Friday 28th Oct 2016 - Logistics Manager

Counting the cost of returns

National newspapers gleefully highlighted the biggest product recall in history as more than over 400 potentially contaminated items were removed from supermarket shelves. Public confidence in the British food industry took yet another knock.

The source of the scare was Premier Foods, which makes Branston Pickle and many other products. The firm is now to be investigated by the authorities after it revealed that a batch of Worcester Sauce supplied to retailers had been contaminated by “a potentially carcinogenic substance” contained in a dye used in chilli powder.

Worcester Sauce is used in hundreds of other food products, so the recall process was extremely complex – effectively a huge reverse logistics operation for every major British grocery retailer, resulting in a bill of around £100Mm. In one sense, the public panic – fuelled, as ever, by the media – was misplaced. Although it made fewer headlines, January 2005 marked a new dawn in food safety. An EU-driven legislative regime of traceability and documentation was quietly ushered in on New Year’s Day, to ensure traceability of food is established at all stages of production, processing and distribution.

In fact, the UK already has a reasonably good record when it comes to food traceability – partly because of those 90s scares. Manufacturers and supermarkets already have measures in place to deal with such situations, and the new EU legislation is unlikely to necessitate too many additional changes.

When it comes to food scares, and the best way to deal with them, what we’re really talking about is good old-fashioned traceability, followed by reverse logistics operations. For incoming materials you should be able to track detailed information from your suppliers about batch and lot numbers, through the production process, to know which machines produced the product, at what time. You also need closely related, specific information about customers and deliveries – as well as details about the packaging associated with the product before it reached the end user.

It’s not a simple matter, but it need not be as complex as many suggest. It just requires a certain amount of commitment, and supermarkets – in particular – have keenly embraced the concept of traceability for some years now. This is partly because they saw how important it was to restore public confidence after the food scandals in the UK in the 90s, but it was also driven by legislation.

Although the Premier Foods scandal is likely to further shake the confidence of British consumers, it was actually a neat demonstration of the links between traceability and reverse logistics. The batches were quickly identified and traced, and a huge reverse logistics operation got them back. There were a few delays at various points in the chain, but in general the entire operation was impressively quick and efficient.

To a certain extent, reverse logistics is a new buzz phrase – we’re really talking about what people used to know as handling customer returns, it’s just that it now tends to happen on a bigger scale. Reverse logistics is simply applying the ability to transfer your business intelligence systems and your reporting systems to backtrack up the chain. The aim is to answer the question: who else got product from that same batch?

It’s one thing to do that when it comes to food scares, but another thing entirely when it comes to higher value product returns. There is a big issue surrounding returns at present, which we at Sage are focusing on because of the increase in Internet trading.

It has historically been the case that mail order businesses always had the highest level of returns to manage. It became a major logistics issue for them to have items returned to a particular site, consolidated, evaluated and then put back into the supply chain – or sent back for refurbishment, or sold out through catalogue disposal shops. With the increase in Internet trading the volumes have increased, and the number of returns has increased proportionately.

The real key to high value product return is to keep the customer informed, or – for the highest value products – to offer exchanges. If, for instance, a customer has just purchased a PDA and the screen fails, that customer will want his PDA back pretty quickly. His investment is such that he will expect decent service in that respect. A company offering an exchange is likely to take more market share than one offering a 14 day return to base and replacement. There are commercial choices to be made.

A full-blown ERP system isn’t necessary to achieve the ability to trace and retrieve products, unless there is a need for an integrated solution covering all activities, in which traceability is an inherent part of the system. Indeed, the inventory modules in Sage’s mid-range products, Line 100and MMS for example, have batch traceability. If a fully integrated system is required, Sage’s Line 500 product acquisition of Tetra’s is an end to end ERP solution. When considering the implications of food scares, and the issues surrounding web-based returns, it is both interesting and instructive to look at the history of traceability in British industry.

Traceability was driven in the first place by the food processing industry, not surprisingly, along with the pharmaceutical sector, the Ministry of Defence and aerospace. The aeronautical sector was particularly influential in developing the concept. If a food manufacturer has a problem but doesn’t specifically know the unique batch affected, delivered perhaps to bulk, silo storage then the only option is to track down everything over a two or three week time span. Traceability is about getting down to a smaller potential recall quantity, it’s about knowing with a high degree of confidence all the other components that might be affected.

The only difference between aeronautical parts and food products is the type and level of risk. Businesses, it should be said, also find traceability a useful aid to product quality.

At Sage, we find traceability is used in a wide range of industries, not just those in which it is enforced. More proactive companies see the benefits. As with all of these things you have to start by identifying what the business process is going to be to optimise reverse logistics generation: at what point do you evaluate the product? For example, if a lot of the returns you are getting are clearly defective and the only option is to scrap them, you’d want to do that as quickly as possible and as near to the point of return as possible – anything else is just adding cost to transportation and storage.

It’s quite an exercise to define the optimum business process in most companies, of course. Items may be in or out of warranty, for example, so there is a need for flexibility. Sage Line 500’s RMS (returned merchandise authorisation) system is one answer. We find that it’s well used by customers with higher value products who go through that fairly exhaustive process of logging the product and analysing what’s wrong with it. If used correctly you can get a lot of valuable information about the product, rather than just deeming it faulty and replacing it without further questions.

The real value of the system is being able to do some analysis and then use that to proactively improve design.

Sage has a UK customer base in excess of half a million and, rather unusually for a software vendor, has products at every point in the marketplace. It is arguably the only vendor able to support a single user system as comfortably as it can underpin a several hundred user system. Over recent years, the company has recognised that a lot of its customers are already in the wholesale and distribution space. Hence the recent establishment and consolidation of the company’s manufacturing wing, and more recently, its wholesale and distribution operations.

The company provides a range of software solutions that not only support generic finance requirements but also address business processes like traceability, that are specific to a customer’s industry sector.

David Pinches is director of accounting and ERP solutions at Sage. Tel: 0845 111 9988.