Decisions, decisions. What should you do with all the returned goods flowing back to your facility through the reverse logistics pipeline? Some companies dismantle them and recycle the parts. Others simply destroy the goods. But there’s a third option: repair, refurbish, and resell them. 
 
For some companies, that third route makes an awful lot of sense: If done correctly, repairs and refurbishment can be a moneymaker instead of a cost  center. Trouble is, it’s not always easy to do it right. The costs of refurbishment (labor, equipment, transportation, and so forth) tend to add up quickly, making it difficult for companies to recoup their investment. And it can be tough to get products back on the shelves quickly enough to avoid some loss of value. If  you’re not sure whether refurbishment is right for your company—or are wondering whether there are ways to make your returns operation faster, more efficient, or more cost effective—the following five tips might point you in the right direction. (EDITORIAL NOTE: While this article is written primarily from the perspective of retail returns to a distribution center, there are some parallels that are very pertinent to more typical corporate investment recovery practices.)
 
Make sure your product is a good candidate for refurbishment. One of the keys to running a fast, cost-effective refurbishment operation is to be smart about which products you refurbish. It’s not uncommon to find situations where it would cost more to refurbish an item than it’s likely to recover through the item’s resale. How do you determine whether a particular product is worth refurbishing? It will probably require some number crunching, says Terry Steger, a senior executive in Accenture’s Supply Chain Management practice. Basically, what you have to do is calculate what it costs to recover and refurbish a product and compare that with the current resale value of the revamped item, he says. However, even relatively low-value products can be worth refurbishing under the right conditions. The key factor is volume. If the volume is large enough, economies of scale make processing even low-value materials feasible.
 
Even if you’ve already done all the cost calculations for your product, it could be time to revisit your decision. “Sometimes, a device or product is so old that, at that point in its lifecycle, it no longer makes economic sense to refurbish it,” Steger says. For products with very short shelf lives, such as wireless devices or high-end consumer electronics, the decision may have to be reviewed on a monthly basis. 
 
Evaluate whether refurbishment is truly necessary. Experts agree that only a small percentage of returned products actually require refurbishing. For example, in the consumer electronics arena, 50 to 70 percent of all returns have nothing wrong with them. Products that have been returned due to buyer’s remorse or because the consumer didn’t understand how to use the product don’t need to go to the refurbishment operation. The sooner you can perform “triage”—that is, assess which products can be immediately resold and which actually need to be fixed—the better. By making this determination as early in the process as possible—say, at the retail return center or a regional DC (distribution center)—you eliminate touches, reduce transportation expenses and the potential for damage, and increase cash flow. Monitor your service provider’s performance and costs. Although some companies like to handle refurbishment themselves, many choose to outsource this activity— largely for reasons of cost.
 
For most companies, it’s more cost-effective to use a 3PL (third party logistics provider) that has specialized equipment and a specially trained staff in place, says Dale Rogers, professor of supply chain management at the University of Nevada-Reno and author of a textbook on reverse logistics. But that doesn’t mean you should just hand off this task and forget about it. It’s important to monitor the process to make sure that your partner is running an efficient, cost- effective operation. For example, Steger recommends keeping an eye on parts usage. Most  third parties charge the contract owner for the parts they use, so it’s wise to put a mechanism in place to assure providers aren’t replacing parts unnecessarily, he says. Another way to keep costs from getting out of hand is to establish a “time required to refurbish” threshold. “If the product takes longer than X minutes to refurbish, it should move to recycle or scrap disposition,” Steger explains. “If it is within the threshold, a company can refurbish it and increase asset recovery.” 
 
Choose the right location for your operation. Where a refurbishment operation is located can have a big impact on the overall cost. While a centralized location provides economies of scale with regard to labor and facility expenses, the savings could be offset by higher transportation costs if the goods have to travel far. By the same token, using regional or local refurbishment centers usually cuts transportation costs but is likely to mean higher facility costs. For this reason, Steger recommends using a local model for heavy or large products that are costly to transport and a more centralized model for lighter products. These days, some companies are relocating their refurbishment operations to Mexico to take advantage of lower labor costs, Rogers says. But labor costs are only part of the picture. When considering whether or not to move your operation south of the border, he says, be sure to factor in the additional transportation costs as well as any political  and security considerations. Steger notes that it may be possible to employ a mixed strategy—for example, using a Mexican facility to serve Southern California and the Southwestern states and a U.S.-based facility to handle the rest of the country. That might allow you to take advantage of Mexico’s low labor costs without having to bear the costs of shipping from, say, Mexico to New England. Make full use of the available data.
 
One of the biggest mistakes companies can make when it comes to their refurbishment  operations is failing to collect and mine data on returns. The real value in refurbishment lies in tracking and analyzing data. It can also make the returns operation itself more efficient. For instance, if a company is able to identify the most common causes of failure for a particular item, it could then use the findings to improve the triage operation—say, by having employees at the processing center sort returns by type of failure. Those items could then be shipped together to the refurbishment operation, which improves efficiency downstream.
 
Perhaps more to the point, however, the company could share its findings on product failures with the original manufacturer’s product design or engineering team. That kind of information has the potential to lead to advancements in the product’s design, which would ultimately produce the biggest improvement of all: reducing the actual volume of returns.
 
By Susan K. Lacefield, Editor
Reprinted with permission from DC Velocity, November 2010.
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