Streamlining reverse logistics

Mar 01, 2006 10:30 PM  By

The returns management process is undergoing an extreme makeover. Refusing to remain a neglected supply chain component pushed off into a dark corner, returns management has changed its name to the more-sophisticated “reverse logistics” and is stepping out of the warehouse, heading for the executive boardroom.

It hasn’t been easy for returns management to change its image. For many years the process has been defined by complaints from customers (“It doesn’t fit”) and management (“Returns are costing too much”). No merchant really wants to take product back from customers, but they have to accept return items to be competitive. Considered a necessary evil for any merchant, returns can be particularly challenging for direct marketers.

Return rates average 6% overall, according to the Reno, NV-based Reverse Logistics Executive Council (RLEC) and can reach as high as 30% for some product lines such as fashion apparel. Associated costs of returns can run as much as 10% of total operational expenses. It is little wonder that some companies have policies designed to reduce volume, such as requiring the customer to call for a return authorization. Returns can sap profits and productivity if not processed efficiently, so the idea of embracing the returns process as a competitive strategy is counterintuitive to management trained to minimize costs.

But today’s reverse logistics strategies are delivering improved processes and competitive advantages. Savvy executives that include reverse logistics in their strategic planning are reaping the benefits. Streamlined processes are improving inventory management and reducing costs. Product is moved quickly and efficiently back into the sales stream, returned to vendors, or liquidated.

Accepting returns may be a required back-end procedure, but it turns out that marketing and service opportunities abound in reverse logistics. Strategically managing the return process throughout the supply chain enhances the customer experience. After all, handling merchandise returns is an important customer touchpoint. Customers who have positive return experiences are the most loyal buyers, as they’ll reorder confident that any potential challenges will quickly be resolved.

The objectives of a successful reverse logistics initiative include increasing sales, reducing volume, and efficiently managing every customer return. Shifting returns from a cost center to a value-added business process, however, requires redesigning the reverse supply chain. There are three stages to this process: planning, executing the plan, and monitoring the results. Let’s take a closer look at each stage.

PLANNING

Effective returns management needs to mesh with the corporate business model and adapt to a dynamic marketplace. The strategic plan must also allow for scalability as technological advances introduce new channels.

The planning stage begins with a careful assessment of the current process and includes

  • reviewing and documenting the return policy for every channel
  • process documentation, including every step taken by employees and customers
  • calculating the costs associated with the process, from taking customer calls to disposing of damaged merchandise
  • analyzing return rates and reasons by product line and channel
  • comparing sales information of customers with returns to that of customers without returns.

After reviewing the existing process, you need to assemble a reverse logistics planning team. This should includes personnel from marketing, merchandising, and operations. If your business model is silo management by channels, you’ll have to expand the team to include members from each channel.

Clearly define the team’s mission so that everyone is working toward the same goals — minimizing return rates of certain product lines by X%, for instance, or getting returned items back into inventory within X days. Then develop the plan by identifying areas for improvement and finding solutions for the challenges. Consider every facet of the returns process, from vendor relations to customer satisfaction.

Reverse logistics planning begins with merchandise selection and channel consistency. For instance, when you select product, establish policies up front that require vendors to accept returns for poor-quality items or packaging. If they won’t agree to do that, terminate the relationship. You should also standardize policies at every contact point, even if returns cannot cross channels (for example, if your stores will not accept returns of merchandise purchased online). Such consistency will reduce customer confusion and employee efforts.

EXECUTING THE PLAN

The best plans fail if strategy doesn’t match reality. Before you implement any recommended changes, test them to ensure that they work as planned. Start with the areas that promise the most return on investment. For example, before modifying your purchasing procedures, tweak the copy on your Website so that it more closely communicates the product’s features. Or you might start by improving the copy on your packing slips to make the returns process clearer to the customer. Both are relatively simple, relatively easy changes.

Resistance to change is a natural response and, of course, one that can undermine implementation of improvements. Successful execution of the strategic plan requires ownership, communication, and (again) consistency. You’ve already established ownership by including team members from every area in the planning process. Facilitate communication by soliciting suggestions for improvements from every employee in the company and providing regular updates on the initiative planning and implementation. As for consistency, follow the plan or explain why it was changed. In other words, ask for help, develop the plan, and then do it!

Outsourcing reverse logistics is an effective solution for some companies. You might consider outsourcing the function if your annual return volume exceeds 10,000 units and your company lacks the resources or expertise to do it well. Even if you handle fulfillment inhouse, you can still use reverse logistics programs from parcel carriers such as United Parcel Service and FedEx, though this may not be cost-effective if your company is located in a rural area. If you do opt to outsource, choose a third-party logistics supplier that offers speed, efficiency, and accuracy. You are entrusting it with your most valuable asset: customer relations.

