The Product Returns Process

For the most part, the returns process is what occurs after retail customers have returned an item
to a store or have sent it back to a catalog or Internet company. The process comprises five
stages — receive, sort and stage, process, analyze, and support — which are common to almost
all companies irrespective of industry or product type. (See “Stages in the Product Returns
Process.”)

STAGES IN THE PRODUCT RETURNS PROCESS

STAGE 1 — RECEIVE.

During the initial stage of the process, product returns are received at some centralized location,
usually a warehouse or distribution center. In many cases, a first step in this process is to provide
areturn acknowledgment. In the bookselling business, for example, returns from retailers are
huge, and this part of the business must be handled effectively and with as little cost impact as
possible. As a result, many large publishers have automated their returns processing to achieve
cost and service goals.
Generally, returned items may include a wide assortment and variety of products, returned via a
variety of carriers and in a seemingly infinite number of packages, either on full pallets or in
individual containers — a far different procedure than when the items were originally shipped
out to customers. The way that items are returned and received greatly influences how products
are sorted and staged in the next step of the returns process. For example, one electronics
manufacturer fast-tracks returns that are full pallets through the system so that they are available
for sale more quickly, typically in less than 24 hours.
Some companies are finding that it is cost effective to “jump-start” the returns process at this
stage, that is, to make a disposition decision about a returned item as early in the returns process
as possible. Much like the theory of postponement for forward logistics processes, the concept
ofprepostponement can be applied to returns. Postponement refers to waiting until the last
possible moment to provide value-added services to a product. For instance, Sauder
Woodworking Co., headquartered in Archbold, Ohio, sells ready-to-assemble furniture. Since
costs are based on product value, which increases as value is added to the product, postponing
value-adding activities can result in lower costs. Conversely, in reverse distribution, processing
returned items nearer the point-of-sale, that is, early in the returns process, saves both time and
money. The thought behind this approach is that returns are evaluated as soon as possible when
they are received to assess their recoverable value. The advantage is that processing expenses
can be avoided for items that are truly worthless and incurred only for those items with
significant value (that is, those items that can essentially be put right back into the normal
distribution channel).
STAGE 2 — SORT AND STAGE.

Once items are received, products are sorted for further staging in the returns process. This sort
could be based on how the items have been returned (for example, pallets, cartons, packets); the
type of return (which could be identified from the address on the item; the color of the label, or
some other kind of easily identifiable feature); or size or number of the item being returned.
Combinations of these options are also possible, with subsorts taking place. Typically, the
standard for this sort-and-stage activity combined with the receipt activity is three days or less,
with most companies having one-to-two day standards.

STAGE 3 — PROCESS.

In this stage, returned items are subsorted into items, based on their stock-keeping unit number,
which can be returned to stock/inventory; while vendor returns (if applicable) are sorted
according to the specific vendor name. It is at this point that customer credits can be given,
although most companies do not issue credits until later in the process, usually in Stages 4 or 5.
Items move from the sort-and-stage area to the processing station(s). Persons at these stations
can process the items in order of their receipt, according to the type of product, by customer type
or location, according to the physical size of the items or some combination of these and other
factors.
Handling a mixture of items evens out the workflow and makes it easier to develop piece-
handling metrics and standards. In one consumer-products company, returns are placed on a
conveyor belt after receipt, then move to processing stations where diverters direct items to each
station so that each processing line has an equal number of return items in their queue. Having
the appropriate information on the return label on the product allows for items from the same
customer to be diverted to the same conveyor line for simultaneous processing.
At this stage, the paperwork that accompanied the return is separated from the item and these
documents are then physically sent to the administrative area for comparison with the electronic
records should discrepancies occur.

STAGE 4 — ANALYZE.

It is at this stage that employees must be the most highly trained, since this is where the most
important disposition decisions are made. Because the value of the returned item varies
depending on the product disposition strategy employed, individuals involved in this stage must
be very knowledgeable about the products, repairing or refurbishing opportunities, allowable
versus nonallowable returns and the financial benefits associated with each disposition option.
For example, items that can be repackaged for resale will return greater financial reward than
items that must be refurbished or remanufactured prior to sale. Repackaged or refurbished items
always result in higher revenues than items being sold as scrap or salvage.
A final step in this stage, and one that needs to be planned in advance, is marketing of products
that have been repackaged, repaired, refurbished or remanufactured. Many remanufactured or
refurbished products are sold in secondary markets for additional revenue, often to a market
segment unwilling or unable to purchase a new product. This might include using repaired
products as spare parts. The markets for these products must be treated just as any market —
with an understanding of customer needs, price elasticity and proper channels of distribution.
Effective marketing strategies for repackaged, repaired, refurbished and remanufactured products
often determine whether a company will make a profit in their returns process.

