Root canal or returns?

Given a choice, the experienced materials handling manager would probably pick root canal.

That's because returns have traditionally been a source of greater pain. "Returns are only bad news," says Ed Winters, who oversees the return of more than $800 million worth of merchandise annually for retail giant Kmart.

What makes returns so hard? "At most companies, reverse logistics is benchmarked against forward logistics, but without the same level of resources for support," says Winters. "No one wants to focus on it."

The numbers associated with returns are daunting. Across all retail operations, more than 100 million parcel packages a year are returned at a total cost of more than $150 billion, according to the Center for Logistics Management at the University of Nevada, Reno.

What's more, the number of returns is growing, as retailers reach out to consumers through television, catalogs, and e-commerce. By the year 2004, the number of individual parcels returned to retailers is expected to top 615 million, says the Center for Logistics Management.

With that much inventory at stake, you would think that returns would be high on the list of priorities. Not so. "Very few companies pay attention to returns," contends Shannon Hauser, chairman and CEO for Returns Online Inc., a Mercer Island, Wash., company that manages returns for others.

The reason is that returns don't generate revenue. Yet, ignoring the reverse logistics supply chain could be a lost opportunity to improve margins.

To begin, returned inventory is valuable. "No CFO in his right mind would put a stack of hundred dollar bills in a corner of the warehouse and forget about them," says Pete Rector, senior vice president for strategic initiatives at Genco Distribution Systems, a returns specialist in Pittsburgh, Penn. "But they'll let returned packages worth thousands of dollars stack up."

Beyond dollars and cents, improved customer service is another reason to develop a reverse logistics strategy. In recent consumer surveys, the hassle of returns is consistently cited as a reason for not shopping online. Nevertheless, the average return rate for online sales is 36%, according to the Gartner Group.

"E-commerce is perhaps the biggest driver in reverse logistics right now," says Brian Hudock, senior principal with Tompkins Associates. "As companies get closer to their customers, they're learning that the consumer is fickle. Delay handling a return and you can lose a customer very quickly."

Fortunately, there are ways to make returns more cost effective, by either outsourcing to a third party logistics provider that specializes in returns, or by optimizing your own operations.

Make no mistake: There are reasons why handling returns is such a headache.

For starts, returns typically cut across several departments: No one department has responsibility.

And, those returns are considered a cost rather than a revenue stream. "Because of that, it tends to get stuck in a corner of the warehouse, where it's assigned the oldest and longest-term employees," says P.J. Harris, vice president of sales and marketing for ReTurn, Inc., Wayzata, Minn. "That means it's expensive and not very productive."

Furthermore, information systems are designed around forward logistics. "Over the last fifteen years, we've been working with advanced ship notifications so that a distribution center knows what it's supposed to get before it arrives," says Patrick Sedlak, vice president, Sedlak Management Consultants, Richfield, Oh. "None of that applies to returns. You don't know what you're getting or in what condition it's going to arrive."

Most WMS systems are geared towards moving product out the door or returning resalable merchandise to stock. Unfortunately, most returns are not returned to stock. "Returns management stands the old 80/20 rule on its head," says Harris. "20% of returns are good, and 80% are the exceptions. It's like your cash register is ringing in reverse."

Physical operations have also been optimized around forward logistics. Conveyors tend to only run in one direction, and receiving operations are designed around products that arrive in standardized packages with compliance labeling.

"Returns come back without paperwork and in any kind of box that was handy," says Hudock. "They might not even be conveyable. Many companies just throw it all in a big bin and send it back to a returns processing area when the returns pile up."

Finally returns are unpredictable. "You can plan for Christmas, but you can't plan for a product recall," says Harris. "That will swamp the little old lady who's been there for forty years and now runs the reverse logistics center."

Just because returns are different, however, doesn't mean there isn't a method behind the madness of a successful returns operations.

Just as forward logistics is defined by receiving, putaway, picking, packing, and shipping, there is a process to reverse logistics as well, according to Hauser of Returns Online.

"We've identified five common threads which cut across retailers, whether they sell through a catalog, a traditional store, or online," says Hauser, who has applied for a patent on the process.

First, someone has to authorize the return. While many companies include return shipping labels in a package, Hauser says that just invites returns. Instead, he believes a consumer should contact a call center or a Web site to get returns authorization. That provides an opportunity to enter an advanced ship notice into the system.

Second, there needs to be a transportation network to ship the return.

