Episode 2 – Are Your Reverse Logistics Leaking Profits?

Reverse Logistics Leaking

Show Transcript

A couple years ago, I was walking through our warehouse, and I noticed a couple unfamiliar pallets in the corner. They had just been delivered. I walked over and looked at the packing list, and I was really surprised. It was hundreds of thousands of dollars of product from one of our main customers that’d just been returned to us. And I didn’t know it was coming.

The next day more pallets showed up. And the next day, even more. Pretty soon, we wanted to lock our doors, and not answer the door when drivers rang the bell because we didn’t want any more of this stuff coming back.

Now customer returns and overstock inventory are something that a lot of growing companies struggle with. Mine did especially. And it’s a little concerning because those can kill businesses very quickly. You can survive with negative net income for quite a while – but negative cash flow is a whole different story. And nothing has the ability to eat up cash quite as fast as too much of the wrong product sitting on your shelves.

So if you have an inventory problem, what do you do?

First, you’re going to want to stop the bleeding by better ordering. That’s what we talked about in our last podcast, improving your S&OP and forecasting process. But even after you have a good process in place, you may still have millions in extra inventory in your warehouse.

And just as dangerous as those overstocks are, customer returns can also pose a huge threat. A few returns here and there are completely anticipated, but five, ten, twenty, fifty percent of your product coming back, and suddenly that’s a huge issue.

Well a while back, I was looking through Inbound Logistics. It’s a great magazine that has some great articles, as well as a bunch of ads for 3PLs and shipping companies. It had a great article that caught my eye by a guy named Curtis Greve that was about reverse logistics, liquidation, and returns. I liked what he had to say, so I reached out to him to learn more. My company had done pretty with liquidating obsolete inventory and managing returns, but I knew there was a lot more out there.

It turned out that Curtis is actually one of the founding members of the Reverse Logistics & Sustainability Council (RLSC). He had some great information to share, especially because he’s seen how many of the big players handle reverse logistics.

I learned a lot from talking with him, and I hope you do too as you listen in on our phone conversation we had recently.

Interview with Curtis Greve

Q: So just to start – get your background – I know you were at Walmart for a while and then Genco. Maybe you can run down your experience and where you’re at today.

Well, right out of school a long time ago, I started out working at Walmart and I spent twelve years at Walmart. In the last four years I was there, I was responsible for the reverse logistics division. Although we didn’t call it reverse logistics back then, it was called returns. So I did quite a few different things at Walmart. I was in charge of corporate audit and different things like that, but like I said, the last 4 years I was there, I was in charge of their reverse logistics division and we decided we wanted to automate, put in some software.

When I first took over, it was all on paper – tally sheets – a very manual process. We decided we wanted to automate it. We started looking for companies that could provide software to automate reverse logistics. That’s how I got introduced to GENCO.

Then a couple years later, I decided to leave Walmart and went to work for GENCO. I was there for 15 years – basically I was the president for about 15 years. We grew from $34 million a year in revenue to about $860 million a year in revenue. I had quite a run and built up a lot of forward and reverse logistics – spent quite a bit of time just in 3PLS working for companies like Sears, Kmart, Target, Canadian Tire, Unilever, Dell, HP- you name it.

I was there for 15 years, and then in 2008 I decided to retire from Genco, and I started my own consulting firm. And that’s Greve-Davis and since 2008 we’ve been providing consulting services, primarily on the reverse logistics side of the business, but we do both forward and reverse logistics. About half our customers today for Greve-Davis, we work for people that are service providers. It could be just forward supply chain 3PLs, it would be liquidation companies, software development companies, you name it. The other half of our customers are retailers or manufacturers that either want help in things like producing a RFP for a distribution center, help us with our returns, help us with our relationship somehow with our 3PL, or come benchmark our process and tell us what you think. That sort of thing. So it’s a variety of different things.

Q: And you’re also on the Reverse Logistics and Sustainability Council (RLSC). What’s that? And what’s the mission there?

Well, Jerry Davis and I, about two years ago were approached by two retailers and a 3PL, and they said, “Look, why don’t you guys start something to help advance the reverse logistics industry.” If you looked at the way reverse logistics actually is, kind of the basic process, it’s pretty much done the same way it was 10 years ago. There was a feeling that there really wasn’t a group out there that was advancing the cause, if you will. In the reverse logistics world, people tend to fly under the radar. So we decided that we would start an industry association that was broad in scope and that really was focused on trying to identify best practices and trying to develop those best practices and spread the word.

