Executive Briefings

Kmart Smooths the Kinks From Snarled Reverse Pipeline

When retail discount giant Kmart set out to remake itself into a tighter, more streamlined company, it found a significant opportunity for savings in its inefficient system for handling returns. The solution: centralizing and outsourcing reverse logistics operations.

Never mind those plants where automakers keep only a few hours' worth of parts on hand. Many of the components that feed the AutoEuropa facility outside Lisbon aren't even manufactured until the vehicle starts down the assembly line.

What makes such tight scheduling possible is the existence of a 900,000-square-meter industrial park right next door to the plant, in the fields of Palmela. Frans Maas is the park's manager, a job that requires it to reach well beyond its roots as a freight forwarder, warehouser and trucker.

In fact, "freight forwarder" doesn't begin to describe what the vendor does for AutoEuropa, a 50-50 joint venture of Ford Motor Co. and Volkswagen. Frans Maas picks and sequences the movement of parts from 10 suppliers inside the park, as well as six others within a 25-kilometer radius. And while that number represents a small portion of the 365 companies from 17 European countries that supply the plant with nearly 7,000 parts, it covers many of the most critical components, including seats, doors, paint, axles, tires and instrument panels. Together, suppliers in Palmela account for nearly 40 percent of the value of all parts that go into AutoEuropa's vehicles.

The project represented a brave new world for both vendor and manufacturer. The AutoEuropa plant was inaugurated in April 1995, less than five years after the partners fixed on Portugal as a place to build minivans for the European market. And Frans Maas hadn't previously managed the flow of parts for a major auto plant, according to Joao Pereira De Almeida, general manager of the entity known as Frans Maas Logistica Palmela Lda.

 

 

 

 

 

Returned merchandise is processed
and scanned at the customer service counters in Kmart stores, and the goods are dispatched at designated intervals to the assigned returns center.

 


 

 

 

The Dutch company was no newcomer to the world of third-party logistics, however. A long-time provider of value-added warehousing and transportation, it already was serving major multinationals, such as Sun Microsystems and Xerox. For Rank Xerox, it had built a successful just-in-time parts pipeline in the Netherlands, which reduced inventory while smoothing out the peaks and valleys of manufacturing.

The company's track record was enough to win it the huge task of managing locally produced parts for AutoEuropa, whose output in 1997 accounted for an estimated 12 percent of Portugal's total exports, and 2.2 percent of its gross domestic product. AutoEuropa makes three minivan models for Europe: the Ford Galaxy, VW Sharan and Seat Alhambra.

For items entering the park from nearby suppliers, Frans Maas unloads the trucks, receives and stores the contents, and feeds them to the assembly line as needed. Parts from more distant locations are carried directly to the auto plant by Wheels, a European trucker. Additional parts move directly to the plant from inside-the-park manufacturers, although Frans Maas retains complete visibility of all parts in the park at any given time.

Inside-the-park manufacturers produce exactly what the plant needs, typically receiving orders from 90 minutes to four hours before a part must be available on the line. Often production doesn't begin until the order is received.

Similarly, Frans Maas receives sequenced orders at its on-site warehouse, where it holds two days of stock from other suppliers. These orders are activated by switches on the assembly line and sent out only after a car actually is in production, Almeida said. At the warehouse, a small, glassed-in office houses a row of desktop computers and printers that produce bar-coded sequence tickets transmitted by AutoEuropa.

The tickets tell Frans Maas exactly where in the warehouse an item is stored, based on data logged into the system at the time it was received. The part is then picked and transported to the plant next door, by vehicles powered by natural gas.

Frans Maas sequences approximately 43 percent of the parts needed by AutoEuropa on a just-in-time basis, Almeida said. Another 3 percent moves under the Japanese kanban system of unit loads, which are automatically replaced as they are used. The rest are delivered from more distant points by Wheels, based on orders sent by AutoEuropa six days prior to required delivery.

The stream of incoming parts is constant. Frans Maas receives between 40 to 60 trucks a day, six days a week, for an average of 1,200 per month. That translates into about 40,000 individual shipments each month. The company employs 350 workers inside the park, second only to Sommer Allibert Industrie S.A., whose workforce of 700 produces bumpers, doors and instrument panels.

