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Barbara Christopher
Industrial and Systems Engineering
Contact Barbara Christopher
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During the holiday season that just past, millions of Americans stood on
line to return something they received or purchased. Whether it was an ugly
tie, a waffle iron that didn't work, or a digital camera that was just
too extravagant, product returns represent an important part of the total supply
chain. How important? In the US, companies spend roughly $950 billion annually
on logistics and 4.5 percent of this, or $43 billion, is for returns. At the
retail level alone, returns add up to $16 billion a year. And retailer return
policies have made headlines lately with stories about services that track "frequent
returnees" as part of an effort to prevent return fraud.

Depending on the industry, return rates range from around 3 percent to as high
as 50 percent of total shipments. The average retail store has about a 6 percent
return rate. In the consumer electronics industry, the rate is about 8.5 percent,
in the apparel
industry it's 19.4 percent, and online apparel purchases are returned
at a rate of 35 to 40 percent. Yet in spite of the magnitude of these numbers,
returns management gets little attention from most companies. When they develop
their logistics strategies, the focus is usually on outbound supply chain efficiency.

The dollars involved aren't the only reason to pay attention to returns
management. Consumers care about how their returns are handled, and may make
future shopping decisions based on their returns experience. They are extremely
sensitive to the returns process and it plays a big part in customer satisfaction.
Manufacturers also have cause to be concerned about the disposition of returned
products: if off-quality items are allowed to re-enter the retail channel they
can have a negative impact on brand image.

Given its volume and importance in the overall supply chain, returns management
offers sizable business opportunities for 3PLs, and many of them are now targeting
this sector with reverse logistics services and programs for customers. UPS,
for example, works with companies to facilitate product returns and repairs
through its network of UPS Stores, its package delivery services, and its Supply
Chain Solutions services. Toshiba America Information Systems and UPS have
joined forces to provide a convenient, fast "return and repair" program for Toshiba
laptop computers. Consumers who need service start by getting a repair consent
from Toshiba, then they take their laptop to the nearest UPS Store where it is
packaged and shipped to a specially designed repair
center at UPS Supply Chain Solutions' campus in Louisville, Kentucky,
adjacent to the UPS Worldport global air hub. With this system in place, it
is possible to receive, repair and return a laptop to its owner – all
in the same day! This system underscores one of the most important features
of an effective returns management network: speed. Fast, responsive returns
management increases customer satisfaction. Another major concern for manufacturers
is the high cost of improper returns. These include products misused by consumers,
products returned after warranties have expired, and products from other
manufacturers. While these returns occasionally involve fraud or stolen goods,
most often they are the result of errors or improper training on the retail
level. Whatever the causes, last year Philips Consumer Electronics billed
back $45 million to retailers for unauthorized shipments of returned goods.
Such post-shipment rejections are expensive for both the manufacturer and
the retailer. To ease the problem, Philips now works with third-party vendors
GENCO Distribution System and Ozark Electronics Repairs Inc. to ensure that
only eligible products make it back to the manufacturer. The 3PLs place employees
in retailers' return centers to verify that items are eligible for return
before they are shipped. They also evaluate defects and determine if components
are missing. The Philips returns management program has identified between
5 and 10 percent of all retail returns as being ineligible for return to
the company. It also speeds refunds and reconciliation because retailers
know what to expect before the product leaves their return centers.

Some retailers including Target, Best Buy, Sears and Wal-Mart are preventing
improper returns by beginning the screening process at the customer service
desk of their stores. Using software developed by SiRAS.com, UPC codes and
serial numbers of Nintendo, Sega and Philips/Magnavox products are scanned
at the time of purchase. That data includes warranty and product exchange
information. Should the consumer want to return the item, the retail clerk
can simply go to a website to find out when and where the product was purchased,
what the warranty states about returns, and whether or not it is eligible.
In this way, improper returns are caught at the store's customer service
counter, avoiding the expense of shipping back to the manufacturer.

The value of an effective returns network is magnified when product returns
involve international shipments. ADTRAN, a telecommunications equipment manufacturer
located in Huntsville, Alabama, entered the China market in 1999 through a
network of distributors in major Chinese cities. The company met with great
initial sales success. ADTRAN had neglected to establish clear reverse logistics
procedures, however, and as a result soon suffered the usual fallout in terms
of customer dissatisfaction, duplicate product replacements and reduced revenues.
International trade issues, including double payment of VAT, duties, taxes
and fees – once for the original product and then again for the replacement – further complicated
the picture, adding expenses and delays.

To counteract these problems, ADTRAN has developed a comprehensive reverse
logistics strategy that addresses warranty repair, non-warranty repair and
advanced replacements. The strategy is designed to tap opportunities for
savings by cutting VAT costs, eliminating China Customs penalties and quarantines,
and saving on labor and transportation costs by performing tests and repairs
in China. To facilitate the program, ADTRAN hired a 3PL reverse logistics
partner with expertise in China Customs procedures, and a post sales service
partner with the facilities, staff and resources to handle testing and repair
of failed products locally, as well as to destroy obsolete products within
China. By setting up clear reverse logistics flow procedures that integrate
the services of these 3PL partners, ADTRAN is now seeing immediate savings
and a more fluid flow of products to the world's second largest telecommunications
market.

These examples, as well as other successful returns management systems, help
us define the characteristics of an effective reverse logistics strategy. First,
a returns management process must have clear guidelines regarding what can
be returned, replaced or repaired, and these must be implemented consistently.
Speed is also critical in returns management so that returned products don't
lose their potential value while awaiting disposition. In addition, the returns
procedures must address the issue of disposition, not only in terms of what
to do with each returned item, but also when and where to do it in order to
get the most value out of the returned goods without compromising the supply
chain. ADTRAN, for example, realized significant savings both in time and money
by moving the disposition decision to China and Philips realized savings and
improved relations with its customers by moving the initial disposition decision
to its customers' returns centers.

If forward logistics is all about getting the right product in the right
place, reverse logistics is all about making the right decision in the
right place, and a key part of making the right decision is having the
right information. An effective returns management process serves as an
invaluable information resource, providing a stream of data that can enhance
the returns process as well as improve product design and manufacturing
quality, indicate packaging problems, and draw attention to marketing issues.
A carefully planned reverse logistics network provides a wealth of information
to help fine-tune forward logistics processes and keep you from returning
to the same mistakes again and again.

Additional Information

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H. Milton Stewart School of Industrial and Systems Engineering (ISYE)

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Status
  • Created By: Barbara Christopher
  • Workflow Status: Published
  • Created On: Mar 30, 2005 - 8:00pm
  • Last Updated: Oct 7, 2016 - 11:06pm