many safe returns

When the first box arrived, workers on the floor at the high-end electronics manufacturer's DC were baffled. Staffers processing the day's returns had opened a package to find one of the company's underwater flashlights with a three-quarter inch hole drilled through it—and a warranty claim for damaged product. Things were to get stranger still in the days to come as more and more flashlights arrived in the same condition.

Eventually the full story came out. A couple of months back, the manufacturer had decided to destroy 3,000 obsolete flashlights by having a hole drilled through each unit and shipping them to a third-party recycler for disposal. But somewhere along the way, the plan went awry. The flashlights leaked back into the supply chain, leaving the manufacturer open to expensive warranty claims from customers looking for replacements or refunds (not to mention a potentially nasty public relations problem).

A tough lesson, perhaps, but an important one. When it comes to high-end goods—jewelry, laptop computers, PDAs, or underwater flashlights—getting new merchandise to the retail store safely is only part of the job; the other part is keeping a close eye on the goods if and when they enter the reverse logistics channel. That's true whether it's first-quality merchandise, obsolete models or even damaged goods.

Surprisingly, tracking high-value goods as they swim upstream through the reverse channel hasn't been a high corporate priority, even for the giants in the electronics industry. "The assumption is that all the larger electronics manufacturers have this nailed down," says Rocky Romanella, vice president and Americas Region general manager for UPS Supply Chain Solutions, a provider of reverse logistics services, "but we've found some inconsistencies in that assumption."

Return of the bling
There are several good reasons to track returns, of course, but the most compelling is money.Whether jewelry or electronics, this is valuable stuff. And in the case of electronics, a surprisingly high percentage of returned merchandise isn't particularly old or particularly damaged; it's first-quality merchandise. According to AMR Research, close to 60 percent of all laptops returned to the manufacturer are classified as NTFs—for no trouble found. Manufacturers like Dell and Hewlett-Packard have learned to reroute them immediately into the selling channel, usually as discounted product sold on their Web sites or marketed in Third World countries.

That's not to say that NTFs are the only returned products worth retrieving. Surprisingly, outdated and even damaged goods can be quite valuable too. In the electronics industry, where a six-month old model may be written off as a dinosaur, "obsolete" is a relative term. And what's obsolete in one market may be a hot item somewhere else. A cell phone without the latest accessories whose sales are languishing in the United States, for example, might prove to be a big seller in, say, Nigeria if the manufacturer can redirect it to that market fast enough. "Companies that can deal with accelerated product obsolescence will be ahead of the game if they can get the products tested quickly and into Third World markets where they are perfectly acceptable," says Marc McCluskey, research director at AMR Research.

One company that's ahead of the game is Motorola Corp., which has the redirection process down to a science. If sales of a particular model don't take off, the cell phone manufacturer has systems in place for shipping the products from the original retailer directly to the next customer, bypassing the interim step of sending it back to the distribution center.

Motorola's sophisticated reverse logistics program goes well beyond the collection of overstocks and slightly obsolete models for resale. It also has procedures in place for retrieving damaged goods, which are screened at the point of sale if possible. If the product is indeed broken, the company takes it apart to find out exactly why it failed and passes on its findings to the product design teams in hopes of eliminating the problem in the future. If a defect is ruled out, the product is returned to the customer, saving Motorola shipping and logistics costs. "Our NTF rates aren't nearly as high as they used to be because we've implemented programs with customers to screen product before it comes back to us," says Larry Maye, Motorola's director of strategy and operations planning for reverse logistics.

But more to the point, collecting those returns has allowed the company to develop a thriving business selling reconditioned products both in Third World markets and via its Web site. "The philosophy used to be why sell a used phone when we can sell a new one?" says Maye. "That is changing dramatically."Maye estimates that the global market for second-hand cell phones approaches 50 million to 60 million units annually.

Keeping it confidential
Not all high-value returns are destined for the resale market, however. Some of them are headed for the scrap heap. Tokyo Electron America (TEA), a supplier of semiconductor production equipment and flat panel display equipment to clients like Intel and Motorola, for example, collects and destroys all of its obsolete inventory. But it too must pay careful attention to securing its reverse logistics channel. TEA managers can't just toss outdated equipment in the nearest Dumpster. They have to retrieve every last integrated-circuit tester to assure that its parts don't end up in the wrong hands.

"Our product has to be destroyed for two reasons," says Jeff Jonas, logistics manager at the Austin, Texas-based company. "First, we want to avoid reverse engineering [the copying of semiconductor chip designs]. We also need to make sure parts aren't picked up by resellers and sold as Toyko Electron parts when they are not sold by a certified Toyko representative."

In the past, the company bought back obsolete inventory twice a year and re-distributed that product backwards through the supply chain. First, it shipped product from multiple sites to one distribution center. From there, the product was sent on to a recycling center for destruction. The destroyed equipment was eventually shipped back to the parent company, Tokyo Electron, in Japan for disposal.

But that was neither efficient nor cheap. Working with UPS Supply Chain Solutions, Jonas found a better way to do the job. The company now ships the obsolete product from each location directly to local salvage centers contracted with UPS, which not only cuts transportation costs but also speeds up the process. Under the new system, TEA moved 59,000 pounds of scrap in two weeks. Previously, Jonas estimates, it would have taken six.

The scrap still gets shipped back to Japan, but it's accompanied by certificates of destruction and before-and-after photos that validate the destruction process. As a certain flashlight manufacturer found out, those certificates can be worth their weight in silicon.