Types of Product Returns and Recovery

Guide and Wassenhove (2009) categorizes product returns in a CLSC into Commercial returns, End-of-Use (EOU) returns, and End-of-Life (EOL) returns. Commercial returns are products returned by customers within a 30-, 60-, or 90-day period after the initial purchase. A consumer can return the product for various reasons such as the product quality not meeting his expectation, incompatible product performance with his needs, shipping damages, finding a better price for the same product, or feeling remorse. EOU returns are product returns due to a technological upgrade of product functions, warranty returns, and end of lease returns. EOL returns are products that become technically obsolete or no longer contain any utility for the current user. Managing product returns is challenging for firms because there is hardly any information on processing and disposal options, return rates, and unauthorized returns.

Product recovery for EOU and EOL returns primarily occurs in two ways: (1) the returned products or components of the product can be remanufactured and sold in the secondary markets, for example, remanufactured engines, automobile spare parts, tools, etc. (2) The returned products could be dismantled, and usable components could be refitted onto a new product, for example, lead recycled from used batteries can be added to virgin lead while manufacturing new batteries. The former is most suitable for EOU returns and the latter, for EOL returns. EOU returns need extensive remanufacturing processes. These returns have high variability in the use and thus product disposition and remanufacturing options can vary significantly. EOL returns are only used for parts recovery and functional parts could be reused/refitted onto new products. Both the US and European markets have some directives or practices for EOU and EOL returns. In European markets, legislative norms such as EOL Vehicle Directive (EU, 2000) and the WEEE (EU, 2003) have mandated industries to explore the reuse and recycling options primarily to avoid landfill (Salema et al., 2010; Kannan et al., 2010). Paper recycling directive, EOL vehicle directive and the WEEE, enforced by the European Union helped recycling and landfill avoidance. In the European Union, automobiles have the highest recycling percentage (94%), followed by aluminum beverage cans (61.1%) and newspapers (57.9%) (Bellmann and Khare, 1999). In the United States, recycling EOU and EOL returns is termed as remanufacturing. Remanufacturing is an industrial process in which worn-out/broken/used products, known as cores, are restored to useful life (Ostlin et al., 2008). Remanufacturing has existed for centuries, typically for high-value and low-volume items, such as locomotive engines, aircraft (aircraft weapons systems and aircraft carriers), largely funded by the US Military (Guide and Wassenhove, 2009). The remanufacturing sector is larger than the United States’ domestic steel industry in terms of sales and employment, with annual sales in excess of $53 billion and over 70,000 remanufacturing firms (Lund, 1996). There are about 2,000 to 9,000 remanufacturing firms in the United States, out of which only 6% were Original Equipment Manufacturers (OEMs) (Hauser and Lund, 2008). Kodak and Xerox have been successful in remanufacturing practices for single-use cameras and refillable toner cartridges (Uster et al., 2007).

Commercial returns is one of the major types of returns in both the United States and European markets. A customer buys a laptop at a retailer and after two weeks of usage finds it to be slow for his needs. He returns the laptop at the retailer and buys a different product. This is an example of commercial returns. The biggest drivers for processing commercial returns are: (1) sustainability, reducing waste by recycling used products, thereby reducing the usage of raw materials (2) profitability, by reusing the usable value in the products and reduction in raw materials purchasing cost. Commercial returns are refurbished and resold in the market, with function and specification comparable to new' products. We will focus on the characteristics specific to commercial returns. Interested readers can refer to Pazhani (2014) for additional reading on type of product returns and recovery.

Commercial Returns

Enormous amounts of commercial returns happen after the consumers are not satisfied with their purchase or potential consumers/critics have completed their evaluation of the product (Vorasayan and Ryan, 2006). A report by Accenture, a technology consulting and outsourcing firm, says that the costs of consumer electronics returns in 2007 was $13.8 billion in the United States alone. The return rates varied between 11% and 20%, depending on the type of product (Douthit et al., 2011). Approximately 58% of consumer electronics retailers and 43% of OEMs would experience higher return rates than in previous years (Douthit et al., 2011). Driven by liberal return policies at the retailers, commercial returns in the United States are estimated to be greater than 10% of overall in-store sales (Guide and Wassenhove, 2009) and approximately 25%-40% of the total online sales. Their return value is estimated to be in hundreds of millions of dollars for a single retailer. The annual estimates of commercial returns (returned within 90 days of sale) in the United States are in excess of $100 billion (Guide et al., 2006). The electronic industry spends approximately $14 billion annually on managing product returns. Data from the National Retail Federation showed that US shoppers returned $396 billion worth of purchases in 2018 (Coresight Research, 2019). According to the Website Builder Expert report (2019) (based on data from October 2017 to September 2018), 27% of electronic products and 23% of shoes are returned in the EU. Among the countries in the EU, German consumers returned approximately 52% of their online purchases.

