Monday, June 25, 2018
Publication Date: 07/1/2007
Archive >  July 2007 Issue >  Tech Watch > 
Automating Reverse Logistics for Cost Savings, New Revenue

Reverse logistics (used today synonymously with returns management) is defined as the return/exchange, repair, refurbishment, remarketing, and disposition of products. Reverse logistics costs U.S. companies an estimated $100 billion annually, according to a recent report by research firm, Aberdeen Group. High-tech manufacturers must sustain rapid market flexibility and adaptability; those with processes in place to remanufacture or refurbish products and parts can convert damaged inventory into salable goods, and recapture value that would otherwise be lost. As such, technology manufacturers are beginning to focus on improving the returns process in order to recapture revenue, retain customers, comply with environmental regulations, reduce operating costs, and improve product uptime and quality.

In terms of product design and development, automating returns provides manufacturers with a powerful new tool — the ability to capture information directly at the source of the return, in real time. With manual processes, critical data on reason for the return is often "lost in translation" as it moves through the various stages of the reverse logistics chain. As a consequence, perfectly good units are often scrapped or disassembled for component re-use, even if the problem prompting the return was not at all related to product performance. By ensuring the return reason travels with the unit throughout the lifecycle, the highest value of the unit can be recaptured and any subsequent repair or refurbish operations can be made dramatically more efficient.

Another key benefit of capturing returns quality data at the source is the analytical potential now available. By automating the process, returns reasons, failure codes and complaint information can be captured and stored for analysis. The data is then visible throughout the design stream, resulting in unprecedented opportunities for designers and engineers to incorporate improved functionalities and capabilities into the product development lifecycle. For example, if a disproportionate percentage of returns are deemed "No Trouble Found", and the attributable root cause is poor packaging or instructions, those areas can be addressed without making wholesale and expensive product design changes. By automating data capture, many companies could leverage valuable customer data to build better, more marketable products.

Hidden Costs
By nature, reverse logistics' costs are difficult to define and identify, as they are typically spread throughout the organization, or "hidden" across various business functions (customer service, warehousing, finance and operations) so no one function is responsible for them except, ultimately, the CFO. To help manufacturers manage their returns costs, we have identified six of the largest, yet hidden, cost areas of reverse logistics. Let's take a look, starting with hidden labor costs.

Labor Costs. From customer relations to Sarbanes Oxley compliance, costs are incurred if returns processes are not automated. An operation is automated if it uses enterprise returns management software (accessed freely by channel partners) which offers rules-based, product-specific protocols for how to handle returned items or systems. Return eligibility for specific serial, part or revision number, can be determined by attributes drawn from the authoritative inventory, warranty policy, and accounting information housed in the company's central ERP, not from a middleware database or from a batch-process database. Other costs in this category:

Customer relations costs for lost sales attributable to poor warranty repair service and generally poor returns experiences.

Customer service costs for determining applicable warranty policies and service contracts, as well as identifying what credit rules are in place.

Financial reconciliation for issuing credit, as well as for determining inventory reporting for Sarbanes Oxley; add in the appraisal/write-down process and the charges incurred if a returned product is not covered by warranty but is returned anyway.

Sales incurs costs for revenue recognition, margin protection, account management, and most importantly return rate forecasts.

Traffic and shipping incurs costs through just managing carriers, superfluous transportation moves, damage incurred in-transit, one-off shipments, tracking (or attempting to track) returned items.

Receiving and Warehousing perform facility and labor planning on little to no information, which costs money in overtime pay or is manifested in poor service levels in processing returns.

Grey Market Items. Grey market contamination of returned inventory is a risk. Assets designated as scrap may reappear for warranty service. In a highly manual process, where large return volumes are in play, the process quickly fails. The result: the brand owner is not actually managing the brand.

Lack of visibility. Customers want the status of warranty returns. If they don't have it, they'll call. Or email. Repeatedly. Guess who pays for that time personnel are on the phone? Merchandising needs inventory readings. Design wants information on what products are returned most often and why. In cases where vendors perform vital receiving or repair functions, 3rd party service providers have no visibility to returns in transit, and by extension, neither do the brand owners. Certainly, OEMs and ODMs don't have visibility to the repair processes at their vendor locations.

Inability to forecast accurately. Return data may be trapped in local spreadsheets. Sales can't "see" enough to make accurate predictions. Operations can't prepare for a returns influx.

Deduction management. Large customers often calculate their own credits — and take a deduction on next payment — all time-consuming to reconcile. Or, return requests are approved, but not matched against receipts, preventing accurate accruals, claims recoupment, or effective vendor management.

Poor response time and brand toxicity. Manual return request processing and validation cause delays in approving or rejecting return requests. This frustrates customers and communicates lack of concern, which tarnishes your brand. So do delays in validation, and discrepancies caught after receiving materials. Customers expect companies to stand by products during the entire lifecycle.

Automating Returns
The solution to making the process pay: Automate the reverse logistics process with a web interface that demands a return merchandise authorization (RMA), return reason codes and compliant label before any return can be sent. This alone can save 35-50 percent over a live call center, according to Gartner. An enterprise-wide returns management system can also deliver tangible savings across all the areas touched by the reverse logistics chain, from transportation costs, to warehousing, to credit processing, to repair/refurbishment. At the same time, providing an easy-to-use web interface for managing returns improves customer service, while providing designers and engineers valuable intelligence that can be used to improve product lines. Such a closed-loop feedback system represents a win/win for all parties, addressing a critical and timely issue for most manufacturing companies.

For more information, contact: Clearorbit, 6805 Capital of Texas Highway, Suite 370, Austin, TX 78731 512-231-8191 fax: 512-231-0292 E-mail: Web:

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