No one likes product returns, but this black sheep of the supply chain is gaining new respect as companies better understand the impact of returns management on customer relationships, brand loyalty and the bottom line.

"Particularly over the last year or so, we see more senior executives taking a keen interest in this area," says Scott Talley, vice president of worldwide distribution at PFSWeb, Plano, Texas, which provides supply-chain and other business process solutions. "These C-level executives want to understand why products are being returned and the financial impact of that, as well as how to reduce returns," he says.

A look below the surface reveals the complex nature of returns management. It includes not only product that needs to be quickly restocked for resale, but also product that needs to be repaired or refurbished, often under warranty, and product that needs to be sold to an alternate channel or disposed of safely and in accordance with environmental regulations. These different channels should be approached in much the same way as different channels in forward distribution, says Robert Gifford, vice president of worldwide logistics at Hewlett-Packard, Palo Alto, Calif., which long has taken a proactive role in managing returns. "For our outbound supply chain, we have multiple routes to market for different products based on specifications and customer demographics. We use that same thought process when talking about reverse logistics," he says.

Because all returns cannot be handled in the same way - and because they represent 20 percent of all products sold - returns management is a thorny problem for most companies," says David Hommrich, senior director of reverse logistics at Manhattan Associates, a supply-chain execution provider based in Atlanta. Hommrich came to Manhattan when it acquired ReturnsCentral, a company he founded.

To help their customers deal with the different aspects of returns, Manhattan and other software providers are building solutions with sophisticated rules engines. "Most companies have policies for dealing with returns - and lots of vendor rules to follow - but these are not easily accessible," says Hommrich. "I have been to locations where people pull out their policy manual for returns and it has dust on it. The information is there, but it is so hard to find that the right rule often doesn't get used. So part of our goal is to allow people to bring all those policies together in one location and to make them accessible."

Manhattan's Return-to-Vendor module can be programmed with all vendor rules governing returns. "Say that some DVD manufacturer requires that DVDs be returned 20 at a time," he says. "You may be sitting on 19 units, then number 20 comes in. Our Return-to-Vendor module sees that and automatically generates a pick ticket and sends it to the warehouse management system. It handles the shipment just as if it were a fulfillment process going to the vendor." The result, he says, is that companies avoid the "binge and purge process" that too often passes for returns management. "If you figure that the average company has 1,000 or 2,000 vendors, each with multiple SKUs, you can see that this would be very valuable," he says.

Rules also can be used to support a gatekeeping function to prevent invalid returns from coming back, says Emily Rodriguez, vice president of program management at eBoomerang, a web-enabled returns business solution based in San Jose, Calif. For example, she says, a manufacturer may have an agreement with a distributor that allows only a certain percentage of purchases to come back, regardless of quality issues. "In that case, we can monitor for the reason for the return and help companies manage the math that says, 'OK, this client bought $100,000 worth of product and is only allowed to return $10,000, so where are they in that cycle?'"

Some companies allow distributors to make only quarterly returns and, for some, returns are dependent on the amount of time the product has been in the field, Rodriguez says. "These are all gatekeeping issues. We deal with all of these variables with a dynamic rules engine we have created that allows companies to decide for themselves - based on the relationship or the product or on a circumstantial basis - what the test is for allowing the return." Circumstantial issues may include a product that is exhibiting a high failure rate, she says. "In such a case, you might want to make it easy for a customer to send back that product, even though your normal requirements are more stringent."
Yantra, a supply-chain execution vendor based in Tewksbury, Mass., uses rules to manage warranty issues as well, which are "a major piece of the complexity of this industry," according to Jim Caudill, vice president-distribution industry for Yantra.

CellStar Solution
Warranties are just one of the factors involved in a massive new reverse logistics offering by Yantra customer CellStar, a Carrollton, Texas-based logistics provider serving the cellular phone industry. The new service, called Omnigistics, is designed specifically to manage handset returns. "Forward logistics in this sector is fairly mature," says Chris Smith, senior vice president and general manger at CellStar. "But returns are very fragmented and are largely dealt with using a lot of spreadsheets and homegrown applications."

In addition, there are many problems unique to cellular phones. "Not only are there many different makes and models, but carriers all have different software they load onto these phones and different warranty policies," Smith says. And there is the sheer volume. "Literally hundreds of thousands of units come back every month from consumers," says Smith. "Every one of those phones has to be touched and evaluated as to the problem, whether it is under warranty or not and whether it can be fixed or is beyond economic repair."