AutoEuropa expects to turn out 140,000 vehicles this year, up from 131,000 units in 1997, according to financial director Kevin Brown. An entire car can be assembled in just over a single shift, with about 677 units rolling off the highly automated production line daily.

The venture has proved to be a near-instant success. In just three and a half years, the partners have captured a third of the growing European minivan market, which still accounts for just 2.8 percent of auto sales in the region. Brown predicts that minivan sales will reach 500,000 units a year by 2000, up from nearly 350,000 in 1997.

Other major producers of a European "multi-purpose vehicle" include Renault, Chrysler and Toyota.

The plant's location in remote Portugal hasn't hurt the automaker's ability to serve the European market. Less than 2 percent of the cars produced at Palmela are sold inside Portugal, Brown said. Nearly 40 percent are shipped to Germany, with Great Britain accounting for another 17 percent. (Approximately 1 percent is earmarked for Japan.) Vehicles move from Palmela by dedicated rail to the nearby Port of Setubal, where they are shipped to Ford and VW dealers in 44 countries.

Visitors to the 1.1 million-square-meter assembly plant find no safety stock and only a handful of near-empty parts racks alongside the production line. The operation relies on the constant movement of parts into the facility. But things can and do go wrong - "almost every day," said Brown.

Murphy's Law can wreak havoc with a tightly run, just-in-time operation. A truck may show up late, or with only half the parts numbers that are supposed to be inside. The plant uses six different kinds of sun visors alone; one type missing is enough to throw off the laborious planning that goes into the building of three distinct models of minivan on a single assembly line.

Almeida speaks of "job-stoppers" - key components that can shut down the line if they don't materialize on schedule. Yet many problems are beyond the control of even the most attentive plant manager. Barricaded roads or trucker strikes - hardly a rare occurrence in Europe - can easily upset the careful sequencing of inbound loads.

Frans Maas and AutoEuropa maintain detailed contingency plans that hold disruptions to a minimum. For small items, such as the missing sun visor, the plant may arrange to have an on-board courier rush a limited number of units to the plant for immediate production. The rest can be brought in later by less expensive means. In emergencies, Frans Maas has relied on planes and helicopters to ship parts to a nearby landing field, Almeida said.

"In my time, we have only lost production once due to missing parts," said Mark Penhall, trim and accessories business manager for AutoEuropa. "We're extremely flexible in overcoming any situations that arise."

The partners keep problems to a minimum through the use of satellite tracking, which allows for total visibility of inbound parts in transit, as well as early warning of any potential disruptions. In addition, said Almeida, all suppliers in the industrial park share Ford's in-house ordering system. Frans Maas uses the data to prepare weekly reports to AutoEuropa, detailing all picks and errors and grading its own performance on a scale from "unacceptable" to "perfect."

The key to the operation's success is a tight relationship between vendor and manufacturer. Evidence of that closeness is both real and symbolic, ranging from the physical proximity of the industrial park, to the blue shirts that constitute the uniform for all 4,000 workers in the plant as well as for Frans Maas's employees next door. In addition, the two sides keep identical hours: two shifts of eight hours each, with a five-minute break and half an hour for lunch.

Frans Maas is accustomed to remaking itself in the image of its clients. With the formation of the European Union and the removal of administrative borders, the 108-year-old freight forwarder has recently been stressing the third-party logistics side of its business. A separate chief executive officer of logistics reports directly to the Frans Maas board.

The company's services to major multinationals include inbound transportation, storage, picking, packing, shipping and proof of delivery. It has even developed its own shipment information and forecasting software, known as LogimaX, although AutoEuropa has opted for Ford's internal ordering system.

Frans Maas will need to become even more flexible to keep pace with growth at the AutoEuropa plant, which at full buildout could produce 180,000 cars a year. The automaker generally informs Frans Maas two months prior to any change in production levels, but the actual lead time can be much shorter. What's more, Almeida said, the industrial park will have to increase in size as AutoEuropa ramps up production of new and more complex models for the year 2000.

One change that Frans Maas hopes to make soon is an end to the joint venture that it was required to form with PGS, a Portuguese entity. The deal was a condition of the operator receiving Portuguese government grants for initial development of the park.

