Many happier returns?

Let's face it—returns are messy. No one really wants to deal with them. They take away from what we really want to do in supply chain—move products forward. No one really wants to back up.

Returns also cost money. Reducing that cost and making the most of a difficult situation is the goal of every well-performing reverse logistics operation.

"With returns, you're working against the clock. The longer a product sits in storage and the more touchpoints it receives, the less value you may recover," explains Ryan Kelly, senior vice president of sales, strategy and communications for Genco, a FedEx company. "It's imperative to have clear and efficient disposition logic in your returns processes and easy access to secondary markets."

What has historically made returns such a messy proposition has only been intensified by the omnichannel revolution. In the past, returns typically came from one source. If you were a retailer, most products were sold in a store, and items were returned to the same store. Similarly, a catalog operation would ship products to a customer, and returns would be shipped back to the seller's distribution center.

Those once-delineated lines are blurry now. Products can originate from a number of different sales channels—online, a store, a catalog operation, a third party, and so on. Some of these items can be ordered through one channel—for instance, online—and returned through another channel, such as a retail store. Managing this kind of diversity makes reverse logistics more complicated than ever.

The percentage of returns has also grown with the advent of e-commerce. "In the Internet age, returns have been driven to a much higher rate—two to three times higher than with a brick-and-mortar store," says Tony Sciarrotta, executive director of the Reverse Logistics Association, an organization of companies and other players involved in returns management.

Sciarrotta says that products sold in a brick-and-mortar store are returned 8 to 12 percent of the time. With e-commerce purchases, the returns rate jumps to 18 to 25 percent. Returns tend to run particularly high for online clothing and shoes purchases, where a customer might order several different sizes to assure a fit and then return all but one.

Handling this kind of volume can be challenging, but if done well, returns can actually benefit a company by providing an opportunity for positive interaction with customers. Returns can also be a valuable source of information that a company can leverage to optimize its supply chain.

"Returns, often considered a problem, are actually a valuable resource for gaining insights that can be used to improve the customer journey," says Stef de Bont, founder and CEO of 12Return, a company that specializes in returns management software. "If done well, returns can really be turned into value for you and your customer."

Part of what makes reverse logistics so difficult is that not all returns are handled the same way. The determination of how to treat a return largely hinges on the item's condition, where it is in its lifecycle, and the reason why it was returned in the first place.

Products in the early stages of their lifecycles include those that are returned simply because the customer changed his or her mind. Items returned to a store in perfect condition can be re-entered into inventory and put back on store shelves. Often, though, product is returned with damaged packaging. (Sometimes this is not the consumer's fault, as the packaging for many items must be destroyed simply to open them.) In these cases, the product will need new packaging or a change to the existing packaging, which might require it to be sold at a discount.

Other products in the early stages of their lifecycle are returned because they are damaged or not working. In these cases, the items need to be evaluated and, if possible, repaired. In some cases, the products may be returned to stock as refurbished goods. In other instances, the products may have to be sent back to the original manufacturer for replacement.

Mid-cycle items are those that are returned for warranty issues. These typically need to be replaced or repaired and then returned to the customer. Retail stores generally do not handle these sorts of claims, but certain distribution centers will. In some cases, the repairs may be done at the facility; in others, the items will be returned to the manufacturer.

End-of-life returns are those where the product is beyond repair. When possible, these items are typically broken down into component parts. The individual parts may be reused for refurbished goods, or they may be recycled. In all cases, the goal is to recover any value from the product before it's tossed in a landfill.

All of these instances present an opportunity for retailers to interact with the customer. Because the customer already has a reason to be displeased with the product, the returns operations' challenge is to provide superior service to retain that customer's loyalty. Such quality service often means crediting the customer's account immediately upon making the return. It also means providing a fast exchange, regardless of the reason for the request.

Due to its complexity, returns management is typically not a core competency for retailers and distributors. Companies must have the operational capacity to process the returns quickly and the IT infrastructure to credit the customer and to track the resolution of the claim. That's why many companies turn to a third-party service provider (3PL) to handle returns for them.

"A 3PL has the knowledge to handle the mess," says Norm Brouillette, vice president and general manager of technology and healthcare at Ryder System. Ryder performs returns management services for clients in a number of markets.

Genco's Kelly concurs. "Companies can benefit by managing returns with a reliable 3PL because reverse logistics requires dedicated resources and expertise to handle. This holds especially true for companies within the healthcare, retail, and technology industries, as regulatory compliance and hazardous material disposal require special consideration," he says. "An experienced 3PL can also provide valuable industry insight and best practices from across varying industries to develop better ways to handle logistics challenges."

