Revving Up Returns

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Optimizing reverse logistics can result in cost reductions and service level improvements of up to 50 percent.

Reverse logistics "is not as simple as just throwing the supply chain in reverse," says Christopher D. Norek, senior partner with Chain Connectors, an Atlanta-based supply chain consulting firm.

Forward distribution is carefully planned to move product efficiently and effectively. But with reverse logistics, "companies often don't plan, don't know what product is coming back, or when it will arrive," Norek says.

"In many companies, reverse logistics is a lower priority than forward logistics," agrees James R. Stock, professor of marketing and logistics, University of South Florida, Tampa. "Unless a company has 100 percent returns, reverse logistics will never be as important as forward logistics."

While optimizing reverse logistics may not deliver the same scale of benefits as forward, plenty of opportunity is still available, says Stock. Some companies have achieved cost reduction and service level improvements of 50 percent or more by optimizing reverse logistics, he notes.

Handling reverse logistics well will become increasingly critical as the areas of competitive advantage—such as pricing, quality, and cycle time—become more equal among competitors, leaving reverse logistics as a differentiator, Stock says.

While forward and reverse logistics share many similarities, there are significant differences. "With reverse logistics, you deal with one item at a time in random order," notes Clay Valstad, director of reverse flow and specialty distribution, Sears Logistics Services, Hoffman Estates, Ill. "That's very different than processing cases, pallets or truckloads of the same item neatly stacked inside factory packs."

In short, "on the forward side, you deal with order. On the reverse side, you deal with chaos, trying to create order," he says.

In addition, "there's more manual processing in reverse logistics, and costs per unit are higher than in forward distribution," Stock says. "It takes longer to reconcile returns and give customers credit because it's a much more difficult process."

And, while forward logistics uses automated information systems to track items, reverse logistics often uses a mix of automated and manual information systems.

Because of these differences, Valstad notes, Sears found that "the reverse flow and forward logistics do not mix well—they have different priorities."

Handling reverse and forward operations in the same distribution center, for example, can lead to competing for space, equipment, systems, and assets. When that occurs, "reverse logistics will always lose," Valstad says. "For that reason, until the reverse logistics operation becomes its own entity, it's hard to do much with it."

While companies in industries that get a lot of returns—such as catalog and electronics firms and book publishers—do handle returns well, a small percentage of firms link reverse logistics to a competitive strategy. Many companies have at least some reverse logistics components that could yield improvement, says Stock, who is conducting a major research project on reverse logistics for the Warehousing Education and Research Council.

Here's a look at some companies that do returns right.

TI Shines the Light on Reverse Logistics

Texas Instruments' Digital Lights Processing (DLP) products unit makes a sophisticated semiconductor devices projection system used in products such as data projectors, digital cinema technology, and High Definition TV. At the heart of the system is a small and complex optical semiconductor chip, with up to one million microscopic mirrors that reflect light onto the projection lens.

Customers design their product around the TI digital Micro-electromechanical mirror, says Greg Chalkley, manager of logistics and customer returns for Texas Instruments DLP, Plano, Texas. While a small percentage of DLP returns stem from "out of box" failures, most are subjective failures that occur when customers are not happy with image quality.

Many times, the device can be adjusted to meet the customer's needs. Or, a device returned by one customer can be downgraded to another level and resold through the returns process to be used with another product.

TI's customer quality engineering and logistics departments work in tandem to handle the reverse logistics flow. Customers submit a failure list of devices to a TI customer quality engineer. The engineer reviews the request, works with the customer to resolve issues, and identifies situations where the device has failed.

A returns authorization number is issued, then logistics processes the return and sends shipping instructions to the customer. TI uses a set of strategic partners—including DHL, Danzas and KWE—who send the returned devices to a TI screening site in Plano.

Logistics receives and processes the return. Quality technicians then review the devices and perform failure analysis. Devices that are good go into forward distribution; those that are bad are reclaimed.

The DLP products unit recently benchmarked its reverse logistics process against two other companies. As a result, "we changed administrative procedures, and streamlined much of our workflow," Chalkley says. The changes have reduced reverse logistics cycle time and enabled TI to do more work with the same people, thus cutting costs.

Equant Outsources Returns

Equant provides global data and IP desktop and network services to multinational businesses globally. The company supports a range of equipment, including core network equipment, personal computers, and large ticket printers used by airlines. Part of Equant's logistical challenge is providing high service levels while minimizing spare parts investment.

Eighteen months ago, Equant began to address the spare parts that field engineers didn't return. To determine the scope of the problem, "we harvested all the equipment that was in the field offices," says Bob Wright, Equant's head of purchasing and supply chain global business optimization.

The company discovered that compliance was substandard because there were no tools that could proactively identify incidents of non-compliance on a real-time basis.

"For every 100 parts shipped out, we got fewer than 15 back," Wright says. "That's when we decided to relocate the inventory within a third-party provider's inventory management system."

Equant considered several third parties, then elected to expand an existing relationship with Choice Logistics, New York.

To prove the new reverse logistics model, Wright last summer developed a pilot program involving a high-end printer used in the airline industry. "We picked a segment where the value of the item was very high and repair times were slow," he says.

Service spares were sent to field engineers with return packs, which contained instructions and an airbill addressed to Choice's distribution center in Atlanta. Choice's inventory management system automatically tracks returned parts, creating an IOU when a part is sent out and relieving the IOU when it is returned. The 3PL reports on outstanding parts to Equant, enabling follow up.

