|Skeletons in the Closet—Profit from Effective Reverse Logistics
by Wayne Burgess, Craig Stevens
In North America, few organizations have the time, resources or desire to focus on building an effective reverse logistics operation. In most cases, the only area of focus is on selling returned, damaged and obsolete inventory off at pennies on the dollar. The current liquidation market is made up of opportunistic organizations that more often than not cherry pick only the best products to maximize their margins. These organizations have little to no interest in protecting their clients brand or market and only want the best product in turn leaving the client to deal with the rest. When adding all the costs and recoveries associated with reverse logistics, most organizations lose considerable amounts of money which contributes to reduced profit margins. Applying some very simple practices can change that virtually overnight and actually enhance a company’s profit margins.
Current Market State
General Capabilities in Canada
In general, reverse logistics capabilities within organizations along with third party providers are extremely ineffective and inefficient when compared to the US. Canadian companies have historically focused on three areas in order of perceived importance.
Gross Recovery: Traditionally organizations have focused most of their energy on trying to maximize gross recovery at the unit level which has encouraged practices such as cherry picking--the consequence being carcasses of product filling up warehouses and storage trailers. The over emphasis and focus on gross recovery effectively neglects to account for the other costs associated with the products such as handling and storage. These costs can be significant enough to drive a positive recovery to negative (as highlighted in chart 1.0)
Test & Refurbishment: Predominately in the electronics industry and more recently moving into appliances many organizations are building their internal or leveraging outsourcing test and refurbishment capabilities. These refurbished products are being
remarketed and sold to their A & B channel trade partners. Refurbishment has the potential to drive up gross recoveries considerably but true net recovery must take into consideration the costs associated with refurbishment as well as the storage and handling aspects.
Clearance Centres: These centres are meant to leverage existing investment into underutilized space within the retail and manufacturing industries. There are typically significant one-time setup costs including staff, systems and processes to operationalize these centres. Many organizations in Canada are now discovering that the cost of managing these centres outstrips any recovery they are making. Those organizations that continue to invest in clearance centres often make the assumption that they need to control this channel to ensure their primary business and brands are not negatively impacted.
Overall Canadian industry has a piecemeal approach to reverse logistics—many components functioning, but rarely is it effectively and efficiently managed as an end-to-end continuous process. A clear understanding of all the major processes and how they work together is critical to an effective reverse logistics strategy.
Current Capability Leaders in Canada
Market leaders, particularly within Retail and Manufacturing, have concluded that spending time on returned product (i.e. B channel), which can be upwards of 5% of their core business, effectively distracts the organization from their critical new business (i.e. A line). Those that have recognized this have either created standalone organizations or outsourced capabilities to a third party. Whether internal or external, these reverse logistics centric units are tasked with moving B channel product quickly, eliminating costs and maximizing recovery on the asset, all while managing brand and industry integrity. All of this coupled with strong reporting and information management.
What are the Options?
In Canada, the external or internal options along with the depths of these options have been limited. Recently there has been more focus on building and delivering true professional reverse logistics options.
In-sourced Solutions: This solution is often the result of an event that has caused senior executives to focus on its returned products, such as an external audit or warehouse capacity issues. This solution typically involves building a separate reverse logistics team or assigning this workload to current staff. In many cases it involves a blend. The team often resides in cross functional areas (Sales & Marketing, Merchandising, Finance & Supply Chain). The primary advantage of this solution is retaining control. This control is typically driven from the sales teams who are not willing to let external third parties take control of their product, brand or market regardless of how little returned product there is. The disadvantages of this option are extensive, including but not limited to slow pace of disposal, limited recovery, increased costs, limited information and continued pressure on the forward supply chain. However the biggest disadvantage over time is the failure of internal resources to focus and along with lack of funds to support a sustainable reverse logistics process. Resources are often distracted onto “A line” projects and competing priorities for internal resources often leave B channel initiatives underfunded. Despite the disadvantages, many organizations cannot overcome the “perceived” loss of control hurdle and therefore continue to half heartily invest into reverse logistics capabilities, draining scarce resources from the forward moving aspects of their business
Outsourced solutions: This can be is a risky proposition for most organizations given the limited maturity and number of the reverse logistic service providers in the market that can provide an end-to-end solution. Traditional 3PLs say they have the capabilities to do end-to-end reverse logistics but their business and pricing model is about holding, moving and storing forward moving products. There is little incentive for the 3PLs to invest in classifying, refurbishing, lotting and selling processes. Some 3PLs have begun to develop components of the model (i.e. marketplaces) but there is little or no end-to-end integration of the components. There are other providers that help with improving information management, conducting consulting assessments and developing improvement plans; however, there is a very limited number of providers in the marketplace today who can deliver true end-to-end reverse logistics services.
Hybrid Solution: For those organizations that want to maintain “control,” they choose this route which allows them to retain the areas (i.e. branding or market) they want to manage and outsource the tactical components of the process (i.e. handling, classifying, refurbishment, data and information management). The companies wishing to retain control of the market and brand often maintain ownership of the sale.
What is the right choice?
Each organization must make its own decision around the reverse logistics solution in which it wants to invest. However, the factors remain the same:
Financial – total net financial benefit to the organization ensuring accounting for all inflows and outflows of cash..
Operational – limiting the impact on forward moving logistics and potential customer care requirements.
Client – limiting the potential for negative impact on the end client/consumer.
Brand & Market Impact – ensuring the companies brand and market are not negatively impacted.
Taking the first step
Understanding is the first step all organizations need to begin the journey of improving reverse logistics capabilities. Does your organization have answers to the following critical questions?
What are your total reverse logistics costs per annum including all costs associated with returned and obsolete product (freight, space, capital costs, internal labour, external labour, repair and refurbishment, customer support and care)?
What are your total returns costs? in dollars and units/annum?
Where is the source of returns by category and geography?
Who is the source of the majority of the returns?
Why is the product being returned?
Often internal resources will not have the time to effectively pull together this information. Leveraging a subject matter expert can provide an objective review and overview of your organizations reverse logistics opportunities. Utilizing a third party can often jump start the process to achieve a long-term sustainable reverse logistics solution.
Wayne Burgess: Prior to co-founding ReturnTrax, Wayne was a tireless champion for clients with Accenture’s Supply Chain practice with specific experience across the entire source to pay process. Wayne has deep consulting & operational delivery experience. He is a talented leader of organizations and has a proven track record of driving significant customer value in several key areas including: Supply channel & operations design and delivery; Process re-engineering & design; Organizational assessment & design; Category Management; Asset Disposition; Strategic Sourcing
Craig Stevens:Prior to co-founding ReturnTrax, Craig was a seasoned supply chain consultant with extensive experience at Ernst & Young and West Monroe Partners as well as many years of direct CPG and Retail industry experience with companies like Hudson’s Bay Company (HBC) General Mills, Maple Leaf Foods. Craig has a specific focus on integration activities, ERP systems, organizational, process and system design across: Logistics, Merchandising, Distribution, Inventory Management, Warehouse and Transportation.