In this four part series, our goal is to help the uninitiated understand what to look for in a quality returns system.  We will describe critical capabilities needed in a state of the art RMS. We will explore what differentiates a state of the art reverse logistics systems from lesser “returns processing systems”.  In the first part of our series, we covered the receiving process.  In this second part of the series we will discuss processing requirements to disposition assets, drive repair practices, as well as direct and monitor physical processing.  In the upcoming third chapter of our series we will cover the processes that drive shipping, financial transactions, and quality assurance.  The last of our four part series will discuss visibility requirements and key reporting capabilities that will be needed.

Processing

Once or twice a year, logistics trade publications will come out with a list of third party service providers and/or logistics software companies that show a matrix of “solutions” offered by each company.  Practically every company that appears on these lists will have the box for reverse logistics checked.  However, there are less than a dozen companies, IN THE WORLD, that actually have a credible reverse logistics software solution.  Many third party service providers (3PL’s) claim to offer reverse logistics solutions, but the reality is that they simply transport, unload, and store used or broken stuff.  This is hardly a “reverse logistics solutions.”

What differentiates the pretenders from the true reverse logistics solution providers is their ability to process goods in a manner that maximizes the value of the assets flowing through the reverse pipeline.  Simply unloading and counting broken stuff is as close to having reverse logistics capabilities as play catch in the back yard is to being a major league baseball player.  However, look at the annual reports on logistics capabilities and you will see hundreds of companies that say they have a reverse logistics solution.

The processing capabilities of an RMS determines how a reverse logistics process maximize the value of an asset.   To understand this concept, you need to understand the basic difference between a traditional distribution operation and a returns operation.

In distribution, orders for new goods are placed, a PO is cut which tells the DC operations what to expect and a general idea of when it is going to arrive.  When the goods are received, they are check in against the PO and put away in a predetermined location.  When orders are cut, a pick ticket is generated, the items are picked, consolidated, loaded on a truck and shipped to their predetermined location.  Items are typically segregated by SKU and are stored in the same part of the warehouse, picked using repeatable processes and shipped.  What is inside of the box almost doesn’t matter.  DC’s receive, putaway, pick and ship large, medium, and small boxes to the same locations on a scheduled basis.

Centralized returns facilities operate with a completely different process.  First, nobody orders returns so you have no idea, really, what will be on the truck until you unload it.  After you get the items in the building, you must account for the specific item, BUT, you must also determine the condition and profile of the item so it can be sorted.  This sorting process and the processes that follow is what drives the value recovery in a returns operation.

For example, let’s say you receive a box of white coffee cups.  Two cups are in the original packaging and have never been opened.  One of the cups is broken in half and cannot be repaired.  Another cup appears to have been used but has no visible flaws or defects.  A quality RMS will ultimately returns the first two cups to the vendor for full cost credit, the second cup will be thrown away and the last cup would be sold on the secondary market for ten percent of the original sales price  As you can see from this example, processing all four cups the same way would either cause problems with the vendor or a loss of value for three of the four cups processed.

It is an RMS’s ability to identify not only the item, but the condition that differentiates a quality RMS from a low end gate keeping solution.  This process of identifying the item, condition, and where it should be shipped to maximize the value of the asset is referred to as “dispositioning” the item.  The interesting thing about dispositioning is that there are only FIVE dispositions for anything.  Whether the returned item being processed is a top of the line hi-tech server or a white coffee cup there are only five possible dispositions for the item.  Those dispositions are:

1. Returned to the vendor or OEM for credit
2. Sold on the secondary / salvage market
3. Donated to charity
4. Returned to a warehouse for redistribution later
5. Destroyed either by being recycled or disposed of in a landfill or incinerator

There are many variations in the processes used to flow assets through any company’s reverse pipeline, but there are only five different final destinations for any item.  Some companies repair goods and sell them on the secondary market, for example, while others don’t repair anything.  They have a simple, yet important controlled destruction process.  Some new items are repackaged and stored for next season while other items are donated to charity.  Some companies are very concerned about brand protection while others are much more interested in keeping costs down and getting the most for the item returned.  The options and variations are as numerous as the companies and the items they sell.

The 3PL or RMS provider, however, must have the ability to capture the information needed to ensure the item is sorted and prepared properly in order to achieve the customer’s goals, while minimizing the risks that might result from improper dispositioning of the returned item.

For many companies, if you had to draw a picture of a car that would represent their reverse logistics process, it would look like Fred Flintstone’s car.  For other best-in-class organizations, the car would look like a Ferrari. The question is “what differentiates a Flintstone from a Ferrari?”  The answer is the returns management system (RMS).  There are not many supply chain executives who have any experience with returns and even fewer IT executives. It is this lack of experience and knowledge about reverse logistics that leads to poor decisions when it comes to building or buying a reverse logistics system.