Profits are shared, with Frans Maas taking 51 percent and PGS 49 percent. With the joint venture now more than three years old and incentives no longer an issue, Almeida would like to see all profits flow directly to Frans Maas, a move the company believes will help it to gear up for an expanded operation.

Frans Maas also would like a bigger piece of the business of moving parts into the plant from sources all over Europe. It had originally offered to handle the entire service package, but AutoEuropa settled on a second provider for long-distance transport.

"Of course we would like to handle more," said Almeida. "It's our core business."

Nintendo Reins In Returns

When the Nintendo Corp. began to market its eight-bit Nintendo entertainment system back in the 1980s, consumers loved it and the company sold millions of units. It was wildly popular - that is, until the more sophisticated 16-bit system hit the store shelves late in 1991.

Then the returns started. First in trickles, then in increasingly heavier currents, consumers were lining up at retailers' customer service counters to exchange their old units for the high-tech version.

"Even though we had a very successful platform, we were faced with some huge losses because of the return situation," explained Peter Junger, director of field operations for Nintendo Corp. "What compounded the problem at that time was that retailers' returns policies were especially liberal, so consumers had no difficulty returning their product either to upgrade to the new platform or get in-store credit to apply to the upgrade."

At that time, Nintendo's return policy essentially was the same as it is today - 90 days from the date of purchase. "The only difference between then and now is that we couldn't tell if the product was within the 90-day period, and neither could the retailer," said Junger. The requirement for a receipt was not strictly enforced by retailers, and even when it was, if someone brought an 8-bit system back with a receipt that bore that particular SKU number, that didn't necessarily mean that the system being presented for return was the one that had been associated with the receipt. So our policy had no teeth."

Return costs soared to tens of millions of dollars a year, with return rates on the Nintendo units well into double digits. Adding insult to injury, 80 percent of the returned units were non-defective.

It was no picnic for the retailers either, as they absorbed the inventory and handling costs associated with stocking both units and processing the returns. "Even though Nintendo gave them perhaps a 100 percent credit for the product that was returned, the retailer still wound up losing, and so did we. And this was a substantial and unacceptable drain on our bottom line," said Junger.

Consequently, Nintendo was forced to make a decision: raise the price of the platform to absorb the returns losses, or come up with an innovative process to curb the return rate.

Nintendo's first move featured a self-addressed card affixed to the outside of the product packaging and bearing the serial number of the product in the package. Retailers were asked to remove that card at point of sale (POS) and drop it in the mail so Nintendo would know when that particular unit was sold - a big help in trying to determine whether the purchase fell within the 90-day warranty period. This information was plugged into a data base, and Nintendo made that information available to retailers via a voice-activated 800 number.

The program, initiated in 1993 and phased in over 18 months, caused a definite shift in the returns momentum, but it still had its limitations. Retail store associates had to be specifically aware of the procedure because it was only done on Nintendo products, and registration at its high point was only 73 percent to 75 percent.

When Junger came to Nintendo in 1994, he was intrigued with the program but noted the compliance level and the fact that it had been sliding downward. "No question about it, the program was a success in that Nintendo was able to reduce its returns costs, and retailers were able to push back now and challenge some consumers because they had the information on hand in many instances," said Junger.

Nintendo looked to technology to solve the shortcomings of the manual registration. What emerged was the basic program greatly automated, with a few other changes. One of the more interesting twists was a an actual cut-out, or window, in the cardboard packaging through which the unit - and specifically the product serial number and label - could be seen. "The product is still in plastic to ensure that there is no moisture or dirt, but you are able to read the serial number at point of sale very clearly," said Junger.

Then in 1995, Nintendo rolled out the electronic point-of-sale registration program that is in place today and signed up its first customer, Wal-Mart, in November 1995.

Here's how it works. When a customer presents a Nintendo unit at check-out, the sales associate scans the bar code or enters the Nintendo SKU number and a prompt appears on the register, asking for the product serial number. The information is stored in the system and periodically transmitted via EDI to Nintendo, often several times a day, where the information becomes available to retailers on the 800 number. In addition to the date of purchase, retailers also can determine the place of purchase.