We developed an online portal for information carrying, and that’s at ReverseLogistics.com, and today ReverseLogistics.com is the largest online information repostiory for reverse logistics that there is. We’ve got some 2000+ documents on there. Again, we’re just trying to advance the cause if you will.

Q: So, I want to pick your brain a little bit about liquidation. That’s a big problem for a lot of small and midsize companies. So, say I’m a midsize company. I’ve just over the years kind of bought too much, and I probably have a million or so dollars of obsolete inventory hanging out in my warehouse and then a couple of my big retail customers are resetting their walls, so I have hundreds of thousands of dollars of inventory coming back to me. What kind of things do you recommend? What systems can I put in place to avoid those problems in the future, especially as I grow?

Well, I think the one thing that I would tell you, is that first of all a lot of people don’t realize the value that’s available to them in that product. It’s the old saying, “one man’s trash is another man’s treasure.” You wouldn’t believe the stuff that I’ve seen sold. So it’s not just about new or obsolete or close out merchandise, which clearly is of value, but it’s everything. You know age really doesn’t matter. Although the faster you move it, the quicker you can get it to market, it’s just like anything else, the higher the recovery value.

So, when you think about liquidation, there’s two aspects to it. Really it’s about getting the product out of your primary supply chain or your customer’s inventory. So it’s about pulling that inventory out, which will free up space and capital to put in new inventory, that will hopefully sale. And it’s about getting the best net recovery value you can for that product when it comes back.

There are hundreds and hundreds of liquidators out there that are looking to buy merchandise. One of the things you’ve got to be careful about is, ‘Are they reputable?’. There’s a lot of people who get into liquidation that just have some money – or say they have money – and they’ll just go out and just start buying product, but it’s about being able to control that product and make sure that it’s handled the way you want it handled.

It’s good for a small or medium – or actually if you look at large manufacturers, they do this too – but manufacturers and retailers usually will go out and work with one or more liquidators who will provide those services in terms of being able to actually get the product out of the current location, which will free up space for the new product, sell it into a developed market that has a number of buyers with the accurate controls in place where they can get a best-in-class recovery value, and then they’ll be able to account for the product and reconcile on the cash end. So you know that you’re getting, that it was sold, and it was sold for the right amount.

Q: I like that net recovery value. That’s not a metric that a lot of people talk about. Maybe you can explain that a little and the importance that it does have to a company.

Sure. Well, you have recovery value which, some companies look at it as a percentage of original retail value or current retail value. Other companies look at it as a percentage of wholesale costs. It doesn’t really matter. The idea behind net recovery value is really the concept of – just like in retail you’ve got sales minus cost of goods sold equals gross margin – in the liquidation world, net recovery value is the same thing as gross margin.

For example, if you took some average consumer electronics. Let’s say a load of consumer electronics, just broad category, typical store returns let’s say. You could probably liquidate that on the secondary for twenty cents on the dollar. However, if you took that, if you started breaking that product down, you could identify items that were like new and were working – let’s say there were a couple of laptops in there that you wanted to sell – you may sell some of those items for as much as 75 to 85 cents on the dollar to the end consumer.

What companies have to be careful about is really looking at, well if you’re going to sell that laptop, let’s say, I can either sell it ‘as is’ for 20 cents on the dollar, or repair, rebox, and sell it to the end consumer for 85 cents on the dollar. So if I sell it ‘as is’ for 20 cents on the dollar, I pay a forklift driver to pull it out of the rack and put it on the truck and you’re done. Where if I’m going to test it, that testing, you need a special technician, you need equipment, and then you have to post it out on a site where you sell it B2C. Then you have to deal with the customer issues where they call and ask questions. If you’re not careful, by the time that you’re done, what may seem to be a good recovery value at 85 cents on the dollar, you may be netting less than you would if you would have just sold it ‘as is’. So that’s kind of the concept behind net recovery value.

Q: And, in general, is it different for each product, or in general do you say, “Hey just go for the 20 cents,” or does it often make sense to try to recover more?

It often makes sense. It depends on the product and the time of the year. The secondary market is the ultimate supply and demand market. It’s generally a cash business, but it tends to be recession proof.

