Question

Case Study,

Electro Stores:

Jim Beam, General Manager Operations for Electro Stores, sat in his chair examining his latest KPI report. He was a bit perplexed by the slight rise in operating costs per square metre. Sales per store person also seemed to be showing a slight reduction. His report only showed aggregate data, and he was unable to determine if this was a system-wide problem or isolated to a few outlier stores. He knew he had to investigate this quickly before it became a trend. He asked his state operations manager, Bruce Benny, to investigate a bit further.

Electro:

Electro operated a chain of around 200 retail stores throughout Australia, selling consumer electronics such as TVs, HiFi sound equipment, car sound systems, computers, smart phones of various brands, GPS navigation equipment, and a complete range of music and video CDs. The stores were all corporate owned, unlike some retailers that operated franchised systems or wholesaler-sponsored chains. This gave Electro more control over operations, and the ability to implement supply chain changes quickly. It was market leader in several consumer categories, which gave it some leverage over its 50 main suppliers. Electro managed its supply chain costs by not operating any warehouses in its system; suppliers delivered directly to each of its stores. There was a decided cost advantage to this approach but it also had some disadvantages.

Problems:

Bruce reported to Jim with his findings. He had drilled down into the financial accounts, and had spoken with several of the retail store managers. Over the last six months there had been a noticeable increase in consumers returning products, claiming they were defective. The retail staff usually were too busy to determine the accuracy of the claims and so they gave the customer a credit or swapped the products. This was good for Electro’s service reputation, but was creating chaos in the stores. Returned products were accumulating at back of store, staff were becoming frustrated as they seemed to be spending more time dealing with returns than making fresh sales, and administrative costs were rising. In the absence of a company warehouse, store managers had to deal directly with each of their suppliers processing product returns. The returns policy for each supplier was different, and store managers were overwhelmed by paperwork to cope with the different policies. When Jim asked what all this was costing, Bruce delivered the bad news that they didn’t know exactly. Electro’s financial systems were not granular enough to determine the cost of processing returns, and no store-wide performance measures were in place to track the level of returns, or to identify the most problematic products or suppliers. This stunned Jim. He had to take action fast.

Solution

Jim rang around a few of his colleagues in other retailers to discuss the problem of returns. His findings left him confused. Some retailers operated warehouses and funnelled all returns back to their DC. Many had no idea what the product returns problem cost them – returns were a fact of life, so deal with it. Others blamed the generous policies set by their marketing departments. Reading some trade journals, Jim found that there were information systems available to help deal with product returns. And, of course, there were the promotional articles masquerading as information touting the benefits of using 3PLs. So, he finally called you, an expert consultant in the field of PRM and reverse logistics.

Your answers to the following questions:

1. What is the potential for PRM to be a source of competitive advantage?

2. List the pros and cons of a centralised vs a decentralised returns chain.

3. What are the advantages or otherwise of using a 3PL to manage returns?

Answer 1

1) A Product Recovery Management can be a source of competitive advantage as it enables

• Ensuring the service level to be maintained

• Reduces the cost of reverse logistics and product returns

• Give actionable insights regarding the products which faces the most number of returns and hence improvement actions can be initiated to reduce returns and increase profitability.

• Reduces administrative overhead in processing product returns.

2) The pros of a centralised return chain are:-

• Greater control over returns

• Uniform policies and stnadardised procedures with many suppliers

• Better forecast of possible returns and analysis of returns

The cons of a centralised return chain are:-

• Higher managed inventory

• Higher cost of operating a warehouse

The pros of a decentralised return chain are:-

• No cost of operating a warehouse

• Lower managed inventory

Cons of a decentralised return chain are:-

• Difficult to control the returns

• Analysis of returns and taking corrective action not possible

3) Advatage of using a 3PL player to manage returns is :

• The 3 PL player can bring in more efficiency in processing returns

• The organization can focus in its core functions without spending resources on the reverse logistics

• The warehousing and overheads cost need not be incurred by the firm.