Can the businesses restrict customer returns? While some companies see these product returns as a roadblock to achieving profits, a few other companies have adopted strict return policies to restrict the returns, hoping to increase their profit margins. According to a research conducted by the Consumer Electronics Manufacturing Association, a store’s return policy is very important for 70% of consumers in their decision to shop there (Pinkerton, 1997). In an empirical study by Jupiter Media Metrix, 42% of online shoppers said they would buy more from the Internet if the returns process was easier (Rosen, 2001). A study by Petersen and Kumar (2010) shows that companies with liberal return policies could maximize their future profits. The authors conducted an empirical study with an apparel company and analyzed their profits with strict and lenient return policies. The observations from the study shows that lenient return policies boost the company’s future profits. Based on this study, it is also observed that products return cannot be curtailed and managing these returns efficiently can yield significant profits.

Once the product has been returned, an accurate return classification should be carried out for efficient disposition and to speed up the recycling process (Visich et al., 2005). Douthit et al. (2011) shows that nearly 68% of returns are products that work properly but do not meet customers’ expectations for certain reasons and 27% of returns are due to buyer’s remorse (situations where customers simply changed their minds). Ferguson et al. (2006) classify them as false failure returns - the returns of effectively new products that ‘have no verifiable functional defect’. Ovchinnikov (2011) empirically stated that, for an electronic product company, only 5% of product returns were attributed to actual defects in the product. These defects may be small cosmetic blemishes, observable cosmetic blemishes, shipping damages to the containers, or malfunction of hardware/software. However, reverse supply chain infrastructure should be in place to efficiently recycle and reuse the value in these products. The refurbished products are then sold in the market for a discounted price. Today, almost every electronic retailer, including Amazon, Best Buy, and Walmart, has an option for buying refurbished items on their websites. Some everyday examples of industries involved in refurbishing/remanufacturing include electronic products such as mobiles, laptops, computers, televisions, and automotive parts like batteries, tires, and starter motors.

The main challenges with refurbishing commercial returns are: (1) cost for refurbishing, which depends on the condition of the returned product and (2) market for refurbished products, which depends on the perception of the consumers on refurbished product quality. A manufacturer will refurbish the returns only if it is profitable to do so. Refurbishing of returns incur two major cost components: inspection and refurbishing cost. Consumers’ willingness to buy the refurbished products depends on the perceived quality of the products for its price (Hazen et al., 2012; Ovchinnikov, 2011; Vorasayan and Ryan, 2006).

Closed Loop Supply Chain Design with Commercial Returns

CLSC and its management have become mandatory for companies to stay competitive and profitable, with product return values estimated to be in hundreds of millions of dollars for a single retailer. A strategic issue in supply chain management is the configuration of the supply chain network that is seen to have a significant effect on the supply chain performance indicators (Pishvaee et al., 2009). Network design complexity in the supply chains have increased significantly due to addition of entities, return products, and the uncertainties associated with them. Given that the commercial returns are inevitable, an efficient supply chain network design (or network infrastructure) should be in place for profitable business operations. Unlike end-of-use and end-of-life returns, commercial returns happen within a short period of time from the initial purchase.

Although aspects of managing CLSCs have been addressed in the literature, there have been no insights into incorporating the two key characteristics of commercial returns: quality of the returned products and customer acceptance toward refurbished products. Given the strategic nature of the problem, ignoring these important return aspects, particularly for commercial returns, will lead to inefficient operations of the entire supply chain, as it directly affects warehouse selection, distribution network plan for returned products, and supplier selection decisions. The aim of this book is to provide insights for companies to design their supply chain network by understanding and incorporating these key return parameters in their design, which directly affect the supply chain profitability. The forthcoming chapters in this book address the planning of CLSCs and develop mathematical models and solution methodologies for designing CLSC networks by integrating both the forward and reverse supply chains.

The framework proposed in this book will help practitioners and readers to answer the questions below': w'hat is the gain in adopting a CLSC with recycling?; how sensitive is your supply chain design and profit to the return parameters?; is it profitable to design your CLSC incorporating these parameters?; w'hat is your supply chains’ refurbishing strategy, given return parameters?; and how to incorporate uncertainties of return parameters in the supply chain design phase? The proposed modeling framew'ork is applied to realistic examples and provides valuable insights to practitioners and readers to understand the interactions of different parameters on CLSC network design. The modeling frameworks, provided in this book, can be easily extended to adopt any CLSC network in designing a sustainable, robust, and profitable supply chain network.

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