A few months back my wife bought me a Kindle and it has been fantastic.  It is one of the best new gadgets to hit the market in the last ten years and many believe it will ultimately make traditional brick and mortar book stores obsolete.  For me, it already has.  While on a business trip last week, however, I was going to use it and the only thing that would come up on the screen was “Your Kindle Needs Repair Please Call Amazon Customer Service at 1-866-321-8851.”

Being addicted to reading, it was critical for me to get this resolved immediately.  I called the number and expected to have some operator walk me through a diagnostic maze that would hopefully reset everything back to what it was.  I must admit, I was not expecting this call to go well and was ready for a fight. However, when I reached Technical Support the response was much different than I had anticipated.

“Sir, I’m sorry you are having trouble with your Kindle.  I am going to overnight a replacement to you right now.  You will receive it tomorrow. Please put the defective one in the box with the shipping label on it and return it sometime in the next 30 days.  I will send an email with these instructions and my phone number if you have any questions or issues.  Sir, please be sure to return the old Kindle within 30 days or we have to charge you for the replacement.” I had two emails within minutes.  One was almost an apology with instructions and the other was shipping information.

I was blown away.  No hassles, no questions, no push back, just great customer service.  Studies have found that customers who find the returns experience unpleasant do not come back 85% of the times.  Studies have also found that customers who find the returns experience pleasant will return to shop again 95% of the time.  As for me, Amazon has a fan who will not only be a loyal customer for years to come but will tell everyone they meet about their great customer returns process.

Is your customer returns experience at the same level as Amazon’s?  If not, you have an opportunity to dramatically improve customer satisfactions which will lead to more sales and profits.

The “Five Rights of Reverse Logistics” are:

Identify the right source of the returned assets – Determining who returned the product is perhaps the most critical step in any returns or reclamation process.  In a returns process, the receiving process is what triggers the financial transaction with the customer.  The customer can be impacted directly, or in the case of retail returns, the store’s inventory will be negatively impacted.  Crediting the right entity for the assets they returned is critical.

Diagnose the right condition of the goods returned – By condition, we are talking about whether the item is new, used, defective, abused, etc.  Recognizing the condition will drive proper dispositioning of the goods.  Properly diagnosing the condition of any returned asset will impact the OEM / ODM, subsequent recovery rates if liquidated, or will increase disposal costs.  If, for example, an item is new and has never been used, it might be returned to the OEM / ODM for full cost credit.  But if the condition is mis-diagnosed, it may end up in the dumpster.  This results in a loss of value on the item plus additional rubbish removal fees.

Determine the right disposition of goods processed in the reverse pipeline – There are only six dispositions for any asset flowing through any reverse logistics pipeline.  The six dispositions are:

• Return to OEM / ODM for full or partial cost credit
• Return to warehouse for distribution next season
• Sold on the secondary market for anywhere between 2% and 90% of original value
• Donated to charity
• Recycled
• Destroyed – sent to a landfill or incinerated

As you can clearly see, determining which “disposition bucket” returned goods end up in will have dramatic impact on whether a company pays additional costs or if they receive significant credit for parties down the line.

Design the right process to efficiently process returned assets in a timely fashion - Returns processing is critical to ensuring companies maximize the value of goods flowing through their reverse logistics / reclamation pipeline.  Many companies do not appreciate the importance of timely processing of returned goods.  Keep in mind that returned assets are not like wine.  They don’t get better with age.  Typical returns don’t come in good packaging and their condition will deteriorate over time, as will their value.  For example, electronic returns will lose 10% of their value per month on the secondary market.  Similarly, the percent of product that has to be recycled or thrown in the dumpster will grow the longer product sits on the dock.  Processing goods efficiently and learning to deal with seasonal spikes is critical to the overall contribution from the reclamation center or returns process.

Ensure the right amount is charged to the right party for the processed returns – Once the goods have been received, sorted, and processed, the final step is to ship product to the next party in the reverse supply chain.  With returns, this is more complicated than in distribution because the value of the goods will vary based on disposition, the ship to point will depend on the disposition, and the charges for the items depend on the returns agreement and the party receiving the goods.  There are some companies that give credit for goods but only want specific models sent back to them.  The other models not returned to the OEM / ODM might be recycled, destroyed, or liquidated.  The variations are endless and often there are consolidation fees, disposal fees, and packaging fees that complicate the final billing even more.