STAGE 5 — SUPPORT.

At this point, the disposition of each returned item has been determined. Items are distributed
according to where they should go. Back-to-stock or back-to-store items are returned to
inventory. If repair, refurbishment or repackaging are required, appropriate diagnostics, repairs
and assembly and disassembly operations are performed in order to get the items into a salable
condition. Relative to costs, the degree of repair or refurbishing that occurs should be correlated
with the potential value of the product once it has been “improved.” Because recovery rates for
repaired or refurbished products are high, exceeding other disposition options, performing repair
and refurbishment efficiently at low cost is important to a company’s return on investment.
Likewise, getting items into a salable condition quickly also reduces inventory carrying costs.
From a service perspective, these salable items are made ready for resale to customers sooner,
thus improving service levels. This would be especially important if there is high demand for the
items and regular inventories have been depleted.
Items that are going to be returned to vendors must be handled quickly, inasmuch as vendor
return windows can be very short, especially when the time to get the items back from customers
or stores is taken into consideration. The speed of the returns process also has important cash-
flow implications. Speedy processing of returns will reduce the amount of cash tied up in returns
inventory, thereby increasing the profitability of the process.
In some instances, processed items will be resold in outlet stores, serve as replacements for
warranty repairs or sold to wholesalers, off-price retailers or offshore buyers. Returned items can
be donated to local, regional and national charities or relief organizations. If the items are not
salable to some type of customer, they will likely be sold to a salvage or scrap dealer who will
purchase the items for the value of their components.

Transforming Product Returns into a Profit Center

Too often, companies are more than happy just to minimize the costs of managing and
administering the cost of product returns. However, product returns management can become a
profit center if managed and administered properly. Turning product returns into a profit center
requires that in addition to cost savings, companies improve the recovery value of returns and, if
possible, obtain revenues from various reverse logistics activities.
More efficient product returns programs can reduce variable costs, resulting in improved
margins. Companies often find that they can reduce processing costs by up to 50%, sometimes
more, if their existing processes are inefficient. Because much of the product returns process is
manual, especially in the processing of customer credits and in the evaluation of product returns
for disposition, the elimination of labor inefficiencies or the improvement of labor productivity
can reap significant cost benefits.7
Strategically and operationally, however, how can reverse logistics be a profit center? The
following illustrate some of the major ways that efficient returns management can reduce costs,
improve revenues and enhance profitability as a result.

IMPROVED CUSTOMER SERVICE AND CUSTOMER KNOWLEDGE.

Effective product returns management usually results in customer credits being issued more
quickly and reduces the number of reconciliation problems, so customers are more satisfied and
revenues are increased (customer satisfaction has been proven to have a positive impact on
profitability). Additionally, customers are more likely to engage in repeat purchasing with the
same company.
In addition, returns are an excellent source of information on the buying expectations and habits
of customers. Few companies are prepared to gather such data, but L.L. Bean Inc., an apparel
company based in Freeport, Maine, and Nordstrom Inc., a major department store chain based in
Seattle, Washington, are companies that do gather information via returns and find that the data
have helped them increase their sales volume. By tailoring follow-up marketing programs after a
return, the companies are able to stimulate additional purchases by the customer.

EFFECTIVE INVENTORY MANAGEMENT AND PRODUCT DISPOSITIONING.

