In case you missed it, we are repeating our publication of the following article, authored by Tom Easton and Chuck Udell of Essential Action Design Group exclusively for aftermarketNews and Counterman magazine. It is intended as a call to action for the industry to fund the effort to determine the Root Cause for returns. Essential Action Design Group and Babcox Publications hope to develop a joint research project as a result of this call to action, and subsequently publish a series of articles to educate the industry and (hopefully) significantly decrease returns in the future. We encourage you to get involved. Send your feedback to Counterman Editor Mark Phillips at [email protected], or aftermarketNews Editor Amy Antenora at [email protected].
Pain in the Chain: What Do We Do When 50 Percent of One Member’s Contribution is Useless and Wasted?
by Tom Easton and Chuck Udell , Essential Action Design Group
If an industry or channel of distribution has an unwanted situation that consumes resources and tends to occur in a repeated fashion, then there is a strong possibility that it might be beneficial to discover what is really causing this situation to occur and resolve it so the situation does not occur again.
This activity of “figuring out what is really causing the situation” is referred to as Root Cause Analysis — finding the REAL cause of the problem and dealing with it rather than simply continuing to deal with the symptoms.
“For more than a decade, I was an analyst for consumer p rod ucts. When I joined the aftermarket industry in 1992, I was stunned by the high rate of p rod uct returns at auto parts stores. Today, 16 years later, return goods as a percent of total sales of this important channel member have climbed even higher, escalating to an unacceptable rate of 30 percent, and in some cases 33 percent of total sales that are being returned.” — Chuck Udell , partner, Essential Action Design Group.
The aftermarket survives on its ability to build effective supply chains. Regardless of the channel of distribution for auto parts, there is an inter-dependent relationship between every member within the supply chain to make hundreds of thousands of application specific p rod ucts available on demand and have delivery service as speedy as home-delivered pizza.
The industry is a network of firms that combine their economic output to provide p rod ucts and service offerings to the motoring public. From the manufacturer that p rod uces the p rod uct to the professional mechanic who installs it, all are part of an extended enterprise. This extended enterprise permits the effective contribution of different types and degrees of participation, connectivity and discipline. How our extended enterprise is organized and structured, and how its mechanisms work for the exchange of information, goods, services and money are vital for the continued profitable delivery of p rod ucts to the end consumer.
Product Returns
Product returns in the aftermarket are viewed as a necessary evil, a painful process, a cost center and an area of potential customer dissatisfaction. Returns are just a function of past sales.
When a channel member as important as the auto parts store is processing one-third of its total sales as product returns there is “pain in the chain” and the cost and profit drain of these returns can no longer be considered just a necessary evil of doing business.
You do not need a crystal ball to see a future of increased costs in energy, labor, benefits and facilities for the auto parts store. The utilization of more modular components (assemblies instead of individual parts) and electronic components int rod uced into the product mix of the aftermarket will produce higher dollar items. If the rate (percentage) of product returns is not reduced, the financial value of these returns will be staggering.
Reducing returns at the store/counter level represents one of the largest and most overlooked opportunities for savings and improvement in the aftermarket.
As an industry we have made great strides in improving availability and logistics during the last decade. However, because of a lack of knowledge and visibility into the reverse logistics process of a store’s returns, it has resulted in lost sales, lost profits and increased investment. Our industry’s current acceptance of the “status quo” cannot be financially supported in the future.
How much does the pain really cost? The bottom line impact of returns for an auto parts store:
At the store, look-up, invoice, pick and send (LIPS) are the important activities that convert p rod uct into currency for the channel. Speed and accuracy is the core of the store’s operation.
If a store’s return rate is 33 percent of sales, then one out of every three p rod uct LIPS is returned. In an activity category time and motion study of store employees’ customer service/sales activities, 78 percent of their time is spent on LIPS. The returned part (reversed logistics) requires the associated tasks of receive, inspect, credit issued, restock. These reversed logistic tasks represent 22 percent of the employee’s time and motion of sales and service activities. Therefore, if one-third of the product sales are returned, one-third of the 78 percent, or 26 percent of the sales activity plus the 22 percent of the time and activities associated with that returned part equals a staggering 48 percent of the labor effort being non-revenue p rod ucing or making NO margin contribution.
If an auto parts store’s payroll expense target is 16 percent of total sales, almost half or 8 percent of total sales is being spent on payroll that is a non-revenue producing activity by the employees. The impact of this inefficiency in our industry’s extended enterprise is connected to the store’s desire to increase sales, requiring the hiring of an additional counterperson or delivery driver. Hiring an additional counterperson could impact bottom line by $32,600 annually ( source: 2007 AWDA Financial Analysis Report ).
What is the bottom line impact of returns for a warehouse distributor or distribution center?
This important channel partner in our extended enterprise understands the impact and importance of returns (inbound and outbound). Most, if not all, automotive parts warehouses have a return goods department.
We recently had a sales improvement engagement where we deployed our researchers to ride along with members of a manufacturers’ sales force for a minimum of five days each. During this time our researchers witnessed and recorded all of the various sales activities of this cohort. One customer service/sales activity we cataloged at three different warehouse locations was the monthly processing of alleged defects and issuing of the appropriate credit by the manufacturer’s sales person to the warehouse.
In each case the salesperson was diligent in this dirty, labor-intensive service task. What our researchers found amazing was the quantity of p rod uct that had been returned defective that was not even the manufacturer’s or warehouse’s product but was returned in their box/carton. There was also product marked as defective that was obviously not defective in material or workmanship. In this small sample (we were not in the field to study returns but to study sales skills and activities) we recorded 35 percent to 40 percent of the returned alleged defectives were set aside and then removed to the trash dumpster. No credit was issued for these parts. And there shouldn’t have been.
