In order to help you prepare for this, we have put together our own Christmas Checklist.  It’s like Santa’s list only it not about being naughty or nice, it is about maximizing the value of goods that will be coming your way after Christmas and minimizing the cost of processing those goods.

Use our 31 Point Christmas Returns Checklist tp ensure that all preparations have been made for processing all your Christmas returns. Just like those Christmas calendars, there is something for every day in December, but don’t wait until December to start planning.

The Christmas Returns Checklist

1. Update defective returns estimates based on sales since Thanksgiving
2. Update seasonal recall volumes by SKU and vendor / OEM / ODM
3. Review existing processed inventory waiting to ship – clear out as much as possible
4. Prioritize shipments by value and cube to reduce inventory and create space
5. Contact primary and secondary temp agencies and review requirements
6. Review management staffing and organization chart for the first quarter
7. Review volume estimates and plans for outbound shipping with carriers
8. Contact the provider of storage trailers and ensure adequate supply will be available
9. Inspect temporary space that will be used during peak season
10. Review plans for temporary space and storage trailers with Loss Prevention
11. Contact top 20 vendors / ODM’s to review plans and estimates
12. Review manpower plans for quality assurance and inventory control
13. Review plans with Systems to ensure NO major systems changes are planned during peak season or with any systems that directly interface with the RMS
14. Review plans for leasing temporary fork lifts and other power equipment
15. Review all parts supplies and ensure procurement plans and sourcing is ready
16. If additional shift are anticipated, procure addition lift batteries if needed
17. Review shipping plans and requirements with top salvage buyers
18. Review inbound sortation plans and shipping plans with internal Liquidation Department
19. Test all risers, security systems, and emergency procedures immediately
20. Schedule preventative maintenance ASAP for all equipment and conveyor systems prior to January
21. Review first quarter manpower plans by function, by shift
22. Review plans & volumes with recyclers and with waste management companies
23. Send any special instructions to all stores, branches, etc.
24. Notify all stores, branches, customers, and/or vendors contact information during peak
25. Review plans of all outsourced repair vendors,
26. Get reports of existing  backlogs for all repair vendors or outsourced support areas
27. Review weekly communications plans with key internal and external teams
28. Review aged files for any claims or disputes to clear up prior to year end
29. Meet with financial support systems management and review plans
30. Contact high volume vendors and ask if they have any plans to shut down during the first quarter for retooling
31. Have a merry Christmas! – Enjoy your family while you can!

With a good plan for peak returns season, and working through the 31 point Christmas Checklist, you can be assured the reverse logistics function is well prepared for this most critical time of the year.

There are many factors that determine who pays for returns, product testing, refurbishment and transportation.  Usually, it’s a matter for negotiation and there is not one set of rules to go by when working out the critical details. There are, however, some general industry arrangement that one can use as a starting point for negotiating return privileges.  Those include:

1. The manufacturer / OEM generally pays for freight directly or indirectly for returned assets, whether defective or recalled.
2. Retailers typically deduct the cost of returns, including charges for inventory, processing and freight from any outstanding payables they have with the manufacturer.
3. Liquidators, meaning buyers of product on the secondary market, generally provide their own transportation.
4. Hi-tech, market dominating manufacturers will not pay consolidation or handling fees and will be much more strict when it comes to enforcing terms and conditions for returns.
5. Goods returned that do not comply with previously agreed to terms and conditions are generally not returned, nor credited in any way.
6. Manufacturers of commodities will pay handling fees but will expect compliance and support where customer abuse is evident.
7. Often, off shore OEM’s have no place to receive and process returns. These OEM’s will often agree to allow you to liquidate their product AND cover the cost of the return. They generally don’t pay handling fees but the liquidation revenue is much higher so it is a win/win.
8. Consolidation fees are paid on a percent of wholesale cost or a flat dollar amount per unit for higher priced items.
9. The basis for the consolidation fees should be the cost of processing returns, not including transportation.
10. Disposal fees are passed on directly to OEM’s when required by the manufacturer. This is especially true if assets have to be incinerated or dumped in a hazardous materials landfill. Disposal fees are NOT passed on for private label goods or product that the retailer or customer facing business destroys for brand protection reasons.

All these terms and many more factors involved in processing returns are negotiable so use this list as a base line to work off of when working out return privileges.  If you are new to the world of return agreements, this will help get you off on the right foot so you can ensure you don’t leave money on the table while promoting good relationships between you and your partner across the table.

