Dirty Laundry Comes Clean

Oct 01, 2003 9:30 PM  By

The subject of retail returns is big, messy, and embarrassing enough that retailers tend to keep quiet about it. Logistics executives toss around words like “nuisance” and “dirty laundry” when they discuss returns. The usual practice is to handle returns as simply as possible, usually at a significant loss. That kind of loss can be absorbed in good economic times, but today companies are confronted with the reality that a particularly large batch of returned SKUs might actually provide a push toward bankruptcy.

Corporate boardrooms by and large still don’t want to be bothered with discussing how much money their company can save by optimizing returns. But that attitude is beginning to change, according to Lucy Rooth, vice president of retail services for Pittsburgh-based Genco Distribution System Inc., a third-party provider of supply chain management services, including reverse logistics. One firm has commissioned Genco to help provide information on the reverse pipeline for a CEO-level study. “They had to pull together all the justifications and some of the reasons why a company should look at reverse logistics,” says Rooth.

STATUS QUOTE

Asad Haroon, vice president of business development for surplus recovery optimization services provider Liquidation.com (a subsidiary of Washington, DC-based Liquidity Services Inc.), suggests that although change in the corporate mentality about returns is slow, progress is being made. Haroon says that large companies’ worship of the status quo has been the biggest obstacle to transforming the returns process. Fortune 500 companies tend to insist that they know what they are doing with returns.

Haroon characterizes this attitude as: “We have Joe Smith who comes in with a truck and takes all our stuff away from us. It works.” Though many retailers have some infrastructure to handle returns, that infrastructure hides costs that the retailers overlook, Haroon says, adding that if merchants could increase just the recovery aspect of returns, the gains could be tremendous, since many companies write off the losses attributed to returns to begin with.

“I think that has opened up some eyes,” Haroon says. “I think on the boardroom level, these execs are saying, ‘We need to embrace some new technologies and look at how we can leverage these to get a better return,’ because in some cases 5%-6% of a retailer’s sales is returns. That’s a huge number.” Given those figures, Haroon adds, if there is an incremental increase of 20%-30% in returns recovery, “that’s a substantial amount of money that the company is generating.”

Rooth gives the example of a leading retailer that used to destroy returns in the field. In such a case, Rooth says, all returns data is lost, such as what is being returned and which are the bad manufacturers. What brings this to a retailer’s attention, and then to Genco’s attention as a reverse solutions provider, Rooth says, is the merchant’s recognition that “I can’t identify where the $90 million went. I don’t know if our manufacturers are compliant.” This is where the subject of centralized returns comes into play, Rooth adds, because then “you actually look at a piece and make an analysis of why that item may have been returned. And now that person or company can go back to the manufacturer and say, ‘You are not meeting our buying agreement and we will stop buying from you unless your quality improves.’”

GUESS WHAT

These days, many companies find themselves in the position of doing whatever they can to survive. Managing the retail supply chain is a gargantuan task, and carefully addressing a specific area such as getting the most out of returns can be extremely helpful in containing costs. Consider, for instance, the difference between Kmart, just emerging from bankruptcy, and retail supernova Wal-Mart, busy consolidating its grip on the number one spot in the Fortune 500.

Bruce Mantz, director of operations for Edison, NJ-based third-party logistics provider Automated Distribution Systems, says that Kmart’s approach to handling returns was filled with inefficiencies throughout its supply chain, as opposed to the more organized approach to returns that Wal-Mart employs. According to Mantz, it’s much easier to manage returns by consolidating them in one location. “That’s what brought Kmart down,” Mantz says. “They had no concept of supply chain management. They just pushed everything to the stores with no regard for what they were selling.”

Mantz says that ADS’s approach to retail distribution is just-in-time inventory, tied directly to a strong EDI point-of-sale replenishment system. ADS’s warehousing services allow retailers to put merchandise in their stores based on “actual sales, not guesstimates,” the same way that Wal-Mart handles replenishment, Mantz points out. The difference is that as a third-party provider, Mantz says, ADS offers that service to “retailers who don’t have that built into their infrastructure. There’s a lot of them out there that don’t.”

Just so, agrees Steve McElweenie, executive vice president of sales and marketing for high-speed sortation equipment provider FKI Logistex Crisplant. Returns processing has not received a lot of attention, says McElweenie, especially “when you look at a distribution center or logistics as a whole. And certainly in the economic times that we are in, it requires organizations to look under every rock for opportunities to improve efficiencies and productivity. Returns is an opportunity to improve the bottom line.”

POWER PLAY

A retailer like Wal-Mart may have vast influence when it comes to mandating vendor compliance with its dictates, but all retailers, big or small, have the power to create an efficient returns process. “Buyers don’t understand how much power they wield in creating a back-end, reverse logistics process for which the vendor they’re buying it from can be held accountable,” says Genco’s Rooth.

In an inefficient returns operation, Rooth says, “huge dollar volumes are tied up in dead inventory and you need to move it as fast as possible.”

Some retailers shy away from contracting out to returns specialists like Genco and try to take care of returns in-house. But when business picks up, returns are one of the last things retailers get around to dealing with. “When the DC gets busy, the returns aren’t a priority, no one pays attention to it, it builds back up, and before you know it, you’ve got trailer loads sitting in the parking lot full of returns — and they’ll say, ‘We’ll just liquidate it,’” Rooth says. She equates liquidating returns to giving goods away. There are any number of ways to dispose of returns for more, Rooth says: Genco has sold goods on eBay and recovered 50% of cost, for instance.

QUICK CHANGE

Greg Shields, senior vice president of distribution for Dallas-based luxury goods retailer Neiman Marcus, agrees that the one important element to handling returns is to get the returned merchandise in and processed rapidly so it can go back on the shelves, if at all possible. “You’d rather pay the money to move it as quickly as you can to get it back out and salvage at least some of the value of that product,” Shields says.

Even if returns are coming in because of a packaging problem, processing speed is important. Swift processing allows the retailer to stop the flow of future outbound products, get them packaged properly, and minimize losses that can be incurred for something as simple as improper packaging. In a sense, Shields says, it would be better to not even ship such items to customers, “because then you’ve disappointed them and you’re going to deal with that return anyway. We actually look at our returns every single day and say, ‘What similarities do we see in the products that are coming back?’”

Neiman Marcus is also testing a service called SmartLabel that is offered by Newgistics, a returns management company with headquarters in Austin, TX. This service provides customers with prepaid, preprinted, and preaddressed return labels that can be dropped anywhere in the U.S. postal system when a customer desires to make a return. Shields says that although he was at first skeptical as to how many customers would opt to use this new method, as opposed to returning goods the old-fashioned way, he was surprised at the number of Neiman Marcus customers making returns via SmartLabel.

“In the early test we had from February thorough July, 90% of the time the customer voted to use Newgistics,” Shields says.

Shields credits Newgistics with doing its homework and with being realistic about turnaround times. The company promised that at least 80% of returned packages would arrive consistently within a one- to seven-day period, with an average of about 98% of returned packages arriving in that time.

David Pluviose is a business writer and editor based in Nashville, TN.