The pilot was a success, and Equant rolled out the new approach for all its products in January 2003. Today, more than 99 percent of parts sent to the field are returned. Service levels have held steady as spare parts inventory costs have been cut and warehousing space has been rationalized.

Equant and Choice are now working on the next stage of the program, where parts that need repair will bypass the 3PL's Atlanta distribution center and go straight to Equant's repair sites. Eliminating one transportation leg will further reduce cycle time and costs.

The success of the new approach is paying off as the importance of reverse logistics is gaining recognition. "Reverse logistics never garnered the resources or head count that forward logistics did," Wright says. "Now, reverse logistics has the necessary focus within our organization."

Sears Centralizes Returns

Accepting customer returns is an integral part of Sears, Roebuck & Co.'s policy of guaranteed customer satisfaction—and its Craftsman tools' lifetime warranty. In addition, Sears customers can return merchandise bought from any channel to another channel, which enables a customer to buy from Sears.com online and return merchandise to the local store.

These are all great for customer service but can present an operational challenge.

Because it recognizes the importance of returns, Sears has been optimizing its reverse flow for nearly a decade. Before that, individual stores were responsible for handling customer returns.

"We deal with thousands of vendors and hundreds of thousands of SKUs," explains Clay Valstad. Couple that with some restrictions on what can be returned and when, and it's no wonder that giving stores responsibility for returns was ineffective.

Sears recognized that "the key to making things work is to keep returns simple for the store," Valstad says.

Store personnel make the initial decision whether or not a product can be put back on the shelf and sold for full price. If not, the store accounts for the product from an inventory point of view, then sends full palletloads of returned merchandise to one of three Central Return Centers. These CRCs, located in Atlanta; Columbus, Ohio; and Sacramento, are operated by GENCO Distribution System, a Pittsburgh-based 3PL specializing in reverse logistics management.

"At the CRC, we create order out of chaos," Valstad says. Individual products are scanned and the individual store receives appropriate credit. Using a blend of in-house and GENCO systems and databases, Sears has all the information needed to dispose of an item, both financially and physically. Vendors are charged and items returned as appropriate.

Over the years, Sears has expanded the use of its CRCs beyond handling returns. "Once we built the infrastructure that lets us cost-effectively consolidate material from more than 2,900 locations, we recognized we could use it for more than customer returns," Valstad says.

The CRCs can now be used for recycling, as well as for new merchandise that needs to be dealt with on a centralized basis—material being returned for quality reasons, safety recalls, liquidation of end-of-season returns, and worn or damaged floor stock merchandise. In addition, the CRCs provide a controlled process for consolidating and destroying returned Craftsman tools.

Getting Smart About Returns

Frederick's of Hollywood sells lingerie, apparel, and accessories through 155 stores, and via catalogs and the Internet. Returns of merchandise bought online or through a catalog are processed at Frederick's of Hollywood's distribution center in Phoenix, where they are inspected, returned to stock or disposed of, and credited to the customer's account.

Until this summer, online and catalog customers returned merchandise by taking it to a post office or arranging another shipping method. Recognizing that facilitating returns could increase sales, Frederick's began searching for a way to handle returns that would be easier on the customer.

"We looked at several options," says Mark Riedel, Frederick's vice president of operations. These options still required the customer to take the product to be returned to another location for shipping or call for the product to be picked up.

In June, Frederick's decided to implement the SmartLabel intelligent returns management solution from Newgistics Inc., Austin, Texas. Customers who want to return product can attach the pre-paid, pre-addressed bar-coded SmartLabel to their package, then drop it off at any USPS mailbox. SmartLabel packages are delivered to a Bulk Mail Center (where they are picked up by Newgistics) or to a Newgistics location.

Newgistics immediately transmits return data to Frederick's, then aggregates the returns and sends them to the Frederick's DC to be processed. Frederick's deducts a standard return shipping fee from the customer's refund.

The new method was fully implemented in mid-September. Today, between 50 to 70 percent of returns are being sent via the SmartLabel method.

"It really does make returns easier for the customer," Riedel says. And having visibility of returns coming into the distribution center improves planning and scheduling.

To optimize your reverse logistics processes, advises Chris Norek, "figure out what reverse logistics means in total dollars, and what it costs for each return."

Examine your reverse logistics strategy and policies. "I was surprised at a leading retailer's policy that anything less than $50 got thrown away because they didn't have a process in place to handle it," he says.

Finding the Time

Consider your reverse logistics practices, including how you handle returns, how long they sit, the length of time required to process returns, what type of information you have, when you receive it, and what information is missing. Then look at optimizing physical handling processes and maximizing asset recovery, Norek advises.

Many logisticians understand the potential opportunity that lies in optimizing reverse logistics, but are tackling so many other, higher priorities that they don't have time to address the issue. "One director of logistics told me, 'I know there are huge opportunities here—maybe millions of dollars that are available—but we just don't have time to get to it," Norek says.

Because it's not a core competence, or because they don't have the systems or the volume to do it right, some companies outsource their reverse logistics to a third party. This may be a generalist third-party logistics provider, or a provider that specializes in returns.

"If you have a large amount of returns, you may want a specialist," Norek says. "Do a cost-benefit analysis to make the best decision."

Whether you choose to outsource reverse logistics or handle them in-house, find the time to do it right. "There are huge cost-cutting and revenue-generating opportunities in returns. It may not be a burning platform, but consider how much you could add to the bottom line," he urges.

You may be missing a great opportunity to make a multi-million-dollar contribution to your company's coffers.

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