Reverse Logistics Management Part 1 - Who Deals with Returns?

As human beings, we do not like to deal with failure. We’re hard-wired to avoid it. Instead, we find success addictive. Ask any manager or CEO what they want to improve, and the typical answer is “sales” or “growth”.

Buying inventory and making sales are exciting activities. These activities are proof that a business is moving forward. Perhaps that is why return management gets so little attention – as product moves in reverse through the supply chain, it feels like the business itself is also in reverse.

Of course, we know that it’s important to think in terms of overall profits, and not just sales. In this case, reverse logistics optimization can be a great way to improve profitability.

The numbers show that there is lots of room for improvement. According to an Aberdeen Group study, the cost of managing returns are 9-15% of sales. The Reverse Logistics Association reports that the volume of returns is between $150 billion and $200 billion per year. That works out to between $13.5 billion and $30 billion spent on returns management per year.

Clearly, there is a substantial opportunity for optimization. Reverse logistics is complex and spans many departments. That’s why in Part 1 of this series on reverse logistics optimization, we’ll focus on who needs to be involved in the reverse logistics process.

Management

The key to a successful reverse logistics process is commitment from management. Reverse logistics is far more complex and difficult to optimize in comparison to forward logistics. Therefore, there needs to be a certain level of expertise devoted to creating an effective reverse logistics plan.

In addition to the expertise needed, in order to create real improvement in the reverse logistics system, it is essential that someone take ownership for the reverse logistics process. This will ensure that someone takes responsibility for the results.

Commitment from management is also essential for:

  • Creating policies & processes
  • Budget allocation to necessary software and training
  • Communicating to all departments involved, as well as customers and suppliers

It is a good idea for management to consult with the multiple departments involved in reverse logistics when creating a reverse logistics optimization plan. This bottom-up approach will help accommodate each department’s needs early on in the planning process.

Companies lacking the time or expertise to develop a plan should consult with a 3PL experienced in reverse logistics management. 3PLs may also be valuable for executing the plan.

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Who Should NOT Be In Charge

Product returns are often perceived as a failure; this may lead staff to avoid dealing with the return. This procrastination can cause the product to lose more value than if it had been dealt with promptly.

For this reason, consider who you ask to manage the return:

Managing Customer Returns

Who is the worst person to manage customer returns? The sales person. The sales person who sold the product should be notified, so he can follow up with the client, address any issues, and attempt to convince the customer to keep the product, if appropriate.

However, you should avoid asking sales people to do administrative tasks associated with returns for two reasons:

  • This would require the sales person to admit “failure”, which will likely cause him to put off filling out any necessary paperwork
  • Talented, driven sales people will avoid any paperwork that won’t help them make a sale. If you’re paying them on commission, you’re only paying them to make sales – so don’t ask them to anything else.

Managing Stock Returns

Similarly, when returning the company’s own stock that did not sell or was not needed, do not ask the buyer or the forecaster to manage the return. This too, will be seen as a sort of failure and will not be dealt with promptly. However, these personnel should still be notified of the return in order to help them improve their forecasts in the future.

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Sales & Marketing Departments

Sales and marketing can help to reduce returns through proper communications with clients. It is very common to see a disconnect between the information that product designers and managers think is being communicated to customers, and the information that sales and marketing actually communicate to customers. To evaluate the role of sales & marketing in returns, review the following:

Are marketing materials accurate and up to date?

It is common for the product developers or managers to make changes to products without successfully communicating the changes to the sales & marketing team. Or, these changes may be communicated, but old sales materials may not be updated.

Is the sales department overselling a product’s capabilities?

Monitor the reasons that products are being returned. If you find that the same reasons come up repeatedly, ask the sales team to give a mock sales pitch so you can evaluate what they are telling customers. This is a better practice than simply asking “are you telling customers X?”, because listening to a sales pitch will allow you to identify any language that could be misunderstood.

Reduce Returns in the Sales Process

Your sales team can help to reduce the chance of returns. Here’s a technique taught by the Sandler Sales System.