In addition to the dramatically rising costs of metals, manufacturers are also facing increased costs and potential liability from product disposal.  There are 17 states that have laws on the books that outlaw throwing e-waste in their landfills.  In addition to these 17 states there are a number of other states that have similar laws working their way through their legislatures.  All of this is in an attempt to do something to reduce the 400 million units of e-waste that are landfilled every year in the US.

This can have a significant impact on electronic manufacturers. When states, such as Rhode Island, decide they want e-waste cleaned out of their landfills, they charge the manufacturers. To be clear, consumers threw these items in the landfill, not the manufacturer.

The question is what can a manufacturer do to control the rising costs of metals and reduce the risks of having to clean up a landfill after their customers have finished using their products?  The answer is to rethink the manufacturing process by incorporating reverse logistics processes that harvest parts and recycle returns and end of life goods.

Some wonder if trying to develop these capabilities are worth it. We argue that it is not only worth it but the way of the future.  Did you know that one ton of mobile phones has more gold in it than 17 tons of gold ore?

Think about this – According to the Electronic Takeback Coalition every year there are about 1.2 billion cell phones sold worldwide. At any one time there are over 4 billion mobile phones in use around the world. Assume that for every phone purchased there is one that is thrown away. That is 1.2 billion cell phones or about 200,000 pounds of waist created every year.  If the manufacturers were to extract just the gold, silver, palladium and copper from just one ton, or 6,000 of these phones, the metals alone would be worth over $48,000. That’s about $8 of value per unit at 2011 metal prices.

If only 50% were recycled and used in the manufacturing process, mobile phone manufacturers would be reusing $4.8 billion dollars of gold, silver, palladium and copper. This doesn’t include a number of other rare earth metals that could also be extracted and reused. In addition, the manufacturers would also greatly reduce their carbon footprint and their risk of liability from their goods going to a landfill.

This is just one example of the impact the integrating reverse logistics into the manufacturing process could have for a manufacturer.  The same is true and impact greater for PCs, TVs, and other hi-tech electronics.  The only question is why aren’t the manufacturers adopting this? Now that is a great question. The answer is that manufacturers have to rethink how they source their materials and manufacturer their products.

Note to Apple, Nokia, Google, Sony, Samsung, and others – do the right thing…profitably.

In addition, companies outsource reverse logistics operations for many other reasons. Some need quick expansion and don’t have the manpower nor the infrastructure in place to expand as needed. Others are looking to cap exposure to worker comp expenses, inventory shrinkage, or hiring costs when starting up a new operation.

All of this can be done by outsourcing to a qualified third party logistics organization (3PL). However, to do this successfully the 3PL agreement must clearly articulate the level of service (LOS) goals, budgets, and the other metrics. LOS goals used by the 3PL must be in alignment and support the company’s goals. The incentive systems and payment terms for performance must parallel and support the same financial impact on the outsourcing company.  In other words, contract terms and conditions must incentivize the 3PL to perform the stated duties in a manner that is in the best interest of the company.

Outsourcing return center management to a 3PL usually goes badly for one of four reasons:

1. The level of service requirements and scope defined in the contract are not in alignment with the financial justifications used to outsource initially.
2. The recovery rates on returned inventory, which justified higher 3PL costs and fees, are below expectations.
3. The volume and timing of the flow of returns is much higher and more condensed than anticipated, causing problems with customer service, space, and escalating processing costs.
4. The contract does not provide the flexibility necessary for a reverse logistics operation.

Many companies new to outsourcing don’t include key metrics in the contract. Often they don’t have good benchmarking data for items such as damage rate, inventory shrinkage, annual inventory turns, and thru put numbers to ensure they are getting what they expected from the 3PL returns operation. These details have to be carefully spelled out along with who will be responsible for the associated costs if the LOS goals are not met.

Reverse logistics operations are much different than distribution operations or transportation.  The contract that governs outsourcing to a 3PL must be specifically designed to ensure these differences are addressed.  Many executives new to outsourcing returns to a 3PL make a big mistake by using “the standard outsourcing agreement” used when outsourcing warehouse operations.  Reverse logistics contracts must provide flexibility to the 3PL and that must be reflected in the financial terms and conditions.

