Left unchecked, the channel has a problem that can snowball to an unmanageable level. Returned products that are not actively managed can create havoc with revenue recognition as assets are stranded and products end up left on the shelf.
Managing reverse logistics (returns) is complicated and expensive. Returns are a significant problem for companies in both business-to-consumer (B2C) and business-to-business (B2B) environments. I have seen U.S. reverse logistics cost estimates from as low as $35 billion to as high as $100 billion per year. Some estimates peg returns at roughly 4 percent or more of total logistics costs, with other estimates pegging returns at around 6 percent of sales, although this varies by product and industry type.
Significant time and planning goes into the “Launch” of a product and getting a client to make a “Buy” decision for your product. Most companies will experience as much as 20% returns of of all products sold. Significant research indicates that 75% of these returns have “No Trouble Found”. These returns eat into your profits but there is a solution to neutralize this problem.
I have spoken with a number of companies, their services teams, distributors and partners and it is shocking the lack of coordination and consistency in managing “Returns”.
If your business had the opportunity to capture stranded revenue and increase profits, would you you do it? Keep reading!
Some interesting stats:
The percentage of returns depends on product line but on average, 20% of all products sold are returned this is measured across retail segments and product types. It has been stated that the majority of returned assets will end up in the landfill!
A significant % (75%) of returns have “ No Trouble Found” – so refreshing these products for possible resale as B-stock or added to the warranty exchange pool require services to often repackage or possibly replace a missing power cord or other accessory.
Cost associated of returned products are 8-15% of top line, this is a major issue when business is not growing at that level.
Example of the business challenge and model
One of our clients, a consumer electronics company, was affected by assets being held in multiple distribution channels due to returns. Lacking the scale at an individual outlet to effectively manage the returns, the problem was ignored.
By bringing all the product to a centralized center for processing, they optimized the process of Evaluation, Testing, Repair, Kitting and Packing.
This process provided a number of alternatives to manage this inventory:
- Conversion to B-Stock to be sold at a discount with an alternate channel.
- Recover and classifying these assets for Warranty Swap
- By replacing warranty exchange products with returns that have been tested and packaged as new, provides for a differentiated client experience.
- Reduces the time for the customer to be satisfied – for products that clients are not willing to wait for, return/refurbished products can be back to the client within 24 hours.
Clearly, returns are an issue ripe with potential, but we find that, short of using rudimentary functions in their ERP, few companies have attacked the reverse logistics problem with technology.
Although a significant problem for many companies, returns remain a secondary consideration because companies continue to prioritize supply chain related IT investments on outbound projects (e.g., order management and fulfillment). Consequently, most organizations live with labor-intensive, manual, often undisciplined and inefficient returns management processes. Without question, we believe reverse logistics must, and we predict it will become a higher priority for companies with large and complex returns problems.
We find that many companies have thrown in the towel and simply elect to outsource returns. There is nothing wrong with outsourcing if it is done strategically, for the right reasons, but if it is simply done because the company doesn’t feel equipped to manage the process, that is a poor reason to outsource.
A growing number of companies (especially in retail and high-tech) see competitive and strategic value in managing returns in house; however, they also recognize that they lack adequate systems to effectively do so.
The specialized returns management market initially emerged around 2000/2001 with a bunch of start-up vendors offering a variety of different return management solutions. Buyers were focused on other priorities at the time, and when this was combined with the e-business bubble-burst, all but a handful of the returns specialists were effectively decimated.
The reverse logistics challenge hasn’t gotten any better, so the need for tools remains. The climate for the new breed of returns vendors is much better than it was. Reverse logistics solutions are more specialized, robust, mature and proven, and demand, in certain industry sectors, like retail and high-tech, is hot.
Given the growing awareness of the value of improving the returns process, there is good growth potential in the specialized returns management application market.
Most ERP systems provide minimal returns capability (e.g., credit orders, limited RMA support), but these solutions lack customer return collaboration (e.g., customer self service) and robust authorization and dispositioning decision support. There is a nascent specialist return management/reverse logistics solutions market that is being driven by the need to make return processing more collaborative and to enhance the underlying returns functionality, particularly in decision support and process flow.
Automating the returns process provides several areas of opportunity.
- Cost reduction – Returns cost savings can be found in people, processes and inventory. Better decision making at the point of authorization such as whether to accept a return and, if so, where best to route it, and having visibility to downstream functions will pull cost from the returns process
- Customer Service – Customers will continue to buy from companies that are easy to do business. Companies with effective, and flexible returns programs, like an REI or Nordstrom, attract repeat buyers because their customers trust them, in part, because of their returns policies.
- Efficiency – Returns are unpredictable and companies do not typically control a significant portion of the process, making manual returns processes highly inefficient and disruptive. Wasted freight and duplicate efforts kill efficiency
- Control – Effectively controlling a manual returns process is near impossible. People make poor decisions if all they have is limited, if any, information and rudimentary tools to help guide the process and, without tools, the process degrades to near chaos. Tools that provide process discipline and guidance will go a long way to improving process control, which will drive the other benefits.
We can help!
PanurgyOEM creates customizable solutions to help our clients address these challenges. Our track record of monetizing these assets has helped tighten financial reporting, capture revenue for distribution and ultimately protect the brand by controlling the offerings to secondary markets.
Call or message me to schedule a review of your reverse logistics and we’ll share our insights that have helped our clients reduce their op ex 45%.
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