Reversing Returns

Reversing Returns

Copyright 2003, Traffic World, Inc.

"There are no profits in the reverse supply chain. There is only loss," said Tony Sciarrotta, director of returns management for Philips Consumer Electronics.

Still, the losses can be mitigated, generating savings and happier customers, and that is what Philips is doing with a returns strategy that includes the opening of a super center for returns in the next six months.

The electronics manufacturer is in the final stages of implementing the new returns center, which will be located somewhere in the Ohio Valley region, said Sciarrotta. The facility is part of the "service transformation project" that Philips is undertaking with consulting help from IBM, he said.

Transforming returns so that Philips can make better decisions about how it handles the product coming back through the supply chain is a primary objective. Sciarrotta described his view of the channel as a panelist at the 2003 Closed Loop Supply Chain conference on Sept. 10 organized by Pittsburgh-based third-party logistics specialist GENCO Distribution System.

He summarized the company''s old returns strategy as: "Take anything back from anybody, anytime." Business rules governing the selection and grading of used product did not exist, he said. The most effective change the company has achieved over recent years "is getting sales to support our efforts to improve gate-keeping," he explained. By that he means "simply closing the window so that you can''t send anything anytime."

By shutting the window Philips has gone from an industry laggard in the returns area - in the 1999/2000 period its return rate exceeded the consumer industry''s rate - to a leader with rates below industry benchmarks in 2003. The value to Philips is 400,000 fewer units to handle annually and savings of more than $100 million a year. There probably will be cost increases in call center and repair support services, however.

A product inspection program at major retailers has helped Philips streamline its returns process. The program weeds out abused, damaged and old goods, as well as the items that Philips did not make. "It gives you a controlled flow," Sciarrotta said, complete with product information derived from documentation such as bills of lading. The inspections are carried out at Wal-Mart''s six returns centers. Additionally "we have worked with GENCO on this program at Target, Kmart, and, soon to be, Sears," he said.

GENCO is a neutral party between the manufacturer and the retailers. "We are both sort of paying" GENCO, he said, and the 3PL electronically feeds product information to Philips'' returns system. Philips benefits from a returns stream that has been sorted, as well as advance details of the used goods that are being shipped to the manufacturer. The advantage to the retailers is that the goods are sorted earlier in the returns channel and "we end the reconciliation nightmares (that can occur) later on," he said.

The super center, which should be operational in 2004, will be Philips'' central receiving point for returns. "We used to have six centers, so we are getting better," Sciarrotta pointed out. Incoming items will be sorted according to business rules that specify when a certain product should be sold "as is" or recovered. Based on these decisions product will be routed to the appropriate destination, back to inventory, to secondary markets or liquidators, for instance.

This process improves on the current system, where the goods are shipped from Philips'' recovery centers to its finished goods warehouses. "Frankly, that''s not a good marriage," he said. In general the returns flow comprises "a wide selection of not very deep inventory," noted Sciarrotta, which is "totally opposite to what a finished goods warehouse really wants to be."

A refinement Sciarrotta has considered is to determine at the retailer''s returns center how to handle product, and route items directly to chosen locations such as a liquidator without having to touch the Philips facility first. However, "I am not sure it will work because you are putting technical expertise into someone else''s hands," he said. At Philips the management of returns is considered to be a core activity "and we don''t like to relinquish control of that yet."

Also important to the manufacturer is making its customers happy and that means eliminating returns as far as possible. Indeed, Sciarrotta believes that Philips can get a bigger bang for its buck from preventing returns than from fine-tuning its reverse logistics processes. Seventy to 80 percent of the DVD players returned are found to have no faults, he explained. Finding out why those units were sent back and addressing the issues means a lot more happy customers and stronger brand loyalty.