But as an industry we must ask ourselves: How did that much product get that far back up the distribution channel? And, the important financial question: Did any of our channel partners issue credit for the parts that ended up in the dumpster? Did these warehouses reduce their sales revenue by issuing credit to their jobbers or their company-owned stores? Did the stores reduce their sales revenue by giving cash back or issuing credit for these alleged defectives?
Wherever the credit flow stopped, everyone else down the line in our extended enterprise lost money!
What effect does the return of product in saleable condition have on inventory investment for our warehouse partner? As inventory replenishment cycles continue to shorten and speed of service increases, how much excess inventory is in our channel because of returns? In some service areas, if a store sells a part before 5 p.m. that part is replenished at the store by noon the following business day.
So, if a part is a fast-moving SKU (an inventory turn of 12 times per year) the store’s min/max would be a quantity of one. In a typical scenario, the store sells the part on Monday, the warehouse replenishes the store on Tuesday and the customer returns the part to the store on Wednesday, the exact same day that the warehouse ordered a replacement from the manufacturer for the one they sold to the store. We suspect that reverse logistics in the aftermarket impact inventory investment and profitability at the warehouse level in the tens of millions of dollars each year.
What is the bottom line impact of returns for an aftermarket manufacturer and supplier? Who knows? Who cares? The manufacturers are the ones with the deep pockets and the huge margins; they are the ones making all the money in the supply chain, right? NOT!
Manufacturers know that improper returns management impacts their profitability; however few fully understand or know the full extent of the problem. They know reverse logistics has visible and also hidden costs. Few have developed or extended their product logistics expertise to include capabilities for end-to-end management of reverse product flows and disposition. And not one can articulate the root causes of returns. They, like other members of the channel, have theories about why the returns are happening, but they do not know the root causes.
Last year we had an engagement with an aftermarket manufacturer to diagnose and make recommendations for the destruction of their organization’s silos. This is a wonderful company with great leadership, talented people, quality products, devoted sales people and excellent customer service. Their annual aftermarket sales are well over $100 million and their net profit has been squeezed down to only 1.9 percent.
While visiting with members of their sales department (silo) we were asking questions about the value drivers and the sales processes, when the conversation/interview migrated to a discussion about their returns population. They were very pleased with that year’s performance in one area of their returns population — alleged defective credits were exactly on target/budget at one-half of one 1 percent of sales.
The perplexing component of this situation was that the previous week we had interviewed employees in the engineering silo and manufacturing silos. The occupants of those silos were exuberant and proud of the gains made during the previous two years. Initiatives for quality improvement like ISO and Six Sigma and other world class initiatives had produced systems and innovations that had raised quality and lowered their p rod uct defect rate to .001 per 10,000 units. This is world-class performance in their product category.
One might wonder how long their stockholders and stakeholders would remain quiet if they knew the gap between revenue write-downs (credits) for alleged defectives and actual defective product was equal to a 25 percent increase in net profit.
Fixing our industry problem – from the bottom to the top
Only when we as an industry know the root causes of these massive return ratios at the auto parts store level will we be able to develop solutions that will help all channel partners effectively reduce returns.
Conventional aftermarket wisdom has divided returns into two categories: (1) Controllable returns, which can be avoided, eliminated or reduced by actions taken by members within the supply chain or channel, and (2) uncontrollable returns, which the members of the supply chain or channel feel they can’t do anything about. If no one in the channel/chain knows the root cause of the returns then they are “uncontrollable.”
It is imperative that we identify the root causes of product returns to the stores in our extended enterprise. We must do it now before the next generation of replacement parts enters the product mix.
There is pain in the supply chain. One of, if not the most important, cohorts of its extended enterprise (the store sales person/counterperson) is spending more than one-third of their selling time at the store/counter taking product back.
Our industry has a cancer and it is affecting the entire body. If we allow this cancer to continue to exist or grow, it will have a debilitating affect on the entire industry in the future.
Attacking the return problem with discussions and theories about mispicks, catalog errors, inaccurate changeover date, offshore quality, lack of front-line expertise, lack of ethics or lack of discipline is simply a blame game without data.
Our industry needs to collaborate and produce a research project to identify the root causes of returns at the store level. We must jointly invest unselfishly to dig below the symptoms and find the fundamental cause. Root cause analysis is a proven procedure for ascertaining and analyzing the cause of problem in an effort to determine what can be done to solve or prevent it. The goal of root cause analysis goes beyond merely “fixing” the problem. It seeks to actually prevent it from happening again.
Call for action
Jobbers/Auto auto parts stores should tell their warehouse suppliers and program distribution groups that they support an industry wide study to determine the root causes of product returns.
Warehouse distributors and program distribution groups should contact all of their suppliers and tell them that they support an industry wide study to determine the root causes of product returns.
Aftermarket manufacturers should contact their associations and tell them they support an industry wide study to determine the root causes of product returns.
And finally, the industry’s associations should come together in the true spirit of collaboration and provide the guidance and governance for the research and analysis to determine the root causes of product returns.
There is a fundamental, pain-causing breakdown at the point where all aftermarket p rod ucts are converted into cash. In other words, there is cancer at the point of sale! As an industry, a great American extended enterprise system, we must commit ourselves to collectively and collaboratively “heal ourselves.”