After making the sale and signing the contract, the sales person should ask the prospect if they’re absolutely sure that they want to buy – if they’re not, they’ll “tear up the sales contract”. This allows the sales person to identify any lingering doubt that could lead to a return. If the prospect does express any doubts, this gives the sales person the opportunity to “resell” them while they’re still in the room. The sales person can address the prospect’s doubts and solidify their confidence, reducing the risk of buyer’s remorse and returns later.

If the prospect is sure, they will say so. The act of having said “yes, I’m sure I want to buy” to the sales person also reduces the chance that they will cancel or return the order later. After all, making the return would require the client to lose face after they told the sales person that they were confident in their decision.

Do Marketing Materials Make the Return Process Clear?

First, look for where the return policy is communicated. It should be easy to find on the company website, and it should be communicated on invoices. Look for anything that may be misleading, and make sure all terms are defined clearly. For example, if you do not accept returns of “custom” products, make sure that you define what “custom” means. For example, a paint store had unhappy customers when they refused to accept returns on their paint. Their invoices said that they accepted returns within 30 days, except on “custom orders”. Clients interpreted that to mean that they could return the paint within 30 days, unless they had asked for a custom shade to be matched. However, the paint store meant “custom” to mean any paint that had been tinted, even if it was with a standard color.

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Shipping & Receiving

If your own Shipping & Receiving department will be accepting returns, make sure that they are prepared to do so. The process for receiving (and shipping) many small numbers of assorted items is very different from receiving several full pallets of one product. Because of this, it is important for management to create a plan for directing Shipping & Receiving in managing returns. If management does not have the time or capacity to create a plan, a 3PL experienced in reverse logistics will be helpful. Questions that the Receiving department will need answered include:

  • Where should returns be moved to?
  • How much sorting will be required by Receiving? Will all returns be sent directly to a dedicated department, or will Receiving need to send returns to different places?
  • If Receiving is doing any sorting, what criteria are they using for sorting? Product type, condition, package size?

Much of the sorting and testing will need to be performed by Quality Control. However, you can save processing costs by training your Receiving department to make decisions about product condition where the choice is more obvious. It is far cheaper for one person in Receiving to dispose of a product immediately, rather than have it moved and processed by 3 or 4 other people before disposing of it.

Alternatively, you may decide it isn’t in your best interest to have your own Shipping & Receiving department manage returns. It may make sense to have returns managed by a separate location specializing in return management.

Accounting

For customer returns, your Accounting department will be responsible for processing the financial aspect of both customer returns and returns to your supplier.

For customer returns, Accounting will need to coordinate with Customer Service. For stock returns, Accounting will need to coordinate with the Purchasing department.

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Quality Control

Processing Returns

The QC department will need to sort and test returned inventory, and evaluate if it can be put back into the forward supply chain, or if it should be sent for refurbishing or recycling.

Preventing Returns

Quality control issues will also contribute to returns – but they can be prevented. Review the reasons for returns carefully to see if product quality is a frequent reason for return. Drill down in your reports to see if there are any issues with a particular product, or coming from a particular factory location.

Customer Service

Repair Rather than Return

The first thing Customer Service should ask for is the reason for the return. If the product is damaged or defective, Customer Service should offer to help the customer get the product repaired before processing a return.

If possible, set up a process to connect the customer with a technician to troubleshoot and repair the product over the phone. If this is not possible, determine if it is cost effective to arrange for an on-site repair rather than returning the product. Finally, Customer Service should ask if the customer would like a replacement product before giving a refund.

Reason for Returning

Customer service should record the reason for a return. If a customer requests a return which isn’t allowed according to company policy, this should also be recorded. This information can later be analyzed for trends; for example, marketing may need to communicate the return policy more effectively.

Returns as Marketing?

Remember, a return is a touch with a client. Zappos CEO Tony Hsieh actually views customer calls about returns as a marketing center, rather than a cost center. If a 20 minute call to Customer Service is incredibly helpful, this serves as a 20 minute advertisement for Zappos – one that customers are likely to tell their friends about. While this unique approach may not be right for every company, it is worth considering.

Conclusion

Reverse logistics is a complex operation, but because of this complexity, it allows plenty of room for optimization. Now that we’ve outlined the departments involved and their responsibilities, in our next article, we’ll drill down into the steps of optimization, including tips for product processing, what data to track, and advice for analysis.