Cost Avoidance

by John Mehrmann, ZSL Inc

Reverse Logistics Magazine, May/June 2008

Returns were once considered an ugly little secret, shrouded in mystery, documented in bloody red ink, relegated to the back pages of ledgers and dark shadows of the warehouse. Today, Reverse Logistics is openly embraced as the critical process that connects retail, refurbishing, remarketing, recycling, and recognizable revenue. Following the trends in business, universities are beginning to offer courses that train future professionals on the complex supply chain management issues associated with returns, and the financial factors that impact each constituent in the process. The science of reverse is a ballet of engineering, logistics, repair, remarketing, accounting, and magic.

The Reverse Logistics Association has been at the forefront of this development, carefully coordinating the collaboration of competitors for the cumulative progress of the procession. If there was any remaining doubt as to the increasing impact and importance of these costs to business, it was swept away in the staggering tide of attendance at the Reverse Logistics Conference and Expo at Planet Hollywood Resort and Casino, in Las Vegas, Nevada. More than 1,400 attendees, representing 615 different companies, filled the convention center and attended the educational seminars. Speakers and panelists represented such renowned companies as Microsoft, Wal*Mart, GENCO, Dell, Sharp, Best Buy, DHL, FedEx, Cisco, Circuit City, ARC International and Data Exchange Corporation, just to name a few. The atmosphere created a unique opportunity for introductions, communication, and collaboration. Big and small companies, from manufacturing and retail to packaging and downstream material handling, the breadth and scope of the challenge filled the air.

That very same vast canopy of breadth and scope that filled the air with excitement at the RLA conference can create suffocating costs for some organizations. As consumers demand higher technology at lower costs, manufacturers study costs with microscopic detail. Every step of the reverse chain is analyzed for competitive cost reductions. 1,400 attendees can’t be wrong, reducing and controlling cost of returns is big business!

An alternative to reducing the cost of returns is avoidance.

“I don’t have a carrot, so paint the stick orange.”

There is an old adage about the carrot and the stick. A carrot is used to entice the horse to pull the carriage forward, and the stick is used to beat the horse as an alternative means of motivation. The penalty approach has been tested with very limited success. By using a stick, some manufacturers restricted and limited the amount of returns from retail or dealers based on a percentage of sales. Some limitations based on product age, date of purchase, or product condition determined eligibility. In these instances, the burden of returns was merely shifted from the shoulders of the manufacturers to the backs of the retail partners. When necessary, retail partners unleashed a rather large stick of their own, by simply choosing to buy another brand until artificial returns limitations were temporarily suspended.

Times have changed. Manufacturers and retail partners are collaborating on ideas to reduce returns altogether, as opposed to shifting the burden of costs. Like a powerful river, creating artificial stoppages in the flow of goods will not stop the problem, but only change the course and flow of the products. Therefore, manufacturers, retailers, dealers, and third partner administrators are becoming far more creative in developing solutions that address the root causes of the returns issues. By working together, cost is reduced for all partners in the process.

“What is the biggest opportunity to avoid cost?”

The tendency to reduce costs is to begin by investigating the returns process, eliminating steps, reducing freight, and analyzing labor. While these are important and admirable initiatives, each approach bypasses the single most significant and staggering statistic of returns, and that is the number of items that do not need to be returned at all. The percentage varies by product category and model, but the volume of “No Trouble Found” is a number that each member of the reverse chain measures and takes to heart.

Typically, 70% to 85% of returned product has no defect found. That means that 15% to 30% of the product offers an opportunity to identify potential defects in material or workmanship that could be adjusted at the factory production, if caught in time. However, that 15% defective product is not all new, and production cycles are much shorter now, so the opportunity to identify a defect in time to make changes in current production are slim to none. Studying defects in returns and field service can be used to design future products, but for the most part, this 15% only presents an opportunity to reduce processing costs. The other 85% is an opportunity to avoid costs.

What can we do to minimize returns of the 85% of product that is not defective? To be effective in avoiding costs, it is necessary to think outside the box, and collaborate with other partners. It is necessary to look upstream in the process, and to embrace the customer.

“If you constantly find yourself thinking outside the box, then maybe it is time to get a bigger box.”

Embracing the customer can be accomplished with the coordinated efforts of product sales, marketing, customer service, web design, call centers, third party administrators, and affiliated partners. This concept should not be outside the boundaries or scope of reverse logistics. After all, if your goal is to reduce costs, then you should become an advocate for changes that will eliminate those costs as much as possible. Sometimes, being an advocate for positive change requires cooperation with resources in other areas. Avoiding these costs should include a very careful review of everyone who touches the source of the returns, and that is anyone who has contact with the consumer.

