Effective returns management in an integrated supply chain
Reverse Logistics - Effective Returns Management in an Integrated Supply Chain By Diane A. Mollenkopf McCormick Associate Professor of Logistics, the University of TennesseeIn the current economic climate, it’s hard enough to manage the forward flow ofproducts to customers, let alone having to think about the reverse flow. But notthinking about the reverse flow of products could mean missing importantopportunities for guiding your company through tough times. Effective returnsmanagement can provide additional means of positively impacting your firm’sfinancial performance as well as building stronger relationships with keycustomers.It’s important to understand the total impact of return products. Financially,returns represent a negative adjustment to sales. But it’s much more than just atop-line impact. Most firms don’t understand the operational cost of returnsbecause these costs often get buried in the financial line items of facilityoperations. But every return product incurs transportation to the customer, thenback to the company. If replacement product is being sent, a third transportationcharge is incurred.When the returned product is re-entered into the inventory ledger, it startsincurring inventory carrying costs, and takes up warehouse space. Each of theselogistical activities is expensive and must be considered part of the total cost ofreturns—beyond the negative adjustment to sales.Perhaps even more important, however, is the impact of returns on customerrelationships. Every return represents a failed service encounter. For somereason the customer was not happy with the sale, and this can turn result indissatisfaction with the company itself. If returns become a hassle for thecustomer, the longevity or quality of the customer relationship may be impacted.Companies that handle returns effectively—by working with customers to resolveservice issues—can actually improve a customer’s loyalty to their firm.Know the Source and Reasons for ReturnsTwo key inter-related aspects of returns include the source of the returns and
reasons for the returns. In a supply chain context, a manufacturer’s products maybe returned from intermediaries (e.g., distributors or retailers) or they may beconsumer (or end-customer) returns from the person or firm that is actually usingthe products. Returns from intermediaries are very different from end-customerreturns. Understanding why returns occur helps identify opportunities forimproving supply chain processes and decision-making.At the consumer or end-customer level, defective product comes back afterpurchase and some level of use. Such returns could indicate quality problemsthat need to be resolved in manufacturing or distribution. It is important to get ahandle on these returns as quickly as possible. But many times firms find nodefects upon inspection of returned products. These no fault found returns maybe indicative of customers not understanding how to use the productappropriately, not being able to properly install the product, or simply finding thatthe product was not what they were expecting. These returns signal the need tore-engineer the product or communicate more effectively to customers aboutwhat to expect and how to use/install the product. Understanding the reasons fordefective returns and no fault found returns requires the involvement of a cross-functional team that might include product design, engineering, packaging,manufacturing, distribution and marketing. The goal is to identify why these typesof returns are happening and work to reduce their volume.At the retail or intermediary level, returns often come back due to slow-movingstock, end-of-season inventory adjustments, or as a means to release capital socustomers can buy more from your firm. As retailer power in the channelcontinues to grow, manufacturers are being asked to bear an increasedresponsibility for taking back unwanted retail-level inventory. This is notnecessarily a bad thing, as “fresh” product can command a higher margin thanold product, and can be more competitive in the battle for consumer dollars. Onthe other hand, manufacturers get stuck with old inventory. Such product mayhave diminished market value, thus making profitable sales to other customersincreasingly doubtful. The key to managing these returns is to try to avoid them.That doesn’t mean playing hardball with customers by simply refusing returns;rather, it means better matching demand and supply in the first place.One consumer electronics company had always employed a traditional approachof selling as much product into the retailers as possible at the beginning of eachseason, often offering deals for larger orders. The sales people bore noresponsibility for returns that might result from their over-zealous sales efforts.But the operations and logistics people sure felt the burden and the cost ofreceiving high volumes of returns each season! The solution came about whenthe logistics, finance, technical support, marketing and sales managers
developed a “sell right, not more” planning approach. This approach alsoinvolved the retail customers in early sales-term negotiations to determine initialproduct volumes to be delivered to them each season. Although gross marginwas reduced up front, the bottom line impact of avoiding all the costly end-of-season retail returns actually improved the company’s bottom line. The companyhas also used this approach to strengthen relationships with key customers.Determining the right amount of product to sell, developing responsive logisticscapabilities to supplement product volumes when needed, and avoiding end-of-season markdowns and returns has helped this firm create value for its majorcustomers.Four Basics of Effective Returns ManagementBased on the discussion so far, there are four fundamentals to effective returnsmanagement. First, think strategically about returns management within yourbroader supply chain strategy. Appropriate returns policies can strengthenrelationships with key customers. Such policies can also enhance your firm’sprofitability by keeping fresh product in the marketplace and by efficientlymanaging the operational logistics of handling returns. As part of your strategicfocus, remember that returns management is a cross-functional process. Get theright people involved from the start—from marketing and sales, operations,logistics, customer service, accounting, and finance. Firms that recognize thecross-functional nature of returns also are able to more effectively integrateforward and reverse supply chain flows for maximum effectiveness.Second, develop appropriate gatekeeping, disposition, and avoidance policies.Gatekeeping refers to the screening procedures employed to identify how, andwhich, products enter the return stream. Effective gatekeeping recognizes thatnot every product should enter the return flow. When the cost of transporting andprocessing the return product is greater than the value of the product itself, it’smore cost effective to credit the customer but not require that the product bereturned. Of course, this requires a solid understanding of the cost of a return,relative to the value of each product. Ultimately, avoiding returns can resolvemany of the gatekeeping and disposition issues, while dramatically controllingcosts. Companies struggling with sku proliferation issues will find that returns canbe avoided by simplifying product lines. Developing more responsive logisticssystems can also enable companies to develop their “sell-right, not more”approaches and avoid the production and distribution of too much inventory.Quality control initiatives in the manufacturing and distribution processes canalso help avoid returns. The cost and customer dissatisfaction associated withreturning product damaged in transit, for example, is totally avoidable—but notalways recognized.
Third, operational policies and procedures must be developed to handle returns.Returns authorization policies help ensure that effective gatekeeping occurs, thatcustomers are credited promptly, and that inventory visibility is created as earlyas possible. Inventory visibility also helps to operationally plan staffing anddisposition opportunities in a timely manner. Determining disposition as early aspossible is important for recapturing as much value in the product as possible.Product that can be resold needs to be re-inserted into the forward supply chainas quickly as possible. And product that requires refurbishment orremanufacturing needs to be identified so as to maximize value recapture asquickly as possible.Fourth, metrics and performance expectations for returns management must bealigned across functional areas and with overall supply chain strategy. Forexample, if marketing/sales people bear no responsibility or accountability forreturns, there is no incentive to manage profitable sales. Returned inventory willcontinue to be a problem. Likewise, if operational people have no value goals orefficiency goals, processing effort will be wasted. Goals regarding processingreturns need to be aligned with objectives relating to timing, volume, or value ofreturns as these goals should drive operational priorities and activity formaximum efficiencies. Ultimately, firms can employ the “sell right, not more”approach to identify goals across the organization that will more appropriatelyalign demand and supply so as to minimize the need for returns.In summary, returns management should no longer be the ugly step-child of thesupply chain. Rather, effective returns management can improve a firm’sprofitability, enhance customer relationships, and be an essential part of anintegrated supply chain management strategy.Source:http://www.scmr.com/article/effective_returns_management_in_an_integrated_supply_chain/+