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f+h Intralogistics 2/2016

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f+h Intralogistics 2/2016

Cost optimization in the

Cost optimization in the returns network About Chair of Logistics Management University of St Gallen Martin Hänsel, Wolfgang Stölzle In a case study, the potential savings from the implementation of certified returns are examined in the context of media distribution. The Chair of Logistics Management at the University of St Gallen, Switzerland, provides an international platform for scientific and practical dialogue in the field of logistics, supply chain management and transport. The chair researches complex problems by developed innovative concepts, methods and instruments. It’s driving the development of logistics management in industrial, commercial and service companies and promotes knowledge building and transfer within an international network of renowned universities and institutes. LOGISTICS MANAGEMENT Nowadays, the market of the music industry is mainly characterized by a fast paced environment and a change from physical, digital or analogue media towards non-physical formats. Due to the large increase in the offer of digitalized music over the internet as well as music portals, the demand and sales of physical media like CDs or DVDs have decreased. As high sales can still be achieved, despite this decline, it is even more important for labels as well as pressing plants and distributors to position themselves as well as possible in the shrinking market. In particular, due to the increase in online retail, but also due to the rising number of products sold daily, there is an increase in the forward but also the reverse flow of goods. Since returns are not completely avoidable due to legal requirements, this process has become a part of the corporate strategy as well as an opportunity to influence a company’s strategy. In the present case study, the potential savings from the implementation of certified returns – a specific form of returns, which have so far only been applied in the publishing industry – are examined in the context of media distribution. An approach from the publishing industry A specific type of return – also referred to as remission – is applied in the publishing industry. Here, magazines, newspapers or other print media are often only produced for a certain period of time (e. g. on a daily, weekly or monthly basis). After this window of opportunity has passed, sending the unsold products back to the dis- tributor does not make much sense, as re-storage or further distribution to third markets is usually not possible. Consequently, the disposal of unneeded items is taken care of by the retailers, in order to reduce the shipping and handling costs. The electronic notification of the number of return-items discarded by the retailer is referred to as “certified returns” or remission. In summary, the following factors can be identified for a reasonable application of certified returns: n The production costs are smaller than the shipping and handling costs for the return. n A resale of the goods is not or only partially possible and the proceeds do not exceed the necessary shipping and handling costs. n Possible risks for the copyright holders of the products are backed by long-term partnerships with retailers. With the aim of illustrating the application of certified returns in B2B-commerce, the subject matter will be analyzed using the example of a media distributor. Returns process analysis In the sale of media to the end user – generally organized through outlets (retailers) – it is to be assumed that most of the goods pre- Prof. Dr. Wolfgang Stölzle is holder of the Chair of Logistics Management at the University of St Gallen, Martin Hänsel M.Sc. mult. is PhD Candidate and Research Associate at the same chair. f+h Distribution 2/2016

sented there, do not belong to them. Rather, they have consignment agreements with the producing or distributing companies. As a result, the retailer has the opportunity to return the unsold items, which are then delivered as returns to the distributor. The daily number of returns at the examined media distributor amount to a total of approx. 14,000 units; which all have to be manually recorded, checked for mistakes and if necessary processed, re-stored or discarded by employees in time-consuming and labor-intense work. The entire return process can be divided into five main processes: 1. Handling by the retailer 2. Return transport of the items from the retailer to the distributor – covered by the retailer 3. Handling by the distributor 4. Processing of the returns 5. Further transport of the no longer needed items to the disposal service providers The first two positions mentioned, handling costs (1) and transport costs to the distributor (2), can be attributed to the retailer. The total costs for the processing of the returns amount to about 900,000 euro annually for the retailer. The internal handling costs of the distributor (3) consist of the proportionate wages, working capital and incidental costs for incoming goods as well as the transport costs of the returns from the receiving area to the returns vestibule. Taking into account the main processes (4) and (5), the total annual process costs attributable to returns amounted to 400,000 euro. Non-physical returns as an optimization approach With the aim of facilitating the decision on the further use during the quality check, so called return-usage-codes (RUC), which can either be automatically entered based on the inventory changes or adjusted manually by employees. Once the barcode of an item has been scanned, additional information on the basis of the RUCs will be displayed on the monitor for the employees. This can be information about specific storage areas, but also about disposal indicators (off-indicators). In the case of the latter, the product needs to be destroyed, regardless of its condition – for example due to excess inventory or outdated content. According to the analysis of data form the 2014 financial year, 20% of all items at the examined distributor were marked with an off-indicator. Although the disposal of these products is to be carried out, regardless of their condition, they are first sent to the distributor for a quality check before being sent to a local disposal service provider, where they are disposed of (= waste products). Waste products therefore go through two processes, each of which is characterized by high labor costs. This results in an annual total of approx. 623,000 items, whose transport for the retailer to the distributor could be saved through the use of “certified returns.” Impact of the returns process and process costs In comparison to the initial situation, the additional information on the RUC of each article being provided by the distributor is a prerequisite for the application of the remission approach. Thereby the retailer has the opportunity, using a special picking list, to gather all the items marked with a disposal-indicator and transport these to the respective local waste disposal service provider. Another change in comparison to the initial situation arises from the returns-notification of the retailer to the distributor. This Process visualization after the implementation of certified returns notification must include a list of all the returned items as well as all the disposed products. In the case of the waste products, this counts as a certified return, since no physical media is returned to the distributor. The examinations have shown that a reduction in the daily amount of return items by 20% accordingly reduces the distributor’s labor costs for the returns processing. The annual savings for the retailer – divided into transport and picking costs – nevertheless amount to approx. 6%. In order to increase the attractiveness of this procedure for the retailers, the disposal costs, which would otherwise fall upon the retailer, should fully or partially be allocated to the distributor. The Figure summarizes the changes to the returns network between the distributor and the retailer (target-state), with the improvements to the process costs, in comparison to the initial situation, which can be achieved. General recommendations for action The implementation of certified returns – so far only known in the publishing industry – provides the opportunity to reduce the costs between the distributor and the retailer. It has been shown using the example of a media distributor that the achieved savings depend on the proportion of waste products. It is assumed that this proportion increases particularly for low-value items as well as products with low production expenses. An equivalent application of the returns process is conceivable for example in the textile industry. The procedure is also equally applicable for higher-value products, for which the reuse of parts or components is desirable. Merely the simplified identification by the picker and the existence of a local third party provider for the disposal logistics must be ensured. A mandatory prerequisite for the introduction of remission in B2B-commerce is the clear identification of the product classification in disposal or processing. While generally all print media of a certain type can be counted as a waste product, an unambiguous classification using the RUCs is possible in the case study of the media producer and distributor. An assessment based solely on the visual characteristics of an article is conceivable in principle, but would probably require extensive training and additional knowhow of the pickers, which would again increase the costs – especially labor costs. Photograph: lead photo: Pixabay / DS-Foto, Figure p. 37 University of St Gallen Source: University of St Gallen f+h Distribution 2/2016


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