Now participating retailers rely mostly on the customer's receipts, and most consumers do bring back their receipt, Junger added. "The sales associate compares the receipt to the serial number visible through the cut-out window. If they match, the associate processes the transaction in accordance with the terms and conditions of the returns policy."

Lest this sounds a bit too Big Brotherly, Junger hastens to remind that it only works against a customer who is trying to make an ineligible return; it makes life easier for the honest consumer.

Compliance with the electronic POS registration continues to rise as retailers upgrade their point of sale systems while continuing to search for cost reduction wherever possible. "It was a bit of a difficult sale in the beginning, but once retailers realized that they can reap the same benefit as the manufacturer can from this program, then they became fairly open to it," said Junger. Current participants include Best Buy, Wal-Mart, Kmart, Sears, Target, Shopco, Toys 'R' Us, Electronics Boutique and Babbages. Some more modest-sized retailers are not yet on board, but that may change in the near future as Nintendo rolls out a program that enables retailers to send in the information via the internet instead of by EDI transmission.

According to Junger, some retailers actually promote the program and want other vendors to consider similar programs for higher-value electronics goods that are easily serialized and susceptible to high rates of returns, such as camcorders, VCRs, wide-screen televisions and power tools.

Nintendo also is working with several vendors who want to emulate the program. "The companies interested in pursuing this see it as a strategic marketing advantage," he explained. "If the retailer makes a greater profit on your product, the tendency is for them to push your product."

Most of the big retailers are on board, but for those retailers that are not, "we actually provide them reports showing them exactly what kind of returns they ar
e taking back - how old the product is, and which retailers actually sold each particular item - and it's not always them. Now that retailers do have ways of controlling these returns, consumers actively look for other retailers where they can dump this product."

Now three years into the electronic registration, there's no looking back for Nintendo. "Even though we spent millions on this program, in the long run it has been well worth it," said Junger. "When we introduced Nintendo 64 about 18 months ago, we hardly noticed a blip on our returns radar screen for the 16-bit system. Since our worst days with the 8-bit system, our returns have dropped by more than 80 percent and now are very low in the single digits." Returns that are coming back now are much cleaner, so a greater share is remanufactured and sold abroad and fewer go into the crusher.

Never mind those plants where automakers keep only a few hours' worth of parts on hand. Many of the components that feed the AutoEuropa facility outside Lisbon aren't even manufactured until the vehicle starts down the assembly line.

What makes such tight scheduling possible is the existence of a 900,000-square-meter industrial park right next door to the plant, in the fields of Palmela. Frans Maas is the park's manager, a job that requires it to reach well beyond its roots as a freight forwarder, warehouser and trucker.

In fact, "freight forwarder" doesn't begin to describe what the vendor does for AutoEuropa, a 50-50 joint venture of Ford Motor Co. and Volkswagen. Frans Maas picks and sequences the movement of parts from 10 suppliers inside the park, as well as six others within a 25-kilometer radius. And while that number represents a small portion of the 365 companies from 17 European countries that supply the plant with nearly 7,000 parts, it covers many of the most critical components, including seats, doors, paint, axles, tires and instrument panels. Together, suppliers in Palmela account for nearly 40 percent of the value of all parts that go into AutoEuropa's vehicles.

The project represented a brave new world for both vendor and manufacturer. The AutoEuropa plant was inaugurated in April 1995, less than five years after the partners fixed on Portugal as a place to build minivans for the European market. And Frans Maas hadn't previously managed the flow of parts for a major auto plant, according to Joao Pereira De Almeida, general manager of the entity known as Frans Maas Logistica Palmela Lda.

 

 

 

 

 

Returned merchandise is processed
and scanned at the customer service counters in Kmart stores, and the goods are dispatched at designated intervals to the assigned returns center.

 


 

 

 

The Dutch company was no newcomer to the world of third-party logistics, however. A long-time provider of value-added warehousing and transportation, it already was serving major multinationals, such as Sun Microsystems and Xerox. For Rank Xerox, it had built a successful just-in-time parts pipeline in the Netherlands, which reduced inventory while smoothing out the peaks and valleys of manufacturing.

