Cover Story

Improving the Customer Experience through Effective Reverse Logistics

by RLM Staff Contributors - Dave Whitley and Colin Hanely

Reverse Logistics Magazine, Summer/Fall 2006

The estimated annual value of returned goods in the United States is at $60 billion and managing these returns costs an additional $40 billion. The fact that product returns cost U.S. companies over $100 billion annually bothered Reiner Jens, when he took over as President of Philips Consumer Products North America in 2004. Philips is a Netherlands based firm that makes everything from plasma televisions to DVD and MP3 players. "I wanted to change the DNA of the entire organization when it came to returns," Jens said in an exclusive interview with Reverse Logistics Magazine.

Reiner, a plain spoken Dutchman was ready to turn things around and was ready to make improving Philips' reverse logistics policies a major part of his overall initiatives. "In order to effectively reduce returns and improve our reverse logistics processes we needed to have a three-pronged approach," Jens stated. "The first being ease of product use, or as the company as coined it, "Sense and Simplicity."

Ease of use of Philips products is something that is critical to Jens. Considering that the vast majority of product returns are related to consumer use, consumer hook up and product connectivity to other parts of the consumer's home systems, getting Philips management to touch and feel the products is an effective method to ensure products ease of use. This out of box screening enables Philips executives to understand the rate of no technical fault found returns. "We take products to the management team before launch and ask them to sign off before introducing it into the market." Jens stated. "Sometimes I will have a product which I've taken home, looked at but cannot get to work. If I can't get it to work, it doesn't land in the hands of a customer," Jens stated.

Philips is working towards more efficient methods of providing customers the capability to upgrade or update their products. For example, their flat screen televisions come with a USB port on the side of the unit that will enable consumers to receive updates directly through this port. The same applies for the Philips MP3 players which can receive updates automatically through the internet. "We want to make the experience as painless as possible for customers, so that we can avoid the pain of costly no fault returns," Jens stated.

Reiner Jens - Philips,
Ahmad Zubair Sahar - RLA and
Tony Sciarrotta - Philips

Tony Sciarrotta, Director of Returns Management at Philips and a Reverse Logistics Association Advisory Board Member, emphasized the company's commitment to reducing what he called the "no fault found syndrome." "There is a classic story of a woman who returned 3 to 4 irons in a row to the store before someone finally asked what was wrong with them. She said that the irons kept shutting off. The customer didn't realize that the iron had an auto shut off feature. We want to avoid that scenario at Philips as much as possible," said Sciarrotta.

The second part of Philips' reverse logistics strategy is accountability. "For many years, Philips was not profitable. We had to look at every area where we were not doing well to identify weak spots. One area was returns and we knew in order to fix this problem we had to drive accountability across the board. What good is a returns policy if there is no accountability?" Jens stated. "We wanted to ensure that everyone in the entire chain was held accountable for their performance when it came to returns."

Philips instituted a unique bonus structure for its sales and marketing employees and some senior level executives by linking aspects of their bonuses with returns reductions. "We wanted our teams to understand that reducing returns can immediately impact their bottom lines—and they listened. If 10 percent of your bonus is dependent on returns, you are going to pay much more attention to it than before," Jens stated.

Another critical aspect of the accountability factor in returns for Philips is ensuring that they push all the way back upstream to the very factories that manufacture the product. Whether it be increased call center calls, increased shipping expenses or extended warranties, the factories are charged each time Philips incurs extra costs due to products with high return rates. "By pushing accountability all the way upstream, we are ensuring that our partners' performance is constantly graded," said Jens.

Philips monitors the performance of its partners is by having regular meetings with their major accounts to review individual results—a report card of sorts. These report cards are sent to dealers, sales directors on specific accounts and even to product managers abroad to ensure visibility throughout the organization. "If our partners are not meeting their forecasts, we want to be able to take immediate steps with them to ensure we get things right," said Jens.

Finally, the last part of the Philips' reverse logistics strategy is effective gate keeping. The returns policy has become part of every vendor agreement. "Every time we generate an RMA (Return Merchandise Authorization), we always make sure to include our returns policy right along with it. This way there are no surprises to either party and we gain more respect from our partners," Jens said. Even the Philips RMA Engine co-developed with IBM, only allows entry of models authorized for return. Further, in the event of an exceptions, Philips documents everything and bills back the dealers through the sales groups.

"For the long term, the out of box experience is key for Philips. Reducing returns helps strengthen our reverse logistics strategy, it will drive our costs down and make the out of box experience better for the consumer—they love your products, they love you, they recommend you and they keep going back to the dealer to shop rather than to return something that didn't work," Sciarrotta stated. "We're very lucky that the company has focused on that. This is what 'Sense and Simplicity' embodies. That's where we'll focus going forward."

"We want to improve year-after-year in our reverse logistics strategies and never forget how critical it is to our bottom line. We also will strive to be innovative while thinking of the customer first." Jens said. "At Philips, we believe that our products should be simple and this 'Sense and Simplicity' concept is in our DNA. We want to ensure that there are no stones left unturned, this industry does not leave room for mistakes."

Reverse Logistics Magazine, Summer/Fall 2006