Third is an auditing process. Someone at the returns facility needs to touch the product to verify what was returned and in what condition it was returned. That will determine how the item is going to be disposed.

Fourth is product disposition based on predefined business rules. Those might include returning salable merchandise to stock, reselling product through an online auction, donating the product to charity for a tax deduction, traditional liquidation channels, or scrapping damaged merchandise.

Finally, a successful returns system creates information about the kinds of products being returned and where they're coming from. That information can be used to refine sales plans in the future.

Before implementing a returns strategy, the next important decision is whether to handle returns in-house, or outsource them to a third party logistics provider, say the experts.

To decide, three issues must be addressed.

The first is whether or not handling returns internally will enhance or hinder a company's core competency.

Sears, for example, is known for its forward logistics prowess. However, Sears outsources returns.

"Our core business is selling to customers," says Clay Valstad, director of central return center operations for Sears. "We support forward logistics because you have to move product to get it to customers. Reverse logistics isn't a core competency. A third party can provide assets that might not be available from our own company on a timely basis. Plus, they have the knowledge and the expertise."

The key to making the system work at Sears is clearly defined business rules for the most profitable disposition of inventory, and a system at the stores to ensure that returned merchandise is properly collected and identified when it reaches a returns facilities. "We have to mark the inventory at the stores in a way that the 3PL can apply the business rules," says Valstad.

The second issue centers on whether you're handling soft goods or hard goods.

Retailers selling soft goods that can be resold through their traditional channels may be wise to bring returns in house. "Clothing is a good example," says Hudock of Tompkins Associates. " If a sweater doesn't fit just needs to be refolded and rebagged and it can go back on a shelf, that can be done in-house."

Hard goods, on the other hand, are typically considered to be candidates for outsourcing. "When someone sends back a refrigerator, it's usually because there's something wrong," says Patrick Sedlak of Sedlak Management Consultants. "A third party provider can handle the return to the manufacturer or to some other channel of disposition."

Finally, determine your company's ability to dispose of inventory through non-traditional sales channels. "We can spread the liquidation over all of the channels we use to get the most for our customers," says Pete Rector, senior vice president, strategic initiatives, for Genco Distribution Systems, Pittsburgh, Penn. "We may move product into global secondary markets, auction a portion on eBay, put it out in a fixed price offering on Amazon's marketplace, and sell it to a liquidator."

There are several third party models for handling returns, according to Hudock.

The traditional method involves bulk returns from a DC to a third party provider. While this is the most cost-effective method, it's also the slowest before a customer receives a credit.

Drop centers allow consumers to take returns to a local mail center that then returns the inventory in bulk to a processing center. "This saves shipping costs and streamlines processing," says Hudock, "but it still has a time lapse before a credit is issued."

The third is a direct return via a parcel carrier to a returns processing center. There items are processed, and credits are issued, within 24 hours of return approval. But this method is only effective if the third party has real time access to order and return authorization information from the customer.

Experts say a successful in-house returns program begins with a consolidation of the returns, whether that's by region or in one big national center. Consolidation allows you to understand the scope of the problem, define a process, and execute it efficiently.

Next on the list is process flow. While that may vary from center to center, the basic goal is to eliminate touches from the process. "Every time you touch a product, it costs you money," says Harris of ReTurn. "You want a sophisticated system that does the thinking and compresses the steps."

An efficient flow might incorporate conveyor and sortation equipment at the receiving dock and a buffer or holding area with flow racks for fast moving items and carousels for slower moving items.

"Some forward thinking firms are creating a holding area for returns," says Patrick Sedlak of Sedlak Management Consultants. "They wait for the next allocation because they know that what they're getting back from customers are typically the hottest items since that's what selling. They'll restock from the returns holding area, saving the labor necessary to restock on the warehouse shelves."

Because returns are labor intensive, information technology is critical. Goods need to come back with bar codes that can be scanned to minimize handling, and with access to information about the disposition of specific stock keeping units under specific conditions.

"The WMS in a returns center needs to be robust enough to track all the different characteristics of an item since product comes back in a variety of different conditions," explains Stan McLean, president, Intek Integration Technologies, Seattle, Wash.

Success will also depend on clearly defined business rules for the disposition of product, whether it's a return to stock, a return to the vendor, salvage, online auction, rework, destroy, donate, or a warranty repair with a return to the buyer.

Finally, focus on the problem. "Focus is the reason that third party logistics providers are successful at this," says Harris. "If you're going to do it on your own, put someone in charge with the autonomy to make it work and hold them accountable."

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