The company's track record was enough to win it the huge task of managing locally produced parts for AutoEuropa, whose output in 1997 accounted for an estimated 12 percent of Portugal's total exports, and 2.2 percent of its gross domestic product. AutoEuropa makes three minivan models for Europe: the Ford Galaxy, VW Sharan and Seat Alhambra.

For items entering the park from nearby suppliers, Frans Maas unloads the trucks, receives and stores the contents, and feeds them to the assembly line as needed. Parts from more distant locations are carried directly to the auto plant by Wheels, a European trucker. Additional parts move directly to the plant from inside-the-park manufacturers, although Frans Maas retains complete visibility of all parts in the park at any given time.

Inside-the-park manufacturers produce exactly what the plant needs, typically receiving orders from 90 minutes to four hours before a part must be available on the line. Often production doesn't begin until the order is received.

Similarly, Frans Maas receives sequenced orders at its on-site warehouse, where it holds two days of stock from other suppliers. These orders are activated by switches on the assembly line and sent out only after a car actually is in production, Almeida said. At the warehouse, a small, glassed-in office houses a row of desktop computers and printers that produce bar-coded sequence tickets transmitted by AutoEuropa.

The tickets tell Frans Maas exactly where in the warehouse an item is stored, based on data logged into the system at the time it was received. The part is then picked and transported to the plant next door, by vehicles powered by natural gas.

Frans Maas sequences approximately 43 percent of the parts needed by AutoEuropa on a just-in-time basis, Almeida said. Another 3 percent moves under the Japanese kanban system of unit loads, which are automatically replaced as they are used. The rest are delivered from more distant points by Wheels, based on orders sent by AutoEuropa six days prior to required delivery.

The stream of incoming parts is constant. Frans Maas receives between 40 to 60 trucks a day, six days a week, for an average of 1,200 per month. That translates into about 40,000 individual shipments each month. The company employs 350 workers inside the park, second only to Sommer Allibert Industrie S.A., whose workforce of 700 produces bumpers, doors and instrument panels.

AutoEuropa expects to turn out 140,000 vehicles this year, up from 131,000 units in 1997, according to financial director Kevin Brown. An entire car can be assembled in just over a single shift, with about 677 units rolling off the highly automated production line daily.

The venture has proved to be a near-instant success. In just three and a half years, the partners have captured a third of the growing European minivan market, which still accounts for just 2.8 percent of auto sales in the region. Brown predicts that minivan sales will reach 500,000 units a year by 2000, up from nearly 350,000 in 1997.

Other major producers of a European "multi-purpose vehicle" include Renault, Chrysler and Toyota.

The plant's location in remote Portugal hasn't hurt the automaker's ability to serve the European market. Less than 2 percent of the cars produced at Palmela are sold inside Portugal, Brown said. Nearly 40 percent are shipped to Germany, with Great Britain accounting for another 17 percent. (Approximately 1 percent is earmarked for Japan.) Vehicles move from Palmela by dedicated rail to the nearby Port of Setubal, where they are shipped to Ford and VW dealers in 44 countries.

Visitors to the 1.1 million-square-meter assembly plant find no safety stock and only a handful of near-empty parts racks alongside the production line. The operation relies on the constant movement of parts into the facility. But things can and do go wrong - "almost every day," said Brown.

Murphy's Law can wreak havoc with a tightly run, just-in-time operation. A truck may show up late, or with only half the parts numbers that are supposed to be inside. The plant uses six different kinds of sun visors alone; one type missing is enough to throw off the laborious planning that goes into the building of three distinct models of minivan on a single assembly line.

Almeida speaks of "job-stoppers" - key components that can shut down the line if they don't materialize on schedule. Yet many problems are beyond the control of even the most attentive plant manager. Barricaded roads or trucker strikes - hardly a rare occurrence in Europe - can easily upset the careful sequencing of inbound loads.

Frans Maas and AutoEuropa maintain detailed contingency plans that hold disruptions to a minimum. For small items, such as the missing sun visor, the plant may arrange to have an on-board courier rush a limited number of units to the plant for immediate production. The rest can be brought in later by less expensive means. In emergencies, Frans Maas has relied on planes and helicopters to ship parts to a nearby landing field, Almeida said.

