The challenges of returns processing

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At almost every ”Supply Chain Standard” Round table over the past year or so, the conversation has come around to reverse logistics – the business of pulling goods back from some point in the supply chain, be it a distribution centre, a store, or a consumer/end user, for resale, rectification or recycling.

It can be a messy business, as you would expect in running a process in the opposite direction to that for which it was primarily designed. It is an area that is increasingly regulated, (in terms of rules for handling ”wastes” such as the WEEE Directive on electricals and electronics); one that has an increasing impact on a supply chain”s perceived ”green” footprint; and one where especially given the multi-channel nature of retail, seems to be increasing in volume. It was clearly time to devote a whole Roundtable to this topic – and our thanks go to iForce for supporting the event.

As Chairman Nick Allen noted, the questions are wider than simply how to manage reverse flows – are we making the right goods in the first place? Do they last long enough? Has planned obsolescence gone too far? And are the supply chain implications really appreciated in the whole design to disposal cycle? What do firms do to meet the WEEE requirements for example?

Alastair Charatan of Woolworths admitted that like many other retailers, Woolworths doesn”t take personal responsibility for taking back electrical goods – rather, it pays in to one of the schemes run by local authorities and others. ”Our general philosophy is to be as green as we can be where it makes economic sense, given that we are a business, not a charity, and we take a pragmatic view. On the whole we do find that being green tends to make economic sense.

”For other goods, clothing returns for example – we use a familiar model. Customers can return to stores, even if they have bought on the Web, and there are different levels of return. Some goods are pristine and can be put straight back on the shelf. Others may be marginally soiled – perhaps the packaging is slightly damaged – and these may be sold at a modest discount. If goods are clearly spoiled, they are dumped. And everything else goes to a third party contractor who determines whether to repair, resell (perhaps on eBay) as individual items, perhaps accumulate a mass of product and job it into another market, or dispose as waste or for recycling”.

Protecting the brand
This is a specialist contractor, not the normal forward logistics 3PL, and Charatan said that although physical handling and software capabilities are important ”the key is to have a good base of jobbers to take stuff off our hands, while protecting our suppliers” brands – some of them really don”t want their goods turning up at car boot sales.”

Chris McGiffen of office supplies company Staples said his firm”s model was very similar. ”We agonise about branded product turning up on eBay. It”s about mitigating loss through getting the best price. We have had people offer to take product abroad – but the return is even lower. Our proportion of returns isn”t huge, it”s not a big impact on the business, so all our effort tends to be in getting things right at the front end”.

Charatan agreed ”the more you can get it right early in the supply chain, the fewer the returns; but when stuff does come back to the store you need to have the right incentives to deal with it properly. We have had poor incentives where it appears to be in the individual store”s interest to send everything back up the chain for a full refund, rather than selling in-store at a discount. But every stage of the return process is costing us money”.

”Task forces in different countries, identifying why we have returns”, is part of the solution at Bernd Schiel”s company Office Depot, but with the complication that ”certain items are drop shipped so that we never see them – so inevitably any returns likewise go back direct to the supplier.

”Money is tighter so we are having to look at how we reduce returns, and how damaged stock can be recovered to act as an internal source of supply. We spend a lot of time and effort in avoiding damage – reams of paper, for example, are very easily damaged so we have to shrink wrap whole packs. But this is a trade-off against the “green” agenda” and doesn”t necessarily play well in countries such as Germany.

”Importantly”, said Professor Alan Braithwaite, ”we in the UK are only just entering that level of [green]requirement that is typical of Germany. We”ve been working with a company in Germany in the automotive reverse logistics chain, where the driver is the need to comply with the rules on recycling things like brake fluid and oil. Some chains have got this to a cost-neutral point” [relative to the costs and penalties of not having a recycling route].

”The UK”, he went on, ”hasn”t got sorted out what models it wants to sponsor, and the industrial implications. Separation of wastes is good, yes, but is there a proper recovery mechanism to extract value from waste? The legislative environment around damaged and recycled goods is not yet finished”.

Phil Tingey of iForce, said that there were two distinct issues for his firm. ”One is to turn the returns process into a cash generator for the client, or at least significantly improve on the losses. The other is to drive down on anything that may otherwise go to landfill. We try to maximise revenue by Internet sales, using alternative sales markets, returning to suppliers anything that could be resold. After that, breakdown and recover materials. The aim has to be to send nothing to landfill – lean is green.” His colleague Claudia Donnelly gave one example of a returns flow where the returns flow has the metal content stripped out to yield pure (and valuable) Aluminium ingots.

Braithwaite stressed the importance of a complete segregation, sorting and reprocessing process. In the automotive industry, he suggested, there may be 13,000 breakers in the UK, and perhaps only four are ”industrially competent”. ”With new requirements coming in over the next few years we are going to need many more competent operators”.

A cultural shift
Allen asked how much of the problem is caused by a cultural shift – people no longer expect things to last, an attitude which of course runs counter to the whole green agenda. McGiffen agreed that ”Twenty years ago people were astonished that things weren”t worth repairing – now, that”s normal”, and Schiel said ”When a portable DVD is cheaper than a simple memory stick, of course this breeds a throw-away mentality”. Another point, suggested Allen, is that with globalisation, the original manufacturer, who potentially has the repair capability, is just too far from the end market for repair to be economic.

