Steven South, a consultant for Harvestime International and former president of the reverse logistics division at GENCO Supply Chain Solutions, says merchants need to remember that all returns have value.
Returns can take many forms, South says. They can be retailer discontinued items, manufacturer discontinued items, mandatory recalls, voluntary recalls, seasonal returns, stock balancing, overstocks, defective product, defective packaging, store damage, warehouse damage, out-of-date issues and customer returns.
Customer returns can be triggered for a myriad of reasons such as damage, defect, missing parts, confusion, buyer’s remorse, general dissatisfaction or even consumer abuse.
Every item returned to a retailer or manufacturer represents an investment that the retailer/manufacturer wants to extract. To not extract value from returns to the fullest possible extent puts companies at a competitive disadvantage.
Most retailers and manufacturers today have specific returns agreements either as a stand-alone agreement or as part of the general buying agreement. These agreements detail the many different sources of returns and the specific logistics and economic actions that both parties have agreed to invest. A detailed returns agreement would be considered a best practice and if a retailer or manufacturer doesn’t have a satisfactory returns agreement then developing one should be a high priority for the returns function, South says.
Most retailers and manufacturers operate with their own version of a ‘Returns Value Hierarchy’ that represents the best opportunities for extracting value from returns. This value hierarchy generally follows the following pattern.
Return to stock: This is usually the best opportunity to extract the most value. If there is nothing wrong with the product and it can go back into inventory at the store level or moved effectively to a different store.
Vendor credit: Often the retailers will have the opportunity to take full or partial credit for returned items. Vendor credit agreements could be for as much as 100% of the cost plus handling fees to reimburse for the cost of handling the returns through the process.
Secondary markets: The world’s secondary markets provide tremendous opportunities for extracting value from returns. The secondary market can be a large well branded ‘second tier’ retailer, smaller family owned shops, internet auction sites, and similar channels. There is a value hierarchy in this process as well where companies are trying to match their returned product to the most value producing secondary market channel.
South says there are three secondary market channels:
Case lot: There is a huge market for overstocks, odd runs, and discontinued product. Usually these items are in production pallet quantities and configurations and just as ‘clean’ as regular inbound product. These products are usually sold in larger order sizes such as truckload or multi-truckload.
Refurbished: Returned products can be repaired, refurbished, cleaned, and repackaged for sale on the secondary market. There are legal requirements guiding the sales of refurbished product but this can be a perfectly legitimate way to extract value from returns.
Recycle: The absolute last thing any company wants to do is put returns in a landfill. First of all, land filling is nothing but cost and it is a negative to internal sustainability efforts. So recycling is the next to last rung on the “Returns Value Hierarchy”. Most plastic, paper, glass, metal, cardboard components of a returned item can be recycled. Food product can be converted into livestock feed and compost. Whether the effort to recycle is extended or not is usually a function of cost, regulation, and passion for sustainability.
Landfill: The least value opportunity is land filling a returned item. This is usually nothing but a hard cost to the retailer or manufacturer but if the land fill cost per item is less than the cost per item to recycle then landfill is often the most economical solution. Landfilling is often justified by brand protection and/or liability reductions.
Most major and mid-major retailers and manufacturers have developed specific ‘reverse logistics’ functions, if not departments, within their sales or logistics groups that specifically manage, measure, and extract value from returns. These dedicated departments are usually charged with understanding returns to the point of reducing returns so they work with customers, sales, accounting, operations, production and other groups to manage returns.