Just think of it this way – back in 2008 when the economy took a nose dive, people who were shopping at Macy’s started shopping at Walmart, and people who were shopping at Walmart started going to flea markets. So, the demand on the secondary market then tended to go up. But go forward a few months, what happened was that all of the sudden the product that was coming back. The return volume, not only was the demand higher, but the amount of volume going into the secondary market initially was high.

People would go home, times were tough, they’d look in their closet, and they’d see little Billy didn’t play with this toy that I paid $200 for, so I’m going to take it back. Suddenly it becomes defective because they want the cash. So they take it back – that ends up going on the secondary market.

Well you go a little bit farther, like 2009, people quit buying those $200 toys, and they start buy $50 toys, etc., etc. So the volume that was going into the secondary market continued to increase, but the average value tended to go down.

You really have to take a look at the different categories and the cost of a processing. For example, do you want to test and repair a laptop?  Well it made a lot more sense to test and repair a laptop back in the ’90s when the average price for a laptop was $2000. If you could get 80% of that $2000, but it cost you $200 between your holding cost, technician cost, parts, etc., that was a good deal. Well, when that price goes down and the average cost is now is like $400, all of a sudden that $200 doesn’t make economic sense. So, it really depends on the time of the year, the category you’re talking about, and ultimately what’s your cost going in, and what can you sell that product for once you put all that money into it on the back end. Does that make sense?

Q: Yeah, absolutely. I want to go off of that comment about the toy that suddenly becomes defective what advice do you have for return policies for consumers?

Well, it’s gonna be counterintuitive. There was a study done, and what we’ve seen is, you’ve got to be careful. Return policies are like pricing in airlines. You never want to be the first to get too liberal or too conservative. If nobody follows, that could cause you a lot of problems.

There was a study done by a couple of professors at MIT and what they identified was that the more restrictive a company makes their return policies, percentage wise, in terms of dollars, the higher their return rate goes. And the reason for that is because being a restrictive return policy actually hinders sales more than it hinders returns. They’ve done a two-year study on a number of catalog companies.

So what I would say is, there’s two opportunities. Number one, your return policy should be adequate based on where you’re at in the market, based on your competition. You don’t want to have the most liberal policy, you don’t want to have the most restrictive policy. But where I see an opportunity going forward, particularly in the retail world, I think there are a lot of opportunities where retailers could take a look at their policy. This idea of having a “one size fits all” policy for all products just does not make sense.

I also think they could take a look at their manufacturing partners and look at their return policies and how they handle returns when the manufacturers sell directly to the consumer. For example, Best Buy could probably learn a lesson from looking at how HP and Dell handle their returns at what their policies are and what their return rates. The opportunity is really around the idea that as more and more sales occur online and you’ve got different skus, you also have a different level of consumer. If you go look on a retailer’s online return policy, you see that they pretty much have the same return policy for everything no matter what. But, manufacturers don’t do that. There’s a lot of people who don’t do that. And you’re in a position where you could have a lot of different questions that you could ask.

You know, one of the big differences between online returns versus typical brick and mortar returns is that, in general, not for every category, but in general online returns can be three times higher than brick and mortar returns. However, 80% of that additional volume that goes back on the internet returns, there’s nothing wrong with it and they can go back into stock and can be resold later.

So the question is how can you keep good customer service, but also deal with a different kind of customer who might have different needs online versus the way you do it today. Simply have one published policy out there doesn’t really work. They don’t do that in the stores. Think about how they operate in the stores. Somebody brings something back, and it’s in automotive, they send them to the automotive desk. Somebody talks them through it, right? They don’t just say, “Oh, here it is.” So it’s really about tailoring the website and that policy to reflect the realities of the online consumer.

Q: So, we’re seeing online sales increase. There’s lots of exciting new things in logistics that could coincide with that: drones, driverless vehicles, even crowd-sourcing firms like Uber. How do you see that affecting future reverse logistics?

You know it’s going to be interesting to see. If you look at retail returns overall, for the last 12 years, it’s been roughly 8.12% of total retail sales, and that’s per the national retail federation. So when you think about the changes that have occurred over the last 10 years, you really don’t see a difference in the overall volume of returns.

Now obviously, the return rates for tablets, for example, are traditionally significantly lower than the return rates for a laptop. That’s because there’s less moving pieces, you can’t tailor them. You don’t  have these bundles of expensive software packages that somebody may or may not know how to install right, I mean there’s a lot of reasons for that.

