Case Study:

Returns Management

Expertise in Returns Management – Delivers business benefits and Financial Results
Case Study

April 2002

Internet software vendors deliver Rapid Financial Performance Improvements to Clients

Customer service processes are crucial to the success of many types of business from insurance companies, electronics and aircraft manufacturers to retail stores. These processes have an enormous effect on the performance of follow-on sales.

Over the years, certain software vendors have developed expertise in analyzing business operations and processes specifically regarding the customer services supply chain.

Certain software vendors deliver financial improvements to clients by analyzing the customer services processes and finding the key areas where changes can make huge financial payoffs rapidly. In addition, by leveraging particularly keen understanding of customer services supply chain management, Internet software vendors can offer web-based enterprise software products as solutions to customer services operations.

How do certain software vendors do it?

Certain internet software vendors deliver rapid financial performance improvement to customers by analyzing processes that are often overlooked in the areas of customer services. Until recently, organizations have neglected most areas of customer service processes by considering them irrelevant, while they can be turned into goldmines. Transforming customer services into profitable processes by reducing costs and increasing repeat purchases from satisfied customers represent an enormous opportunity at most companies. This is often an area where most organizations over look huge improvements in their financial performance.

One example of how internet vendors help to deliver immediate financial benefits to customers lies in returns management. In this particular case study, a certain software vendor realigned the entire customer services supply chain for the customer from the call center, as the main front-end activity, the “hub” of communications and processes, to the back-end where logistics applications capture all types of information from parts inventory velocity to product weakness as the cause for service calls in the first place.

Returns Management

In this case study, we review one electronics equipment manufacturer. We focus on one particular pocket of opportunity for rapid benefits, the returns processes. This is a particularly interesting area because, for many organizations, it holds many “gottchas.”

Product returns represent by far one of the most costly areas in the customer services supply chain. Return costs come in various forms, for example:

· Inefficient Returns Logistics: in the labor and overhead of the returns logistics alone, one product returned can cost an electronics equipment manufacturer easily $300 to $400 per item

· Revenue reduction: the sales revenue for many of the products returned for a cash pay-back

· Devaluation/Loss: once a product is returned, usually it losses roughly 50% of its original value

· Ineffective Customer Response: the issues of frustrated customers who may not care to make any future purchases

Issues regarding returns are often overlooked because they are counter-intuitive. Consider the case where you have 500 customer-service representatives responding to customer requests for help in a call center. This call center staff is large and, on an hourly basis represents a relatively high operational cost with hourly wages at, say, $12 for representatives who merely answer the phone and make suggestions to the customer about how to resolve product issues. If you calculate 500 service representatives by $12 per hour at 40 hours per week, you discover that the monthly cost is $960,000

Consider also that at this same organization, the returns costs are high at $300 to $400 per item returned. If returned products represent 13% of the revenue at a company with $900M in annual revenue and factoring in 50% devaluation on the returns, it behooves one to find a way to reduce these costs of more than $58M yearly. Avoid returns.

Causes of Product Returns

We need to consider why people would want to return a product. Since returns are one of the most costly areas of customer service 2supply chain management, it is worth our time to analyze why they occur. There are several reasons why a customer returns a product after sales such as the following:

Defective: The buyer found the product defective or broken once unwrapped

Difficult to Use: The customer had difficulty in understanding how to use the product

Buyer’s Remorse: After the purchase, the buyer discovers that the product does not match exactly with the expectations or needs

How to Avoid Returns

In this case study, as indicated above, with a return rate per revenue of 13%, if we can reduce the costs associated to the returns process, we can drastically reduce the returns costs as indicated in Chart A, which indicates a reduction in returns from 13% to 6%, a decrease of over 50% or from $58M to $27M.

The Root Cause of Returns

On the surface, one might consider reducing costs by reducing the overhead of the $960k/month in the call center. The solution to this type of situation is, however, somewhat counter-intuitive.

By looking at this situation, we might put it into an equation format something like this:

The question now is, what part of the equation do we change in order to reduce the customer services operational costs? Surprisingly, many organizations reduce costs in the call center. Seeing the customer services operations as a cost center, most organizations look at the head count and associated hourly costs in the call center to respond to the phone and they make the decision to reduce either the number of customer service representatives in the call center or their hourly wage or both.

This type of decision represents one of the “gottchas” we warned about at the beginning of this case study. One of the solutions to this situation is counter-intuitive. We have to look at the root cause of the cost drivers, not the costs to run the call center, the operational costs.