Typically when someone today returns a phone that is under warranty, that customer is given a new phone, fresh out of the box, he explains. Since the average selling price for a new phone is $150, this is a very big expense. Omnigistics' value proposition is based on giving that customer a repaired or refurbished phone instead, at a cost that is 30 percent to 40 percent less.

"With Omnigistics, when a customer calls or comes in to say their phone is broken and under warranty they are directed to a call center," says Smith. "The call center takes down information about the phone and electronically sends us an order for that customer. We provide him with a comparable replacement phone through next-day mail." Along with the new phone, the customer receives a return package to use to send the broken phone back. During the original phone call, all the information about the phone, including the serial number, is taken and entered into the Yantra system. "So when that individual phone arrives, we log it in by serial number and we can then trace that back specifically to the customer and can verify if what they reported as being wrong is what we found." The serial number also lets Omnigistics determine whether the phone is still in warranty with the carrier or manufacturer. "As the phone goes through the repair and refurbishment process, we are able to track all the parts consumed on that phone as well as labor cost and understand exactly where that phone is at any point in time," says Smith.

In addition to substantial savings and better customer service, another major benefit is the information itself. "We provide reporting on aggregate repair tasks back to the retailer or manufacturer so they can see if, for example, we are receiving a lot of a certain model with antenna problems," says Smith. "That allows them to get ahead of the game. Before, we just did not have that information. So what we have introduced with the Yantra program is transaction processing, that allows us to give really valuable information and analysis to our customers."

Easy Access
Toshiba computer had a different problem with return of its laptop computers because a substitute computer will not do; customers want back their particular computer, with all its data intact. "We think that customer satisfaction is driven by two key things - speed and did you fix it right the first time," says Joe Karcher, director of technical support and logistics for Toshiba in Irvine, Calif. "If a company in our business misses on either of those, they will have poor customer satisfaction."

Taking that customer perspective, Toshiba used Six Sigma processes to look for ways to improve the cycle time on repairs. The company wanted to outsource this operation, Karcher says, but it struggled with the question of whether to partner with primarily a repair company or a logistics company. "If you look at a very large-scale operation, which is what we were talking about, there are not many companies with a core competency in both of these areas," he says.

Ultimately, Toshiba decided that UPS Supply Chain Solutions had the best balance between a very strong logistics core and repair capability. "We sort of tipped our hat to the logistics side, thinking that was just a little more important. We believed the repair part could be better learned, whereas it is hard to come up with a new logistics model right out of the hat," Karcher says. "You really need to have a core competency in that."

UPS's end of runway advantage in Louisville, Ky., also was a big plus. Toshiba's parts storage and repair center are all based under one roof at the Louisville complex. "The impact on inventories is incredibly good because the subcomponent never has to leave the facility," says Karcher. The impact on cycle time is equally impressive. Turnaround on repairs, which used to take up to 10 days, is now down to four.

UPS's store network is a big contributor to this cycle time reduction. Now, rather than sending the customer a box to use for the return, which added days to the cycle time, the customer can go to a UPS store. The store will box the computer for him and send it out the same day. "The stores are a huge benefit," Karcher says.

Being able to easily get product into the reverse supply chain is important in many returns management programs. Upscale retailer Neiman Marcus, Dallas, provides that access to its small-package customers by using the SmartLabel solution from Newgistics, Austin, Texas. "When we ship out an item, we enclose a shipping label and include in the box the pick ticket itself, which describes the merchandise, the cost, etc.," says Greg Shields, vice president of operations at Neiman Marcus. That pick ticket also has a SmartLabel to use for returns. Embedded in the barcode of the SmartLabel is all necessary information about the shipment. If the customer decides to return something, he can use the same packing material and simply apply the SmartLabel. Then he can drop that package into the postal service wherever it is convenient. "This is where Newgistics really helps us," says Shields. "Our customer can put the package in the office mail or leave it in his home mailbox or take it to the post office - there are many avenues to easily get it into the U.S. Postal Service."

Sort and Consolidate
Shortly after this induction, Newgistics extracts these packages from the postal system and takes them back to its own facility for sort and consolidation. "Before sending our returns on to us, Newgistics palletizes them by carton size, which is a real labor savings at the fulfillment center," Shields says. "They also send us an advance ship notice so we know what is coming back, which enables us to process returns and get them back in stock very quickly." On average, it takes Neiman Marcus only 3.77 days to process a return, from the time the customer inducts it into the postal service. "We handle over 50 percent of our returns the same day we receive them, so if you are a customer, you usually have a credit on the return in four days, definitely in five days," says Karcher. This makes customers happy, even though they are charged for the cost of handling the return. On satisfaction surveys, more than 90 percent of customers rate the Newgistics service as a 5, which is the highest rating, for convenience, ease of use and overall satisfaction, Karcher says.

