RL Magazine
Think out of the box to reduce the cost of retail returns
by Justin Clarke, MGH Consulting

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The retail market for consumer electronics remains challenging; according to the US Consumer Electronics Association and GfK, consumer electronics growth in West Europe is expected to decline by 3% in 2012, following a sluggish 2% growth in 2011. No wonder that manufacturers and retailers are under continuous pressure to reduce costs, increase sales and improve profitability. The natural response for many businesses is to focus investment on their brand and gaining market share, but unless businesses pay attention to managing the cost of returns, all the benefit of brand investment can easily be lost in reverse logistics costs.

From smart phones to web enabled TVs new product development drives consumer demand, but product complexity comes with its own support challenges as consumers grapple with potentially unfamiliar technology. Everyone loses when a consumer returns a product that ultimately turns out to be no fault found; the consumer has a poor brand experience plus the retailer and manufacturer have the cost of processing the return. It is therefore of crucial importance that retailers make the right ranging selections and post sales support contract decisions. Likewise manufacturers need to ensure reverse logistics processes correctly match product value and complexity.

Improving reverse logistics doesn’t have to be about starting from scratch, incremental improvements may be all that is required. In this paper we challenge some of the commercial norms that directly influence reverse logistics and give guidance on getting the best from reverse logistics processes.

Retailer ranging decisions

A common retailer strategy is to build a good/better/best sell up model per category, where the entry ‘good’ product carries the retailers own label brand and the ‘better/best’ offerings are from established manufacturers. With own label products moving into markets and technologies that have previously been the exclusive preserve of established brands retailers need to provide support services and processes that match those of the brands being displaced.

Whether managed in house or outsourced to a third party service provider, the costs of these services have to be identified and correctly attributed to product profitability. Best practice retailers include the reverse logistics investment in own label product lifecycle costs, to ensure accurate and profitable ranging decisions between own label and branded solutions.

When to opt for Bought Out Guarantee

A successful reverse logistics process that provides the right level of support to consumers as well as minimising cost and maximising recovery for both retailers and manufacturers only works if the process is treated as a partnership by both retailers and manufacturers.

Bought Out Guarantee (BOG) has historically been associated with low cost, own label and OEM business. However, it can have a role to play for mainstream manufacturers as well; as a way of reducing the overall cost of reverse logistics, for specific classes of products, for retailers that have a significant reverse logistics capability and for retailers who have their own very specific warranty terms for consumers.

Every touch point or goods movement for a product return carries a cost for the retailer or manufacturer. Managed correctly, BOG can reduce the number of goods movements and so the overall reverse logistics costs, benefiting retailers and manufacturers and also reducing the environmental impact.

For products where repair is not viable and scrapping is the only reverse logistics solution, BOG is ideal. Retailers cover the cost of replacement and disposition from their BOG allowance - negotiated either as a discount on invoice price or as oversupply. Best practice retailers use benchmark average return rates as the starting point to negotiate BOG terms, with clauses to offset the risk of epidemic product failure.

For niche or low volume manufacturers, retailers may be able to negotiate better rates for post sales support and repair than the manufacturer can achieve, with the intervention costs charged back to the manufacturer as part of the BOG terms. Best practice manufacturers will retain control of technical training and auditing of service providers and use a balanced scorecard to measure performance.

BOG should also be considered by manufacturers in certain instances even though they may have an established reverse logistics infrastructure. Some retailers set a price threshold below which the warranty policy is to replace rather than repair, in which case BOG should be considered in order to control reverse logistics costs. Best practice manufacturers will ensure that product disposal by retailers does not impact the manufacturers’ brand or sales in other channels.

Sell smart

The risk of high product returns starts with forecasting and purchasing. Both for manufacturers and retailers there is the temptation to secure better pricing through committing to higher volumes. If these volumes cannot be sold they will likely come back as returns. The message is clear; only purchase what you know you can sell.

Promotions clear slow moving inventory, but is this necessarily the right solution? Retailers and manufacturers need to compare the lifecycle costs of a promotion and benchmark against the cost of disposition through reverse logistics channels. In many cases disposition will have the least impact on margin and brand value.