But I don’t really see – when you look at some of these changes on the forward side, you know obviously, the more you handle something, the more damage you’re going to have, that could increase, but I think that will be relatively minimal. So you know, I think in terms of the overall volume and what’s going to happen, I think it’s probably going to remain about the same. It’s really going to come down to any kind of dramatic changes in the products themselves, a.k.a. going from a desktop computer to a laptop computer to a tablet. That’ll have a bigger impact than pretty much the forward side. You know, forward sides are pretty stable. When you look at the reverse logistics side it’s really all about sell-through to avoid overstock situations and it’s about customer service on the return side.

Q: So you have all of these products being delivered, lots of different modes. Transportation is becoming more of an important thing, especially with online sales. For companies that are looking to outsource their 3PL services, what advice do you have, and what are some things that are sometimes overlooked in contracts?

Wow, that’s a big question. When you’re looking to outsource your 3PL, first of all, most of your major retailers outsource today. But really on the contract side, companies outsource pretty much everything on their supply chain side, whether it’s forward or reverse, for three primary reasons.

One is, particularly on the reverse logistics side, is core competency. They don’t have the core competency and they don’t want to develop or pay for core competency. They want to get up to speed quicker. The 3PLs have been doing it for a long time and they’re really, really good at it.

Number two, is flexibility. They don’t want to go build a warehouse, but a 3PL will have a warehouse or they’ll lease a warehouse on behalf of the customer. And once again, they don’t have to go to the capital committee and get the capital funds to go lease a warehouse. You can just outsource it, and the 3PL will sign a three-year lease. So again it’s increased flexibility.

Then the third thing is really protection. If you higher a 3PL, you don’t have to worry about worker’s comp rates going up, you don’t have to worry about health care, they manage all the workforce issues. If you’re in a high union area, you don’t have to worry about dealing with the union, the 3PL will do it.

Well, and one of the big ones is, if your cost is out of control. A number of companies run return centers and they look at it and they say “Oh my gosh, it’s costing me three bucks a unit to process this, the benchmark in the industry is a dollar.” If you go higher a 3PL and they sign a contract to do it for a dollar a unit, then you don’t have to worry about it. Automatically, you’ve corrected your problem. Same thing with shrinkage and some other categories like that, you’ve kind of hired an insurance company in a 3PL where they’ll sign up for all the risks. And you pay a margin to them, but they take on the risk and you can not have to worry about that piece of the business any more.

You know that’s why companies really outsource is based around those three reasons.One of the reasons reverse logistics and liquidation tends to be outsourced on such a high rate by companies that have extremely well-developed logistics capabilities is because of the core competency. Most executives that work for retailers and manufacturers, you know those mid-level executives, don’t sit around and say, “Boy, I’d love to run that return center for them.” You know, they want to go run big DCs, they want to run factories, they want to make and sell product. They don’t want to deal with the red-headed stepchild that comes back when it doesn’t sell or is broken for some reason. So that’s why most companies outsource the functions.

So you know, if I was a retailer or manufacturer today that saw an opportunity, first of all, they all have broad opportunities. There was a study done by the Aberdeen Group group that found that the average manufacturer will spend between 95 and 14% of total sales on returns. A lot of that cost is related to issues around buying the inventory back, in effect, from your customer. But there is a significant amount of it that could impact the bottom line in a positive way, if you can get over the mindset that this is throw-away cost of doing business.

If a manufacturer looks at returns as just a cost of doing business and a write-off, they’re leaving millions on the table. In fact, I always argue, for years I’ve sat down across the table from CFOs for both retailers and manufacturers and I’ve told them, “Look, if you outsource this, you’ll have a bigger impact on your bottom line than just about anything you can do.” And here’s why:

If you think about a traditional supply chain, where let’s say you’ve got the senior vice president of supply chain and they come in and they say, “Alright, we’re gonna really have an impact on the bottom line. We’re gonna improve our processes. We’re gonna reduce our cost of labor.” The most he can probably impact the company’s bottom line is maybe a half a percent, maybe one percent. That’s because all he can really control is reduce the cost of processing. Labor, miles travelled, that sort of thing. On reverse logistics, it’s different.

