For most companies supplying technical products to their market (i.e., non-perishable, and non-consumable), becoming circular can means that, someday, close to 100% of their products may need to come back. Now, any supply chain leader would almost instantly come to realise that their operations are just not set up for that. While most companies would have some level of reverse logistics operations in place, it will also become clear that the challenge ahead is not just one of scaling up.
So, how do you learn, plan, and practically prepare for such seismic change? We would argue that taking a deeper look at your existing returns in the first instance, and then seeking new return flows may hold a lot of the keys to unlocking change.
Learning from your existing return flows
Unless your business model is already somewhat circular (e.g., rental, leasing) your returns operations are likely catering for one or more of these three ordinary return flows today, somewhat influenced by your position within the value chain:
- Remorse returns: These would typically be barely used products aged less than two months, and returning at a rate of 10 to 20% of sales. Other industries of course, such as apparel, can generate multiples of this.
- Channel returns: Depending on your industry, these could be unopened products of less than 6 months at low volumes. This can often depend on the generosity of your own policies.
- Warranty returns: These would be mostly defective products of less than two years, returning at rates ranging between 1% and 15% depending on the product type and their reliability, or an average of 3.5% if global financial warranty provisions are to be trusted
As you gear yourself up for this circular future, there are valuable insights and data points to gather from these existing return flows, for example:
- Remorse returns: How is your current packaging helping with the safe return of the product? How is the labelling of the product helping with its identification? How is the testing or inspection process able to quickly identify those products ready to go back on the shelf? How is your IT system informing the onwards disposition of the product?
- Channel returns: How quickly can you receive products back into available inventory? How much margin can you retain on brand new products that may be of a previous generation? Which markets/channels have demand for products that may not be of the latest generation or out of fashion/season?
- Warranty returns: What elements/components of your products are responsible for the highest claims/failure rates? Are all elements returned genuine, and how can you tell? What is the overall condition/performance of the product after 3 months, 6 months, 1 year, 2 years? What portion could not be fixed, and why? How much effort is involved in reconditioning? What was eventually sold as damaged goods and what eventually made its way to the waste stream? What happened to this waste?
These may all seem like very basic questions but with returns handling an activity often out-of-sight (perhaps even purposely hidden away) in the corner of a warehouse or outsourced to a third party, it is not uncommon for these answers to be elusive at first. Yet, they may prove essential in setting-up future circular operations, and seeking new return flows!
While there is a lot to learn from your existing returns flows, they do not provide a full picture of what you will have to deal with in a circular context. That is because, as described above, experience with handling such returns tends to be limited in volume and likely skewed towards recent products in relatively good condition (be it slightly less so on the warranty side).
In order to complete that picture, you may want to consider the unthinkable: seeking more returns. For professionals that have tirelessly collaborated with marketing, sales, engineering, procurement and finance to minimise returns year after year, this may well seem rather counter-intuitive if not utter nonsense. Let us try to convince you otherwise.
In a linear economy the supply of material or parts necessary to make your future products is very tightly administered. You have selected and approved a number of suppliers, established a consistent level of incoming quality, and agreed on a price for a guaranteed lead time and availability.
In a circular economy where your future supply is in the hands of your clients, this rulebook has to be re-written. Given a lot of these new rules will be very specific to your products and your market, one way to start writing them up is to run limited pilot programs whereby you proactively create the conditions for products to be returned to you. These can take the form of:
- Take-back: Offer your customers the option to discard with you any of your products they no longer need or want, free of any charge. Convenience is the key to success for such a scheme. Expect some very, very old products in poor condition with limited opportunity for re-use. On the flip side: it is a great opportunity to learn about waste shipment/handling requirements (perhaps even hazardous waste), blind receipts and product identification challenges, end-of-life attributes of your products, product disassembly challenges, material composition determination, materials segregation issues, not to mention the technical financial and environmental reality of materials recovery.
- Trade-in: Offer your customers a discount on the purchase of your new products in exchange for their current product. The convenience of the transaction (i.e., the fewer questions asked about the returned products), and the attractiveness of the discount will determine the success of such a scheme. Expect a more homogenous mix of products and more recent generations with opportunities for re-use or harvesting. A very good opportunity to learn about product grading, the handling (and comparative qualities) of third-party products (limited option to pick and choose), the value recovery potential for different products, grades, generations and channels, and the costs involved in screening and reconditioning and the handling of accessories, procurement of end-of-life spares, and the challenges/legality in remarketing non-new items in various markets. It is also a perfect opportunity to experiment with “recertified” sales, and how they can be used to increase margin or penetrate new markets.
- Buy-back: Offer your customers (or anyone, for that matter) the ability to sell to your used products. Your catalogue and pricing strategy can greatly influence what will be sold/returned to you in such a scheme. This is a great opportunity to learn about end-users/owners, product acquisition marketing and pricing, secondary market competition (both for acquisitions and sales), (reverse) financial consumers transaction handling, disputes management, and perhaps also some insight into triggers for “end-of-use”.
Ultimately, these new return flows will provide you with a first-hand, real-life understanding of what it means to “circulate” your products. It will offer key data points and information on potential business cases and how they could be improved. It will highlight very quickly the gaps in skills and capabilities you will need to address in your supply chain and beyond. It will trigger necessary discussions with your compliance department, and new considerations for your legal department as it relates to future contract clauses. Most critically, it should form the basis upon which to make informed choices for future product and business model design.
If this looks like a lot of work, it is probably because it just is! The good news is, though: if you start early and carefully select and orchestrate your pilots, experience has shown you may actually be able to rewrite two key elements of the old rule book: establishing a supply chain that directly generates new revenue and directly contributes to sustainability!
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