Keeping it sold

Various studies have shown that 60% plus of product returns are No Fault Found (NFF.) Just reducing the NFF rate will have an immediate impact on the bottom line. The key here is to provide consumers with the right tools and information for self-help, to ensure that returning the product to store is the last option. By the time a consumer has packed up a product and returned it to store they will not look favourably on being asked to check a web site or contact a call centre; in these situations it is most likely the retailer will end up crediting the customer anyway.

Reducing the NFF rate starts with providing the correct product support information; do the in-box instructions clearly guide the consumer through product installation and use?

Customers need to be guided to web sites for additional information and ensure that the information is relevant and topical. Include FAQ’s, information about known problems and their resolution, ‘how to’ guides and links to software upgrades.

Customers should be guided to call centre support as an alternative to or escalation from web site support. The key here is to ensure agents have the right level of product technical competence and the call centre is structured with lines of support; first line to solve general set up problems and a technical second line to guide users through more detailed interventions.

Call centre reporting and feedback improves the training and tools for call centre agents. By way of example a consumer electronics manufacturer noticed that a significant number of calls concerned interconnectivity. This led to the development of a connectivity database – callers listed the products they wanted to link together and the type/number of connections on each. The database would then produce a connection diagram which could be emailed to the caller. This improved the consumer experience and lowered the call handling costs.

Best practice manufacturers and retailers use call centres as the first step in the returns process to screen for genuine faults and issue a returns authorisation to the customer, which will be required before the retailer accepts products back. Tracking the number through the returns cycle ensures continuous improvement of the fault diagnosis process; the fault as reported by the customer can be compared to the call centre diagnosis and to the actual fault found on the returned product.

Maximising disposition

Maximising the recovery from the disposition of returned products starts with the condition in which products are received back from the channel. Are products complete with original accessories and packaging? Is adequate care taken to correctly pack products for transport to prevent damage? A service level agreement between stakeholders may be required to ensure policies are clearly communicated and adhered to.

Once a returned product is back in the warehouse the priority is to take action to dispose of it. The longer it remains unsold the less the recovery.

For companies in the technology business, disposition typically comes down to a choice between recycling, re-using, refurbishing and brokerage. The decision as to which disposition process to implement depends on the type of product and the recovery that can be realised from each process.

Recycling is potentially not the low cost solution for disposition that manufacturers imagine; re-processors charge for the collection of materials to be recycled and there may well be a further end of life disposal cost through WEEE legislation.

Re-using gets returns back into the supply chain as swap stock for warranty interventions. The cost of product testing and dismantling associated with re-use should be justified against the reduction in warranty intervention costs. Best practice companies will use the testing associated with re-use to identify faulty third party components and return these to suppliers for credit, further maximising recovery.

Refurbishing for re-sale ensures manufacturers have full brand control in the disposition process and, assuming refurbished products are sold at a discount over ‘new’ product , will attract new consumers for whom the brand was previously out of reach. Refurbished product can also be used as an alternative to discounting new stock to support retailer sales promotions. Manufacturers should consider setting up their own direct sales store for refurbished product; alongside retailers in outlet centres or online, through eBay for instance.

Brokerage is the fastest way to clear returns from inventory. At its simplest product is sold by the pallet or by weight, typically untested. At its most complex manufacturers filter products into batches of like products in like condition. Retailers with high volumes of bought out guarantee products or returns that have been rejected by manufacturers should consider brokerage solutions to clear returns inventory. Manufacturers should use brokerage when other disposition routes are at capacity. Best practice sellers will control the process by only working with authorised brokers who have signed an SLA to control how products are sold-on by the broker. Depending on product type it may be appropriate for sellers to manage the brokerage through an on-line auction or sealed bid offers.


Better management of returns can significantly contribute to retailer and manufacturer profitability targets. But this can only happen if after sales is considered an integral part of the business planning. That means including after sales strategy as part of ranging decisions and matching the service proposition to consumer expectations and retail ways of working. Providing consumers with appropriate returns avoidance tools for self help and making the correct choices for disposition minimise the impact of returns on profitability

Justin Clarke, Senior Project Manager at MGH Consulting has considerable experience in a variety of marketing and commercial based positions that include operations, marketing, business development and people management, gained in a career working for a variety of blue chip high technology and IT companies including Philips, NEC, Toshiba and Fujitsu.

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