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HowPhilipsReducedReturnsFromtheNovember/December2003issueofSupplyChainManagementReviewTONYSCIARROTTASupplyChainManagementReviewNovember1,2003Theanswertoreducingthecostofreturnsdoesnotalwayslieinimprovingyourreverselogisticsoperations.AtPhilipsConsumerElectronics,thereturnsmanagementdepartmenthasfocusedonhowitcanstopreturnsbeforetheyevenenterthereversesupplychain.Bytakingpreventativestepssuchasimprovingaproduct’seaseofuse,enforcingcompanypolicies,andrevitalizingtheservicenetwork,Philipshascutitsreturnsbymorethan$100millionperyear.In1998,Iwaspresentedwithanopportunity:headupareturnsmanagementdepartmentwithinPhilipsConsumerElectronicsandhelpleadeffortstocontrolamajorcostdriver—productreturns.Atthattime,PhilipsConsumerElectronicshadnoreturnsmanagementdepartment,andreverselogisticswasnotyetpartofthelanguageofmostmanufacturers.ButmanagementandKenGoins,thevicepresident/generalmanagerofPhilipsServiceCompanywhoapproachedmewiththeopportunity,recognizedthatthecompanywasfacingrelativelyhighreturnrates.Theimpactofthosereturnsonthebottomlinewassignificant,amountingtotensofmillionsofdollarsinlosses.Philipsmanagementwasunderpressuretoreducethecostofreturns.Theyrealizedthatthecompanyneededtodevelopacorecompetencyinreturnsmanagement,whethertheactualprocesseswerehandledinhouseorviaoutsidepartners.Managementbelievedthatitneededadepartmentwithadedicateddirectorandfocusedstafftoaccomplishthesegoals,hopingthatsuchadepartmentwouldenduppayingforitselfintheprocess.WhenKenapproachedme,Iwasworkingintheproductmarketinggroupafteradecadeinsaleswithregionalandnationalaccounts.Mybackgroundwasnewforthereturnsmanagementrole.Normally,thecredit,finance,orservicegroupswithinmostcompanieshandlereturns.ButKenunderstoodthatreturnsreallyarereversesales,andtheyareoftencausedbyproduct-marketingdecisions.Aswebegantostudythesituation,wediscoveredareturnsenvironmentthatwasoutofcontrol.Ingeneral,returnsintheUnitedStateshavebeenincreasingduetoatakeitbackculture,propagatedbyretailerswithliberalandalmostunlimitedreturnpolicies.Retailerswerefoundtobegivingrefundstoconsumersovertwo-thirdsofthetime.Inmanyofthosesituations,consumersdidnothaveacopyofthesalesreceiptfortheirpurchases.Storepoliciesthatwereinplacewerenoteasytoenforce,makingitdifficulttoreduceimproperproductreturns.Theriseofreturnswasfurtherfueledbytheincreaseinproductsthatcouldnotbeservicedinthehomecoupledwiththedemiseoftheindependentserviceproviderswhoperformedin-homerepairs.Mostconsumerelectronicscompaniesviewedreturnsasthecostforthesteadysalesgrowthinnewretailchannels.Butalongwiththeincreaseinoverallreturnswasanotherdisconcertingstatistic—therateofproductsreturnedwithnodefectfound(NDF)wasveryhigh,averagingmorethan70percentforconsumerelectronics,morethan85percentforPCproducts,andevenover90percentforsomesmallappliances.Retailersandmanufacturerswerepayingsignificantreverselogisticscoststomoveproductsthatwerenotdefective.ThesituationatPhilipsreflectedthisexternalenvironment.Becausewehadnoonefocusedonreturnsandnoclearreturnspolicyorprocedures,Philipshaddevelopedacultureoftakeanythingbackfromanybodyanytime.Thetotalcostofreturnshadneverbeenexposedtotheproductbusinessownersorevenidentifiedcollectivelyforthecompany.Philipshadneverattemptedtoimplementreturnssolutionsacrossdepartmentlinesorbyworkingwithretailers.Thislackofattentiontoreturnswashurtingus:Until2000,thereturnsratesatPhilipswereevenhigherthantheindustryaverage.Addingtoourproblems,manymajorretailershadbegunthepracticeofdeductingforreturnsuponshipmentbacktovendors.Theclaims,counterclaims,andreconciliationprocessesbecametime-consuming,manual-intensivenightmaresformanufacturerslikeus.Finally,thesecondarymarketforthesegoodsintheUnitedStateswascostlyforPhilips.ManyoftheliquidatorsthatPhilipsdealtwithhadquestionablefinances.Additionally,inthesecondarymarketwewereexperiencingpoorrecoveryonthefactorycostsofourproducts.Asanexample,forDVDssoldatliquidators,Philipswasonlyrecovering20to30centsonthedollar.Clearly,changesneededtobemade.Philipsfirstneededtoanalyzeitsreturnsnumberstounderstandtheirsizeandtotalcosttothecompany.Wealsohadtounderstandtheconsumerandretailerenvironmentinordertomakeimprovements.Thisinvolvedresearchingconsumers'reasonsforreturningproducts—particularlythosewithoutdefects.Finallyaparadigmshiftwasneededinmanyareas.Thatis,weneededtotakeproactivesteps,bothinternallyandincooperationwithourretailpartnersandserviceproviders,toaddresstherootcausesofreturns.UnderstandingtheProblem:MeasuringReturnsEveryonerecognizestheaxiomthatwhatgetsmeasured,getsdone.Forthoseofusinreturnsmanagement,thismeantrealizingthatakeytosolvingthereturnsproblemlayinhavingacommonsetofmeasurementswiththerightlevelofdetail.AtPhilips,themainproblemwasalackofconsistentmeasurements.ReturnsweremeasuredanddefineddifferentlyintheUnitedStatesthanintherestoftheworld,anddifferentpartsofthePhilipsorganizationuseddifferentITsystemstomeasurethem.Furthermore,wecouldnotagreeonwhattimeperiodtouse(yeartodate,monthly,rolling12month,delayedmeasureforretaillag,etc.)orhowtoclassifythereturns(car