Some companies are turning a tidy profit by reselling returned products that were once consigned to the scrap heap. The trick, they say, is figuring out what's junk and what's worth a second look.
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.
For years, Cisco Systems Inc.'s product returns operation was pretty straightforward stuff. The merchandise arrived, and with few exceptions, it was thrown out. From 1995 to 2005, Cisco discarded more than 95 percent of its returned goods. According to company estimates, the Web networking giant in 2005 dumped $500 million worth of returns, junking enough product to cover 12 football fields knee-deep. By 2005, Cisco's returns business was a bona fide cost center. That year, it spent $8 million more to process returns than it generated in revenue from selling some of the items at residual raw material value.
Dan Gilbert, Cisco's vice president, supply chain field operations, thought there was a better way. But he couldn't be sure until he instructed staffers to visit one of Cisco's receiving warehouses and pull a cross-section of returned goods off the conveyor belts. The employees were told to visually inspect the merchandise and dispatch those items that passed muster to company engineers for further testing.
The results were revealing: About 80 percent of the products analyzed were in good operating condition, with half needing some cosmetic work. If that sample reflected Cisco's total returns activity, Gilbert reasoned, most of its returns could gain what he called a "second or third life" before being tossed.
Gilbert embarked on what would become a three-year mission to rewrite Cisco's reverse logistics playbook. He started by exploding the myths that all returns were defective scrap, that the returns process was a "hairball" that could not be improved, and that the company's supply chain was good enough to manage what was in place.
Gilbert created a profit & loss statement to give the returns process financial accountability. He built collaborative relationships with Cisco's sales, marketing, and financial arms, and developed a plan to support Cisco's global network of 500 supply depots. He assembled channels to receive returns, which can be roughly classified as follows: products that can be repaired and consigned as spare parts for Cisco's supply network; products destined to be sold into secondary markets; products that can be reused as refurbishing gear in the company's laboratories or for customer demonstrations; and products that can be donated for philanthropic purposes. Under the new program, only those items that don't meet any of those criteria are tossed out.
Today, about 40 percent of Cisco's returns are reused, an eight-fold increase from three years ago. Operating expenses, measured as a percentage of recovered value, have been pared to 39 percent from 119 percent. For Cisco's 2008 fiscal year, which ended July 28, the returns process contributed $100 million in net profit to its bottom line. Most of the contribution, Gilbert notes, came from increased revenue streams rather than from deeper cost savings.
"One of the myths is that you should treat all returns the same," Gilbert told the Council of Supply Chain Management Professionals' annual global conference in October. "The reality is there is a huge variation in the products you receive. You really have to dig into the details."
"No trouble found"
Companies that dig are more than likely to find products worth reusing. As much as 80 percent of all returns are classified as "no trouble found," meaning they are functional in their existing condition or at most, just need to be refurbished, according to DEX Systems, a Camarillo, Calif.based company that inspects returns and develops software applications to analyze their value. Buyer's remorse is by far the primary factor influencing a return, DEX says.
The percentage is even higher in the consumer electronics category. Approximately 95 percent of all returned consumer electronics products worldwide are free of defects that would require some type of repair, according to data from consulting firm Accenture. Wireless handset returns, in particular, are almost always remanufactured or refurbished because of their high component value, the firm says.
Many challenges
In a world of heightened environmental awareness, separating the returns wheat from the chaff has taken on elevated prominence as a "green" issue. According to the U.S. Environmental Protection Agency, consumers got rid of about 372.7 million electronic items such as television sets, computer equipment, and cell phones in 2006 and 2007. Of those, 304.2 million units were thrown out; only 68.5 million units were recycled, according to EPA data.
Despite that, evaluating which returns have a profitable afterlife and which should be consigned to the scrap heap remains, in the view of many in the industry, a business issue. And it's not a particularly easy business issue to manage. Unlike the forward logistics process, returns are inherently unpredictable. Each shipment is often touched multiple times, with a flow of so-called "decision points" that can add cost at each juncture.
The challenges are compounded by the short shelf lives of many products. This is especially true in the high-tech and electronics sectors, where life cycles are now measured in months instead of years.
Another factor is the globalization of manufacturing, which has brought overseas producers—many of them Asian-based— into a loop they may not yet be ready to enter, some experts say. A strong returns process "starts with infrastructure, and companies in Asia do not have the physical returns programs in place" to connect the dots with their supply chain partners, says Ronald Kula, vice president of business development for DEX.
Terry Steger, senior executive for Accenture's electronics and high-tech group, says Asian producers may not fully understand the implications of product returns on current and future revenue streams. But the biggest problem is a lack of timely communication between intercontinental partners, Steger contends. The communication gap is keenly felt when there is a costly product defect requiring a significant change in future manufacturing processes, he adds.