Remember, nobody orders returns.  You don’t know what you will get until it shows up at the door.  It isn’t a good contract unless it is flexible. 3PL outsourcing agreements should include language addressing how costs will be paid based on a wide range of unique returns related metrics, the biggest of which is volume. Many companies use volume bands to calculate variable costs. Some companies use a fixed dollar fee for the provider.  Many 3PL contracts are cost plus with a budget cap. All of these methods can work in the right situation, with the appropriate means of adjusting the T’s & C’s built into the contract.

There are two reasons for signing a contract with a 3PL when outsourcing reverse logistics. The first reason is so there are clear terms and conditions for running the operation and billing.  The second reason is to have a framework to dismantle the operations if it fails.

Many companies that outsource don’t seem to think about the details and what they are going to do if they have to fire the service provider. Make no mistake, terminating a contact with or without cause can cost millions. You need to think about what happens to the inventory, the capital equipment, the building, ongoing worker comp issues, shut down and closing costs and what you are going to do after the 3PL is gone. All of these and many more issues need to be considered and you must spell out who is liable for each issue under each scenario. Once you’ve decided to end the relationship, you could save yourself millions if the contract addresses the shut down process correctly. There are many valid reasons to outsource reverse logistics to a 3PL. The key is to have a good contract that will protect everyone’s interest, achieve the original goals that drove the decision to outsource, and ensure a win/win relationships between the parties.

What they often do not understand is that defective customer returns on average accounts for less than 25% of assets that flow through the reverse pipeline. The big mistake that many executives make is that they confuse their customer return rate with the total volume of goods returned.  Customer returns is only a piece of the pie.

Another fact that is often overlooked is that for companies that send parts to the field for repair, on average get one out of six parts returned. Parts are returned because they weren’t needed, they ordered the wrong part, or they ordered more than they needed. Components and replacement parts are a big part of many manufacturer’s returns. Processing returned parts is a key component to an economically efficient parts management program.

Product recalls are another major volume contributor to the reverse pipeline. Last year the US Government ordered over 1,000 products recalled off the market. Empirical evidence shows that for every government mandated recall there is at least one non-mandatory recall made by either the manufacturer or their customers. For every manufacturer, the question is not if you will have a product recalled off the market. The question is when will you have a product recalled off the market.

Another aspect of reverse logistics that is often overlooked by many manufacturers is end-of-life strategies and seasonal recalls.  These are recalls that are generated when new models are sold or there is a change in season.  The product in the field or on the shelf is in great condition, it just didn’t sell and it needs to come out of the market in order to avoid conflicts with new product sales. Many companies such as Walmart require manufacturers to have end-of-life strategies and plans in place to process recalls before they will agree to purchase from them.

To recap, here are four reasons why every manufacturer should focus their resources and efforts on improving their returns processes:

• Defective returns, while only 3% – 6% of sales, are only 25% of the assets that get returned.
• One out of every six parts shipped to a customer or repair technician is returned
• The Government ordered over 1,000 different products recalled off the market in 2010
• Many manufacturing customers require end-of-life and recall processes to be in place before they will buy

Studies have found that ON AVERAGE manufacturers spend between 8% to 15% of sales on returns. When manufacturing executives understand that these returns include much more than simple customer defective returns they suddenly find the time and resources to focus on improving their reverse logistics processes. These efforts often result in increasing profits by as much as 3% to 5% of sales!

Now that is worth talking about.

A common mistake that many manufacturers make when preparing to sell Walmart is to only prepare to discuss their product and their price. Many don’t even consider the last two pages of the supplier’s agreement before they meet with a buyer. These last two pages can have a significant impact on their overall profit margin without them even realizing it. The last two pages of a Walmart Supplier Agreement covers the terms and conditions for returned product.

There are ten questions about returns that suppliers should be ready to discuss and negotiate with the buyer when closing the deal at Walmart.  For those who may be thinking “Returns? What is the big deal?” we would point out that a study conducted by the Aberdeen Group  in 2007 found that on average manufacturers spend 9% to 14% of sales on returns. Another interesting finding from the same study found that 30% of the companies surveyed had no idea how much returns cost them. They were literally blind to cost of returns. The point is that proper preparation, knowing Walmart’s expectations and what the benchmark for returns processes are for your products will have a significant impact on the bottom line. In fact it could be worth as much as 5% of sales!

