You are on page 1of 5

Philips Electronics Finds the Best Way to Tackle Reverse Logistics is to Focus

on Root Cause, Enforce Policies


Tony Sciarrotta of Philips was given the challenging assignment of reducing return costs, and he notes
that many companies have tackled the "reverse logistics" problem by trying to improve reverse logistics
processes and flows. Philips decided to tackle the root causes themselves. As Sciarrotta notes: "While
efficient reverse logistics helped minimize our losses, they did nothing to address the profits that were
still being lost at every point of the returns process."

It's an uphill battle. Many retailers either have "take it back for any reason" policies, or don't enforce the
returns policies they theoretically have.

Sciarrotta notes: "But along with the increase in overall returns was another disconcerting statistic - the
rate of products returned with "no defect found" was very high, averaging more than 70% for consumer
electronics, more than 85% for PC products, and even over 90% for some small appliances." Apparently,
there are even people that do the electronics equivalent of the "buy the dress and return it after the
party" scheme, e.g. buy the camcorder for the wedding and return it the next week.
What was the medicine? First, doing a lot of research as to why consumers were returning products,
which led to improvements in packaging information, in-store information, training of sales personnel,
etc., which had some success in reducing product returns from customers who really didn't understand
what they were buying.
More effective - and perhaps more controversial - was getting tough on returns policies themselves. For
example, working with retailers to reduce the number of cash returns for "defective products" that
aren't defective at all, or to enforce "no receipt, no return" policies. Best Buy appears to be a leader in
"get tough" policies.
Philips' efforts in conjunction with retailers seems to be working. It is also getting a lot of advantage
from working with the Siras electronics database, which capture serial numbers at point-of-sale, then
helps enforce policies when a return is attempted (was it purchased at this store? within the return
period?). What I didn't realize was that Siras can eliminate the need for manufacturers to capture serial
numbers in outbound distribution processes, which is very expensive.
Bottom line benefits to Philips of $100 million. My perspective is that as price competition becomes ever
more brutal, and margins equally thin, that more and more manufacturers and retailers will decide that
angering some customers with more rigorous returns policies will increasingly be worth the cost.

99 Cents Only Stores Makes Smart Supply Chain Investments - Often on the
Cheap
Interesting story about the strategies of 99 Cent Only Stores, a bargain-price retailer that puts
everything on its shelves for less than a buck. The company employs an unusual combination of
aggressive deployment of logistics and supply chain technology - but aggressively keeping IT costs below
retail norms at the same time.
Has the company automated distribution? Substantially, in part using voice technology, driven by a new
WMS from HighJump: " As a "picker" for 99 Cents Only Stores, Walton spends his 5 a.m.-to-3:30 p.m.
shift cruising around a 750,000-square-foot distribution center in Katy, Texas, in an electric cart
responding to a stream of spoken instructions. "Go to row 12, section 8, bin 31," an authoritative
woman's voice in his ear commands, and Walton zips to row 12. Blip-blip. He scans the bin tag with a
wireless handheld computer to confirm he's arrived at the right place. "Pick two cases plus four items,"
the voice continues. Beginning to break a sweat, 24-year-old Walton lifts two cases of vinyl tablecloths
onto a pallet, rips open a third box and removes four more tablecloths. "Confirm pick," he says into his
microphone, thus prompting the voice to send him zipping off on another assignment. Doesn't her
bossiness get annoying? 'Nah, she's cool,' Walton says. 'She tells me what to do and I tell her when I do
it.'"
But, they entered the new 750,000 square foot building in Texas by picking up the DC after it was
abandoned by grocery chain Albertson's. Albertson's investment: $80 million. 99 Cent's cost: $23
million.
The company is also more focused than most about ensuring strong return from IT investments. "[The
CIO] Adams himself insists the company is too small and traditional to deploy 'bleeding edge'
technologies. It's primarily the intelligence with which the company integrates proven technologies into
its overall system that sets 99 Cents Only apart. Adams usually has at least six or seven IT projects going
at the same time. How does he prioritize them? "I'm going for the low-hanging fruit," he says. "If the ROI
is obvious, the implementation is straightforward, and it gets the product to the customer faster or
better, I'll go ahead." But he doesn't always finish what he starts. On the contrary. "We'll get the
important things out of a project," says Jeff Gold. 'Say 90 percent of the planned benefit, and then we'll
put it on hold because something else comes up that we decide will provide more benefit in a shorter
time period. We still get our 90 percent of the benefit, and it works out great that way.'"

You may think it's obvious, but I think this strategy of investing strongly in very high payback areas, and
being something of a penny pincher in everything else has some real merit. I have certainly seen, for
example, companies build new DCs when "used" alternatives were available for pennies on the dollar.

Harley-Davidson Uses Web Portal to Take Out Supply Chain Costs


Harley-Davidson is wrapping up a two-year project to integrate its material suppliers, using the web to
provide a new level of visibility and transaction management.
The capabilities and goals are similar to supplier portal efforts:

Eliminate EDI charges for large suppliers and provide on-line transactions to smaller non-EDI
capable suppliers.
Provide automated replenishment notifications to suppliers based on current inventory levels
and planned production. In the just-in-time world of the automotive-related industry, suppliers
then have 48 hours before the Harley truck stops to pick up the parts.
Suppliers can receive on-line performance metrics relative to quality, on-time delivery, order fill
rates, etc.
Visibility and a common set of data for use by Harley buyers and the suppliers.

