Reap The Returns

Attention Kmart shoppers: The BlueLight specials of yesterday are history. There will be no more holiday wrapping paper in July or bikinis in December. Now, the BlueLight is back with deals like 2-liter bottles of Pepsi for 79 cents. Hurry now before these are gone too. And as always, thank you for shopping Kmart.

Customers want to see new merchandise on a regular basis, not the same recycled items - no matter how good the deal might be. This means purging unsellable and returned items not only from store shelves but also from the stores themselves. Returned and overstocked merchandise are inevitable by-products of the retail life cycle. As a result, retailers are stuck sending merchandise through the supply chain in reverse. And now with many brick-and-click operations allowing customers to buy online and return at stores, there is more pressure than ever to efficiently manage the unwanted merchandise.

Fortunately, Kmart learned that returns and overstocks don't have to be like annoying shirt tags constantly itching the back of its neck. After outsourcing the management of unwanted merchandise to a returns management company, Kmart freed its more than 2,100 stores to concentrate on the forward motion of the sales cycle - a cycle that earned the retailer $37 billion last year. The entire concept lit up like a blue light bulb above Kmart's headquarters, saving the retailer cash and people power in the process.

Outsourcing: Try It. You'll Like It. Kmart Did.
Kmart's first attempt to move merchandise out of its stores at a faster rate was to manage a centralized reverse logistics operation within one of its DCs (distribution centers). "It's not that we couldn't have done it ourselves, but there are other areas of our business that produce more profit. We don't want returns to become our core competency," said Ed Winter, director of reverse logistics at Kmart Corp. "You throw a wrench into your DC by suddenly taking on a lot of reverse flow." Kmart never wants its return centers to become as large as its DCs, but at the same time the retailer wants to maintain standard, efficient processing across its operation.

So in 1995, Kmart worked with GENCO Distribution System (Pittsburgh) to establish four return goods centers across the country. Each return center accepts returned, damaged, and overstocked merchandise from 400 to 500 stores, then ships it to manufacturers or secondary selling channels, or destroys it. GENCO runs more than 80 reverse logistics facilities for its customers and processes over $6 billion worth of returns globally each year. Its facilities use a combination of staff and software, serving as melting pots for merchandise.

"When I joined the Kmart logistics team in 1997, we were sending hard goods merchandise to the return centers. My challenge was to broaden that and to make it as uniform and as simple a process for our stores as possible," Winter said. Regardless of whether the merchandise was summer clothes or electronic equipment, Kmart did not want the complexity of a reverse logistics system at the store level. And it shouldn't. The retailer processes about $800 million in unwanted merchandise each year. "The stores need to focus on selling, and their square footage is critical, yet limited. We were putting an inordinate amount of labor into the returns process because there were so many steps that the stores had to handle," Winter said.

Turn Merchandise Around As Fast As You Can
Prior to the return centers, the stores would handle all reverse activity including scanning the items, sending damaged goods out for local repairs, mailing merchandise back to the manufacturer, and destroying whatever the manufacturer didn't want back. If a product was sent out for repair, the individual store had to keep track of the merchandise, pay for it, and decide how it would resell the product when it came back.

Now, the outsourced reverse logistics system has eliminated many steps at the store level. Store employees scan the returned or overstocked items, and GENCO's R-Log software indicates the predetermined fate of each product. The system then builds pallets based on what needs to be shipped to a facility. GENCO staff employees scan the products again as they arrive at the center, verifying incoming shipments with advanced ship notices (ASNs) sent by the stores. Goods are then processed in accordance with manufacturer contract information, which is all installed on facility computers interfaced with Kmart's custom-built systems. Depending on manufacturer specifications, some of the items are still handled at the stores, but GENCO carriers transport the majority of the goods to the return centers on a weekly basis. Even if the items are to be destroyed, it is less expensive to do so in large quantities centrally than at each Kmart location.

Although Kmart outsources its returns management to GENCO, the Kmart logistics team makes decisions based on vendor agreements and the nature of the merchandise. "We don't want items with a Kmart label showing up in the stores again as a return," Winter said. "There are no monetary transactions that are handled by GENCO; it is mainly logistics data that is passed back and forth." But as this data is exchanged, it is also being compiled into trend reports that both Kmart and its suppliers can use to better understand the reverse supply chain.

Ditch The Products, Save The Valuable Data
Now that Kmart has an established reverse process, Winter frowns upon exceptions to it. "Otherwise you don't gain the efficiencies at the store level," he said. "When you look at the sheer volume of returns that are processed, it is a lot more than many companies ship in their normal forward mode. Sometimes the smaller manufacturers aren't used to truckloads of returned merchandise pulling up, but the larger ones appreciate it." Manufacturers don't like getting 1,000 separate shipments, queries, or financial transactions from individual stores. And the benefits suppliers and retailers realize are not limited to the movement of physical merchandise. By centrally tracking the merchandise it ships to the GENCO return centers, Kmart is able to use the data to identify product quality issues, merchandising patterns, and regional purchasing behavior.

"Since we are dealing with such large amounts of merchandise, we can easily spot trends, which can lead to bottom line savings," Winter said. "A store may disregard sending a few of the same products to a manufacturer, but we saw trends when we started having 400 stores funnel an item into a return center. This is where we can start doing something significant with the data."

In the past, Kmart might have had 400 stores returning three inaccurately sized sweaters to the manufacturer and no one gave it a second thought. But, if those 1,200 sweaters now arrive at a return center, the retailer sees there is a sizing problem and can alert the manufacturer to avoid a similar situation in the future. Kmart can even use this information as a reason to insist upon increased quality standards. "The key to gathering this data is keeping the process simple at the stores. If it is too complicated, we run the risk of stores discarding merchandise rather than processing it," Winter said. "Now we are able to understand the patterns of returned merchandise and establish accurate ROI results. In theory, there could have been money spent in other places, such as waste disposal, that was never connected to the cost of returns. Now we can better understand those relationships."

Similar information can be gathered from overstocked merchandise. Both suppliers and retailers can refer to the amounts of overstocks when making inventory management and purchasing decisions. Or, they can work on solutions together such as increased product promotions or package redesign. Kmart also uses the return centers to enhance the reallocation of overstocked products within a season. For example, if gloves are not selling well at a particular Kmart store, they can be shipped via the return centers to another store where a snowstorm just hit.

So, the next time you enter the back room of your retail operation, listen carefully to those looming piles of merchandise. Maybe you will hear an announcement.

Attention retail buyers: If you aren't thinking about how returns can affect your bottom line, perhaps you should take a look. Hurry before these unwanted quantities become unlimited.