says.

A product in less-than-perfect condition isn't resold as new, of course. "If there's a safety issue or a true defect, we return the product to the vendor, or dispose of it," Janecek says. And if an item comes back with just a dent in its carton, it is sent to the Land of Nod outlet store in Naperville, Ill.

Some suppliers make specific agreements with retailers to keep undamaged returns in stores. "We work with our dealers to sell returned items as open-box units at a discount price, so we don't have to bring them back to our distribution warehouse," says Rubina Farooq, director of return logistics at LG Electronics USA, a global manufacturer of electronics products. "We don't want the unit to go through the whole reverse supply chain because we risk more damage and incur more cost."

Although sales of electronics climb during the holiday season, in the past, LG hasn't seen large spikes in post-holiday returns. "Most retailers sell returns through other channels, such as open box sales or outlet stores," Farooq says.

This year could bring a change, though, as LG starts selling products through warehouse club chains.

While some products go back on sale through the channels that originally sold them, many don't, even when they are returned in pristine shape. Instead, retailers ship those items to a returns center operated by the vendor or a 3PL.

"The national retailers are good at negotiating return policies," Pasquale says. "They don't want liability and they don't want to absorb any additional labor. They want the supplier to deal with it."

At the returns center, products undergo triage. Items in perfect condition might go into inventory for sale through an outlet store or e-commerce site. Those items sometimes need to be re-kitted or repackaged. Imperfect or slightly used items are repaired, then sold as refurbished products.

Wireless phones provide a good example of products that move straight from the returns counter into the reverse logistics chain. If a consumer returns a handset to a store in perfect condition, it will likely be sold through a different channel, such as the wireless carrier's Web site. Handsets that require some repair might be used as replacements under a warranty or insurance program, or sold on the Web as refurbished items.

GIVING CREDIT

National retailers accumulate items in their own return centers before shipping them in bulk to the vendor or its service provider, says Blake Vaughn, director of reverse logistics at Brightpoint. As Brightpoint processes those handsets, it transmits data on their status to the wireless carrier.

"It's important that the products get processed accurately and quickly, because a national retailer is waiting for a credit, which typically totals hundreds of thousands of dollars," says Vaughn.

Like Brightpoint and its clients, Musician's Friend puts a lot of effort into recovering the value of items that customers return in less-than-perfect condition. Employees in the repair department rate products on a scale of 1 (best condition) to 5 (badly damaged), then determine whether it's worth investing resources to bring the condition up a notch. Musician's Friend sells refurbished instruments on eBay and on its own Web site, while a badly damaged product might be sold in the clearance store attached to the company's distribution center.

"Somebody will buy it for the parts, or we'll use the parts ourselves," Erickson says. "We don't throw anything away."

Apart from merchandise that ends up in retailers' own secondary channels, many items that consumers return are sold in bulk to liquidators and end up in closeout stores, online auctions, or flea markets.

"The secondary product market totals more than $100 billion a year," notes Stephen Fraser, chief executive officer for 3PL GENCO Reverse Logistics Businesses, Pittsburgh, Pa.

The reverse logistics chain in the year's first quarter works much the way it does the rest of the year; there's just more product flowing. And holiday returns make up only part of the picture. The first quarter also is peak season for clearing out merchandise that hasn't sold or that the retailer no longer wants to carry in the store.

"Most retailers close their books at the end of January for the calendar year," Fraser says. So while they're handling holiday returns, they're also disposing of excess inventory that they don't want on their books in the new year.

"The combination of holiday returns and inventory management decisions related to year-end financial planning floods the reverse channel with product in the first 45 to 60 days of the year," he notes.

While it's important to implement the reverse logistics process correctly throughout the year, the high-volume period after the holidays poses special challenges.

"One of our biggest challenges is related to when we will receive returns from the retailer," says Justin Holtzinger, director of reverse logistics at Virgin Mobile USA, a wireless products and services company that uses Brightpoint to handle its logistics and a portion of its repairs.

The fact that national retailers accumulate returns before sending them back complicates this puzzle. "It's hard to forecast how many batches of returns will come through," Holtzinger adds.

Virgin Mobile and its partners try to mitigate the effects of fluctuating volume by maintaining the necessary levels of staff and repair parts. That's especially hard to do after the holidays.