Using a 3PL also gives customers the flexibility to modify their returns processes without a major investment in infrastructure and equipment, according to Matt Ennis, vice president of business development and client solutions at Yusen Logistics, another company that provides returns management services. "As product sourcing patterns change [such as the selection of new suppliers, new locations, or new channel options] to feed the forward supply chain, so must the reverse supply chain change to accommodate these shifts," he says. "If a company relies only on its internal network and associated resources, it limits itself to what it can do alone and how quickly it can react to these changes." He adds that using a 3PL offers companies a low-risk way to test new ideas and processes for handling their returns.

Many 3PLs specialize in handing returns of specific categories of products, such as electronics, bulk products, clothing, or food. One of these is PlanITROI, a Denville, New Jersey-based firm that offers a full range of reverse logistics management services geared to the higher-value IT, consumer electronics, and small appliance markets. Among the company's clients are Acer Computers, healthcare electronics manufacturer HoMedics, and headphone maker Sol Republic.

"Our biggest value-add is that we manage from the first user to the next user without a lot of hands in between," says CEO Paul Baum. "We will also handle all of the ins and outs of the [transaction], including taking over the manufacturer's warranty," he adds.

Once a store or manufacturer receives a return, it ships the item to PlanITROI for processing. Baum says that 70 percent of the returns his company receives are a result of buyer's remorse and arrive in unused or barely used condition. Unopened product is classified as "A-stock" and returned to the retailer or vendor to be placed back into their inventory. (Depending on the arrangement, some retailers will handle these returns internally instead of shipping them to PlanITROI.)

Products that have been opened need to be tested. If they pass muster, they're sold as recertified goods, or "B-stock." Baum says there is actually more demand than supply for recertified products, as they typically cost less than new ones and have been checked over at least twice.

Less than 5 percent of what PlanITROI receives requires repairs. About 70 percent of these simply require reloading or updating the product's software to function properly. Only about 1 percent of returns have physical damage. In most of these cases, PlanITROI assumes the manufacturer's original warranty and makes needed repairs. It then sells the items as refurbished goods, often to secondary markets rather than through the original retailer. Such goods are commonly sold on sites like walmart.com, staples.com, and newegg.com.

Refurbishing is not always an option, however. Some manufacturers and retailers choose not to sell refurbished goods. In this case, and when the products are determined to be BER (beyond economical repair), the components are harvested for use as replacement parts. Parts that cannot be reused are broken down further to their base materials. Plastic, glass, magnets, aluminum, and other metals are sent to recycling operations and refiners. PlanITROI actually has a division that oversees the recycling of these materials so they can be turned into future goods.

For companies that opt to take the 3PL route, selecting the right partner is key to the arrangement's success. But how do you find a provider that will handle your returns accurately and efficiently, while making certain your customers are satisfied? We asked several experts for advice. What follows are their recommendations and suggestions.

First of all, be sure that the company you select has experience in handling your type of products. "You don't want to be the beta site," warns Bob Lieb, professor of supply chain management at Northeastern University in Boston.

As with PlanITROI, there are companies out there that specialize in specific product categories, such as electronics, food, and clothing. Find a company with experience handling your full range of products. For instance, if you sell washers and dryers, you need a partner with the capacity to handle large, bulky items. Price should not be the determining factor in choosing a partner. "Don't just look at a quote," says Gailen Vick, founder of the Reverse Logistics Association. "Find a partner that understands your total business."

Second, look at the company's financials. Many companies are getting into this lucrative field, but do they have a solid business model and the capital, facilities, IT infrastructure, and other resources to back it up?

Another key consideration is the provider's ability to track the real-time status of each return. "Visibility into the return is very important to our clients' customers. They want to see that credit issued quickly," says Ryder's Brouillette. Sciarrotta of the Reverse Logistics Association agrees. He says the trend is to provide credit to the customer immediately upon issuing a tracking number, even before the product is received and evaluated. The view is that it is better to lose a product than a customer. "You can't put procedures in place that negatively affect 99 percent of returns for the 1 percent that is damaged or fraudulent," he says.

Next, agree in advance with your partner on specific performance metrics. Be sure both parties understand who is responsible for what and who is responsible for the costs associated with each process. You don't want surprises.

Access to secondary markets is also important. If the product cannot be sold as new, does the provider have a network to dispose of the products, either as recertified, refurbished, or recycled items? "One of our customers uses our services because it doesn't want to see its returns put in a landfill," says Brouillette. Ryder's capabilities to break down and recycle components were a big draw for the environmentally conscious client, he explains.

In some cases, a manufacturer may not want its products sold in the secondary market because of concerns about diluting its brand's image. "And some retailers may not want their products to be resold at all, as it might impact their other sales channels," says Vick. He notes that in these instances, they might prefer that their goods be given to charities. It's best to determine in advance which channels should be used to dispose of specific goods.

Regardless of which partner a company chooses to manage its returns, establishing a good working relationship is critical to long-term success. Keeping communication lines open can help reduce both the risk and the mess, while assuring many happy returns.