Retail logisticians have focussed attention on the efficiency of the forward supply chain. Costs have been driven down and customer service improved.
The drive for further efficiencies is starting to focus attention on reverse logistics. For some companies reverse logistics has risen up senior management’s agenda because of the imperative of meeting recent EU legislation, for others it is the growing awareness that poorly managed reverse product flows can have an adverse impact on a company’s bottom line. The Waste Electrical and Electronic Equipment (WEEE) Directive and Vehicle End of Life Directive have forced electrical goods manufacturers and retailers and automotive companies, respectively, to take responsibility for the cost of recycling of products. Landfill is no longer an option.
Value and volume of returns
The value of products returned to/by UK retailers, according to the report, The Efficiency of Reverse Logistic, was estimated to be in the region of 2.5 per cent of sales (1). For the UK, this represents, at a conservative estimate a value of around £6bn of goods each year returned back up the supply chain.
Research undertaken by Taylor Nelson Sofres for Wincanton found that 40 per cent of customers returned unwanted gifts after Christmas, adding extra pressure on supply chain infrastructure. As high street retailers have moved to multi-channel marketing, in particular online shopping, which increased by 54 per cent last Christmas, returns are set to rise substantially.
According to the Reverse Logistics Executive Council, USA, reverse logistics costs amount to approximately one-half of one per cent of total USA gross domestic product (2). The Council estimates that on average between three to 15 per cent of all companies expenditures are spent on reverse logistics activities. “Forbes”, the US business magazine, stated that nearly 20 per cent of all goods sold are returned (ie more than $100bn) of which 32 per cent are under $200 in value.
The initial objective should be to reduce returns. It is a false premise to assume that the main driver of product returns is faulty goods. Research undertaken by Mike Bernon, Cranfield School of Management and Professor John Cullen, Sheffield University, has found that a number of internal supply chain drivers lead to product returns. They identified five key categories of returns:
- Customer returns – these can range from faulty and damaged goods to no-fault found products, with electrical and high-tech goods forming a high percentage of no-fault returns.
- Marketing driven returns – include returns resulting from poor forecasting, promotional activity, products returned due to slow sales, the need to reposition stock, end-of-season items and overruns.
- Asset returns – ie repositioning of an asset or refurbishing/remanufacturing of products.
- Product recalls – an example being Sony’s global recall of battery packs in 2006. The usual reasons are safety and quality issues.
- Legislative/environmental returns – to comply with legislation.
As Adrian Dickinson, head of research of the Neutral Group DHL, pointed out when introducing a Cranfield School of Management seminar on retail returns, the first step is to understand why returns occur and how different parts of the organisation can work together to reduce the associated costs. As he and other speakers at the seminar pointed out, managing returns is not just a logistics problem. Issues particular to managing returns that must be taken into consideration include:
Forecasting product and volumes of returns is more difficult than forecasting for the forward supply chain. Media suppliers, such as Entertainment UK have found that as much as 60 per cent of a DVD title can be returned.
- Quality of returns is not uniform, eg parts may be missing.
- Packaging is likely to be damaged.
- Costs are not directly visible as they are likely to impact various departmental budgets, eg high street stores, logistics, merchandising and so on.
- Inventory management of returns does not receive the same attention as outbound inventory.
- Process visibility tends to be less transparent than the forward chain. A recent survey by the Flanders Institute of Logistics found that 41 per cent of companies based in its catchment had no or limited information and reporting capabilities about reverse flows.
- Disposition and value recovery – the appropriate route must be carefully selected, eg to protect the brand, meet legislative requirements.
- Focus is no longer on the customer but asset recovery.
- Benchmarks – there are no standard measures.
Managing returns at Halfords
It is some two years since Chris Hall, head of quality and cost reduction at Halfords, realised that with the introduction of high value technical products, such as satellite navigation systems, the company was experiencing an increase in the volume of product returns (3). They also found that a large percentage of these returns could be classified as ‘no-fault- found’. Whether this meant that the purchasers had changed their minds (eg it wasn’t quite what they wanted) or that they could not get the product to work, they had no means of knowing. The key issues that Halfords identified were:
- Costs – they had no idea of the cost to the company of their liberal customer returns policy.
- There was a lack of process visibility and management reporting.
- No control of the security of returns. A £100,000 of stock a month was written off as ‘lost in transit’.
- The retail stores had little interest in returns, as their priority was sales; they also received a credit for all items returned, including incomplete products. Therefore, at store level there was no incentive to understand why customers were returning products.
- Buyers had little interest in returns.
Chris Hall took the decision to concentrate initially on in-car technology returns. Recognising the need to get different sections of the company involved it was obvious that the project needed high-level support. Therefore, an early action was to engage the finance director by demonstrating the savings that could be achieved.
This in turn gained the commitment of senior management and led to the appointment of a returns manager with a commercial background who has been able to bring customer service and the buyers on-board. The returns manager has a view of the buying process from start to product end-of-life. More companies are now appointing returns manager in a determination to drive down the volume and cost of returns. For example, the appointment of a returns manager at Woolworths, although initiated by supply chain, the post reports to the commercial function within the company.
Key lessons
The introduction of a returns management process is no different to implementing any other change management process. Chris Hall described it as complex; cross functional and best tackled in bite-size chunks. Some of the lessons learned by Halfords and others include:
- Gain visibility of the returns process. Jose Dhooma, business development manager of Entertainment UK, recommended as a first step preparing a time based process map for each SKU or product category to identify the areas of value and non-value adding activity and wasteful processes that could be eliminated.