Cultural turf wars also come into play. Marketing folks are in business to push the newest generation of products and often have little incentive to focus on older merchandise, Kula says. In addition, top management may choose to scrap returns because it's too costly and timeconsuming to explore alternatives. "It's not like they are taking the easy way out," he adds. "It is the only way they know."
No more failure to communicate
The ideal solution is to dissuade buyers from returning the product at all. However, once the companies have returned goods in hand, they must play the cards they're dealt. The general rule is that a remanufactured or refurbished product must be resold for 70 to 80 cents for each dollar of current value to justify the cost of the work. Many older products have fallen to such low price points that it makes more economic sense to junk them than spend the time to even inspect them for their fitness.
As is often the case, IT tools can ease the decision-making process. RedPrairie Corp., a leading supply chain software provider, has integrated a reverse logistics module into what it calls its execution management platform. RedPrairie says its integrated model gives the recipient a companywide window on the return rather than treating the process in isolation. This enables broader visibility and better advance planning since the recipient sees how the return affects the entire organization, according to Tom Kozneski, vice president, product strategy.
For example, if the recipient of a returned product is unaware it has been discontinued or is out of warranty, that item may be labeled a good product and stored for processing, Kozneski says. As a result, labor and space are unproductively allocated, and a credit would be mistakenly issued, he says. "The returns system is based on integration with all other aspects of your business systems, so your returns staff gets current detail on whether the item should be processed at all or discarded," Kozneski says. "If there is information in your main database about the latest updates on SKU status, that detail is reflected at the returns processing station and it guides the subsequent action. It eliminates a lot of confusion and wasted effort up front when the returned items are checked in."
At DEX Systems, "economic triage," in Kula's words, is performed on returned products. DEX will visually inspect the product to determine its general condition and then conduct diagnostic tests to gauge the work that would be required—if any—and assess its monetary value.
Kula says DEX is guided by what he calls the "clip level," a pre-set ceiling on what will be spent to repair or refurbish a returned product. Products whose repair costs exceed the clip level are usually disposed of; Kula notes that many returns don't make the first cut.
"The first question that's often asked is 'Do we want to do anything?'" he says. "If the answer is yes, we will push the product down the line. If not, it may be disposed of."
ClearOrbit Corp., another company that supplies reverse logistics solutions, has developed software that separates returned components during the intake process and then asks the recipient a series of questions to help determine how the components can be disposed of. Based on the information derived from the responses, the company can repackage, reship, or reconfigure those items that have value, and the products then can be shipped or scrapped. "The recovery process now becomes a revenue source for resale of products that otherwise would have been thrown away," says Pat Anderson, senior solutions architect for ClearOrbit.
One ClearOrbit customer, a major manufacturer of automated teller machines, uses the software to refurbish older machines by evaluating the components on returned units that have been placed out of service. Instead of tossing the parts, the company has been able to update some of the components and resell products that might have been junked, Anderson says.
The ClearOrbit example underscores the notion of returns processes and technology converging on one goal: to assign a value to each return rather than lumping them together as a homogenous mass. As more manufacturers embrace this mindset, they may be pleasantly surprised to find there's gold in that junk pile.
Robotic technology has been sweeping through warehouses nationwide as companies seek to automate repetitive tasks in a bid to speed operations and free up human labor for other activities. Many of those implementations have been focused on picking tasks, a trend driven largely by the need to fill accelerating e-commerce orders. But as the robotic-picking market matures and e-commerce growth levels off, the robotic revolution is shifting behind the picking lines, with many companies investing in pallet-handling robots as a way to keep efficiency gains coming.
“Earlier in this decade and the previous decade, we [saw] a lot of [material handling] transformation around e-commerce and the handling of goods to order,” explains Josh Kivenko, chief marketing officer and senior vice president at Vecna Robotics, which provides autonomous mobile robots (AMRs) for pallet handling and logistics operations. “Now we’re talking about pallets—moving material in bulk behind that line.”
Kivenko explains that whether items are being packaged and shipped directly to a customer’s home address or moved as finished goods to a shipping bay for store delivery, those items are first moved in bulk in some way, often by human hands and with human-operated equipment. He describes warehouses as chaotic environments in which humans move pallets and cartons in multiple ways—up and down, side to side, from receiving to storage, from storage to shipping, or via cross-docking. Automation can help bring order to that chaos.
“What we’re trying to do is relieve some of the pressure [on the] humans [doing] this work,” Kivenko says of companies that develop pallet-handling robotic technologies. “At the end of the day, we’re trying to automate some of those flows, relieve labor pressure, save costs, and keep the goods flowing.”
