DISCUSSION

For Week 5, you get again to be a real consultant and show what you know or think you know about recalling an item. Given that a consultant will often make organizational recommendations, it is good to consider how the organization is structured.  Consider that there is an organizational case for an executive level vice-president to champion reverse logistics.

Introduction

Despite the belief of some individuals, all organizations must recognize that all retail companies, especially electronics companies, are competing for the same consumer market. In the past, local retail operators competed with other local retails for market share in a specific geographic location. Now, local electronics companies must not only compete with other local companies but they must compete with e-retailers and other less-than-local competition that have competition leveling services such as free shipping or other discounts targeted at out of area consumers. If this were not enough, operations managers have to cope with larger and more complex organizations making it harder for managers to be available to address new issues. Organizations are moving to be more specialized and more streamlined in their focus.

Despite the reports generated by the quality assurance department, returns are a fact of any business. Even achieving Six Sigma does not always decrease the volume of returns and improve customer satisfaction. There is an organizational myth that is circulated that controlling the quality of the product is the only means to control the amount of returns. If this were true, an organization that is operating consistently at Six Sigma, the organization would expect about 3-4 returns per million units sold. We know from research and practical operational experience that this is never the case.

Furthermore, retail electronics companies are removing returns from their own supply chain and having consumers return material directly to the manufacturer. Rather than manage these returns through their own supply chain, they are having consumers deal with another company. Many retail outlets, online and face-to-face, have a disclaimer to not return the product to the store where it was initially purchased it. Instead, retail stores have consumers mail the defective good via some UPS drop or other organization whose name does not resemble that original store or product manufacturer.

Yet, most organizations accept that a very small portion of distributed goods will be returned for some other reason. In many cases, the reason for the return is unclear and many organizations simply ignore the returns as long as the returns are not quality related or highly visible to the media. The reason that this important information is ignored is because there is no one to own the problem. For example, quality circles tend to manufacturing quality, procurement professionals attend to sub-contractor and supplier quality and so there is no one left to attend to the quality outside of these important areas.

The Problem

Studies in reverse logistics have shown that there is always a portion of products that are returned and tested but the company fails to identify any issue with the product. These ‘no fault returns’ cost a company money in time and prestige. Interestingly, these ‘no fault returns’ will often outnumber the quantity that is returned for actual quality issues, yet few organizations try to learn what the cause of these types of returns is. Many remain focused on reducing manufacturing errors and remain ignorant to the real problem with their returns.

Another important matter to consider is the actual costs associated with reverse logistics. The reported value of U.S. returns alone is estimated at 100 billion per year and consists of approximately 4% of the U.S. GDP (Stock & Mulki, 2009, Li & Olorunniwo, 2008). This information shows the importance of the management of returns, not even considering the other areas associated with reverse logistics. Further studies have shown that the rate of returns can vary between 5-50% (Rogers & Tibben-Lembke, 1998) and so even at a modest 5% rate, this level of returns is significant.

Assuming that 5% of a company’s value is tied up in reverse logistics can have serious brand ramifications, this alone should be sufficient for an organization to address this significant issue. Given the erosion of margins in most market segments given the current state of the economy, 5% can be the difference between success and failure. Even considering a highly efficient organization might have a scant 0.5% returns, (1 in 200) this is significantly more than the 0.00034% (3.4 per million) that Six Sigma promised to deliver. Clearly, there is more at work than just quality with regards to returns and hence organizations must take notice of this situation and apply management solutions in order to achieve a clear competitive advantage.

Almost all organizations have some form of procurement and logistics organization that is charged with maintaining the flow of quality goods and services to an organization. Traditional supply chains have skilled negotiators and professional managers to control the flow of materials to an organization. The employment of highly specialized individuals and a corresponding department head (VP level) will be charged with maintaining an uninterrupted flow of goods (and services) to an organization. This professionalism will also support quality assurance, risk management and operations in order to manage inbound quality. Organizations understand having a highly trained and professional supply chain group will yield organizational benefits beyond the cost of these professionals. Many organizations are only beginning to realize that applying the same level of training and professionalism to reverse logistics can yield the same, if not greater, level of organizational benefits.

The Solution

Current research in the field of reverse logistics has shown that the field is specialized enough that it should be its own separate department headed up by a senior level management professional with specialized skills (Kempter, 2009, Stock & Mulki, 2009). Furthermore, once a senior level management professional is responsible, the reverse logistics department can apply the same quality improvement techniques to areas such as returns and repairs in order to become as effective as quality is for operations (manufacturing). The electronics industry would benefit greatly by the adoption of this executive level champion for reverse logistics within an organization. The electronics industry has high value and low perishability items that need to work when in the hands of consumers. In addition, since these items need to be user friendly, the more that can be done to improve the customer relationship after the sale, the more that the consumer will remain loyal to the brand.