If a you have answers to the following ten questions you will have everything you need to negotiate a win/win deal with Walmart and maximize the your profits.

1. Will you credit Walmart for returns based on actual items returned or provide a standard off invoice allowance?
2. Do you want Walmart to dispose of the returns or send them back to you?
3. Are you going to receive returns directly from each store or through the return center?
4. What should your company’s consolidation fee be for items returned through Walmart’s return center?
5. What is your end of life strategy for your product?
6. How are you going to handle recalled product?
7. What are your return authorization requirements?
8. What is your plan for seasonal overstocks?
9. Are you going to have “return caps” or other limits to the value of returns that you will credit in a given period?
10. If you are going to use an off invoice allowance, what is the standard for your product and how will it be adjusted?

If your company does not have a state of the art returns management system you have three options.  First, you can live with what you have and continue to let money fall through the cracks and get thrown in the garbage. Second, you can attempt to write a package using internal resources, which will cost twice as much as promised, providing half the benefits, and take twice as long to to implement.  Third, you can buy a state of the art RMS from one of over 30 companies that have been developing and implementing returns systems for many years.

Based on our combined 40 years of experience in designing and implement reverse system, the only option that makes sense is to buy a package from a software provider that has experience implementing returns management systems for similar companies. When buying an RMS there are a few key features that clearly separate the contenders from the pretenders.  Purchasing a software package that has the required features and is installed by experienced reverse logistics professionals will pay big dividends.  In fact, if you buy software that doesn’t have the right functionality in production, you are wasting your money and most likely financing the development of a new module for the software vendor you’ve selected.

When deciding which RMS application to buy, how will you know if you the software includes the components you will need to maximize the value of the returned assets that you will be processing?  If you ask your software provider to explain the following, you will be able to separate the best-in-class from the jokers-in-class when it comes to reverse logistics software:

1. Explain the process flow of goods and what happens to goods after they are received.
2. Show me the report for units that are scrapped.
3. Show the process for scrapping a unit and how you capture and track parts that will be used to repair other units.
4. How does your system account for the parts inventory that is used to repair product?
5. Can your system re-disposition parts that are not needed?
6. Does your system facilitate parts harvesting / liquidation?
7. Can your system track separate inventories of units that have different owners?
8. How are Bill Of Materials (BOM) stored in the system?
9. Can your system support more than one BOM per model?
10. How does your system support warranty returns and related repairs?
11. How many classifications of repaired units do you have and how are is the inventory valued?
12. Show me the productivity reports for receiving, repacking, repair techs, picking processes, and shipping.
13. Can you re-designate finished goods as liquidation, A, B, or C stock goods?
14. When do you designate how and where to ship goods, can you add change shipment status from LTL to Small Package, or Truckload?
15. Show me how your system supports selling refurbished goods directly to the customer or B2B?
16. Does your system provide sustainability reports that provide an audit trail for carbon footprint reporting purposes?
17. Can your system process credit back to the customer based on condition at time of receiving and based on diagnostic results?
18. How does your systems track and process consolidation fees and transportation fees for both inbound and outbound processes?
19. Demonstrate how your system processes advanced service parts orders and other similar transactions?
20. Are all your reports available on the web and do you provide a report writer as part of your standard system?

If you ask a reverse logistics software provider these twenty questions along with the follow up questions that will naturally come up during the software demo, you will quickly be able to tell the wanna-be’s from the best-in-class providers.  The last and most important step in purchasing reverse logistics software is to check their references.  These references should be from companies that are similar to your own.  If you are an electronics manufacturer and all the references are retailers, you can bet the software provider does not have the package you need to drive your process. Finally, insist on touring most, if not all of the reference locations to see the process and software in action. During the tour, talk to the customer’s implementation team.  They will tell you what it really costs and how well your potential RMS provider performed during the implementation phase.

While buying an RMS package is usually the best option for companies looking to improve their reverse logistics capabilities, you must do be sure to get the right software providers involved in your RFP process and you need to go the extra mile in completing your due diligence before your company writes a big check for the software solution.

Let’s look at a few best practices that a manufacturer can use to help consumers avoid the need to make a store return.

• Helpful packaging, if the item needs to be assembled, let the picture on the carton be one that shows the whole unit, after assembly, in a clear way, hopefully from more than one angle. If the loaf of bread that the bread maker produces is round, don’t show a picture of a rectangular loaf of bread on the package.  Remember to use the package as your first line of defense against returns and your first opportunity to educate the consumer about your product.