For the uninitiated, returns can be a confusing and costly part of their supply chain.  If, however, you approach developing your reverse capabilities around the Five Rights of Reverse Logistics, you may find significant amounts of hidden profits you can recover.

When designing a returns processing facility, the size of the facility and fixed assets employed is setup to accommodate roughly 80% of peak volume.  While this works well for most companies that have small spikes in their rate of return, for manufacturers of seasonal products, online retailers, specialty retailers, and catalogers this approach would result in having a lot of excess space and equipment for nine or ten months out of the year.  The annual costs would be prohibitive and a waste of money.

For companies that must process big spikes in returns volume, there are two options that will be much more cost effective.  The first option is to outsource part or all of the processing during the peak returns period.  If you are thinking about this option, there are a few things to keep in mind:

• Ensure processing requirements are documented in detail and given to the third party processor prior to any pricing or contract development
• The documented processes should become part of the contract as a defined scope of work
• The scope of the project must be clearly defined with estimated inbound volumes, outbound volumes by processing category, pricing, approval processes, start and end dates
• The third party must guarantee a minimum amount of processing space and storage space at a specific location
• Pricing should be a flat monthly rate for fixed expenses such as rent, utilities, etc, plus a cost per unit for each disposition – scrap, refurbished, new, clean, or what ever the various conditions of the goods you expect to receive
• Expectations for “A stock”, “B stock”, “Scrap”, and overall yield rates should be clearly stated and pricing should be based on these expectations
• Startup costs and decommission costs should be clearly specified
• Productivity incentives and penalties based based on volume adjusted budgets should be included in the contract
• A clear change order process must be documented to address any unanticipated processing requirements that may be outside of the scope of the agreement
• Ensure appropriate insurance coverage is in place for the inventory that will be processed
• Avoid any lean provisions that might impact how processed inventory is handled, this includes specifically baring the third party from holding merchandise over payment disputes etc.
• Develop a communications plan that will provide direction to customers, vendors, suppliers, and internal team members

The second option to consider is to set up and operate temporary return centers yourself.   In order to seriously consider setting up a temporary facility and operating it internally, you must have the infrastructure to support the operation and the management that can focus exclusively on the temporary operation.  Once you determine you have the internal support needed and the leadership, you will want to ensure you keep the following in mind:

• Define capital assets and personnel that will be required for each week the temporary facility will be open
• Define lead times and availability for both, in detail
• Identify sources for fixed assets and facility labor
• Develop contingency plans for space, equipment, temporary employees and management in case volumes are significantly higher than anticipated
• Identify SPOC (single point of contact) to plan, oversee and report on the project
• Ensure lead times for identification and contracting of temporary space, equipment, and employees are sufficient
• Identify mile stones from the start of planning to decommissioning
• Establish weekly meetings/calls to communicate progress in planning, startup, processing, and decommissioning of the temporary facility
• Define “Red Flag” process that will be used to communicate issues during the event
• Develop a communications plan that will provide direction to customers, vendors, suppliers, and internal team members

Whether you choose to outsource seasonal returns’ processing or set up a temporary solution and manage it yourself, one of the best things you can do is to conduct an “After Action Review” within 30 days after decommissioning.  This meeting should include everyone who had anything to do with the temporary facility and notes should be taken and sent to everyone to ensure they improve the process the following year.  Whether you are going to outsource or do it yourself, the key to handling seasonal returns processing successfully is to “Plan Your Work and Work Your Plan.”

1. Dramatic increases in transportation costs and the resulting changes that will be required in supply chain networks
2. Reverse logistics networks and how companies can increase their bottom line profits by as much as 4%  or more
3. Continued demand for development of sustainable solutions and how sustainability can dramatically increase profits

Curtis points out that most companies will agree these three drivers are going to happen.  Business executive also realize that these elements will have a negative impact on their business if they don’t address the situation, yet few are doing anything about it.  How a company deals with these inevitable changes will determine if they will thrive or if they will find themselves at a significant disadvantage that could result in their ultimate demise.

But in the world of reverse logistics, there are plenty of people who tried outsourcing returns once and got burned so the company just reverted to the old process and never looked back.  There are a number of companies that tried outsourcing reverse logistics but either picked the wrong third party or the wrong manager to set up the internal support systems.  In both cases, everyone found themselves in a bad position and were happy to go back to the old way of processing returns.  When it comes to returns, failure often means never trying it again.