- Consider how to reduce returns, eg following its introduction, Halfords’ telephone help-line for electric ride-on toys reduced returns by 50 per cent during the Christmas trading period. The introduction of in-store experts and a fitting service for in-car technology has had similar results. PC World achieved similar results when they introduced their technical help-line. Halfords have also given store managers authority to sell off in-store resalable returns valued at £15 or less. The result has been a 50 per cent reduction in the volume of returns to the distribution centre.
- Introduce performance measures that encourage change, eg incomplete goods returned to the distribution centre are charged back to the returning store.
- Use key performance indicators and reporting to change behaviour, eg Halfords has established ‘league tables’ by stores, buyers and suppliers.
- Regular financial and non-financial reports should be provided to senior management to justify the case for investment in returns management. Clear visibility of the cost of returns and the savings achieved is essential.
- Involve all parts of the business that impact on returns, including product design, buyers, commercial and suppliers. Mike Griffin, vendor manager, Littlewoods Shop Direct, established a working party to facilitate interaction between business divisions that, in his view, “did not normally interact”. This enabled the returns process to be considered at the design/procurement stage.
- Do not consider outsourcing reverse logistics until the costs are fully understood.
Understanding costs
The lack of understanding of the true cost of returns or how to assess the cost was the one issue that stood out above all others identified by logistics practitioners during workshops, held at Cranfield School of Management as part of a two year Department for Transport funded reverse logistics project. It soon became clear that the full cost to the business was more than the logistics cost. The workshop delegates identified costs across the business, including:
- Stock write-offs; this is also complicated by ‘no-fault found’ returns in high-tech product categories.
- Warehouse space and back of store space used for returned products.
- Loss of customer – disappointed customers will go elsewhere.
- Staff time in handling returns.
- Multiple handling of returned products in store and the warehouse.
- Administrative costs, eg raising debit notes. Halfords found that in-store disposal of small low cost returns reduced administrative and handling costs.
Reverse logistics costs include staff, warehouse space, handling and process, transport (although as backhauling is often used this was generally not seen as an additional cost) and product loss. Jose Dhooma of Entertainment UK suggested that the ‘five Ds’ (4) be adopted for the cost of returns: Depreciation, Deterioration, Damage, Discontinuity, and Disappearance (stolen).
In 2003 Datamonitor estimated that only 15 per cent of UK reverse logistics operations were outsourced compared with 80 per cent in the USA. Driven by environmental legislation logistics service providers have identified reverse logistics as a potential income stream. An increasing number of companies, including Wincanton, Christian Salvesen, DHL, Schenker, Unipart and Bibby Distribution offer reverse logistics operations for all categories of retail goods, including WEEE.
The reverse chain is often characterised by inefficiencies, lack of traceability and less sophisticated processes than the forward chain, which according to Wincanton can lead to operating costs being four times higher than deliveries to stores. Efficiencies have improved with the provision of monitoring and reporting systems. Wincanton has implemented the returns management software system, RLog, which is marketed by US returns specialist, Genco. Christian Salvesen has developed an in-house software solution, BACTRAC.
Major retailers, including Asda, Tesco, Littlewoods Direct, Comet and Argos have outsourced their reverse logistics activities. At the Asda Returns Centre, Magna Park, Christian Salvesen manages the returns and product recall processes for a variety of products including electrical and car products, books, gardening and DIY lines. The key features of the returns process are the maximisation of returns to vendors, management of a sole jobber contract and the provision of detailed management and financial reports to the client. Littlewoods Shop Direct has contracted Wincanton to manage the returns and recycling of white goods to meet their WEEE obligations. DHL operates the UK’s largest two-man home delivery and returns network for Argos, handling some 300,000 returns a year. As the key focus is on value recovery DHL has provided specialised handling training for drivers. The result has been a significant reduction in damaged returns.
Managing reverse logistics
During the past two years Cranfield and Sheffield Universities have been working with retailers, suppliers and logistics service providers to develop a means by which companies can assess and improve the management of their reverse logistics operations. According to Chris Hall: “The Department for Transport reverse logistics project had a major influence on the introduction of new reverse logistics processes within Halfords. It helped increase awareness of the issues and the large potential for improvement to both bottom line performance and customer service, through the introduction of improved processes.”
The project, Tools to Manage Reverse Logistics (5), was supported by the Department for Transport. The Reverse Logistics Self Assessment Workbook will be available in the autumn. The Reverse Logistics Workshops led by Mike Bernon, Cranfield School of Management will continue in the autumn. For information contact Richard Ellithorne, Chartered Institute of Logistics and Transport, email: richard.ellithorne@ciltuk.org.uk
References:
1. Department for Transport, The Efficiency of Reverse Logistics, 2004. Available to download from www.reverselogistics.org.uk
2. Reverse Logistics Association, USA, Reverse Logistics Conference & Expo, Amsterdam June 2007
3. An integrated approach to reverse logistics, presented by Chris Hall at the Retails Returns: Managing the Reverse Supply Chain Seminar, Cranfield School of Management, July 2007
4. Effective process and cost management at Entertainment UK, presented by Jose Dhooma at the Retails Returns: Managing the Reverse Supply Chain Seminar, Cranfield School of Management, July 2007
5. Tools to Manage Reverse Logistics, project web site www.reverselogistics.org.uk