In this four part series, we will help the uninitiated understand what to look for in a quality returns system.  We will describe critical capabilities needed in a state of the art RMS. We will explore what differentiates a state of the art reverse logistics systems from lesser “returns processing systems”.  In this first part of our series, we will talk about the receiving process.  In the second part of the series we will discuss processing requirements to disposition assets, drive repair practices, as well as direct and monitor physical processing.  In part three we will cover the processes that drive shipping, financial transactions, and quality assurance.  The last of our four part series will discuss visibility requirements and key reporting capabilities that will be needed.

The Receiving Process

The receiving process of an RMS should accomplish two primary functions.  First, the receiving process should identify and credit the “sender” of the assets for what they shipped to the processing facility.  Second, the receiving process adds the value of the returned asset into the “inventory” of the returns processing facility.  Before an item can be refurbished, repaired, repackaged, recycled, or sold, it has to be properly identified and recorded in the processing facility’s inventory.  In the world of returns it isn’t “garbage in, garbage out” that you worry about.  You worry about good inventory in and garbage out.  That costs money.

To ensure this doesn’t happen, you must have a quality receiving process at the front end of your RMS.  The RMS should drive a process that answers the following questions as goods are received:

When did the item arrive at the facility?

Where did the item come from?

Who was the shipper?

Is there any damage and should a freight claim be filed?

What is the SKU / Model number / Serial number or other identifying number for item identification?

Is the asset “hazardous” or some other regulated classification?

What is the condition of the item? (New, defective, damaged, damaged beyond repair, in original packaging, etc.)

What quantity is received?

What is the value of each item received?

What is the total “inventory” of the shipment that has been received?

Once this information is collected for each shipment, the process of crediting the sending customer/store/plant can take place.  One of the critical differences between an Returns Management System and a Warehouse Management System (WMS) is that most WMS’s rely on processing receiving against a PO.  In the returns world, there usually isn’t a PO or similar document and the condition of what is received can vary greatly.  The condition of the individual item determines how the asset is valued and how the item flows through the process.

An important back office function relies on the RMS receiving process.  That is the reconciliation of what the sender says they shipped versus what was received.  One of the challenges that exists in the world of returns is that most of the customers, stores, plants, or consumers are not properly equipped to determine the condition of the item they are returning.  They have no way to determine the condition and the value of the returned asset based on the condition. The accuracy of goods shipped is not reliable and the preparation and packaging of the item is not sufficient to prevent significant damage during shipment.  These issues cause differences in valuation and drive the need for a back office reconciliation process.

Identifying the item, determining the condition and valuing the item is the critical capability of the RMS receiving process.  Once this information is gathered, the process of inspecting, refurbishing, repairing and dispositioning the assets can take place.  It is at this point in the process that the value of the asset is determined.  Without a well thought out receiving process, the value of the returned assets could be lost when the item is received in the returns facility, before the process really gets started.

Correct values could be dramatically different and there are a host of issues that impact the real value of the returned goods for which a claim is filed.  Examples of some of the problems in valuing returned assets are if there are missing components, or if the item has been tampered with, or if the item has been abused and is broken beyond repair.  These are common finding in processing returns but if an item is missing or if the carrier smashes the case containing the item, figuring out these variables ends up being nothing more than a guess.  Collecting on claims filed can almost be impossible, at times, because of these variables.

The best, easiest and most straight forward method to file freight claims is to establish an “average value per case”.  The average value per case is based on the budgeted units and total value of the goods that are to be processed.   No company can really peg the value of any item that is going to be returned in the future.  Using a logical method to calculate an average value per case is a fair, acceptable way to base reverse logistics freight claims.  Once an average value is determined, the process used to calculate the average should be reviewed with the carrier and the average value to per case should be included in the carrier contract and reviewed on an annual basis.

A word of caution, however, if the value of an individual item is significant, traditional freight claims processes should be used.  The level of detail concerning the returns goods is much greater using this method and you must ensure the proper processes for identification at the point of origin are in place.  In order to file “normal” freight claims, an exact list of items shipped will need to be recorded, tracked, and received at a detailed level for each shipment.  You must also ensure that the proper documentation noting the value of the shipment is made, prior to shipping.  If this level of detail is not possible, using an average value per case is probably the best method.

