Every warehouse manager must deal with the inevitable stream of returns. Deciding whether to rely on third-party expertise or not is crucial.

In today’s tough market, how a business deals with returned merchandise—receiving, examining and making it profitable—can make or break a company. “Business today boils down to one word—trust,” says Brad Grimsley, senior vice president at Spiegel’s Distribution Fulfillment Services. “How well you handle a customer’s return and credit builds a level of confidence and trust.” Last year, Spiegel Group’s distribution facilities handled $300 million of returns, out of the $1.5 billion of merchandise the company shipped from its web sites and Spiegel, Eddie Bauer and Newport News catalogs. Its return rate of 20% is typical in the catalog industry where rates range from 18 to 35%. Other channels such as the Internet, telemarketing and television marketing have also helped create a still-growing behemoth: the reverse supply chain. The number of parcel packages sent back each year will likely exceed 615 million by 2004, say Dale Rogers, Ph.D. and Ronald Tibben-Lembke, Ph.D., of the Center for Logistics Management at the University of Nevada, Reno.

A key decision in reverse logistics is whether to utilize one’s own facilities to process returns or outsource to a third party that offers size and specialization. Unfortunately, there are no hard and fast rules. For example, size is the reason cited by Spiegel for handling its own returns. “With our size, it makes sense to do it ourselves,” says Grimsley. However, Sears, an even bigger retailer, is outsourcing. “Reverse logistics isn’t a core competency for us,” says Clay Valstad, director of central return center operations for Sears. “A third party can provide assets that might not be available from our own company on a timely basis. Plus, they have the knowledge and the expertise.”

Further complicating the decision, physically handling the returns is only one part of the problem. Customers have to be credited promptly and the merchandise resold or liquidated rapidly. Because of these concerns, several departments such as warehousing, marketing and customer service must work together. The marketing department’s return policy often determines whether returns are processed in-house or not. One general rule is the more generous the return policy, the greater the likelihood of in-house handling for higher-quality customer service. For example, cataloger Road Runner Sports lets customers return items in whatever condition within 60 days of purchase. “Returns are tough,” says Shelly Reynaga, operations manager at Road Runner’s distribution center in San Diego. “But we don’t want to give up control of how and when our customers get serviced.” Conversely, companies promoting their variety and low prices may choose to depend on the greater efficiency of an outsourcer.

Before tackling returns in-house, companies must realize that returned merchandise presents unique challenges. Unlike supply chains, which rely on a forward-looking strategy and the receipt of expected quantities of uniform goods, returns are unpredictable and always vary in volume and quality. Volume is seasonal, leading to dramatic fluctuations. Staffing gets tricky, and even with a system that consolidates returns into bulk shipments to outsourcers, items still have to be handled one at a time. Moreover, reverse logistics introduces a daunting list of processes that rarely come into play on the forward side—return authorizations, warranty tracking for merchandise covered by manufacturer or retailer agreements, returns to vendor, repairs and repackaging so the item can be sold again. The warehouse or distribution center will often perform credit authorizations—usually a task for customer service—to expedite the process. After all this, disposal of the product still remains. Goods can be resold as new, sent to an outlet store or liquidator, sold through online retail web sites such as eBay or Amazon, or scrapped altogether.

Fortunately, there are ways to make returns less of a logistical nightmare. First of all, experts recommend starting with a system to consolidate returns as much as possible. For example, Automated Distribution Systems (ADS), a New Jersey-based third-party logistics provider (3PL) instructs its retailers to presort returned merchandise at a regional consolidation center before sending it to the 3PL site. “Our claim to fame is accuracy,” says Bruce Mantz, ADS director of operations. “By presorting before the merchandise gets to us, 95 to 97% of what we process is good saleable material that goes back into the stores.” Technology can also help ease some of the logistical headaches. Spiegel, for example, employs ReturnValet on its front end. This technology solution from Texas-based Newgistics obtains customer information before a product is returned. This allows Spiegel to divert it to the appropriate place—whether vendor or outlet store—without letting it add to the pile at distribution centers.

Other reverse logistics solutions can be as simple as setting up an inspection area in the warehouse where boxes can be opened and the condition of the product examined so credits can be issued. Furthermore, solutions must include product disposition that follows predetermined business rules. Companies can choose to donate the product to charity for a tax deduction or use traditional liquidation channels or emerging ones such as the Internet. “Returns are what you make of them,” says Mantz from ADS. “If you allow returns to manage you, they will. If you put disciplined processes in place at the beginning of the process, you can manage them.”

Source: Return to Sender
Bob Trebilcock, Editor at Large
Warehousing Management, May 1, 2002
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