How Philips Reduced Returns FromtheNovember/December2003issueofSupplyChainManagementReviewTONYSCIARROTTASupplyChainManagementReviewNovember1,2003Theanswertoreducingthecostofreturnsdoesnotalwayslieinimprovingyourreverselogisticsoperations.AtPhilipsConsumerElectronics,thereturnsmanagementdepartmenthasfocusedonhowitcanstopreturnsbeforetheyevenenterthereversesupplychain.Bytakingpreventativestepssuchasimprovingaproductseaseofuse,enforcingcompanypolicies,andrevitalizingtheservicenetwork,Philipshascutitsreturnsbymorethan$100millionperyear.In1998,Iwaspresentedwithanopportunity:headupareturnsmanagementdepartmentwithinPhilipsConsumerElectronicsandhelpleadeffortstocontrolamajorcostdriverproductreturns.Atthattime,PhilipsConsumerElectronicshadnoreturnsmanagementdepartment,andreverselogisticswasnotyetpartofthelanguageofmostmanufacturers.ButmanagementandKenGoins,thevicepresident/generalmanagerofPhilipsServiceCompanywhoapproachedmewiththeopportunity,recognizedthatthecompanywasfacingrelativelyhighreturnrates.Theimpactofthosereturnsonthebottomlinewassignificant,amountingtotensofmillionsofdollarsinlosses.Philipsmanagementwasunderpressuretoreducethecostofreturns.Theyrealizedthatthecompanyneededtodevelopacorecompetencyinreturnsmanagement,whethertheactualprocesseswerehandledinhouseorviaoutsidepartners.Managementbelievedthatitneededadepartmentwithadedicateddirectorandfocusedstafftoaccomplishthesegoals,hopingthatsuchadepartmentwouldenduppayingforitselfintheprocess.WhenKenapproachedme,Iwasworkingintheproductmarketinggroupafteradecadeinsaleswithregionalandnationalaccounts.Mybackgroundwasnewforthereturnsmanagementrole.Normally,thecredit,finance,orservicegroupswithinmostcompanieshandlereturns.ButKenunderstoodthatreturnsreallyarereversesales,andtheyareoftencausedbyproduct-marketingdecisions.Aswebegantostudythesituation,wediscoveredareturnsenvironmentthatwasoutofcontrol.Ingeneral,returnsintheUnitedStateshavebeenincreasingduetoatakeitbackculture,propagatedbyretailerswithliberalandalmostunlimitedreturnpolicies.Retailerswerefoundtobegivingrefundstoconsumersovertwo-thirdsofthetime.Inmanyofthosesituations,consumersdidnothaveacopyofthesalesreceiptfortheirpurchases.Storepoliciesthatwereinplacewerenoteasytoenforce,makingitdifficulttoreduceimproperproductreturns.Theriseofreturnswasfurtherfueledbytheincreaseinproductsthatcouldnotbeservicedinthehomecoupledwiththedemiseoftheindependentserviceproviderswhoperformedin-homerepairs.Mostconsumerelectronicscompaniesviewedreturnsasthecostforthesteadysalesgrowthinnewretailchannels.Butalongwiththeincreaseinoverallreturnswasanotherdisconcertingstatistictherateofproductsreturnedwithnodefectfound(NDF)wasveryhigh,averagingmorethan70percentforconsumerelectronics,morethan85percentforPCproducts,andevenover90percentforsomesmallappliances.Retailersandmanufacturerswerepayingsignificantreverselogisticscoststomoveproductsthatwerenotdefective.ThesituationatPhilipsreflectedthisexternalenvironment.Becausewehadnoonefocusedonreturnsandnoclearreturnspolicyorprocedures,Philipshaddevelopedacultureoftakeanythingbackfromanybodyanytime.Thetotalcostofreturnshadneverbeenexposedtotheproductbusinessownersorevenidentifiedcollectivelyforthecompany.Philipshadneverattemptedtoimplementreturnssolutionsacrossdepartmentlinesorbyworkingwithretailers.Thislackofattentiontoreturnswashurtingus:Until2000,thereturnsratesatPhilipswereevenhigherthantheindustryaverage.Addingtoourproblems,manymajorretailershadbegunthepracticeofdeductingforreturnsuponshipmentbacktovendors.Theclaims,counterclaims,andreconciliationprocessesbecametime-consuming,manual-intensivenightmaresformanufacturerslikeus.Finally,thesecondarymarketforthesegoodsintheUnitedStateswascostlyforPhilips.ManyoftheliquidatorsthatPhilipsdealtwithhadquestionablefinances.Additionally,inthesecondarymarketwewereexperiencingpoorrecoveryonthefactorycostsofourproducts.Asanexample,forDVDssoldatliquidators,Philipswasonlyrecovering20to30centsonthedollar.Clearly,changesneededtobemade.Philipsfirstneededtoanalyzeitsreturnsnumberstounderstandtheirsizeandtotalcosttothecompany.Wealsohadtounderstandtheconsumerandretailerenvironmentinordertomakeimprovements.Thisinvolvedresearchingconsumersreasonsforreturningproductsparticularlythosewithoutdefects.Finallyaparadigmshiftwasneededinmanyareas.Thatis,weneededtotakeproactivesteps,bothinternallyandincooperationwithourretailpartnersandserviceproviders,toaddresstherootcausesofreturns.UnderstandingtheProblem:MeasuringReturnsEveryonerecognizestheaxiomthatwhatgetsmeasured,getsdone.Forthoseofusinreturnsmanagement,thismeantrealizingthatakeytosolvingthereturnsproblemlayinhavingacommonsetofmeasurementswiththerightlevelofdetail.AtPhilips,themainproblemwasalackofconsistentmeasurements.ReturnsweremeasuredanddefineddifferentlyintheUnitedStatesthanintherestoftheworld,anddifferentpartsofthePhilipsorganizationuseddifferentITsystemstomeasurethem.Furthermore,wecouldnotagreeonwhattimeperiodtouse(yeartodate,monthly,rolling12month,delayedmeasureforretaillag,etc.)orhowtoclassifythereturns(carrierdamage,stockbalance,defectives,warehouseerrors,service,etc.).Thesedifferencesinmeasurementledtomisleadingresults.Finally,in2001,aPhilipscross-departmentalteamestablishedsomemeasurementstandards.Theteamdecidedtoseparatereturnsidentifiedasdefectivefromreturnsforallotherreasons(forexample,carrierdamage,stockbalancing,andordererrors).Theyalsoagreedtousearolling12-monthcomparisonovertwoperiods.Thismeant,forexample,thatreturnsfromonedealerforSeptember2002toAugust2003wouldbecomparedtoreturnsforthatsamedealerfromSeptember2001toAugust2002.Theteambelievedthatthiswouldprovidethemostrealisticviewofdealerreturns,whicharelessaffectedbyseasonalitytrends.Returnreportsarenowissuedbydealer,byproductcategory,andbymodel.(AnexampleofatemplateforsuchareportisshowninExhibit1.)Tokeepthereturnnumbersinperspective,wechartthemagainstgrosssalesandtrendsinreturnandsalesratesfortheentirecompany,whichwouldshowanyspecificincreasesordecreases.Thereportsalsoincludeatargetpercentagereductionandareturnpercentratecolumntokeepalleyesonourgoals.MyroleinreturnsmanagementforPhilipsrequiresthatIdisseminatethisreturnsinformationtothekeysales,service,finance,andproductgroups,includingseniormanagement.ButIunderstandthatinformationaloneisnotknowledge.Forthisreason,eachsummaryreviewhastoincludekeyreturnsissuesbymodel,group,ordealer,alongwithmyrecommendationsorupdatesofactivitiesforimprovement.Theconsistencyofthereportsplayedakeyroleingettingthekeyplayerstoacceptboththereportsthemselvesandtheresponsibilityforreturns-reductiongoals.Productmanagershadtoseethesameresultsfortheircategoriesasthesalesgroupssawfortheirtotals.Ournewlyinstalledinformationsystem(SAP)enabledustoprovidethislevelofconsistency.AnyoneinPhilips,anywhereintheworld,whoistrainedtoaccessthereportswillseethesamedata.SAPalsoenabledourreturnreportstodrilldowntomodel-anddealer-leveldetail.ThisisamassivereportforacompanylikePhilips,whereweshipover10millionboxesperyear.Inaddition,thebuilt-inflexibilityofSAPstillallowsustogeneratesomereportsthattrackreturnsatthemonthlyandyear-to-datelevel.Thesereportsaregiventogroupssuchasfinanceandlogisticsthatneedtheinformationpresentedthiswayforforecastingandwarehouseplanning.GettingInsidetheConsumersHeadUnderstandingthereturnssituationdependedonknowingnotonlyhowmanyreturnswewerehandlingbutalsowhyproductswerebeingreturned.In2001,PhilipswasabletoworkwithanationalretailertosurveyitscustomerswhohadboughtandreturnedselectedPhilipsproductswithhigherthanbudgetedreturnrates.Theretailersmarketresearchgroupcontactedsome400-plusconsumerswithanagreed-uponlistof25questionsabouttheirshoppingandreturnexperience.Togetparticipationandhopefullytogainmoreaccuratefeedback,weofferedgiftcertificatesfortheseextendedphoneinterviews.Surprisingly,morethan75percentoftheconsumersadmittedknowingtheirreturnedproductswerenotdefective.Thesurveyidentifiedtheprimaryreasonforthereturnsasmisinformationatpointofsale.Thesecondaryreasonsrelatedtodifficultiesinhookup,use,oroperation.Anotherdisconcertingstatisticwasthattheretailergavecashorcreditrefundsfortwo-thirdsofthereturns.ThisstatisticwasparticularlytroublingtoPhilipsbecauseinthemajorityofthesecasestheretailerdidnotusearepairserviceprovider.Insteadmostofthereturnsweresentbacktothemanufacturersasdefective.Asreturnsincreased,carriervolumegrew.Inresponsetothatincrease,wehadbeguntodevelopreverse-logisticsprocessesthatmademovingthesegoodsbackthroughthesupplychainmoreefficient.Yet,whileefficientreverselogisticshelpedminimizeourlosses,theydidnothingtoaddresstheprofitsthatwerestillbeinglostateverypointofthereturnsprocess.Basedonthesurveyresults,Philipsandtheretailerrecognizedthatreturnswerenottiedtotheactualqualityoftheproduct.Instead,manyoftheseissueswererelatedtoproductpackagingnotclearlyrepresentingtheproductortheproductsoperatingrequirements,suchassubscriptionservices.Anadditionalfactorwasinadequatetrainingofretailsalespeopleforcommunicatingproductfeaturesandbenefitstotheconsumer.AtPhilips,theresearchalsohelpedustounderstandbetterthereasonsfortheincreaseincallcentertimespentonmanyofournew,digitalproducts,suchashometheaters,satellitesystems,digitalvideorecorders,andevenDVDplayerswithoutstandardantennajacks.Thecomplexityandtechnicalproblemswiththeseproductswasfurtherincreasedbyproductsfromonehardwaremanufacturerhavingtoworkwithsoftwareorservicesfromadifferentprovider,suchasTiVo,AOL,orWebTV.OnedigitalInternetdevicewiththisdualownershiphadreturnratesofmorethan25percentandano-defect-foundrateofmorethan90percent.Suchresultspointtousabilityproblemsandlackofproduct-packagingclarity.ThesurveysubstantiatedmanyintuitivebeliefsfortheretailerandforPhilips.Itwasobviousthatstepsneededtobetakentoimproveproductclarity,usability,andinteroperability.ButtherealchallengewashowtocorrecttheperceivedentitlementamongAmericanconsumersforreturningpurchasesbacktoretailers.ThisphenomenonismuchmoreprevalentintheUnitedStatesthaninothercountries.Inmostothercountries,consumersareencouragedtorepairdamagedproductsoracceptalternativesolutions,suchascontactingthemanufacturerdirectly,insteadofreceivingcashrefundsforreturns.ButintheUnitedStates,Philips(andotherglobalcompanies)havetofindwaystostartworkingdifferentlywithretailerssothattheycanreducetheflowofgoodsinthereversesupplychainespeciallythoseproductsthatarenottrulydefective.Ifwedont,theestimatedcostsforbothsidesareenormous.ManufacturersSteps:ImprovingtheOut-of-the-BoxExperienceBasedonthisresearch,weidentifiedfactorsatthemanufacturing,retail,andservicesupplychainthatwerecontributingtothehighrateofreturnsandlookedforpotentialactionstotaketoalleviatethem.Oneofthemainmessagesofthesurveywasthatitwasntpoorproductqualitythatwasdrivingreturns,butthecomplexityoftheproduct.Internally,atPhilips,werecognizedeaseofuseasthenextbarrierforconsumersandbeganworkingtoimprovetheout-of-boxexperiencefortheconsumer.WehaveincreasedservicesupportwithWebandcallcenterenhancements,suchasFAQs,hook-updownloads,andfreeproductupgradesforDVDandotherdigitalproducts.Additionally,Philipsisnowincludingstopsheetsintheboxwiththeproduct.Thesesheetsareemblazonedwithastopsignanddirecttheconsumertocontactthemanufacturerfirstbeforetakingtheproductbacktotheretailstore.Alloftheseactionshavehelpedreducereturnsbyencouragingtheconsumertocontactthemanufacturertotrytosolvetheproblem.Philipsisalsoexaminingwaystoincreaselocalorcentraldepotrepairandoffereasyexchangeprograms.Undersuchaprogram,Philipswouldpayretailersorservicersahandlingfeetosendreturnedproductsdirectlybacktous.Theseprogramsmightpossiblyincludeprovidingdrop-offcentersforreturnsatplaceslikeStaplesorMailBoxesEtc.orprovidingUPScall/shiptagsforwarrantyservice.Inadditiontotheseefforts,PhilipsjoinedtheEaseofUse(EOU)Roundtable()in2002.TheEaseofUseRoundtableisaPCandconsumerelectronicsindustryassociationcommittedtoimprovingtheconsumerexperiencewithhigh-techproducts.Participantsincludeleadingmanufacturersandretailers.Intelfoundedtheroundtablein1998whenindustrydataindicatedthatthenumber-tworeasonpeoplewerenotbuyingPCswasbecausetheyweretoohardtouse.TheEaseofUseRoundtablelooksathowcompaniescanbasenewproductcreation,design,andoperabilityonthedesireduserexperienceratherthandevelopingatechnologyandlookingathowtosellitafterwards.Forexample,high-techcompaniesmaylookatdesigningprintersandcomputerssothatawhenaprinterishookeduptoacomputer,thecomputerrecognizesandsetsupthesoftwareneededforittowork.Thisisaccomplishedthroughusinghuman-factorengineering(HFE)agrowingdisciplineinthePCandconsumerelectronicsindustriestocreateInitialExperiencePredictors(IEPs).AnInitialExperiencePredictorisachecklisttoolthatprovidesthedesignteamwithaseriesofquestionsthathelppredictwhatausersout-of-boxexperiencewithaproductwillbe.TheIEPwasinventedbyIntelandfurtherdevelopedbytheEOURoundtable.Itcanbeusedduringproductdevelopmenttotaketheendconsumersneedsintoaccountwhendesigningtheoperation,packaging,andinstructionsforuseofanewproduct.Doingthisshoulddecreasethenumberofno-defect-foundreturnsaswellasreducingsupportcentercallsandimprovingcustomersatisfaction.Suchimprovementswilladdsignificantlytothebottomlineforallmanufacturers,avoidunnecessaryreturnsatretail,andlowercallcenterandothersupportcostsdrivenbyproductcomplexity.Allofthiswillhelpexpandthemarketforeasier-to-usePCandconsumerelectronicsproducts.Yet,whilethereismuchpotentialinusinghuman-factorengineeringandInteractiveExperiencePredictors,roomforimprovementstillexists.Philipshasbegunusingthesetechniquesindesigningitsproductsbutwithvaryingdegreesofsuccess.Whilereturnshavedecreased,wehavefounditdifficulttoaccountfordifferencesinhowconsumersaroundtheglobeapproachelectronicproducts.EOURoundtablemembersalsoparticipateinsettingindustrystandardsforusability.TheEOUalsopublishesguidelinestohelpdevelopmentteamsproducedesignenhancementsthatreducethesetuptimefornewcomputeroperatingsystems.TheEaseofUseRoundtableguidelinesandwhitepapershavehelpedthehigh-techindustry,includingPhilips,developandexpandtheuseofquicksetupguidesandreduceover-designedownersmanuals.Manufacturers,suchasPhilips,thatadopteaseofuseasthenextfrontierbeyondqualitywillwinattheretailandconsumerlevel.RetailerSteps:NewPoliciesandTechnologiesRetailers,fortheirpart,alsohavebeenmakingchangestoreducereturnsandtheirreverselogisticsflow.BasedonPhilipsresearch,someretailershaveimprovedstoresignstoincludeimportantinformation,suchassubscriptionservicefeesandminimumsystemsrequirements,atthepointofsale.RetailersalsoaretrainingtheirsalesassociatestoprovidecustomerswithmoreinformationaboutproductoperationandsubscriptionservicefeesforsuchthingsassatelliteTV.Additionally,inthelasttwoyears,retailershavemadeanefforttogainmorecontrolofreturnsfromconsumers.Someoftheseeffortssimplyinvolveenforcementofpreviouslyexistingreturnpolicies.Manyretailers,suchasBestBuy,nowposttheirreturnpoli