GENCO Canada
Most efforts to reduce transportation costs focus on optimizing current freight runs. Improvement strategies typically assume the freight needs to move from point A to point B. But does it?
As logistics professionals, we need to examine strategies that avoid, not just optimize, freight runs. That means being a more vocal participant in strategy discussions and calling attention to processes that are major drivers of freight costs and carbon emissions.
One example is the handling of “return to vendor” (RTV) merchandise – the billions of dollars worth of retail store returns that get shipped back to the original manufacturer for disposition. Our research indicates that RTV-related overhead costs often exceed any added dollar recovery vendors might achieve by handling liquidation from their own facilities. By liquidating product direct from the retail returns center, vendors can realize a 10%-20% improvement on net return and contribute hundreds of thousands, or even millions, in added profit for their organizations. Also, by eliminating these freight runs, they can avoid tons of carbon emissions and present a more “green-friendly” profile to the world.
Sending retail returns back to the original vendor is a long, costly journey.
Figure 1 illustrates the major cost buckets as product travels from the retailer’s processing center back to the manufacturer.
Vendors absorb most of these RTV processing costs, including shipping from the retailer’s warehouse to the vendor’s facility. In fact, some products should not make this return trip on the basis of freight costs alone. For high-cost freight like hazardous materials and large furniture, the recovery cost is not worth the investment. The less you move them, the more value you preserve. Similarly, an RTV strategy would not make sense for low-value items like toothbrushes and combs, where the recovery value would not warrant the extra freight and processing costs.
Each situation is different. For many manufacturers, an RTV strategy makes sense. For instance, high-value electronics that are damaged could be inspected, refurbished and resold as “like new” for an attractive return. But added processing would not increase the value for a large amount of returned goods.
Let’s do the math on a portion of retail returns with initial recovery value in the secondary market of $100,000. Figure 2 illustrates the combined impact of overhead costs and devaluation on the “net recovery” for RTV product.
The purple area indicates the impact of time on product value, using a very conservative 5% devaluation rate. The orange area at the bottom indicates the overhead costs to carry this inventory, assuming a 25% carrying cost per year. The light blue area indicates the vendor’s net return on this inventory, after devaluation and carrying costs. So how do these facts impact recovery value?
For a majority of RTV product, extending the liquidation cycle has a negative impact on profitability. Any higher return that a vendor can realize through in-house processing is more than offset by the impact of product devaluation and overhead costs.
The primary reason is brand protection. Many manufacturers want cradle-to-grave control of their products to protect the integrity of their brands and the retail pricing of the products. They don’t want the same products being offered for less through readily available secondary channels.
In response to these concerns, sophisticated merchandise liquidators like GENCO Marketplace (GENCO’s business unit focused on liquidation of distressed inventory) have developed advanced brand protection services that include brand name defacing and administration of channel restrictions. These services, plus export capabilities, can alleviate most brand protection issues.
GENCO Marketplace can isolate and estimate costs for processing returned goods based on established benchmarks for operating costs and recovery rates. These benchmarks are used to evaluate improvement opportunities. If you lack the internal resources to conduct an evaluation, GENCO Marketplace can assist you to develop the hard numerical evidence needed to recommend a strategic change.
Figure 3 illustrates, at a high level, the assessment methodology that GENCO Marketplace or other asset recovery consultants follow.
Each year, billions worth of retail returns are sent back to product vendors for processing and disposition. This return journey racks up significant freight, storage and labor costs and deepens a company’s carbon footprint. Vendors should calculate their net recovery rate after assignment of overhead costs. When overhead costs offset any added recovery achieved through in-house disposition, vendors should consider direct liquidation from the retail returns center.
To determine the right disposition strategy, manufacturers should conduct a detailed analysis that examines the processing cost and recovery potential for each class of product sold. If internal resources and expertise are not available to conduct this analysis, seek outside help from qualified liquidation companies and asset recovery consultants. They can conduct the analysis and provide a recommendation that could yield substantial savings that go straight to your company’s bottom line.
