Complexity causes 50% of product returns: scientist – Yahoo! News
Define your Product or your customer will Return it!
Product returns is a very expensive process for manufacturers. A product returned in large volumes can lead to a products demise due to unprofitability. Its important to understand that retailers today do everything in their power to avoid the cost of dealing with returns. After all, they have to pay employees to staff a customer service department to handle returns, not to mention, dealing with the inventory of returned goods, that must be either properly disposed of or packaged, scheduled & shipped back to the manufacturer. The process has an accounting cost as well, as the manufacturer has to be ‘debited’ – (reversed invoicing) for the value of the returned item.
So retailers have gotten smart and started charging manufacturer’s for the cost of freight and very often for the handling of the product, which can be billed at a flat rate or as a percentage of the value of the item.
So picture a $200 widget returned to your local retailer.
The retailer pays a clerk $6 / hour(not making a value judgement about living wages or benefits in this dialogue) to cut you a receipt and take the product back. Each return takes 4 minutes ($0.40). Plus, an inventory clerk has to hall it from the front of the store to the back and drop the widget in a return bin to route it to the distribution center (6 minutes or $.60) UPS shows up to pick up the box of widgets for the month, halls them off to a distribution center where they are consolidated with widgets from 2,000 other stores. Lets assume 20 widgets per store over 2000 stores, is $40,000 in labor. Does not include storage or boxes or time scheduling freight pickups, so lets add another $1 per widget in overhead. Total cost to get to Distribution center $80,000.
The distribution Center pays again to hold the goods and consolidate them and schedule freight. So lets add another $2 per widget. $80,000.
Total cost to Retailer $160,000
They get reimbursed for freight at actual cost + 3% as their local carrier contract does not allow them to share pricing information. So wash on freight and pick up profit of 3% on cost of freight. Let’s say freight cost $4k to ship truck load of widgets across US. So the retailer flips this cost center into a minor revenue stream and makes 3% of $4k = $120.
The show is not over yet. They then turn around and charge a 8% handling fee on the cost of the product to the manufacturer. (20 units per store x 2000 stores = 40,000 widgets x $200 / widget = $8,000,000). This $8m is also what the retailer paid for the widget in the first place, assuming they have cut a check already. So they return the product and deduct $8,000,000 for the value of the returned goods & they add a deduction of 8% on $8,000,000 for fees for handling the returned goods (8,000,000 x .08 = $640,000).
So if you’re following along they just charged $640k for services which they have $160k in costs built up. That’s a SUPER flip of a cost center into a Revenue stream even a profit stream. They just made $480k!
Now, I’m not saying this is a great deal for the retailer. They just made 8% on a product when their goal or intent was probably to make 35-50% in margin marking it up and selling it to the customer.
However, they do benefit from the customer paying that markup, the retailer sitting on the cash till the product is returned, and then from the foot traffic of getting the customer back into the store when they return the item. Potentially, they will buy other products, so now the return becomes and up sell for them to boot.
So this the retailer is flipping a bad situation and making it as good as possible. The manufacturer however is getting a big ‘chargeback’ for the return and this hits the bottom line in a negative manner. In addition to paying the retailer, they have to inventory this returned product and ‘disposition’ or figure out what to do with it.
Ergo refurb, resell, destroy, play with a magic 8 ball and hope for some good advice . . .
All of these things can be expensive and do not benefit the manufacturer. So if Manufacturer’s can take the information from the findings from the original link, and take this lesson to heart they can make a better product, suffer fewer returns, reduce a significant amount of costs, and have happier customers!
All they need to do is figure out how to do this while shaving a month off of the product development life cycle that they employed last year when they couldn’t figure this out.
They need better information, better processes, and better communication.