Liquidation - cash from trash

Most of the retail companies consider returns and damages to be unavoidable cost of doing business. Every return refused by the manufacturer is deadweight for a retailer. Good news is there are simple ways to reduce your return rate and recover some hard cash from the trash.

1. Prevent "negative value" liquidations
Pre-calculate value of each return scenario; train your returns specialists on making the most cost effective decisions on the fly.

1.1 Customer remorse
Let`s take a $129 end table as an example (free shipping). Wholesale price for the product is $50 and your shipping cost is $35. If you accept the return – customer’s refund will be $129 – 2* $35 – 20% * $129 = $33.2. Quite a difference with $129 someone paid in the first place!

Frequently, just doing this calculation together with the customer is enough to save the order. You can always add a sweetener and give a $10 discount making your customer feel appreciated (and prevent liquidation).

1.2 Damaged in transit
In this scenario the same table was damaged in transit. You can file a claim for the invoice amount and depending on how good your claims process – recover 20-40 % of the retail value or $25 - $50. Keeping in mind that you still pay the vendor his $50 wholesale cost – you are at a loss. Obviously, you want to discount the order all the way to your costs – meaning $50 wholesale and $35 shipping giving you $129 - $50 - $35 = $44 as a “discount bucket”.

If you can not convince the customer to keep the order – request him to send you the pictures showing damage and ask to scrap the product. This way you will still be entitled to recovering money from the carrier and save on return shipping/ storage. To help you make decision scrap/ return use a similar logic: Liquidation value of the table is 10 % of the retail meaning $12.9. Returning the table will cost $35 in shipping and $10 in inspection/storage warehouse fees. Expected value of the return is $12.9 - $35 – $10 = -$32.1!

1.3 Missing Parts
Do your best to avoid picking up products for this reason. Those products have almost zero liquidation value and will become a struggle between you and your vendor.

Let`s say the table is missing a set of screws. Most of the vendors I worked with would ship parts without a problem. Be mindful about shipping cost. Sending a small box on your UPS account can easily cost $5-7. Given is vendor`s fault - do you want to bare the costs?

My advice is to outsource parts requests to a third party and have them collect statistics on all such requests. Based on their numbers you should invoice vendors to pay your shipping and handling costs. $5 for shipping plus $5 for order processing looks small till you realize that there are dozens or hundreds of parts requests a month that are eating into your profits.

2. Design an efficient liquidation channel
In the brick-and-mortar retail world liquidator comes to your warehouse, picks items they want to sell (leaving trash to you) and cuts you a check for 50% of the recoveries. Downsides of such arrangement are - liquidator will only take good items (that you could re-box and resell for a full retail value) and you keep paying storage charges (that accumulate fast and hide inside your other warehouse fees). At one point, one of the companies I worked with was paying $6,000 monthly just for storing the returns.

The best solution is a centralized liquidation location. Your returns team categorizes the return and if the product is worth liquidating and can not be returned to the manufacturer arranges the return to be shipped to the liquidator. Upon the receipt product gets photographed and inspected. Then liquidator sells the product through eBay or other channels and splits the recovery with you.

3. Outsource liquidation management
A rule of thumb - liquidation value for most of your products will be about 10 % of the retail value. Unless you have a lot of returns - having a dedicated person is not cost effective. I am a very strong advocate for outsourcing scriptable and repetitive processes. This is a perfect example - offer a flat handling fee plus a % of recoveries, define Key Performance Indicators, request detailed reporting and stop wasting your time on something that is marginally profitable.

Liquidation management (along with returns and damage claims management) is something that is worth doing in-house only if you have significant scale and can afford a full-time specialist. Otherwise it distracts you from growing your company.

Remember, even if returns are unavoidable - your costs can be significantly reduced through smart policies and efficient processes. Come back for more of our articles on Returns and Liquidations or follow-up with me directly at max@optimalogica.com to discuss how my team can help solve your returns puzzles.

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1 Comments:

Blogger internetretailer said...

Great article. It gave me a heads-up where to begin. Thanks

August 19, 2008 at 2:37 PM  

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