If we reduce the quantity or the quality of the call center representatives, the volume of calls will increase. The more times the customers have to call to resolve product issues, the more frustrated they become and the higher is their propensity to return the product.

With the appropriately qualified call center representatives, who demand a slightly higher hourly wage, we can reduce the volume of calls as indicated in chart B. We want to reduce the volume of calls for several reasons. Each call in itself is costly. More importantly, the more we can resolve customer questions, frustrations and issues during the first call, the more we reduce the number of returns. Remember, returns represent the highest costs in this case study, not the call center.

We want to staff the call center with well qualified representatives who can eliminate customer frustrations, at the initial stages, especially the three causes for product returns that we listed above: defectives, lack of help in using the product, changes in expectations about the product. By resolving customer frustrations within minutes of their first call, the more we can drastically reduce some of the highest costs in the customer service supply chain, namely, returned products.

Key Performance Indicators

Since we can drastically reduce the customer services costs by measuring and monitoring each of the key performance indicators, organizations require information systems that deliver this type of business intelligence in real-time.

For example, in this case study we learned that when the well-qualified representatives eliminate customer frustrations within minutes of the first call, we want to measure and monitor how well each representative achieves this important goal. Consider Chart C.

In Summary

We have walked through one case study. There are many different case studies, each one deriving wealth from the various areas in the customer services supply chain. Each case study helps us to discover where certain links in the chain are particularly weak.

We can analyze some of the various processes and activities within the customer services operations in similar manner and deliver rapid financial results to our customers. For example, in another case involving a leading electronics retailer, we were able to reduce the returns rate from 2.5% to 2.1%, thus resulting in a financial benefit of over $60M within the first year for returns alone.

From this one case study alone there are several lessons worthy of review. For example, we worked the situation down to its essentials, its root problems. We discovered that by increasing the human skills at the customer-facing activities, namely in the call center representatives, we reduced the much higher costs at the back-end by mitigating any sources of customer frustrations. This led to reducing the number of returns thus reducing the lost revenue and the loss of value in products once returned.

Capabilities at the call center are important. Call center performance depends on many features, among them are:

· Skilled service agents who can deal with frustrated customers and even increase customer satisfaction from bad situations in order to increase repeat purchases and customer referrals, thus increasing revenue

· An information system in the call center that delivers real-time business intelligence to enable employees to make the most appropriate, well-informed decisions

· A customer interaction journal that enables employees to communicate with customers in a well-informed, consistent and personalized manner regardless of contact person or department

· A knowledge base that delivers product information at the service agent’s finger tips in order to resolve issues quickly

· Multiple channels of communication that make it easy and flexible for customers to communicate and find answers to their questions

· Efficient back-end logistics that optimize the process of handling those returns that could not be avoided at the front-end in dealing with the customer

· Visibility in the returns logistics so that customers can track the progress and status of services

· Parts inventory – business intelligence that enables managers to maintain the right part inventories in order optimize repairs and other services

· Business Intelligence enabling managers to prevent errors such as over stocking products or even procuring products that indicate a high level of returns

The Time for Action is Now

A few web-based enterprise software solutions for customer service supply chain management have already transformed many service operations into highly profitable business processes. Although various types of organizations harness the financial benefits of using internet applications in their own unique ways, certain common capabilities reappear in all success stories such as real-time, end-to-end visibility and measurement of processes and their performance, collaboration across departmental and company walls, resource and asset optimization, improved customer personalization and increases in repeat customer revenues.

Realizing these and many other benefits, as depicted in Chart D, however, requires an implementation methodology that is rigorous enough to prove results in early successful pilots and builds momentum with creditability.

Making changes in an organization has become the only constant part of competing. The organizations that keep pace with market trends can expect industry average results. The organizations that make the type of innovative changes to business process that implement new ideas, they can expect above average results.

Most sustainable competitive advantages arise from unique ways of conducting business that focus on wealth creation. Since organizations have neglected to transform their customer service operations into wealth creation processes, for the most part, they tend to perform quite poorly. Bringing wealth creating innovation to the customer services operations is what we are all about. This is what we can deliver to your organization. This is our area of expertise.

The organizations that move first and move with smart innovations, they seize the opportunity to benefit from major wealth creation. They are building sustainable competitive advantages that outstrip any one else in their industry.

The time for action is now.