Most manufacturers see product returns as a necessary evil. But in recent years, a growing awareness of just how much product returns are costing companies has led many to develop returns strategies. In 1999, Hewlett Packards inkjet printer division made such a move. In that year, the inkjet printer group saw $157 million in revenue reversed because of product returns and spent another $50 million on handling those returns. On a total of six product lines of inkjet printers, over 50,000 units per month were returned through hundreds of retail locations throughout the US, a trend that showed a year on year increase of 20% in terms of volume of units returned.
In this Case Study, Luk Van Wassenhove, the Henry Ford Chaired Professor of Manufacturing, V. Daniel R. Guide, Jr., Assistant Professor of Operations Management at Penn State University and Visiting Research Fellow, Centre for Integrated Manufacturing and Service Operations at INSEAD, and Neeraj Kumar, Research Associate, look at the complex processes involved in returns and explore some of the options available to the business.
The authors explain that the business, under the direction of Sylvia Davey, World Wide Product Returns Manager for the Inkjet Products Group, developed a two-pronged approach to reduce losses due to returns. Their first goal was to reduce product returns as a percentage of revenue by initiating programs that would address directly the root causes of returns, the second was to reduce costs per unit shipped through improved management of the product returns process. For the first goal, they would need to communicate to resellers just how much returns were costing the company. Toward the second goal, Davey and her team revamped the returns process.
Their original system was decentralized. With ten return and credit issuance locations (one for each product line), products were often sent to the wrong depots, leading to costly and inefficient inter-depot shipments and credit reconciliation problems. In the new centralized system, all products arrived in the same facility for sorting and routing, which allowed for a number of labour and costs savings. Around the same time, HP developed decision-making models to help managers determine the best use for a returned unit. The model gave insights into several key questions such as whether to recover and resell the returned products as remanufactured or to use the recovered products in customer support processes; whether to disassemble the returned product into components for internal use or as spare parts; to resell as is; or to simply scrap or recycle the returned products.
As the company moves forward with its returns strategy, say the authors, there will be some additional issues to address:
- How to reduce the incidence of product returns?
Without hurting relationships with their resellers, HP will need to communicate that returns cut into everyones profit margins.
- Whether to engage in remanufacturing activities and if so, how?
A major risk associated with remanufacturing is cannibalising new product sales. If the company decided to move ahead with remanufacturing, it would need to decide whether to outsource this process or do it in-house.
- What can be done to maximize value recovery?
To cover losses due to product returns, HP would need to improve velocity of flow through the returns channel, as the most value from returns can be recovered during the early stages of a products lifecycle.