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.

Large Recovery Opportunity

As thankless as the task may be to manage the data around returned items, with this much inventory and bottom-line dollars at stake, your chief financial officer or CEO will have just one thought: Recover that inventory for forward sales ASAP. The opportunity is indeed large, and recovering returned good-as-new products can have a dramatic impact on a company's bottom line. The magnitude of the opportunity is even greater when you consider the fact that many other reverse logistics costs — claims processing, write-offs, freight charges, credit reconciliation — are hidden throughout your organization, and therefore not the responsibility of any one department. Once alerted to the size of the problem and opportunity, the senior management team will see reverse logistics as one of the last frontiers where waste can be squeezed out of the supply chain process and financials can be improved. What supply chain officers have traditionally viewed as an annoyance, senior management can today see as a fantastic profit center, if the process is handled just right.

According to the Reverse Logistics Executive Council, the increase in costs for processing a return, as compared to a forward sale, is an astounding 200-300 percent. It costs three times as much to process the reverse logistics of new items as it did to process the forward logistics to sell it. According to Gartner, the percent that net profits are reduced by improperly handled returns is 35 percent, so it pays to get reverse logistics right. The solution to making the process pay: automate the reverse logistics process.

Financial Gains Realized

Many insightful companies have been highly disciplined about returns authorization. This isn't a new practice in the aftermarket service and warranty sectors. A product can't be returned until it has a return merchandise authorization (RMA) label generated by the person returning the product. But this practice seems to be contained to companies that do nothing but reverse logistics. The logistics manager is already "thinking in reverse," and it is rare — though less and less rare — to have this level of automation at the industrial level for the return of a new large quantity of otherwise saleable products.

A few approaches to reverse logistics have already been tried and shown to be inefficient. For some companies, it seemed like a good idea to ship a product with a pre-printed return label. This process guarantees just one thing: Returned inventory will be shipped to the proper address because it is printed on the label. Beyond that, the data management process hasn't advanced much because these labels don't declare the quantity of goods, nor if the return shipment is a mixed lot.

Other companies have tried call centers. Good idea in theory, because an agent typically produces correct, or nearly correct, data, and this approach allows you to sort through the various mix-matched SKUs in the shipment. But manual, human invention in a returns process, as with any supply chain task, is costly.

According to Gartner, automating your reverse logistics with a Web interface that demands a RMA and compliant label before any return would save you 50-70 percent over a live call center. Gartner further notes that if you set up an entirely Web-based RMA system that links directly to your ERP, your company could save 50-80 percent over pre-printed return labels.

Executives today are eager to achieve these levels of savings. And in order to produce such results, the return on investment for an enterprise returns management system can be achieved in a remarkably short time, given the margins and the money currently left on the table. Set up a Web-based RMA system, pre-integrated to your ERP, and train your customers to respect and adhere to your rigorous returns process, as enforced by Web services. This need not alienate your customers, nor be perceived as inflexible. Indeed, returns can be remarkably easy, given the flexibility built into the new ERM systems for manipulating highly granular data, the wide availability of "distance printing" of customized "returns compliant" labels, and the availability of sophisticated Web services in the ERM system that can access and distribute data from a central ERP…and update that ERP with awareness of inventory that is heading back to the warehouse, and better yet, what to do with it once it arrives.

With reverse logistics, supply chain officers and executives have a rare opportunity to present their management team with a problem and a solution at the same time. Returns management presents a significant opportunity that will be discovered sooner or later. Why not become the messenger of good news…and a viable, affordable solution. Go on, step up: Be a Supply Chain Hero!