But automated pallet handling isn’t right for every situation, so it’s important to understand the warehouse conditions required and the protocols and best practices needed to make it a win. Here are some guidelines for applying pallet-handling robots and gaining the most from your investment.
FIRST, UNDERSTAND THE TECHNOLOGY
Pallet-handling robots fall into four general categories, explains Rich O’Connor, vice president of storage and automation for Raymond West Group, a business unit of lift truck manufacturer The Raymond Corp. They include:
Palletizing/depalletizing robots, which are used to load or unload items onto and off of pallets, usually with the use of a robotic arm for picking and placing. Today, these systems are being increasingly integrated with automated storage and retrieval systems (AS/RS) to further streamline pallet handling in the warehouse, O’Connor explains.
Autonomous guided vehicles (AGVs) and autonomous mobile robots (AMRs), which are used to transport pallets within the warehouse. Often outfitted with lift decks or conveyors, or designed to tug or tow items, these robots move pallets from point A to B within a facility. AGVs, which often follow a marked guide-path or wire in the floor, have been around for many years, but the advent of high-performance guidance and vision systems is allowing them more flexibility today, O’Connor says. AMRs are self-guided vehicles that use software and sensors to navigate their way through the warehouse.
Forklift AGVs and AMRs, which can move products both horizontally, from place to place, and vertically, into and out of storage racks. They come in various styles—including stackers, counterbalanced trucks, reach trucks, and even very narrow aisle (VNA) vehicles for use in densely packed warehouses. These vehicles are more complex than those used only for horizontal transport, O’Connor explains. They must be “highly integrated” into the facility’s warehouse management system (WMS) or warehouse execution system (WES) so that they know precisely where to retrieve and deliver pallets within the facility.
Robotic pallet shuttles, which move pallets into, out of, and within dense storage racking. The Raymond Corp. describes such a system as “a standalone, automated deep-lane pallet storage system that utilizes self-powered shuttle carriages to move pallets toward the back or front in a racking channel. Shuttles are motor driven and travel along rails within a storage lane.”
O’Connor and others say that no matter which of these technologies you’re investing in, it’s important to remember that they are all part of a larger system designed to optimize operations throughout the warehouse.
“The expanding role of all these different styles working together is what’s amazing today,” O’Connor says.
SECOND, ENSURE THE TECHNOLOGY IS A FIT
Kivenko, of Vecna, also emphasizes the importance of pallet-handling robots working in concert, particularly AMRs and AGVs.
“The magic isn’t just that the robots are autonomous and driving by themselves. The magic is multiple robots—when you have a [whole integrated] system [in place],” he says. “[It’s] how the fleet operates autonomously and optimizes itself for continuous improvement. That’s where the exponential gains are. [It’s] not just about automating what a worker does; it’s about automating a system.”
But you can’t install these systems in just any warehouse and expect magic. Kivenko and others point to certain conditions that enable the best robotic pallet-handling outcomes, especially when it comes to transportation-based and forklift-type AMRs and AGVs.
“The robots that I sell are large-load machines with very expensive technology,” Kivenko explains. “They move material, generally, in larger facilities. And in order for them to produce a return [on investment]—because that’s the name of the game here—they have to be higher-velocity facilities.”
He says pallet-handling robots work best in large facilities running multiple shifts, usually more than five days a week. Wider aisles allow the equipment to move more freely through the facility and at higher speeds, to optimize efficiency and productivity. Strong Wi-Fi networks and clean, dry environments also help keep equipment running at top performance.
O’Connor agrees that pallet-handling robots are best suited to facilities with multishift operations, where they can ease labor constraints and boost productivity. And he says many customers are willing to extend the typical two- to three-year ROI period to five years in order to achieve those gains. But there is even more to it than that. O’Connor’s colleague John Rosenberger says customers must first step back and analyze their processes to ensure that, even if they have the right facility for pallet-handling AMRs or AGVs, they are moving material in the most efficient way to begin with.
“Many times, we find that the processes in place [are inefficient],” says Rosenberger, who is director of iWarehouse Gateway and global telematics for The Raymond Corp. He emphasizes the importance of analyzing existing data—from an equipment telematics system or similar—to determine the best path toward automation.
“Do you have congestion zones now?” he asks. “They’ll still exist if you automate [those processes exactly].”
THIRD, MAKE SIMPLICITY A PRIORITY
Another basic rule of thumb when implementing pallet-handling robotics: Keep it simple.
Andy Lockhart, director of strategic engagement for global warehouse and logistics process automation company Vanderlande, says that when designing a pallet-handling robotics system, “you want to minimize the processes you [automate]. When you can create [an automated system] that focuses on one task—for example, AMRs delivering pallets from a high-bay [storage rack] directly to the palletizing cell—you can do that efficiently and effectively. When you ask the AMR to do this and this and this … you are adding risk of failure.”