The service makes the retailer happy as well. "If that product is in perfect condition, and most times it is, the quicker we can turn it and get it back in stock, the quicker we can get it right back out to a customer that wants it," says Karcher.

Of course, not everything can be resold and the field of asset recovery offers lots of opportunity for providers in this space. UPS Supply Chain Solutions recently launched a new service that includes asset recovery and recycling management. "This is a business-to-business offering where customers we engage with for warehousing or service parts often have excess or obsolete inventory or returns inventory and they are looking for an easy and appropriate way to dispose of this, says Phil Corwin, director of marketing. "Based on what the customer wants, we can resell through some of our vendors to maximize revenue or we can recycle in an appropriate manner." Recycling typically is handled by EPA-approved partners, he says.

CellStar's Smith says disposing of handsets in an environmentally safe manner is a "very big growth opportunity" for his company. A new California law is a harbinger of things to come, he adds. Beginning in 2005, this law will require carriers and retailers of cellular phones to document that they are following an environmentally safe process for disposal of end-of-life phones. "This will force even larger volumes of phones to come back to be disposed of properly," he says.

Hewlett-Packard long has been concerned with safe disposal of old electronic office equipment. HP has a complete reverse logistics supply chain for items that go in bulk to recycling centers, says Gifford. These centers typically salvage any metals or plastics that have commodity value and safely dispose of hazardous materials.

While proper handling of returned or end-of-life equipment is not an issue for HP, the transportation of these goods sometimes is. "The real challenge for us in reverse logistics is the actual movement of goods," says Gifford. "As volumes increase for customers from all over, making sure that we have the network to support those pipes is the challenge. We have years of experience in how to deal with products once we have them back. It's really setting up the infrastructure to ensure that those products flow as needed that has been the challenge."

Gifford says he has not seen a real focus on reverse logistics on the part of most service providers. "It all depends on the region, the product, the demographics of the customer segment," he says. "We look for the best provider in that specific space to do these activities and so each reverse logistics solution is rather customized."

Freight Solution Providers, Sacramento, Calif., is one company working to fill this gap. It offers a white-glove asset-recovery program in which it picks up the assets and fully packages and protects them to minimize any damage. "Returned products often incur substantial damage from the returns process itself," says Bill Creech, vice president of strategic planning at FSP. "Traditional models, wherein a major percentage of these products may be scrapped, have fostered this type of performance and behavior." However, the increased use of secondary markets makes minimizing damage a key priority.
One of FSP's customers, Creech says, previously had a process that involved picking up a return at a customer location and taking it to a returns facility, where the product would wait for inspection and the issuance of credit to the returning customer. After this process, it was shipped to a test and refurbishment facility where it was prepared for resale. This entire process took 25 days at best, says Creech. "Moreover, these particular products were sustaining, on average, $750 damage per unit directly attributable to the reverse logistics process."

FSP now inspects the asset and verifies its condition at the customer's site. This allows FSP's customer to immediately issue a credit to its customer. The product then is shipped directly to the test and refurbishment center. And, because of improved handling, there is little or no damage in the returns process. "For this customer, FSP saved them 12 days, $700 a unit in avoided damage and the processing and site costs of the inspection and credit issuance center," says Creech.

Another advantage of good returns management is information that can be used to prevent returns in the future. "We believe returns management is about more than execution," says Scott Gerberding, managing partner at ProActive Solutions, Chicago. "It is about developing a strategy to reduce the number of returns." One of the ways ProActive does this is with an engineering analysis on products before they go to market. "We have engineers who do a lot of testing and looking at products for our clients from the user's standpoint to try and figure out why they might be returned," says Gerberding. The company also provides technical customer support. "If a customer has a problem and we give them a first line of defense through a phone number that is readily answered and backed by someone trained in the product who can troubleshoot and explain how to operate it, a lot of time we can keep the sale." One such customer is FrancisFrancis, a high-end espresso maker. "Our people have walked a lot of customers through the correct way to steam milk," he says.

Similarly, once a company can accurately track returns, they can start to make use of this information. "Companies can start to pick up on things that had been missed before, says Manhattan's Hommrich. For example, any time a product reaches a certain level of returns, someone can be alerted. "Maybe the reason it is something as simple as a new product having the wrong picture displayed on the web, but without monitoring and alerts two weeks might go by before it is corrected."

While gaining in importance, reverse logistics "is still not that high on the radar in a lot of companies," says HP's Gifford, "but I think we will see a rapid change in this area over the next couple of years. If you are in logistics, a big piece of what you do will be your reverse logistics channel."