by James Stock, Thomas Speh, and Herbert Shear | Harvard Business Review
If it sometimes feels as though your business is swimming against the tide, it probably is. Product returns, long the bane of industries like publishing, pharmaceuticals, and food retailing, have become an increasing burden for makers and sellers of almost every kind of good. In fact, the Wall Street Journal recently reported that the value of products that U.S. consumers return to the nation’s retailers each year exceeds $100 billion—or more than the GDP of two-thirds of the world’s countries.
There are many reasons for this trend—the rise of electronic retailing, the increase in catalog purchases, more self-service in stores, lower tolerance among buyers for imperfection—but few companies are doing the best job of dealing with it. The experience of companies that handle returns well, however, suggests that this process, commonly referred to as reverse logistics,shouldn’t be viewed as a costly sideshow to normal operations. Rather, the process—which may include the remanufacturing, refurbishing, recycling, reuse, or disposal of goods—should be seen as an opportunity to build competitive advantage.
At the very least, returns handling, if done right, can enhance relationships with consumers and supply chain partners. That is what General Motors did when it simplified its process for returning automotive parts. Dealers love the new system, which is less complex and less costly than the old one; they now send all returns to a single facility, using GM’s prepaid shipping labels.
A good returns-handling system can also be a source of significant cost savings, as Estée Lauder found out. By focusing on getting its returned products back into the distribution pipeline before the end of a selling season, the cosmetics company was able to cut the amount of merchandise it was dumping into landfills, saving millions of dollars every year.
Ultimately, a good returns-handling system can even function as a profit center. Consider what Volvo did, as it anticipated Swedish legislation that would hold automakers accountable for disposing of vehicles. The company set up such sophisticated operations for salvaging and dismantling cars that it actually generated revenues through them: Metals, plastics, and other items were sold for scrap, and parts that could be remanufactured or offered for sale as used were resold in the secondary market.
In another example, Sears established a cost-effective transportation network that shuttles customer-returned merchandise from about 2,900 locations to just three central returns centers. The company is profitably leveraging this network to consolidate for shipment and resale products that customers return to the vendor; slow-selling or excess inventory for liquidation; hangers and plastic sheeting for reuse and recycling; power tools and electronic merchandise for reconditioning and parts recovery; and hand tools for metals recycling. Other companies, like Canon and Xerox, routinely remanufacture products that are worn out or obsolete. And it’s not uncommon for companies to realize higher margins on these remanufactured products than they do on new items. Indeed, sometimes remanufactured goods are resold for a higher price than the original items were. For instance, Uniden cordless telephones were returned to the U.S. retailer from which they were purchased for $34.98 each. The retailer returned the phones to the manufacturer, which then sold them to a salvage company that remanufactured or refurbished the phones and resold them in Mexico for up to $48 retail.
Making Money in Reverse
What does it take to recast a backwater operation like returns processing into a profit center? For most companies, it will require a fundamental shift in mind-set and a focus on three main objectives:
1. Give returns handling its own turf.
The returns area in any company is usually not hard to spot: It’s like picking out the teenager’s room in an otherwise orderly house. Most companies, lacking the volume to justify separate facilities for processing returns, shoehorn the function into the corners of their warehouses. If the function is to be handled efficiently, however, it needs a layout designed with its processes in mind. If that can’t be done in a company’s own facilities, the returns might be handled by a third-party logistics provider. At the same time, giving returns processing its own turf means assigning it separate leadership. If the system is expected to generate profits, it needs someone with good business instincts in charge of it.
2. Treat returned goods as goods for sale.
A returned product has a different profile than the new product it once was—but a no less willing market. Maximizing profits on returned goods means targeting different buyers—like resellers, scrap merchants, and charities—and interacting with them in their modern, on-line forms. For instance, auction Web sites like eBay.com and FastAsset.com are now generating high recovery rates for returned goods, especially when the goods are posted in small batches. Finding the most profitable market for returned goods can sometimes require real creativity, as we saw in one manufacturer of engines and pumps. In the course of taking back defective goods, it realized that some of its bearings, while not up to the company’s own precise specifications, were still of better quality than those used in some other manufacturers’ applications. Previously, the parts would have been sold for scrap. Now the company sells them at a fair price.
3. Design efficient routes for returned products.
Just as companies take pains to develop efficient logistics processes for new goods, they must do the same for returned goods—understanding that the processes may be quite different from those defined for forward distribution. Returned products can take several different paths at the warehouse, and you’re generally dealing with just a few of a certain product—not pallets or cases of goods. The paths have to be determined and the products sent on the correct path. High-tech companies such as HP, Compaq, and IBM often use nontraditional channels to dispose of returned goods. Third parties such as FastAsset will use various channels to liquidate surplus and returned CPUs, memory chips, video cards, hard drives, CD-ROMs, and peripherals from the manufacturers. They will then return a portion (usually 70% to 90%) of the price they get for those items to the manufacturer.
Naturally, companies should try to prevent returns when they can, either through better forecasting or by striking special agreements with retailers. Procter & Gamble did the latter when it switched to a zero-returns policy. The most cost-effective solution for P&G was to give retailers a fixed percentage allowance, assuming that they would receive an average level of customer returns, and let them just keep the returned products. No shipping costs, no paperwork. And now the retailer has another chance to turn a profit on the goods.
But at some point, preventing returns becomes more costly than it would be to handle them. Getting good at handling returns is the better option. It can lead to more sales because customers know they can return unwanted merchandise easily. It can also improve relationships across the supply chain, improve profits through reduced costs, and lead to greater efficiency and higher recovery rates for returns. Managing returns wisely means thinking about the returned goods not as costly mistakes but as products still waiting to be sold profitably—an opportunity to be exploited.