"In my time, we have only lost production once due to missing parts," said Mark Penhall, trim and accessories business manager for AutoEuropa. "We're extremely flexible in overcoming any situations that arise."

The partners keep problems to a minimum through the use of satellite tracking, which allows for total visibility of inbound parts in transit, as well as early warning of any potential disruptions. In addition, said Almeida, all suppliers in the industrial park share Ford's in-house ordering system. Frans Maas uses the data to prepare weekly reports to AutoEuropa, detailing all picks and errors and grading its own performance on a scale from "unacceptable" to "perfect."

The key to the operation's success is a tight relationship between vendor and manufacturer. Evidence of that closeness is both real and symbolic, ranging from the physical proximity of the industrial park, to the blue shirts that constitute the uniform for all 4,000 workers in the plant as well as for Frans Maas's employees next door. In addition, the two sides keep identical hours: two shifts of eight hours each, with a five-minute break and half an hour for lunch.

Frans Maas is accustomed to remaking itself in the image of its clients. With the formation of the European Union and the removal of administrative borders, the 108-year-old freight forwarder has recently been stressing the third-party logistics side of its business. A separate chief executive officer of logistics reports directly to the Frans Maas board.

The company's services to major multinationals include inbound transportation, storage, picking, packing, shipping and proof of delivery. It has even developed its own shipment information and forecasting software, known as LogimaX, although AutoEuropa has opted for Ford's internal ordering system.

Frans Maas will need to become even more flexible to keep pace with growth at the AutoEuropa plant, which at full buildout could produce 180,000 cars a year. The automaker generally informs Frans Maas two months prior to any change in production levels, but the actual lead time can be much shorter. What's more, Almeida said, the industrial park will have to increase in size as AutoEuropa ramps up production of new and more complex models for the year 2000.

One change that Frans Maas hopes to make soon is an end to the joint venture that it was required to form with PGS, a Portuguese entity. The deal was a condition of the operator receiving Portuguese government grants for initial development of the park.

Profits are shared, with Frans Maas taking 51 percent and PGS 49 percent. With the joint venture now more than three years old and incentives no longer an issue, Almeida would like to see all profits flow directly to Frans Maas, a move the company believes will help it to gear up for an expanded operation.

Frans Maas also would like a bigger piece of the business of moving parts into the plant from sources all over Europe. It had originally offered to handle the entire service package, but AutoEuropa settled on a second provider for long-distance transport.

"Of course we would like to handle more," said Almeida. "It's our core business."

Nintendo Reins In Returns

When the Nintendo Corp. began to market its eight-bit Nintendo entertainment system back in the 1980s, consumers loved it and the company sold millions of units. It was wildly popular - that is, until the more sophisticated 16-bit system hit the store shelves late in 1991.

Then the returns started. First in trickles, then in increasingly heavier currents, consumers were lining up at retailers' customer service counters to exchange their old units for the high-tech version.

"Even though we had a very successful platform, we were faced with some huge losses because of the return situation," explained Peter Junger, director of field operations for Nintendo Corp. "What compounded the problem at that time was that retailers' returns policies were especially liberal, so consumers had no difficulty returning their product either to upgrade to the new platform or get in-store credit to apply to the upgrade."

At that time, Nintendo's return policy essentially was the same as it is today - 90 days from the date of purchase. "The only difference between then and now is that we couldn't tell if the product was within the 90-day period, and neither could the retailer," said Junger. The requirement for a receipt was not strictly enforced by retailers, and even when it was, if someone brought an 8-bit system back with a receipt that bore that particular SKU number, that didn't necessarily mean that the system being presented for return was the one that had been associated with the receipt. So our policy had no teeth."

Return costs soared to tens of millions of dollars a year, with return rates on the Nintendo units well into double digits. Adding insult to injury, 80 percent of the returned units were non-defective.

It was no picnic for the retailers either, as they absorbed the inventory and handling costs associated with stocking both units and processing the returns. "Even though Nintendo gave them perhaps a 100 percent credit for the product that was returned, the retailer still wound up losing, and so did we. And this was a substantial and unacceptable drain on our bottom line," said Junger.

