Reverse Gear

A company may outsource all or a portion of its operations. Typically, a firm that chooses to outsource the fulfillment portion of its business does so for that entire function — receiving, storage, pick/pack, shipment, and returns processing. Recently however, a new category of third-party providers has emerged that processes returns only.

To familiarize myself with this type of service, I posed a number of questions to a senior executive at a leading returns services provider.

The outsourcing of returns processing is relatively new. Why now? Why outsource at all?

The simplest answer is that as direct-to-customer commerce has continued to grow, returns have become much more of an issue. In Going Backwards: Reverse Logistics Trends and Practices, Drs. Dale Rogers and Ronald Tibben-Lembke found that on average, returns reduced the profitability of survey participants by 4.2%. Also, the considerable growth in the multichannel retail segment has presented challenges in managing returns for a number of merchants.

Explain the cost benefits of using a third-party returns processing provider.

Companies have historically focused on getting product out the door. The benefits of outsourcing returns include: (a) a closer focus on the process; (b) the ability to use available technologies without major systems or software investment; (c) the ability to complement existing returns capabilities; (d) cost savings; and (e) a higher potential rate of asset recovery than that in traditional disposition models.

What type of company/program would benefit most from this service?

It depends on the provider being considered. Some RSPs (return service providers) are interested only in fully taking over a client’s returns process. Others take a more modular approach, in that companies can choose to use the technology, reverse logistics services and/or asset recovery (via Internet auctions, for instance), or the parts that complement existing capabilities. The best candidate for this type of service is probably a multichannel retailer (catalog, online commerce, and/or brick-and-mortar) on the business-to-consumer side. In business-to-business, firms with high-value parts operations and short product life cycles would benefit.

How many companies are currently providing this type of service, and what is the percentage of total returns currently outsourced?

UPS and FedEx have services in the marketplace, but they are not very well defined or refined as of yet. Two, and Newgistics, offer technology and a services platform. Others are physical-asset-based providers with their own distribution centers, such as Returns Online, Inc. and ReturnBuy. Return Exchange is a technology-only venture.

Older companies (Genco, USF Processors, Universal Solutions) have processed returns for pharmaceutical, health and beauty, electronics, and apparel companies for some time. Their model is more of a “store sweep,” featuring centralized sortation and traditional liquidation.

A reasonable estimate is that less than 5% (in terms of return merchandise value) of total returns are being outsourced.

Walk us through a typical, in-house returns processing procedure.

The customer/end user returns an item to the merchant, filling out the returns form that typically is on the reverse side of the order form. For items of higher value, a merchant may require an RMA to validate the return.

The merchant opens, sorts, and inspects the item, processes it back to inventory, and issues a credit. The merchandise is then returned to stock, sold as used, destroyed, donated, or liquidated by traditional “job out” firms. Some merchants may include a prepaid USPS label for the return.

All returns come back to a centralized DC operated either by the merchant or manufacturer or by a third-party fulfillment services provider.

Can you describe the typical third-party returns management process?

Merchant/manufacturer business rules drive the entire process. The customer/end user completes basic information about the return on a Web site and receives a prepaid label to ship the return via the USPS or another carrier. The end user then affixes a label to the package and drops it off at an appropriate carrier location.

The business engine allows multiple routing options. For example: An item identified as “A” stock may be returned directly to the merchant’s DC, while a product indicated as defective may be returned directly to the vendor (RTV) or to a liquidation agent.

At the merchant’s option, the third-party firm may do the physical returns processing. Either the merchant or the service provider opens, sorts, and inspects the item, processes it back to inventory, and issues a credit.

Some providers handle asset recovery through a network of Internet auctions (both B2C and B2B), which typically results in speedier recovery of the cost of goods at a higher rate than traditional liquidation methods. The usual options of return to stock, sold as used/overstocked, destroyed, donated, or liquidated still remain, however.

What information is available to clients, and how is that information typically communicated?

Third-party returns companies provide all transaction-related information required for a return (origin, destination, transit status, and, depending on carrier, the return reasons). Additionally, they may provide significant information with respect to returns by SKU, reasons by SKU, geographic trends, the value of goods in the returns pipeline, and the value of goods where asset recovery is performed. Information is available in a variety of formats: online, downloads, hard-copy reports.

What might a client expect to pay for such services, and what critical elements typically affect the cost?

The “basic” service normally requires a minimal setup fee ($1,250-$2,000) for linking to a client’s Web site and establishing business rules. More elaborate services have a slightly higher fee because of the work involved in establishing interfaces with clients. From that point on, services are structured on a fee-for-transaction basis.

Critical elements affecting cost include product selected, scope of services provided, and the volume and term of the service agreement.

How flexible are third-party returns procedures? Should the client expect a “one size fits all” approach, or can the process be tailored to each client’s needs?

Flexibility should be one of the biggest advantages of outsourcing returns processing. As mentioned above, some RSPs are taking the approach that clients should outsource the entire process. An RSP should conduct enough due diligence and deliver a solution that either complements or outright replaces a client’s current capabilities. A modular approach creates a solution that complements existing capabilities while giving clients the option to take advantage of a true “end-to-end” solution.

What services are offered in addition to the actual returns processing?

You can choose from, among others, technology (for RMAs, routing, reporting), Internet-based asset recovery, and reverse logistics services (testing, refurbishment, repair, return to vendor).

Lew Waddey is a practice specialist with Spaide, Kuipers & Co. The firm provides outsource search services to the direct marketing industry, with offices in Pennsylvania, New Jersey, and Tennessee. Waddey can be reached by phone at (423) 886-5255 or (610) 668-8297 and by e-mail at

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