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Centralizing The Process

By Kim S. Nash  |  Posted 2003-01-17 Print this article Print

Technology helped the $41 billion a year retailer improve the way it processes 23 million items returned each year—and make money doing so.

Centralizing The Process Discounters and other kinds of secondary buyers prefer to buy in big lots rather than a few items at a time. Before, Sears stores often would end up destroying or discarding some merchandise because amassing enough of it to sell on an alternative market took too long. Sears lost income this way.

But managing returns from three warehouses, rather than 2,900 individual back rooms, means that bulk collects quickly and other markets are a practical and frequent option.

Store labor is one of the biggest areas for savings, Greve says. At retail companies where each store handles reverse logistics, managers and clerks typically spend a total of 40 to 80 hours per week on returns work at each store. Most of that time is spent sorting merchandise and following up with suppliers.

By centralizing and outsourcing the process, in-store people simply take back the products from customers, pile them on a single pallet unsorted, then call Genco to pick up the goods when the pile gets big. Labor can be cut to 15 or 20 hours per week, per store, Greve says.

A recent financial analysis Genco did for a regional discount chain showed a positive cash flow in reverse logistics in as little as one year. The discounter averages 4 million returned items per year and spends about 50 hours per week handling them in each of its 104 stores. Genco's services would cost about $3 million per year, plus an initial $323,000 on capital equipment, such as scanners and bar-code readers.

By Genco's estimates, centralizing and outsourcing returns can cut in-store labor to about 10 hours per week per store. Product shipments would be simpler, with pallets of all different manufacturers' merchandise being sent every two weeks to Genco return centers. Annual benefits-increased manufacturer credits, fewer labor hours on the chore, more cost-effective shipping-are pegged at $4 million per year.

Still, problems arise. One is philosophical: Although every retail executive knows that returns can cost significant money, getting funding for a reverse logistics operation can be tough. The process is antithetical to the mission of a retailer to move products out the door, so why spend money on it?

Doing the initial database upload is also tricky. Genco, for example, had to spend several weeks with Valstad's eight-member staff and other Sears managers to understand and record all the different returns requirements of Sears' suppliers.

Plus, the database has to maintain data on items Sears no longer even sells. Though there is usually a 30-day return limit, customers commonly return products months or even years later. Sears won't turn away a customer with a gripe. "It still says 'satisfaction guaranteed' above the door," Valstad says. Genco keeps two years' worth of Sears data on file.

For example, as part of a $1 billion restructuring plan to jack up profits, Sears is cutting slow-selling products, including bicycles and custom window treatments. Genco will keep pertinent data at least until the end of 2004.

Sears also works with other reverse logistics companies. Hangerman, in Grand Rapids, Mich., for example, repacks and sells 100 million plastic garment hangers per year for Sears, and Sears gets a cut. Damaged hangers go to plastic recyclers, also income for Sears.

Valstad won't say how much Sears takes in from its various reverse logistics programs, or how much the company spends with Genco. But he says the venture is profitable. "In addition to recovering significant dollars in vendor credits or through recycling, we are able to recover all of the costs of running our reverse logistics program," he says.

As for Diane Petro's granddaughter in New York, she saw a new pair of jeans under her tree.

Senior Writer
Kim has covered the business of technology for 14 years, doing investigative work and writing about legal issues in the industry, including Microsoft Corp.'s antitrust trial. She has won numerous awards and has a B.S. degree in journalism from Boston University.
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