December 1, 2006
strategic insight | Reverse Logistics

The returns of an American icon

the returns of an American icon

If you build your business by guaranteeing customer satisfaction, you'd better be prepared for a flood of returns. An exclusive look at L.L.Bean's strategy for staying afloat on a sea of returned backpacks, fly rods, parkas and moccasins.

By John R. Johnson

It wasn't the most auspicious of retail debuts, but Leon Leonwood Bean was undaunted. After returning from a 1911 hunting trip with cold, damp feet, Bean had designed and begun marketing a better hunting boot—a model that featured leather uppers stitched onto a workman's rubber boot. He mailed out promotional fliers and in short order, collected 100 orders for his Maine Hunting Shoe. But then he ran into a problem: Of the first 100 pairs he sold, 90 were returned when the rubber bottoms separated from the leather tops.

A less determined merchant might have gotten discouraged and closed up shop, but not Bean. He made good on every pair, giving each unhappy customer a full refund. Then he borrowed more money and corrected the problem, and a wildly successful retail business was born.

The company he founded, L.L.Bean, has come a long way since it sold those first 100 pairs of boots. It now sells nearly $1.5 billion worth of outdoor clothing and accessories annually (the company's sales have doubled every four years since 1967). Today, L.L.Bean has grown to include seven U.S. retail stores, more than a dozen outlets, and a thriving catalog and Internet business.

What hasn't changed is the company's satisfaction guaranteed policy. L.L.Bean allows customers to return products at any time for any reason—no questions asked. It also bends over backward to make the returns process easy for them. "I look at returns as the protector of the guarantee," says Mike Perkins, the company's vice president of distribution and returns operations. "We've already disappointed the customer once. In order to protect that guarantee it absolutely has to be right the second time. The returns process has to be quick and no hassle, and it must go smoothly for the customer."

Smooth operators
Keeping the returns flowing smoothly is no small challenge, given the volume of items that flood into the company's reverse logistics center each year. Of the 48 million units L.L.Bean shipped last year, six million were returned. Returns volume peaks in the days after Christmas, when things get so busy company executives have been known to pitch in and open boxes. During these peak periods, the returns department can expect to see an 18-fold increase in volume—on the busiest day last year, the department processed 47,000 individual returns. This year, L.L.Bean expects to handle 265,000 returned items in the week following Christmas.

Returns are processed in a special reverse logistics center located at L.L.Bean's distribution campus in Freeport, Maine. At 135,000 square feet, the returns facility rivals many distribution centers in size. Inside the center, a dedicated returns staff of 500 processes returns and exchanges. The company says about 85 percent of returned items are accompanied by a request for a refund, while 15 percent are exchanges. L.L.Bean also repairs returned items. Although it's doing less and less of that work these days, it still repaired a half million items last year.

The returns staff includes a sizable percentage of veterans. Many have 20 years of service with the company, and one employee has been with L.L.Bean for 35 years. Having experienced workers on hand helps assure that operations run smoothly during the peak holiday season, when Bean supplements its workforce by adding 250 temp workers. "We handle 140,000 unique SKUs," says Perkins, "so it's not easy to train a seasonal workforce."

High-tech, low-touch
Still, training seasonal workers should be easier this year than in the past. This summer the company invested in a new one-touch returns processing system designed to reduce the number of handoffs needed. With the new system in place, a single associate can handle a product from the time it's picked up off a conveyor belt to be scanned, processed and prepped to the time it's sorted to a tote and placed back on the conveyor for reintroduction into Bean's inventory system.

"Eighty percent of returns can now be processed by one person, which is a significant change from how it's been in the past," says Barb Wood, L.L.Bean's senior manager of returns operations. Though the system has only been in place a few months, productivity has already improved—the number of units processed per employee per hour has risen from 16.5 to 18. Wood expects that as associates gain more experience with the system, her department will exceed 18 units per hour during this year's peak season.

Other innovations are on the way. Once L.L.Bean completes an update of its computer system next year, the company will have much greater supply chain visibility, says Wood. At that point, it will be able to begin filling orders directly from the returns center. Right now, Bean's computer system doesn't receive information on what returned items have become available until the merchandise has been moved across the parking lot to the DC, where it's re-scanned and entered back into inventory. Once the new system is in place, a pop-up message on an associate's computer terminal will alert him or her that an order is pending for the returned item he or she is checking back into the system.

Wood is also looking into creating a staging area for returned goods for which no order is pending but which are still likely to be reshipped within a day or two. Well over 50 percent of returned items are purchased again within 48 hours, she explains. Wood hopes to have that system in place for next year's peak holiday season.

Outsource proposals get the boot
Of course, all this technology doesn't come cheap. Taken together, the various costs of running the high-tech returns operation amount to some $14 million a year. That would prompt many retailers to consider outsourcing their returns programs, but not L.L.Bean. The company considers reverse logistics to be a core competency and far too critical to its business model to place in someone else's hands.

"We're trying to satisfy a dissatisfied customer," says Perkins. "We fear that if we hand that off to people [who] are not responsible for our bottom line, they might not make the same decisions we do during the process."

Aside from customer care considerations, the company also sees financial value to keeping its returns process in house. L.L.Bean executives say the veteran returns staffers have developed considerable expertise in restoring returned items to "first quality" status, which allows them to be returned to inventory and resold. Items that can't be sold as "firsts" are sold off at discount outlets or employee stores, or discarded, which means the company takes a financial hit. "Our challenge is how to get a product back to pristine quality, and our ability to manage that has dropped money back to our bottom line," says Perkins. "An employee might spend five minutes refurbishing a T-shirt, but the gross margins we get back make the returns process pay off in spades."

Perkins adds that the company shares its back-to-stock goals with employees. It also incorporates backto-stock rates into its incentive plans to encourage associates to restore as many items to "first quality" status as possible.

Mostly happy returns
For all the customer goodwill it promotes, doesn't that "no questions asked" returns policy invite people to take advantage of it? Perkins acknowledges that about one-half of 1 percent of the returned items L.L.Bean receives have been abused—a backpack run over by a bus, for example, or a frayed sweater that's obviously been stuffed in the back of someone's closet for the past 10 years.

Although the company has placed some frequent abusers on a "no returns" list, it has no plans to retreat from its generous return policy. L.L.Bean executives are convinced that the customer satisfaction guarantee pays for itself many times over.

"One hundred other people sell something that looks like a Maine Hunting Shoe, but only one guarantees that you can return that item anytime and anywhere," says Perkins. "That's great marketing. It's something you can't buy with a TV ad."

About the Author

John R. Johnson
Editor
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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