Going in Reverse Can Be the Right Direction

Returns management can offer significant cost savings for manufacturers.

By David Blanchard

For consumer goods and high-tech manufacturers, as well as their retail customers, Christmas isn't necessarily the most important time of the year. In fact, it's Christmas returns season that is make-or-break for many of these companies, says Curtis Greve, principal of Greve Davis, a company specializing in reverse logistics and aftermarket services. "Your ability to process the tidal wave of returns during the first quarter of the year will have a big impact on your company's bottom line," he says.

There are at least 100 billion reasons for companies to take product returns seriously, since that's how much it costs U.S. manufacturers and retailers every year in lost sales, transportation, handling, processing and disposing of goods. Since 2007, the cost of returned consumer electronics has skyrocketed by 21%, reaching $17 billion last year. In a recent survey conducted by Accenture, 43% of the electronics manufacturers polled say that product return rates have increased since 2007, and only 12% say returns are trending downward.

One might think this high rate of returns is indicative of customer dissatisfaction, with the problem being largely one of defective or substandard products. Not so, says Mitch Cline, managing director of Accenture's electronics and high-tech group. Only 5% of all returns are due to product defects. While another 27% are because of "buyer's remorse," by far the main reason why products are returned can be summed up in the phrase "no fault found," with 68% testing out fine after being returned.

As Tony Sciarrotta, director of asset recovery at Philips Consumer Lifestyle, a manufacturer of TVs and other appliances, points out, "no fault found" is no longer considered a product issue, but rather, a customer experience issue. And that puts the responsibility for reducing returns squarely on the shoulders of the manufacturer.

One of the ways that Philips has improved its returns management has been addressing the problem at the design stage of the product, focusing on ease of use and interoperability, with the goal of making the products more customer friendly. Also, every Philips division now has a formal returns department, with bonus programs in place to encourage reduction in returns at every level.

Accenture's analysis indicates that by reducing the number of "no fault found" returns by just 1%, a typical large high-tech manufacturer could save $21 million per year in return and repair costs.

"These high consumer electronics return rates are unsustainable in a sector with brutal competition and thin margins," Cline points out. Manufacturers, he suggests, should help consumers "understand, set up, use and optimize the products they purchase. Most companies invest considerable sums to manage returns but need to refocus their strategies on proactively preventing returns through customer education and aftermarket support."

The payoff can be significant. Hitachi America, a manufacturer of HDTVs, has developed a Service Call Avoidance program, which relies on an outsourced call center to handle complaint calls from consumers. The program is part of an ongoing effort to improve first-call completion rate, the percentage of customer complaints that can be solved on the first call. As a result of the program, the first-call completion rate has climbed from under 60% to over 90%, with 33% fewer service call referrals overall.

While many manufacturers use the services of third parties specializing in reverse logistics, some are opting for a more direct route: either partnering with or acquiring outright providers of returns and asset recovery services. Avnet Inc., for instance, an electronics distributor, recently acquired Canvass Systems, a provider of remarketing, refurbishment and asset disposal services. Similarly, Ingram Micro, an electronics and IT distributor, has begun offering IT asset disposition services to its channel partners, thanks to a collaborative effort with U.S. Micro, a provider of IT recycling services.