Want to be a Supply Chain Hero?

Save your company's supply chain from a glut of dormant returned inventory. Here's how.


Go on. Be a hero! As a supply chain officer or executive, you can immediately go to your senior management team and confidently assert that at least six percent — and often as high as 35 percent (depending on your industry) — of top-line company revenue is sitting dormant on loading docks or in warehouses, the victim of a broken or non-existent returns management process. That's inventory you've already paid for.

For many companies, realizing revenue from this latent inventory is difficult for two reasons. First, most companies are forward-focused and consider returns a nuisance or not worth the trouble. Second, many senior executives are simply not aware of the magnitude of the problem and therefore have not sought a reverse logistics solution. Herein lies the opportunity for supply chain officers and executives to bring good news and opportunity to senior management in the form of a solution to a problem they might not know exists. Let's take a closer look.

What's Stuck on Your Docks?

When we talk about reverse logistics, we're not just talking about a pair of boots coming back to L.L. Bean or consumer goods warranty service issues. For that class of product, companies typically have a returns process in place, because they handle returns on a regular basis. We're talking about a second class of product, where the true volume of reverse logistics lies: industrial-grade returns that add up to over $50 billion dollars each year (some claim much higher). Most of these goods have never been used, are not in need of repair and are available for immediate resale. These products are often grossly overstocked for various reasons and returned because the distributor didn't want to keep them in inventory. Items such as 7,600 wiring harnesses, 150,000 feet of coax cable, 12,000 pounds of raw chemical, 150,000 empty prescription containers, 10,000 hard drives returned by a computer maker who wrongly predicted seasonal demands.

How did these items end up sitting idly on a dock? Through no fault of your end-user — indeed, customers can claim and unilaterally expect credit for returned goods — these items are the victim of overages, a lack of advanced planning in the forward logistics process, or aggressive fulfillment on the part of the supplier. Other events come into play as well, typically seasonal issues, or rapid changes in production and cancellation at the manufacturing level in response to equally rapid changes in demand.

Unless a company has a reverse logistics tradition (such as aftermarket services), many companies are wholly unprepared to take these items back, and forward-focused workers are often uncertain about what to do with perfectly good items, often in mixed lots, that are returned by the truckload. If a company's systems are unprepared to accept these items, they will often be stored and unrecognized as available inventory within the depths of a warehouse, only to be discovered at a later date during physical inventory counts. For items with expiration dates, this is entirely avoidable waste.

Why Not Just Put Items Away?

What's so difficult about simply putting these returned items away? Many of today's enterprise resource planning (ERP), customer relationship management (CRM) and warehouse management (WMS) systems are not set up to efficiently take back new products. As simple as it seems, inbounding products through reverse logistics is a data management challenge. According to AMR Research, it takes 12 steps to process inventory inbounded through reverse logistics management for every one step required in forward logistics. Items can come back as fractional pallets or mixed lots. Though the outbound shipment process may have had a rigorous system for allocating and organizing stock-keeping units (SKUs) and printing compliant labels, the end-user you shipped the product to probably has no way of communicating with your system (nor incentive to do so). Mixing of batches, lots and product categories is common. Pallets can come back with only 10 percent of their inventory used, yet the SKU initially assigned to that pallet does not allow for a quantity adjustment. So, for lack of the flexibility required to deduct an item from a gross amount and issue a new SKU, a nearly full pallet of goods sits "unavailable" on the warehouse floor. Someone has to take on the relatively tedious process of breaking that pallet down, separating out the mismatched items, generating the proper labels and repositioning that pallet, or fractional pallet, so items can be resold.

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