If you are not a system guru, and the typical decision maker for buying reverse logistics isn’t, how will you know if you the software or process includes the components you will need to maximize the value of the hi tech, hi value assets that will be processed?  If you ask your software provider or third party processor to explain the following, you will be able to separate the best-in-class from the jokers-in-class when it comes to reverse logistics software:

1. Explain the process flow of goods and what happens to goods after they are received.
2. Show me the report for units that are scrapped.
3. Show the process for scrapping a unit and how you capture and track parts that will be used to repair other units.
4. How does your system account for the parts inventory that is used to repair product?
5. Can your system re-disposition parts that are not needed?
6. Does your system facilitate parts harvesting / liquidation?
7. Can your system track separate inventories of units that have different owners?
8. How are Bill Of Materials (BOM) stored in the system?
9. Can your system support more than one BOM per model?
10. How does your system support warranty returns and related repairs?
11. How many classifications of repaired units do you have and how are is the inventory valued?
12. Show me the productivity reports for receiving, repacking, repair techs, picking processes, and shipping.
13. Can you re-designate finished goods as liquidation, A, B, or C stock goods?
14. When do you designate how and where to ship goods, can you add change shipment status from LTL to Small Package, or Truckload?
15. Show me how your system supports selling refurbished goods directly to the customer or B2B?
16. Does your system provide sustainability reports that provide an audit trail for carbon footprint reporting purposes?
17. Can your system process credit back to the customer based on condition at time of receiving and based on diagnostic results?
18. How does your systems track and process consolidation fees and transportation fees for both inbound and outbound processes?
19. Demonstrate how your system processes advanced service parts orders and other similar transactions?
20. Are all your reports available on the web and do you provide a report writer as part of your standard system?

If you ask a reverse logistics software provider these twenty questions along with the follow up questions that will naturally come up during the software demo, you will quickly be able to tell the wanna-be’s from the best-in-class providers.  The last and most important step in purchasing reverse logistics software or hiring a third party processor is to ask for references of other customers that have the same requirements you have.  Insist on touring most, if not all of the reference locations to see the process and software in action.

Often the final RFP will have a completed contract that has to have pricing filled in and signed when returned for final review and selection by the buying company. Companies that issue Commodity Pricing RFP’s don’t care how much is profit, what the provider’s cost is, or what assumptions were built in by the service provider. They seldom pay attention to critical elements such as yeild rate, scrap, or disposition statistics.  Their only concern is their cost. For some it could be a cost per unit, others look at total dollars out of pocket, and some ask for a monthly dollar amount for fixed expenses and a firm cost per unit based on volume. This approach works great if the solution calls for a “commodity service” that is not customized, and with little or no variation in residual value of goods flowing through the reverse pipeline.

However, if the valuation of returned goods could vary significantly based on how the product is processed, the Commodity Priced approach can end in disaster for both the company and the provider.  Disaster strikes when the condition or make up of the goods returned are not as expected.  And just like when you drop buttered toast on the floor, it ain’t going to be in your favor.  The 3PL ends up either spending a lot more time and money trying to process the goods or they take short cuts to avoid losing their shirts.  Regardless, it is a big problem for both the third party service provider and their customer.

The second approach to developing reverse logistics or reclamation RFP’s is called the “Relationship” approach. If you are going to outsource a reverse logistics that requires flexibility on the part of the provider and the rate of variability is high, you want to select a provider that you trust.  You will need a provider that will work with you and is willing to agree to contract language that will tie the provider’s interest to your interests.  Relationship contracts are often volume based. Many times contacts are cost plus with a budget cap, based on a mutually agreed to set of assumptions. These contracts are much more complicated than a fixed priced agreement but they can result in much better service over the long haul.

Watch out, though, contracts with assumptions and variability require a lot of effort and oversight to ensure everything is on the up and up. If you are outsourcing returns management to an industry expert, you better have an internal expert working for you, otherwise you could be taken to the cleaners.  One client was getting charged $400 per hour for additional software customization, even though the contract clearly stated that systems charges were fixed.  The customer was “confused” because the contract was cost plus so when the system invoices came through they were never questioned.

If your company is going to outsource and you are developing the RFP or you are ready to select the third party provider, ask yourself the following questions:

1. What type of RFP and contract is typical for the industry?
2. How much variability occurs that is out of our control?
3. How predictable are the basic metrics?
4. What is an acceptable yield rate for repaired & refurbished goods?
5. What is the expected scrap rate for product by category?
6. What kind of additional “value adds” are you looking for the service provider to bring?
7. How long do you anticipate the contract and associated relationship to last?
8. What was the justification used to get approval for the project?
9. What risks can be controlled if included in the contact? Shrinkage, mis-ships, worker’s comp, health insurance increases, union organizing efforts……

For those looking to outsource reverse logistics, take a look at RL Quote on the Reverse Logistics Association’s web site.  This is a great tool and can ensure you get access to the best in class service providers in the field of reverse logistics.  Their members provide reclamation services, refurbish and repair services, software, operations and consulting.  This is the best source to find 3PL’s who specialize in reverse logistics.

The key component in developing an RFP and later, the contract, is to ensure that you have someone on your side of the table that is as knowledgeable as the third party service provider sitting on the other side of the table.  There are many details involved in outsourcing reverse logistics.  Having an experienced negotiator that understands these details can be worth millions over the life of a contract.  If you are equally matched and you end up with a professional service provider that hits it out of the park, the benefits outsourcing will far exceed the expectations.