Currently, 300 of Harley's nearly 700 suppliers are using the portal, with the rest expected to come on
line over the next year.
Though there are no specific metrics associated with the supplier portal, the benefits seem obvious, and
Harley is clearly doing something right with its supply chain. Operating expense as a percentage of sales
continues to fall, driving up margins.
Key Takeaway: The benefits of these web-based supplier portals seem so obvious, I don't understand
why more companies don't use them. Many vendors have very packaged capabilities to facility webbased supplier integration. I suspect the real barrier is that many companies don't have their own backend systems ready to expose over the web.

Pepperidge Farm and Kroger Redesign Logistics Flows to Drive Out Cost and
Increase Sales
Pepperidge Farm was contacted by a regional division of Kroger, who proposed a new supply chain
strategy for Pepperidge Farms frozen line of sandwiches, pastries and other food products. It involved a
switch from the traditional replenishment network for that segment, in which Pepperidge Farm shipped
from plants to 3PLs it managed. Those 3PLs shipped to Kroger DCs, from which Kroger replenished the
stores.
In the new model, Pepperidge Farm would ship product to a consolidation 3PL set up by Kroger that
would feed the Kroger DCs across many of the retailers vendors. Though Pepperidge Farm would still
own the inventory and be responsible for inventory levels, Kroger would provide daily replenishment
recommendations based on consumption and forecast data. Though this would require Pepperidge
Farm to now stock inventory at two points in the region (the original 3PL for other customers, plus the
Kroger-controlled 3PL), the promised benefits for the total supply chain were overall lower inventories,
lower transportation costs through use of full truckload shipments to the Kroger DCs (versus LTL from
the Pepperidge Farm 3PLs to the DCs), reduced out -of-stocks and shorter order-to-delivery cycles.
After six months of data gathering, analysis, and strategy discussion, Pepperidge Farm agreed to the
strategy. Results have come very close to plan: total delivered costs shrunk by 21 cents per case;
Krogers days of inventory dropped from 22 to 12, while Pepperidge Farms inventories were basically
unchanged despite stocking in two locations; Kroger stores service for Pepperidge Farm products
increased by almost 3%, leading to significant sales increases for both the retailer and Pepperidge Farm.
The companies are looking to roll the strategy to other KMAs (Kroger Market Areas). Total cycle time
from data analysis to implementation for the new supply chain design about 13 months.
In addition, the two companies are now discussing another supply path for promotional or holiday
items, using plant direct shipments to the Kroger DCs. Though this would require Kroger to take on extra
inventory, and live with longer lead times (perhaps two weeks for both lead time and inventory levels),
the total transportation savings of nearly 40 cents per case probably should outweigh the extra costs to
Kroger, which would receive an off-invoice allowance as part of the deal. While clearly driven by Kroger,
and perhaps representing an offer that would have been tough for Pepperidge Farm to refuse, this
nonetheless was an excellent example of the true idea of collaboration two companies changing the
way they do things in concert to benefit both parties.

Using Order Profile Data to Drive Warehouse Improvements at Arrow


International
I attended a useful session involving medical products manufacturer Arrow International along with a
few consultants and academics on using detailed warehouse activity data to improve decisions around
layout, storage modes, processes and automation.
At one level, theres nothing new here, as many of us have used this technique for many years.
Nonetheless, its always good to hear how someone has profited from such an exercise, and these kinds
of sessions reinforce the truism that only a small percentage of distribution managers realty have or use
order profile and activity data regularly and that almost always, some assumptions about how the
business is running, arent supported by the facts.
Warehouse activity profiling involves linking data from three sources:
1. Line-item level order data
2. Item master data, including weight and cube
3. Warehouse layout and storage location data
Arrow used this information to support a new DC design, one which would end up using less than full
pallet storage for many SKUs, selection of a full case picking process that used a medium choice of
automation versus the full automated sortation system that was also considered, and SKU-based rather
than discrete order picking for parcel shipments. The design also substantially reduced the warehouse
footprint originally envisioned by company execs reacting to perceived needs for storage and fulfillment
capabilities driven by sales growth.
A few key takeaways from the session:
Cube data, even when availability in the item master, is generally the most unreliable data youll get
you must validate it.

Plan on 30-60 days for working with IT to get the data, while the data analysis itself generally
only takes 1-2 weeks.
Its helpful to plot the activity data over the warehouse layout, color coding to show levels of
activity (says number of order picks). Several low cost programs exist to help do that. Georgia
Tech is also almost complete with a free tool that enables companies to graphically plot pick
travel paths across the facility its available from Dr. John Bartholdi email him at
john.bartholdi@isye.gatech.edu.
Make sure everyone is on the same page on what the terms mean for example, in looking at
activity volume by SKU, is the activity based on units, number of picks, or cube movement?
In todays world, focus on flexibility. Perform sensitivity analysis around potential changes in
assumptions around volume growth and order profiles. In Arrows case, they had to take on
customer direct business after the company stopped using many distributors, which changed
order profiles, and had to consider possibly closing a west coast DC.

You might also like