February 1, 2005
operations insight | Returns Management

Waging war on returns

waging war on returns

In the home computer market, a single return can vaporize all the profits from the sale. No wonder consumer electronics manufacturers and retailers are so intent on avoiding them.

By John R. Johnson

Every day, somewhere in America, an unsuspecting consumer wanders into an electronics store and leaves clutching the latest wireless networking device. Dazzled by the prospect of effortless access to files stored on his home or work computer from anywhere in the world—or the capacity to turn his computer on and off from just about anywhere, at any time—or the ability to keep up with the bills during next month's extended business trip to Hong Kong, he races home to set it up.

But once he gets home, buyer's remorse quickly sets in. Try as he might, he can't install and configure the wireless network. Aggravated by indecipherable error messages and despairing of ever getting the technical support he needs, he heads back to the store's returns counter.

In a day and age when Americans are deluged by ever more sophisticated consumer electronics, the sad truth is much of it gets returned by consumers who find themselves in over their heads. That's particularly true of wireless technology, which has pushed networking out of the average user's reach. "Only the leading-edge techno-geek people are playing with a lot of this new networking equipment," admits Intel executive Scott Lofgren, who is chairman of the Ease of Use/PC Quality Roundtable.

That collective consumer frustration is causing more than just headaches for the industry; it's costing them serious money. A study conducted by the Reverse Logistics Executive Council revealed that although the average profit for a PC sold at the retail level is $75, returns and support costs can run as high as $95 per unit. That's led some manufacturers to band together to form the Ease of Use/PC Quality Roundtable, which addresses—among other things—the problems users face when they attempt to link PCs and consumer electronics devices at home. "Our job as an industry has to be to figure out how to improve the consumer experience," says Lofgren.

Rage against the machines
The problem's not limited to computers. Companies that make and sell devices like DVD recorders are experiencing similar problems. "The things we're trying to do with devices in the home right now are much different than when we just slapped a record on a turntable," says Lofgren. Manufacturers have come to realize that they're partly to blame for the frustration. "DVD recorders have [excessively] high return rates and that seems driven — by ease of use issues," admits Tony Sciarrotta, director of returns management for Philips Consumer Electronics. "The consumer is genuinely frustrated by this. We don't make these products easy to use."

Nor are they easy to network. As anyone who's ever tried to hook up a new DVD recorder to a VCR or satellite TV receiver knows, you have to fight your way through a tangle of wires and navigate a dizzying array of output and input options. "The hookup aspect is the real nightmare," acknowledges Sciarrotta. "That's where we get the most calls [to customer service]. If we solve the problem—fine. But if we don't, it's our product the consumer will probably end up returning because it was the most recent purchase." In fact, return rates for DVD recorders run well above the 5 to 6 percent typical of the consumer electronics industry.

Still another problem is a lack of standardization. Manufacturers have made little attempt to standardize their formats. Bring home a Philips or Sony DVD recorder and you may be dismayed to find that it uses a different format disk from your old Panasonic unit. It's no wonder consumers are throwing up their hands in defeat.

The best return is no return
What can manufacturers do about mounting returns costs? Some have hired third-party returns specialists to manage reverse logistics for them. Others have invested in tracking software to help rein in costs.

But Sciarrotta thinks he has a better idea: He's concentrating on finding ways to keep returns from happening in the first place—or at least minimizing the number of items that need to be returned. So far, his company has been remarkably successful implementing this strategy, known in the industry as "avoidance." Though Philips' rate of returns once ran about double the industry standard, the company has sliced its rate in half, cutting annual returns from $200 million's worth of merchandise to well under $100 million.

So what does avoidance involve? Sometimes it's simply a matter of designing products better or making them easier to use. "Avoidance really starts right from the beginning of the product design stage," says Dale Rogers, professor of supply chain management at the University of Nevada and chairman of the Reverse Logistics Executive Council.

Other times, it's not so much the products as the ancillary items or services that are responsible for consumers' frustration. Some manufacturers have found that what they really need to do is improve their after-sales support—supplying better-written user manuals or making it easier for customers to get help. And needless to say, it's essential to work out any quality control issues to ensure that products are defect-free before they leave the plant.

Point of no return?
But even providing 100-percent defect-free DVD players or cell phones is no guarantee that consumers won't return them. Statistics show that for some consumer electronic product lines, seven in 10 items that are returned have nothing wrong with them.

It's partly a cultural issue, says Sciarrotta. "Over the years we've made it extremely easy for consumers to bring an item back to a retailer and get their money back—even if it's not defective." Blanket no-questions-asked returns policies have led to abuses like the college kid who scores backstage passes to a Lenny Kravitz concert, buys a digital camera to record the big event, downloads the photos to his PC, and returns the camera the next morning.

Other times, perfectly good products are returned simply because the manufacturer has recently introduced a newer, faster, more powerful model and the consumer feels entitled to an upgrade at no cost. That's a trend that Philips, for one, has been tracking for some time now, says Sciarrotta. "Every three to six months, a higher-speed CD burner comes out, and it's evident that consumers are bringing the old ones back and getting the new higher-speed ones as replacements."

Philips' response to that has been to establish better gatekeeping policies—refusing to accept items that should not have been returned in the first place or that have been returned to an inappropriate destination. "Instead of taking anything back anytime from anybody, you use entitlement controls to authorize models that are within a certain window," Sciarrotta explains.

For example, Philips now publishes "approved model lists" that spell out for retailers which products they're authorized to accept as returns. If a retailer grants an unauthorized return and ships the item back to Philips, the company will send it back with an invoice to cover the cost of the return. Philips has also set time limits, says Sciarrotta. "We shouldn't take things back that are five years old."

To flag items that aren't eligible for returns, retailers like Wal-Mart and Target have launched electronic product registration programs. When a bar code is scanned at the register, a Wal-Mart associate, for example, also scans a serial number that records information about the sale in the retailer's database. If a customer attempts to return the product later without a receipt, the store associate can simply scan the serial number to confirm when and where the product was purchased. "We have people try to return things at Wal-Mart that are five years old," says Sciarrotta. "Our retailers can avoid that now with this … validation process."

Some retailers have even come up with programs to discourage returns on their own. Wal-Mart, for example, has implemented a national warranty repair program. If a customer walks in with, say, a two-year-old CD burner (or any item purchased outside of its approved returns window—normally 30 to 90 days), Wal-Mart will no longer exchange it for a new one. Instead, it offers to ship the product to the manufacturer, which will repair or replace it and ship it back to Wal-Mart. Once customers realize that they won't get cash back for the return, many opt to keep the product.

Though he admits the program is expensive, Sciarrotta considers it well worth the cost. For one thing, Wal-Mart enjoys extremely competitive shipping rates with UPS, which keeps transportation costs down to reasonable levels. Second, the program helps manufacturers like Philips retain customers, which is a key goal. "If Wal-Mart granted a refund," he says, "the user would most likely go out and buy something [made by someone] else."

"The combination of electronic serial number registration, plus the national warranty repair program has put them in a tremendous position to minimize returns," says Sciarrotta, who reports that Philips has seen a 50-percent reduction in returns from Wal-Mart. "That's cash flow right out of the register. If a retailer can make even a 1-percent improvement there, [it is] looking at a huge improvement to the bottom line."

About the Author

John R. Johnson
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.

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