When done effectively, more value is created from the disposition of returned merchandise (there
are many options available for dispositioning returns, and the options have different cost and
revenue implications). A good example of prepostpone-ment, discussed earlier, is Logitech
International SA, which dispositions returns as early in the return cycle as possible, putting
product back on the shelf or into an alternative channel rapidly, thereby speeding cash flow and
minimizing storage cost. Logitech, based in Switzerland, is a $1.4 billion producer of joysticks,
computer mice and keyboards. Returns for Logitech often represent 10% or more of outbound
shipments. Because of the fast pace of technology in this business, inventory has to be moved
quickly to avoid severe price erosion. Logitech follows a process ofprogressive
dispositioning, where the goal is to rapidly and continuously disposition (repair, refurbish,
liquidate, recycle and scrap) returned inventory as early in the cycle as possible. One way they
accomplish this goal is to use an online site that dispositions excess inventory through various
channels, such as intranet auctions. On balance, a key financial goal of the returns process is to
lose as little as possible on a return. To accomplish this goal, the focus in designing the system is
to minimize the loss of product value, because each step in the returns process and each handling
of the item incur costs that subtract from the product’s value.8
It is important to keep in mind that efficiency (low cost) in returns processing is not always the
best strategy. Speed is the critical variable in many cases, and managers need to remember that
cost-efficient supply chains are not necessarily fast supply chains. The longer it takes to retrieve
and process a returned product, the lower the likelihood of economically viable reuse options.
Logitech provides a good example of the need to focus on speed rather than cost. For items with
short life cycles (for example, fresh produce, some pharmaceuticals) the more efficient the
returns process, the more product is “saved” from destruction or markdowns.

EFFICIENT PRODUCT RETURNS AS A MARKETABLE ASSET.

Good product returns and reverse logistics operations can be marketed to other companies
(revenues can be achieved from selling off the process to other companies or using the
competency as a competitive weapon against other companies marketing to the same customers).
Charging the various functions — sales, marketing, manufacturing, transportation and
warehousing — for return goods processing will help each of them focus their attention on
increasing quality, making normal, not outrageous claims to potential customers, handling
products more carefully, pricing correctly and so on. Proper control of product return costs, as
well as receiving revenues from vendors, suppliers and even customers, can result in profits from
returns management.
One highly publicized effort, now considered to be a classic example of product return
efficiencies, was that of Estée Lauder Companies Inc., a major cosmetics company based in New
York. The company used to dump $60 million of their product returns from retailers into
landfills each year. Then they invested $1.3 million in scanners, business intelligence tools and a
data warehouse and, in the first year after installing the new systems and processes, the costs
were recouped due to several factors: (1) 150% increase in redistribution of its returns, (2)
$475,000 saved in reduced labor costs, (3) reduction from 37% to 27% of returned products
being destroyed, (4) reduced production and inventory levels resulting from an increased ability
to place products back into the market more quickly, and (5) better data on why products were
being returned in the first place.9

Personnel and Training.

A general rule of thumb is that the companies that perform the best job of processing returns are
those with full-time managers responsible for the activity. Additionally, the best companies
provide both formal and informal training of employees in product returns processing. Standard
operating procedures manuals are provided to new and continuing employees responsible for
processing returns. Each of these procedures is discussed in depth through explanations of each
step in the process; review of the equipment that will be used in the processing activity; and
explanations, with diagrams, of computer inputs required at each stage of the returns process. In
addition to written policies and procedures, new employees are mentored for some period of time
by more experienced personnel.

Good Communications.

An effective and efficient returns process cannot work without well-conceived communications
processes, both personal and electronic, which facilitate the smooth and rapid transmission of
information. When one looks at the processes involved in returns — open, inspect, repair,
remanufacture, scrap, etc. — it is obvious that these steps require communications with various
internal and external departments, customers, vendors, liquidators and, in the case of hazardous
materials disposal, various governmental bodies. For Internet sales, communication is especially
important, because customers will demand rapid processing of credits to their credit card
accounts.

Use of Third Parties.

Processing product returns requires more than part-time effort and minimal resources. Using
third parties can sometimes be a better choice when the company lacks the expertise, if it has
limited funds or experience or where the amount of products returned to the company are low.
Specifically, there are several reasons that justify a company’s decision to outsource product
returns processes. First, if the third party can perform the product returns process more quickly
and accurately than the company, outsourcing can be a good choice. Second, if a company
experiences few product returns and they do not have dedicated personnel or procedures for
dealing with product returns, going outside to a third party for product returns services is a viable
option. Finally, because third parties are often specialists in processing product returns, they can
often provide higher levels of efficiency and effectiveness, resulting in lower costs and higher
revenues from better disposition of returned items.
ALTHOUGH THE NATURE OF PRODUCT RETURNSvaries significantly from company to
company due to type of industry, product, market and other factors, top management at most
successful companies recognizes that full-time administration of the product returns process is a
priority because it can result in cost savings, revenue enhancements, service level improvements
and, in some instances, sustainable competitive advantage. Most of these successful companies
implement the policies, procedures and practices presented here and subject them to continuous
measurement, evaluation and improvement.