Going backwards seems to be too often the norm when it comes to returns.  However, if at first your don’t succeed, companies should ask themselves – “Why did we fail?”  Experience has shown there are usually a few things that both third party service providers and the executives did not do that could have made the difference.

First, the company outsourcing returns must realize there is one big difference between a returns processing center and a distribution center.  In a distribution center, you know what your are going to get, how much is going to come in, when it is coming and when it is going to ship.  In a returns center, nobody knows what your are going to get, how much is going to come in, when it is going to get there or what condition it is going to be in when you get it.  Nobody in the company can accurately predict asset returns nor can any third party service provider, at least to any reliable degree.  Because of these unknowns, third party return center agreements must be structured in a manner that is flexible. Inflexible plans, budgets and pricing will lead to trouble.  The structure of a reverse logistics outsourcing contract must be flexible.  The contact should provide a basis to adjust costs and pricing based on variability of unit volume, item condition, and preferred disposition.

The second tip to avoid conflict between the service provider and the outsourcing company is to clearly define all the assumptions made when developing budgets, pricing, incentives, physical facility attributes, and manpower plans.  In addition to detailing out these variables, there must be clear language about what is to happen if these assumptions are incorrect.  One thing you can be sure of is that the assumptions will be incorrect. The parties must agree on the tolerance level for each assumption and the process to make any adjustments in pricing, cost, or other areas that might be impacted.  It is for this reason that having a clearly defined change order process is critical.

If an organization outsources reverse logistics services to a third party logistics company, they may not see cost per unit they were expecting, but they will have an agreement that focuses on customer satisfaction and that promotes maximizing the value of goods flowing through the reverse logistics pipeline.  In the end, this is the most valuable contribution a returns process can make to an organization.

Because of partisan bickering that has been going on since the Clinton administration, the five person National Labor Relations Board has struggled to maintain three permanent members and hasn’t even come close to having the full five member board as designed by the National Labor Relations Act.  Since the Obama administration has been in power, the NLRB has only had two members for the majority of the time.  During the first year of the new administration, over 600 decisions were handed down that reversed many NLRB rulings and administrative directives that were put in place during the Bush years.  As you might expect, these decisions were pro labor and anti business by a wide margin.

Today’s ruling by the Supreme Court seemed to nullify those decisions.  These cases will now have to be reviewed once again, once three or more members are on the board.  This increases an already growing case back log by a significant amount.  The end result will probably be much like the world of labor was during the Bush administration.  This decision will also empower the conservative, pro-business elements because they will now have to have a seat at the table if the Democrats and pro-labor folks ever want a decision to be made by the NLRB again.

Score one for business.

If you are looking to reduce returns processing costs or wanting to find ways to increase profits, try this best practice to reduce the cost of returns.  The following process has historically been a great source of savings.  It starts by flow charting the process of top twenty sorts within the returns facility.  Just focus on the top twenty.  In the vast majority of return centers, the top twenty items impact 80% of the costs of the facility.  When flow charting out the processing path of each item, be sure to write down every detail of what happens to the item from the time it enters the four walls of the facility through to final shipment.  Flow chart each item, category, or sku separately.

Once you have the flows documented, lay them out and then start looking for functions that can be combined, differences in processing requirements from one item to the next, and steps that can be eliminated.  It is very helpful if you place people onto the chart, by name.  You will then be able to see where some people do very little, work stations should be moved, and other opportunities to combine steps that may not be seen by observing the actual operation.  After you have all the pieces to the puzzle in front of you, start experimenting with the flow of goods.  Play what if games and see what the impact would be.  Many of the best design and flow improvements come from drawing the existing flows and process on butcher paper and then brain storming about how the flow could be changed and improved.

The best way to get ideas flowing and get the most out of your brain storming session is to ask “Why?” five times.  By this we mean ask something like:

1. Why does the item have to be received this way with all this information?
2. Why do we have to collect all the profile data and causal information?
3. Why do we to sort, separate, and segregate the items the way we do today?
4. Why are the items packed, prepared, inspected, or processed they way they are today?
5. Why do we ship, scrap, recycle, or dispose of  the item the way we do today?

If you ask the five “Why’s” for the top twenty items flowing through your returns facility, you will find many opportunities to save time and money.  You will also find that the process improvements developed for the top twenty items will apply to most if not all items flowing through your returns facility.  The impact of eliminating just one step in the process of one of your highest volume returns will have an amazingly large impact on the financial performance of the facility.

Why ask “Why?” The answer is “To Save Money!”