• Instructions and package inserts, be certain that they are accurate and easy to understand. Do not let the engineers write, proofread, and approve the instructions. By all means try them out on executive assistants, spouses, warehouses workers or even an executive or two. Make sure that there are pictures that accurately reflect how the pieces fit together and how the unit will look at various stages in the assembly process.If it is a consumer electronic product, be certain that all the connecting wires or ends are color-coded and that the wires are bundled when possible. If it is possible to label parts or wires with a letter or number, by all means do so. Regular folks find that to be of great assistance in assembling a product. Note those facts in the instruction manual. All instructions and inserts should be written in multiple languages.  Use a brightly colored insert to ask consumers to call your 1-800 technical support line before returning the product to the retailer as well as printing it in multiple places in the assembly instructions themselves.

• Have an 800 technical support line.  The number should be on all instructions and box inserts that are available to the consumer. In large, clear fonts specify that customers must call the technical support line before returning the item to the retailer. The support line should be staffed when your customers are most likely to need it. That means evenings and weekends. This is the time when most of your customers will be assembling your products. It is always amazing to me when I see a support line open from 9:00am to 4:30 pm, Monday thru Friday. Make sure that the people who answer the phone can plainly speak the language. I know that overseas call centers are a popular means to control costs but when your customers are calling your help line they are generally already frustrated with your product. Do you really want to give them another reason to be upset with your company? Call the help line yourself, on different days of the week and at different times of day and night to see what kind of service you get.

To summarize, look at the ways to reduce store returns that have the most positive effect on consumers.  You will quickly see that making effective use of your packaging, instructions, inserts and 1-800 tech support lines are the most cost effective method of improving customers satisfaction and reducing product returns. These methods are time-tested ways to make the sale stick and keep customer returns to a minimum.

If you would like to download a PDF of the slides used in the webinar click on the following link –  Harvard Business Review’s Reverse Logistics Webinar.

If you would like to listen to Curtis Greve’s presentation click here.

Over 800 companies participated in the webinar and over 300 requests have been made for more information. Unfortunately, we had limited time for questions but we have received the entire list of questions and over the next few weeks we will use these questions as a basis for future blog posts.

If you have any specific questions on the content of the HBR webinar feel free to contact us at info@grevedavis.com or call us toll free at 877-638-7357.

The cost of fuel and the lack of qualified commercial drivers are causing the buyers of 3PL and aftermarket services to include reverse logistics more and more into their planning. The rise of sustainability initiatives and the confusing morass of state level end-of-life regulations for Consumer Electronic manufacturers are a big cause for concern.

These are all important factors. However, in the future the largest driver behind the need for reverse logistics and the least understood, is the coming shortage of rare earth minerals. This shortage will force manufacturers to examine their entire supply chain to uncover ways to reclaim, not only the parts, but the minerals and metals as well. This process will compact and shorten the supply chain and those 3PL’s and aftermarket service providers who can’t provide this service in an integrated way run the risk of becoming as extinct as dinosaurs.

 

Minerals – Years of Reserves Left

Hafnium – 5 to 10 years of supply

Indium – 5 to 10 years of supply

Platinum – 10 to 15 years of supply

Silver – 15 to 20 years of supply

Antimony – 15 to 20 years of supply

Tantalum – 20 to 30 years of supply

“Earth Audit” by David Cohen – New Scientist – May 2007

In the future, we believe, we will see many more distribution centers that have reverse logistics centers co-located within them. These facilities will handle the reverse logistics function of maximizing the value of the returned product through product disposition management. Cleaning, parts and raw material harvesting, refurbishing, product liquidation, recycling, repackaging, repair and remanufacturing will all occur alongside the much less complicated process of shipping products to customers.  These high end, technically complex processes will command a higher margin than simply shipping pristine cases to customers.

Todays distribution and reverse logistics network was built on the foundation of fuel prices at $2.00 per gallon and on the concept of unlimited natural resources. We now know that foundation was built on shifting sand. Fewer miles must be driven and raw materials must be recovered and reused at a much higher rate in order to provide electronics at an affordable price. The challenge for 3PL’s and aftermarket service providers is to understand what these changes mean to their customers and how they can develop their capabilities in order to deliver cost effective services that will meet the future demands of their customers.