Reverse Logistics: What happens to all of those product returns you've been making, anyway?

David Theleman, Vice President of Business Development at Genco Lifecycle Logistics presented in my MBA class today, and gave a fantastic overview of the emerging area of reverse logistics. Once viewed as a necessary evil associated with being in retail, some companies are partnering with third party logistics like Genco to render RL more of a strategic capability that adds significantly to the brand.

David has lots of experience in this area – he worked with QVC, the television seller, which guarantees any returns for purchases made within 90 days. During his tenure there, he was able to achieve an 89% recovery rate on all returns, in terms of costs. In the world of Returns, that’s phenomenal.

Returns are a major problem for consumer packaged goods manufacturers in general. This is because 94% of all consumer product introductions fail. After a product is introduced, many companies have distribution channels stuffed full of product, retailers who have cleared out shelf space in the store, and have developed commercials, incentives to promote the product. When the product fails, the first thing they do is lower the price. And then when none of it sells, it comes back at full cost with transportation, handling charges, and no secondary market for it. (No one wanted to buy it at the front end, why would they want to buy it on a secondary market?!) And supply chain executives are realizing that they need to become more strategic in answering the question – how should we manage this asset now that we are stuck with it?

Genco serves an important role in managing the relationship ibetween the retailer and their suppliers. They act as an intermediary, receive the returned product, scan it, and provide the retailer with the reporting on returns. They then forward it along and bill it to their manufacturer. All return departments in stores ship the products to Genco to handle in a centralized manner. In theory, this sounds great. In the real world, it has problems. For instance in one major retailer, individual stores were responsible to handle damages – if they found a case of broken lightbulbs, they created an invoice to the supplier for $30 for light bulbs. With 2000 stores, they need a person who is fluent at each store and aware to do it every month for all of the stuff that comes in to the returns counter. Some do it well, others do not. There is a ton of money for credits they could have gotten that was a legitimate claim, but hadn’t been asking for that money. So the idea was to centralize it, bring it to 3-4 locations, let Genco scan it, and they will then have these invoices and the money they can collect on which will cover some costs. But the challenge is – individual stores still have bad habits. They used to liquidate it and can’t figure out the new system. They may get a credit and it sits there – and the store manager destroys it or sells it to the flea market – and there is a big difference between the way things should be and the way they are. Unless you really audit and account for what happens to returns, it ends up in many cases going into the dumpster. And in many cases, the product is still good. It can be refurbished, repaired, or re-sold to a secondary outlet, or donated for credit. Remarketing and Recycling is another important element. Selling in different markets at a different price may often be an option. Until you tie that behavior back to the store, and tie the inventory responsibility for the stores, it is difficult to get behavior aligned. Part of the expertise is working on these challenges upfront

David is quick to point out that being “Green” is inherently associated with reverse logistics, in the end it is really just good business management principles being applied. People pursue Green because they want to tell people they want to do the right thing – and will spend $10M on a sustainability program, and then 3M telling them about it. Reverse logistics begins and ends with a business case, and the ability to execute on that business case to cover the cost of returns, which are an increasing cost in the retail environment.