Manufacturers, dealers and retail partners have recognizable points of contact with consumers. Third party logistics and return processing centers may be completely sheltered from direct contact with consumers, but can still contribute to the process improvement by providing valuable metrics on the percentage of units returned with no defect found. Leave no stone unturned.

Embracing the customer requires a little more carrot, and a little less stick. The customer needs to feel like 24 carats, good as gold. Enacting strategic initiatives that incentivize consumers to keep product should be calculated as a return on investment through a measured reduction of total returns.

“The Surprise Inside”

One method, referred to as the Cracker Jack Surprise Inside, is designed to provide consumers with unexpected rewards. The concept is to place incentive inside the box with the product. This is not an advertised promotion, but rather, an extra reward to the consumer for a good purchase selection. The reward, or promotion, is most effective when it is associated with a time based offer. For example, a credit for free DVD movie rentals might be included in the box with a DVD player, but the free rentals are not available until 30 days after registration. This gives motivation to register the product, and incentive to keep the product long enough to enjoy the free rentals. After 30 days, the customer is less likely to return the product. The free rentals may be sponsored by a company that would like to invite the consumers to try the rental service, thereby avoiding any cost to the manufacturer. In this example of a virtuous circle, everyone receives potential benefit, without incurring unwanted cost.

The concept of the Cracker Jack Surprise Inside can also be easily applied to Extended Service Plan offerings. By announcing a discount available 60 days after the date of purchase, the customer has motivation to register as a means to receive the access to the discount. The Third Party Administrator can calculate fiduciary responsibility on product after the out-of-box failure period, and the customer is far less likely to return the product after sixty days. There are many ways to work with partners in a manner that discourages returns by rewarding positive consumer behavior.

Another way to embrace your consumers, to reward loyalty, and to introduce incentives to keep the product beyond the normal return period, is to nurture a customer community. Consumers like to be a part of a community. Many people like to be appreciated, and to feel that they belong. This community may be nurtured by web services that offer meaningful personalized data to the consumer. It is not necessary to look any further than a community service that downloads tunes to an electronic device, to understand the incredible power of such a strategic initiative. The tunes stored on the device are a statement of individual preference, and part of a community experience. This community access is also a place to make important product announcements.

A powerful new tool for achieving the individual customized consumer attention in a community environment is called a PURL. A PURL is a Personalized URL, which is a web site designed for a single user. For example, once a consumer registers a product, the PURL may provide specific information that is only relative to that user and product. No more searching through drivers, downloads, manuals or lists of accessories to find the items that match your product. The PURL lists only those items that match your registered product. The PURL is a powerful communication tool, enabling targeted promotional rewards, announcements, updates and a customer rich environment. Give a string of PURLs to your loyal ring of consumers, and watch your returns drop.

Another point of consumer contact is the call center. Voice and touch tone prompts have enabled our society to herd consumer cattle with little or no actual human intervention. We marvel at this technology when it is used to avoid calls in our own organizations, and curse it when we encounter it in others. How easy it is for us to forget that we are all consumers for someone else. This commentary is not intended to propose abolishing the automated routing of calls, as there is certainly merit to providing robotic direction to a proper destination. However, call centers should be empowered to care for consumers with discretion that allows for resolutions that might prevent a return. If you have done your homework, and you know the cost and losses associated with returned product, then you can quickly calculate the discretionary allowance of a call center agent that could avoid a return and simultaneously salvage a greater amount of profit. Call center metrics should be tied and bound to returns, even so far as to track serial numbers whenever possible. Managing these costs is a shared responsibility.

Returns can also be used as a positive strategic initiative. Some organizations offer “Technology Upgrade” programs, which provide a small credit for the return of discontinued products. This does not avoid the return of new product, but rather creates a channel for return of old product. The old product may have value for hard to find parts or components. The credit helps to maintain the relationship with the loyal customers. Of course, not all customers are loyal, but shouldn’t you be targeting your investments toward the loyal customers who continue to invest in you?

“Try it, you’ll like it!”

How can you contribute to internal efforts, or benefit your partners and clients in the reverse logistics chain, by avoiding costs? This is a great conversation. It may require reaching out to new contacts in familiar companies, or integration of new technologies. In any case, it is a wonderful way to demonstrate your commitment to clients and consumers. Try it yourself. Reach out and call someone this week, while your ideas are fresh in your mind, and discover how much you can change the industry with a positive approach to avoid costs.

John Mehrmann is Vice President of Business Development at ZSL Inc. ZSL is an ISO 9001 certified provider of technology services. ZSL leverages specialized knowledge in custom enterprise application development, reporting, data management, administration, and application integration to assist enterprises in raising service levels, while reducing costs. ZSL Inc has extensive experience in mobile, wireless, and web application development.

Reverse Logistics Magazine, May/June 2008