Consequently, Nintendo was forced to make a decision: raise the price of the platform to absorb the returns losses, or come up with an innovative process to curb the return rate.

Nintendo's first move featured a self-addressed card affixed to the outside of the product packaging and bearing the serial number of the product in the package. Retailers were asked to remove that card at point of sale (POS) and drop it in the mail so Nintendo would know when that particular unit was sold - a big help in trying to determine whether the purchase fell within the 90-day warranty period. This information was plugged into a data base, and Nintendo made that information available to retailers via a voice-activated 800 number.

The program, initiated in 1993 and phased in over 18 months, caused a definite shift in the returns momentum, but it still had its limitations. Retail store associates had to be specifically aware of the procedure because it was only done on Nintendo products, and registration at its high point was only 73 percent to 75 percent.

When Junger came to Nintendo in 1994, he was intrigued with the program but noted the compliance level and the fact that it had been sliding downward. "No question about it, the program was a success in that Nintendo was able to reduce its returns costs, and retailers were able to push back now and challenge some consumers because they had the information on hand in many instances," said Junger.

Nintendo looked to technology to solve the shortcomings of the manual registration. What emerged was the basic program greatly automated, with a few other changes. One of the more interesting twists was a an actual cut-out, or window, in the cardboard packaging through which the unit - and specifically the product serial number and label - could be seen. "The product is still in plastic to ensure that there is no moisture or dirt, but you are able to read the serial number at point of sale very clearly," said Junger.

Then in 1995, Nintendo rolled out the electronic point-of-sale registration program that is in place today and signed up its first customer, Wal-Mart, in November 1995.

Here's how it works. When a customer presents a Nintendo unit at check-out, the sales associate scans the bar code or enters the Nintendo SKU number and a prompt appears on the register, asking for the product serial number. The information is stored in the system and periodically transmitted via EDI to Nintendo, often several times a day, where the information becomes available to retailers on the 800 number. In addition to the date of purchase, retailers also can determine the place of purchase.

Now participating retailers rely mostly on the customer's receipts, and most consumers do bring back their receipt, Junger added. "The sales associate compares the receipt to the serial number visible through the cut-out window. If they match, the associate processes the transaction in accordance with the terms and conditions of the returns policy."

Lest this sounds a bit too Big Brotherly, Junger hastens to remind that it only works against a customer who is trying to make an ineligible return; it makes life easier for the honest consumer.

Compliance with the electronic POS registration continues to rise as retailers upgrade their point of sale systems while continuing to search for cost reduction wherever possible. "It was a bit of a difficult sale in the beginning, but once retailers realized that they can reap the same benefit as the manufacturer can from this program, then they became fairly open to it," said Junger. Current participants include Best Buy, Wal-Mart, Kmart, Sears, Target, Shopco, Toys 'R' Us, Electronics Boutique and Babbages. Some more modest-sized retailers are not yet on board, but that may change in the near future as Nintendo rolls out a program that enables retailers to send in the information via the internet instead of by EDI transmission.

According to Junger, some retailers actually promote the program and want other vendors to consider similar programs for higher-value electronics goods that are easily serialized and susceptible to high rates of returns, such as camcorders, VCRs, wide-screen televisions and power tools.

Nintendo also is working with several vendors who want to emulate the program. "The companies interested in pursuing this see it as a strategic marketing advantage," he explained. "If the retailer makes a greater profit on your product, the tendency is for them to push your product."

Most of the big retailers are on board, but for those retailers that are not, "we actually provide them reports showing them exactly what kind of returns they ar
e taking back - how old the product is, and which retailers actually sold each particular item - and it's not always them. Now that retailers do have ways of controlling these returns, consumers actively look for other retailers where they can dump this product."

Now three years into the electronic registration, there's no looking back for Nintendo. "Even though we spent millions on this program, in the long run it has been well worth it," said Junger. "When we introduced Nintendo 64 about 18 months ago, we hardly noticed a blip on our returns radar screen for the 16-bit system. Since our worst days with the 8-bit system, our returns have dropped by more than 80 percent and now are very low in the single digits." Returns that are coming back now are much cleaner, so a greater share is remanufactured and sold abroad and fewer go into the crusher.