If inhouse processing is your choice, eliminate challenges by executing in stages and refining as you proceed. The key is to find the right mix of customer service and corporate economy. Every company has a unique culture; make sure your plan fits in.

Keep in mind that customized solutions maximize results. For example, many gifts and apparel merchants do not require return authorization, but many electronic and computer mailers do. Given the size and expense of the product, computer merchants might find it more cost-effective — and more amenable to the customer — to make every effort to resolve the problem on the phone before having the customer ship the product back. In this case return authorizations might help reduce returns — but they don’t work for everyone.

MONITORING THE RESULTS

Whether returns processing is inhouse or outsourced, monitoring results keeps it on track. Key performance indicators are return rates, processing costs, satisfaction index, and sales. The information compiled during the planning stage is the baseline or control. You’ll want to compare all future results to this starting information.

During the implementation period, monitor results weekly. Use the information to measure vendor performance, evaluate product categories, manage costs, and track sales. Watch for trends that signify successful execution or the need to revisit the redesign. For instance, look for spikes in returns, which could be more than just an anomaly and might be an early indicator of a problem. Publish the results for everyone participating and ask for improvement suggestions.

Celebrate when goals are reached then set new ones. Remember that reverse logistics management is a continuous improvement process. Once the process is optimized, review historical analysis to determine how often each indicator needs to be monitored going forward.

A SUCCESS STORY

National Allergy, a supplier of allergy-relief products based in Norcross, GA, is seeing benefits from redesigning its returns process last year. Before it improved the process, the company handled returns as a standard warehouse operation, the way many merchants do. But now National Allergy is more proactive about handling returns on the front end.

For one thing, the company changed its policy to encourage customers to use its products for 30 days before returning them. It also added more information on its Website and packing lists so that customers are more likely to be aware of its policies. When returns do occur, National Allergy processes refunds or exchanges immediately. The merchandise enters the system for resale if it is unused and undamaged, while used merchandise is thrown away. Damaged or faulty merchandise is returned to the vendor.

According to National Allergy operations manager Kathryn Teague, the returns process is one way the company identifies weaknesses in its systems and products. It uses the information in its continuous improvement program. Recent results are driving additional changes to its Website and packing lists.

Reverse logistics has become a growth industry because of the opportunities associated with the process. Package delivery and third-party logistics companies offer alternative solutions when inhouse processing is inefficient. Companies that manage this supply chain component well receive a competitive advantage while reducing costs.

The evolution of the multichannel market requires managing returns efficiently and accurately. Return logistics strategic planning is here to stay. Make it a priority for your company. Start planning your reverse logistics makeover today so that you will be ready for your next peak season.


Debra Ellis is founder of Wilson & Ellis Consulting, a management, marketing, and operations consulting firm based in Barnardsville, NC.

Going forward with reverse logistics

Improving your returns management process takes time and effort, but the rewards are well worth it. Here are a few tips to ensure your program’s success:

Communicate with prospects, customers, employees, and vendors. The more information prospects have about returns, the more likely they will order. The more information customers have about the process up front, the lower your customer service costs. The more information employees have about the procedures, the faster the processing. The more information vendors have about quality issues, the better the product. In every case, more communication is better. Provide returns policy information with every marketing medium. Tell when, where, and how to return. It will not increase the number of returns. It will increase sales, satisfaction, and efficiency.

Integrate marketing, merchandising, and inventory management with returns processing. Business models that isolate departments are detrimental to growth and profitability strategies. Incentives associated with merchandising and marketing achievements should include returns analysis. Integrate systems, channels, and departments to optimize processing and analysis.

Automate every possible area. Allow customers to complete their return forms online, then import the information into your system with a pending status. When the item is received, update the status. Notice that the word is “allow,” not “require.” Customers should be able to choose how they process their returns. Include a returns form with every order. Preprint it so that the customer has few blanks to fill. The easier the customer’s steps, the easier the back-end processing.

Eliminate customer challenges and duplicate handling. Provide call tags or prepaid labels when returns are due to company error. Provide customer-paid labels when returns are due to customer choice. Include the order number on the label to expedite look-up. Unless there are extenuating circumstances, do not require return authorizations. They are expensive to process and reduce customer satisfaction without reducing returns. The best-handled return is the least-handled one. Aim to complete the returns process with one touch. Issue the customer’s credit or generate an exchange order and route the item to its appropriate destination when the incoming package is opened.

Evaluate systems and processes to find opportunities. Optimal efficiency requires good information. Most resources are allocated to forward logistics. Order management systems are limited in the information they capture and provide when the process is reversed. Evaluation of the systems and processes identifies weaknesses and opportunities. Eliminate the weaknesses and capitalize on the opportunities. Use the resources generated by reduced costs and increased sales to improve the systems and processes.
DE