Think of it like this, if you’re a billion dollar manufacturer, and let’s say you get a 10% return rate, if you’re throwing that product away where you can increase the recovery value, on that product that’s coming back, that’s millions of dollars. You’re not just dealing with labor. You’re dealing with increasing the value of the recovery amount that your company brings back into the company on the inventory that’s coming back. So if you’re a billion dollar retailer and you’ve got $100 million in returns and you can increase that recovery rate by 10%, we just put $10 million on your bottom line. Often I’ve sat across the table from executives and said “What else could you do today to make a decision that would have that kind of impact on your bottom line?” Frankly, there are very few things that you can do that with.

Q: So, if I recognize that my expenses are probably too high, and I want to benchmark other companies, what would you recommend? What’s a good process to go about doing that?

Part of the challenge of reverse logistics is, again, it flies under the radar. It’s a small industry, there’s not a lot of people in the industry, and you’ve got to know the industry well. I think there’s three good ways to get into benchmarking.

One way is why we created ReverseLogistics.com. If you’re a retailer or manufacturer, you can go join RSLC – go online at ReverseLogistics.com – and sign up and it’s free. There you can get access to experts in the field. You can get access to other executives – your peer group. There’s a ton of information out there where you can do your research and read.

The second way is you can look to the academic field. There’s several leading academics that have done a lot of research and they know a lot of people.

And this comes under the heading of self-serving, but the third way to do it is contact people like me in the consulting field and talk to them. Let them tell you where to go or help you with your problem. Those are probably the three easiest ways to go about doing it.

Probably a last question is, any other advice you’d have for mid-size companies that haven’t really focused on reverse logistics before, but see that potential like you said, and want to put in a better reverse logistics program?

If you’re new to the reverse logistics world, it takes a while to understand all the moving parts and pieces.They need to think in terms not only of ‘what is it costing me to process the goods?’ but, ‘how much revenue am I generating once I get the product back?’ Look beyond just the idea that, ‘well, it’s the cost of doing business. It costs us three cents an item – it’s not that big of deal.’ It is a big deal. It could be a much bigger deal.

There are implications around customer service. If you have a good reverse logistics process, by definition you’re doing a better job of serving your customers. Happier customers buy more stuff.

If you have a good reverse logistics process, you’re significantly reducing potential liabilities down the road, particularly if you’re a manufacturer. These manufacturers, their name is on the product. If that product ends up in a landfill somewhere, they could have a big issue down the road that they get to pay for. And if you’re like many other companies, if you like to tout your sustainability, you need to be able to address what in some cases are 8%, 10%, 15% of your total inventory. What’s happening with that in terms of after its original useful life is over. What are you doing with that product? Do you have recycling capabilities? What’s happening with the product when it comes back? Are you being good stewards over that product?

Lastly, in terms of liability, once you have a good reverse logistics pipeline built, then you don’t have to worry about things like product recalls. The Consumer Product Safety Commission (CPSC) passed a law back in 2010 that allows the CPSC to get more active and have the ability to fine companies that have issues with products in terms of defects that could be harmful. Prior to 2010, the CPSC had on average between 200 and 300 products recalled every year. You’ve probably read about them – it’s everything from the baby strollers that hurt children some way to laptops that have batteries that catch on fire. You always hear about the big ones. Well since they passed that law, last year they had over 1,600 product recalls. So if you’re a manufacturer, the issues is not whether or not you’re going to have a product recall, it’s just a matter of when. What are you going to do and how are you going to handle that when it happens?

To avoid liability and get that product off the market, and minimize potential long-term liabilities through lawsuits, the faster you move, the more effectively you can do that. All that flows through the reverse logistics pipeline. So once you have that pipeline built – whether it’s just to deal with customer returns, liquidating your product, recycling your product, or dealing with recalls – the incremental cost of adding to that pipeline is pretty small. It’s a nice way to wave the sustainability flag and avoid a lot of liabilities.

So I would tell people, “Look beyond just the cost of processing and ‘it’s a write off.’ It’s about increasing recovery values that can have a significant impact on your bottom line and minimizing significant risk both in terms of customer service and long-term legal cost that could occur.”

Curtis, thank you so much for talking with us. It’s been a pleasure – I’ve learned a lot.

Well, thank you. I appreciate it. The other thing I tell people, a good place to start would be RLSC’s website at ReverseLogistics.com, or go read our blog on GreveDavis.com. If anyone ever has any questions, feel free to give me a shout, I’ll be happy to help them out any way I can.

Curtis, thank you so much.

You too, have a good day

Show Sponsored by DemandCaster

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