"We transact a high percentage of our business within a few months," Holtzinger says. "That means we also handle a good percentage of returns within a few months."

Repair partners are understandably reluctant to add resources to handle peak return seasons, only to see them sit idle the rest of the year.

"We encourage our partners to add resources and order additional parts in anticipation of the expected volume of returns," Holtzinger says. The goal is to process returned handsets as quickly as possible, so Virgin Mobile won't need to order a large volume of new merchandise from original equipment manufacturers.

Still, Holtzinger understands that his service providers are his partners, and success requires collaboration. So, during the post-holiday spike, Virgin Mobile loosens its expectations for turnaround time (TAT) on repairs.

The usual TAT is five to seven days. But meeting that standard in January would force repair partners to staff up more than is practical. "During the post-holiday season, I'm comfortable with a 10- to 15-day TAT, as long as it is reduced during the next 30 to 60 days," Holtzinger says.

Preparations to handle returns and liquidated inventory after the holidays start well before merchandise starts flooding back. "GENCO begins staffing, preparing, and training in the fourth quarter for the extra load that the reverse supply chain will handle in the first quarter," Fraser says.

Also, GENCO's liquidation business, GENCO Marketplace, works all year to develop new markets for returned or excess inventory. So even though products flow into the secondary market early in the year, GENCO's customers find demand for their liquidated merchandise is similar to other periods.

One area where GENCO doesn't need to prepare for special post-holiday challenges is transportation. "True, there's more returned and liquidated merchandise to ship at that time," Fraser says. "But there's also less new merchandise on the road. Because it's traditionally a slower time of year, trucking capacity issues don't arise right after the holidays."

Like the service providers, Musician's Friend adds staff to handle post-holiday returns. Starting on Thanksgiving and continuing into the first quarter, Erickson's industrial engineering and human resources employees are tapped to become operations staff.

Also to stave off post-holiday headaches, Musicians' Friend takes extra care to avoid picking mistakes during the holiday shopping rush. The warehouse does a quality check on all items it ships between Thanksgiving and Christmas, a crucial step at a time when many temporary workers join the staff.

As with any sort of hangover, there's no shortage of formulas for relieving the pain of post-holiday reverse logistics. For retailers and their vendors, judicious staffing, flexibility, collaboration with reliable partners, and attention to detail can ease the transition from the winter holidays into the new year.

WHAT'S IN THE CARDS?

Although consumers are expected to spend cautiously this holiday season, one product that's likely to see increased sales is the gift card.

Whether plastic or electronic, gift cards have become an increasingly popular way to say "I care" at holiday time. So even as we're tossing out the used gift wrap and ribbons, hordes of recipients will be gearing up for a second round of shopping. Some will barely give their cards a chance to nestle into their wallets. Others will contemplate their purchases for months before ringing them up.

For people who manage the supply chain, the influx of gift cards at holiday time doesn't pose any special challenges, say retailers, vendors, and service providers.

"It's not such a huge percentage of sales that we're waiting for the other shoe to drop when the gift cards are suddenly redeemed," says Michael Janecek, warehousing and logistics manager at The Land of Nod, a purveyor of products for children. Like most retailers and direct marketers, The Land of Nod sees more consumers pay for purchases with gift cards in January. "But it tends not to affect our inventory position significantly," he adds.

Gift cards may, however, extend the peak retail season beyond the end of December. At Musician's Friend, which sells musical instruments and equipment through its Web site and catalog, electronic gift cards help make January the company's second-busiest sales month. The company's post-holiday catalog hits the mail between Christmas and New Year's, and customers who receive cards as gifts respond with gusto. "We have a very high redemption rate on our gift cards," says Galen Erickson, vice president of fulfillment.

Although he doesn't yet have figures to prove his hunch, Justin Holtzinger, director of reverse logistics at wireless carrier Virgin Mobile, theorizes that the growth in gift cards helps to keep some product out of the reverse logistics stream, relieving post-holiday headaches.

Consumers who receive a wireless phone as a gift but really want a higher-end unit might return the phone and add extra cash to get the product they really want. But people who receive a gift card can buy the product they want in the first place. "As customers are able to choose the exact products they want, we'll see fewer products coming back to us," Holtzinger says.

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