Lockhart’s colleague Jake Heldenberg advises customers to first test their target processes via pilot programs within the warehouse or DC. Heldenberg is Vanderlande’s head of solution design, warehousing, North America.
“If AGVs or AMRs for pallet handling are interesting [to a customer], the best thing to do is pilot one or two in an existing DC,” he says, explaining that the process can help companies troubleshoot, understand integration timelines, and gauge ROI. But pilot programs can add expense to a project, making it unaffordable for some.
“If that’s the case, then the best advice is work with a vendor who has experience integrating [the technology],” Heldenberg says. “Use their experience to benefit your business. You won’t have the same hiccups and challenges you would with a less-experienced vendor.”
Jeremy Van Puffelen grew up in a family-owned contract warehousing business and is now president of that firm, Prism Logistics. As a third-party logistics service provider (3PL), Prism operates a network of more than 2 million square feet of warehouse space in Northern California, serving clients in the consumer packaged goods (CPG), food and beverage, retail, and manufacturing sectors.
During his 21 years working at the family firm, Van Puffelen has taken on many of the jobs that are part of running a warehousing business, including custodial functions, operations, facilities management, business development, customer service, executive leadership, and team building. Since 2021, he has also served on the board of directors of the International Warehouse Logistics Association (IWLA), a trade organization for contract warehousing and logistics service providers.
Q: How would you describe the current state of the contract warehouse industry?
A: I think the current state of the industry is strong. For those that have been focused on building good client relationships over the years, I think it’s a really exciting time. Coming out of all the challenges of the past few years, I think there’s a lot of opportunity for growth and deeper partnerships. It’s fun to see the automation and AI (artificial intelligence) integration starting to evolve [in a way that’s] similar to what we saw with WMS (warehouse management systems) in the early 2000s.
Q: You are now president of your family firm. Is it an advantage having grown up in the business as opposed to working elsewhere?
A: I definitely believe it was an advantage growing up in the business. Whether it’s working with family or someone else in the industry, there’s always an advantage when you have mentors[to guide] you. I’ve been blessed to have several mentors, some in the industry, others just in life, and I’m thankful that they were willing to mentor me and that I was willing to listen to them.
Q: What are the biggest challenges currently facing 3PLs, and how are you addressing them?
A: Labor and legislation are both tough right now. The two seem to have a lot to do with each other, and it can make it tough to find and retain people. So I think we’ll see more and more automation of processes industrywide.
Q: Third-party service providers often must handle a wide variety of products for a lot of different clients. Does this variety make it difficult to invest in automation and other new technologies?
A: It can make things more difficult when looking at certain automation, but it’s in the “difficult” that a lot of opportunities lie. It would be tough to find a single solution that fits every client’s needs, but there are always opportunities to improve in certain areas. It just takes a bit of vision and commitment, and a willingness to invest in your own long-term success.
Q: As a 3PL, what do you look for when selecting the clients you work with?
A: Quality relationships that will last a long time. When both parties are happy and working together in the same direction, everyone wins.
Q: You’ve been a board member of the International Warehouse Logistics Association since 2021. Why is your involvement with this organization important to you?
A: I think it’s important to understand what’s happening in the industry. IWLA is a great resource for staying up to date and getting a solid education when it comes to the latest logistics trends. I also think it’s important to give back and pass along what we’ve learned to those just getting started in the business. As important as it is to have a mentor, it’s just as important to mentor and help others.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.
“ExxonMobil is uniquely placed to understand the biggest opportunities in improving energy supply chains, from more accurate sales and operations planning, increased agility in field operations, effective management of enormous transportation networks and adapting quickly to complex regulatory environments,” John Sicard, Kinaxis CEO, said in a release.
Specifically, Kinaxis and ExxonMobil said they will focus on a supply and demand planning solution for the complicated fuel commodities market which has no industry-wide standard and which relies heavily on spreadsheets and other manual methods. The solution will enable integrated refinery-to-customer planning with timely data for the most accurate supply/demand planning, balancing and signaling.
The benefits of that approach could include automated data visibility, improved inventory management and terminal replenishment, and enhanced supply scenario planning that are expected to enable arbitrage opportunities and decrease supply costs.
And in the chemicals and lubricants space, the companies are developing an advanced planning solution that provides manufacturing and logistics constraints management coupled with scenario modelling and evaluation.
“Last year, we brought together all ExxonMobil supply chain activities and expertise into one centralized organization, creating one of the largest supply chain operations in the world, and through this identified critical solution gaps to enable our businesses to capture additional value,” said Staale Gjervik, supply chain president, ExxonMobil Global Services Company. “Collaborating with Kinaxis, a leading supply chain technology provider, is instrumental in providing solutions for a large and complex business like ours.”