”Look at the blatantly obvious” recommended McGiffen. ”I see volumes of plastic, paper, board, metal, that I can deal with to get some sort of a return. I can get paid for it and I don”t have to pay to ship it to a hole in the ground. I object to paying hundreds to stick plastic in the ground: if that makes me penny-pinching I”m perfectly happy to be seen that way.”

Braithwaite noted that a market is slowly developing. He cited press ads offering payment for old mobile handsets. ”Someone has captured that as a way to make money. The general question is who will broker between the firms that can do the technical recovery, and the logistics of getting the stuff to them economically?”

The model of charities, or indeed others, soliciting used printer cartridges for refill was cited, and revealed the pluses and minuses. On the one hand, it”s an easy model – slip your cartridge into a Freepost bag (Schiel noted the ”excellent level of complaints” when the free bags were once inadvertently left off a batch of his company”s cartridges). On the other hand, refilled cartridges can be of variable quality, which undermines the market and gives OEMs the excuse to use practices such as offering equipment very cheaply but insisting that only (expensive) OEM-original cartridges or other consumables can be used without invalidating warranties. A clear case of market failure?

Allen raised the challenge of multi-channel retailing. At previous Roundtables we had heard of serious problems where goods bought, say on the Net from one catalogue, are returned to store, where the product may have another identity, or indeed may not be offered at all in the High Street (in which case the store can”t put it ”back on the shelf” for resale). Braithwaite went back to ”the provenance of the returns business which was the mail order centres – huge industrial engines. Multi-channel is much more fragmented, there are more people potentially handling returns and the scale economies are lost. There”s all the triage to determine where something should go; have you got a back-to-back deal with the supplier, and so on”. Far from an industrial process, it is a series of isolated decisions.

Tingey recalled that in classic mail-order, a 20 per cent or higher return rate was common. Braithwaite countered that in modern fashion industries the figure is more like 50 per cent – ”by week 10 of the catalogue [their returns operation]can be their own biggest supplier” and yes, firms have gone into shortage if returns have been lower than expected. On the other hand, he suggested, multi-channel retailers have greater chances of managing expectations, for example through ”when it”s gone, it”s gone” promotions, in a way that is not possible for Staples or Office Depot in the main.

More generally, Braithwaite suggested, ”The cost of obsolescence is generally one of the biggest sources of margin erosion. There”s more money lost in the computer industry through obsolescence than the industry makes – the costs are 5-8 per cent of turnover, and nobody is getting those margins.”

As McGiffen noted, ”One of the advantages of proprietary product is that customers know what they are getting – they aren”t returning because ”it”s not the same colour as in the catalogue, or on the screen”, or as Tingey noted, because ”in fashion, there is no such thing as a standard size 10”.

Schiel agreed, and revealed an interesting development at Office Depot. ”We have invested heavily in cutting down on returns causes like missed or erroneous picks. But we were brainstorming and said ”if we have all the technology to pick, why can”t we reverse the process to replace returns into the pick points? We can link the returns process to the picking process, so that returning products are collated [effectively becoming another source]and run through the system to be replaced into stock. This was a ”what a great idea” moment – we know the stock is there, there”s nothing worse than not being able to use it.”

Braithwaite noted that the mail order ”machines” do this, but it is very cost and labour intensive. Schiel”s approach, which has been implemented in Germany, is designed into the picking system, and works in normal time – it”s not a question of putting stock back on premium, after-hours rates.

Clearly, technical remedies are coming through – Tingey said that iForce has processes to track a returned item presented at a till back to the point of sale (through whichever channel) which can help the client analyse the underlying causes of returns. But equally fundamentally, he stressed, definitions of what is resaleable differ. Firms could really help themselves maximise recovery and minimise cost by allowing more local decision-making – the ”manager”s special offer” and so on. Yes, there are issues in preventing misuse of such processes, but the loss from a possible illegitimate 10 per cent discount needs to be weighed against the very real costs of a fully compliant returns/recovery/waste cycle. But as Tingey noted ”a lot of firms need to get a much better idea of their cost of returns”.

The way forward
What is the way forward. It was generally agreed that the UK”s approach to the reverse chain is much less developed than that of say Germany (although we are coming on – as Braithwaite pointed out ”five years ago we couldn”t have had this conversation at all”). There are some serious market failures – industries are not picking up responsibility, preferring to sign a cheque to a ”scheme” rather than participate actively. Some trade practices positively exacerbate the problem. There is too little autonomy in the most effective routing of individual returns, and when we get down to the recycling level there is neither the support for the creation of appropriately scaled and located recycling industries, nor for the creation of markets for the products of recycling.

It is also very noticeable that, whether in the academic literature or in journals like ”Supply Chain Standard” there is very little in the way of ”accepted best practice” around the reverse supply chain – indeed Braithwaite suggested an absence of even basic research on the economic and environmental costs and benefits of different reverse flows.

That this is frustrating logisticians of good will is evident. This author cannot recall a previous Roundtable where the consensus was for greater government intervention in the marketplace, but that was indeed the position we found ourselves at.

[asset_ref id=”346″]Nick allen 
Chairman, and Editor of ”Supply Chain Standard”
”Are we making the right goods in the first place? Do they last long enough? Has planned obsolescence gone too far?”

[asset_ref id=”347″]Professor Alan Braithwaite

Chairman, LCP Consulting and Visiting Professor, Cranfield University
”The cost of obsolescence is generally one of the biggest sources of margin erosion. There”s more money lost in the computer industry through obsolescence than the industry makes”

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