Companies ignore reverse logistics at their own peril, because improving the returns process is a relatively easy way to move dollars to the bottom line. An automated reverse logistics operations—one in which both you and your channel partners use enterprise returns management software that offers rules-based, product-specific protocols for how to handle any returned items—can slash costs. Yet too many companies overlook the option—and in fact the reverse logistics process overall. As a result, just about any senior manager who cares to risk a look will see a great deal of money wasted on poorly managed reverse logistics.
This week we’ll look at three major categories of hidden costs within the reverse logistics process. Next week we’ll view three more, as well as discuss how to go about automating the process.
1) Hidden labor costs
From customer relations all the way to Sarbanes- Oxley compliance, there are layers of costs incurred if your returns process is not automated. Based on information linked to the product’s SKU—which can be activated by scanning or radiofrequency guns—returns management software can best determine what return rules and parameters apply if its attributes are drawn from the authoritative inventory, warranty, policy, and accounting information housed in your central enterprise resource planning (ERP) solution, not from a middleware database or a batch-process database. These enterprise returns management systems work best when linked directly to a customer-facing Web interface (more on this below), thereby integrating every link in the returns process to the ERP, allowing visibility across every station in the value chain 24/7. In terms of customer relations, a nonautomated process will incur costs as employees manually decipher return policies on a one-off basis, determining a product’s eligibility for return, the timing of credits back to the customer, and identifying which warranties (if any) apply. Moreover, you risk the perception that your company is interested only in customers who buy and not those who return. Along similar lines, customer services costs incurred with a nonautomated process result from employees having to determine which warranty policies to enforce, which service contracts apply, which credit rules are in place, how a product should be coded when it is replaced with a new one, and whether special needs (such as expedited return shipping) apply.
Furthermore, handling returns-related customer contacts is time-consuming in and of itself. On average, customers call up to four times to inquire about each return. Imagine being able to eliminate 30%-50% of your existing customer service cost basis, or redirecting the capacity to generating additional revenue, by making the returns process quicker.
Speed also plays a part in reducing repair, replacement, liquidation, or recycling costs. If handled on a product-by-product by an undereducated worker, it’s a time-consuming, error-prone process. Also, assets and subcomponents devalue rapidly in some markets (2%-5% a month in some cases), and value is lost if disposition isn’t timely. Value recovery of a product means appraising its residual market value before it goes to costly repair. A cell phone whose market value is $5 isn’t worth fixing for $15. But what returns manager can know the difference without physically opening the return shipment?
Financial reconciliation of the return is required, as is issuing credit to customers. So is the inventory reporting for Sarbanes-Oxley (where forward and reverse activity can very possibly be logged across two quarters). Add in the appraisal /write-down process and the charges incurred if a returned product is not covered by warranty but is returned anyway. On the sales side, there is complicated revenue recognition, margin protection, account management, and most important, return rate forecasts (perhaps to debit sales commissions that were not escrowed against returns and prepaid).
Because you are likely paying the shipping of returned items, it will cost you more in labor to individually assign a shipping method for each returned item. There are carrier-control rates to consider, as well as damage incurred in transit, one-off shipments, any inability to track returned items, and cost-effective aggregation and routing. Without the application of rules, these decisions are made and costs incurred on ad hoc basis. Certainly, the processes aren’t monitored regularly via metric reporting.
2) Gray-market items
Even if a warranty program is controlled by serial numbers or SKUs, manual look-ups are costly, and gray-market contamination is a risk. Controlling both asset history and required disposition systematically at the SKU or product-category level helps to minimize this risk. For example, assets designated as scrap may reappear for warranty service. Manual operations are not able to quickly ascertain this, and costly work is performed against an asset that has been deemed to have no residual value. The key to avoiding this cost is to establish a rigorously enforced returns authorization process that grants you the power to deny any unacceptable return and offers you advanced knowledge of what’s coming at you.
3) Lack of visibility
Customers want visibility to the status of their return requests. If they don’t have it, they’ll call. Or e-mail. Repeatedly. Guess who pays for the time personnel are on the phone? Merchandising would like to know what inventory is on hand, immediately. Do they need to order more of the latest hand-held device, or is a sufficient supply in-transit as a return? Design would like to know if a product line is experiencing high return rates due to a single component failure. Marketing wants information about the instructions on the new phone system that are so confusing that customers think the phones don’t work. A well-run returns operation can derive more efficient use of capital by capturing, synthesizing, and publishing intelligence about your returns population to the relevant functional areas in your organization.
Lee Norman is senior manager of enterprise returns management and John Reece is president of Austin, TX-based supply chain solutions provider ClearOrbit.