Reverse Logistics Comes of Age Calculate Your RL

Reverse Logistics Comes of Age Calculate Your RL Operations Cost SOX - Keep Your CEO Out of Prison Giving Your Management RL Visibility Bottom Line, and Beyond By Jim Cochrane, Sharon Daniel & Gailen Vick

Reverse Logistics Trends Customer Satisfaction Bottom-Line Contributions Brand Protection Hidden Cost Data Collection Surveys Social Responsibility Shareholder Board of Directors Definition/Market Size Magnitude & Myths Innovations Entitlements

Reverse Logistics Defined Supply Chain - After Market Supply Chain PRODUCT LIFE CYCLE FORWARD LOGISTICS CORPORATE IDENTITY CHANGE New Product Development • Design Development • Technology Roadmaps • ASIC Development • Mechanical Design • PCB Layout • Prototyping • New Product Introduction Material Management • Vendor Relations • Planning • Procurement Inventory Planning • Component Fabrication REVERSE LOGISTICS Manufacturing & Distribution • PCB Assembly • Box Assembly • Volume Manufacturing • Integration • Configuration • Final Testing • Distribution to Customer • Customer Fulfillment • Transportation E N D U S E R / C O N S U M E R Aftermarket Customer Services "In other words, anytime money is taken from a company's Warranty Reserve or Service Logistics budget, that is a Reverse Logistics operation"

Reverse Is Different Forward Reverse Product quality uniform Product quality not uniform Disposition options clear Disposition not clear Routing of product unambiguous Routing of product ambiguous Forward distribution costs more easily understandable Pricing of product uniform Reverse costs less understandable Inventory management consistent Inventory management not consistent Product life cycle manageable Product lifecycle less manageable Financial Management issues clearer Financial Management issues unclear Negotiation between parties more straightforward Type of customer easy to identify and market to Visibility of process more transparent Negotiation less straightforward Pricing of product not uniform Type of customer difficult to identify and market to Visibility of process less transparent Source: Genco

Reverse Logistics Market Size EQUIPMENT & SYSTEMS CATEGORIES COMPUTER/OFFICE EQUIPMENT ($ BILLIONS) YEAR 2001 2002 2003 2004 2005 2006 39. 0 45. 3 51. 9 60. 1 61. 4 63. 8 124. 4 146. 1 167. 4 192. 6 224. 3 264. 7 COMMUNICATIONS NETWORKS 47. 6 52. 2 54. 8 59. 3 64. 3 69. 6 STAND-ALONE COMMUNICATIONS 29. 9 32. 7 35. 7 39. 0 42. 8 47. 1 INDUSTRIAL PLANT & EQUIPMENT 74. 2 79. 9 86. 3 93. 5 99. 0 105. 6 BUILDING EQUIPMENT & SYSTEMS 48. 3 51. 8 55. 8 60. 3 63. 1 69. 1 MEDICAL/SCIENTIFIC & SYSTEMS 17. 9 20. 4 22. 5 24. 5 26. 7 29. 1 5. 8 6. 6 7. 1 7. 8 8. 4 POWER & DISTRIBUTION SYSTEMS 13. 2 13. 7 14. 3 15. 0 15. 6 16. 2 TRANSPORTATION EQUIPMENT 76. 7 78. 6 80. 6 82. 6 84. 6 86. 8 PRINTING & PUBLISHING 20. 3 23. 4 26. 5 30. 0 34. 6 39. 9 8. 8 10. 7 12. 5 14. 4 16. 4 18. 4 505. 3 560. 7 614. 9 678. 4 740. 7 818. 7 ENTERPRISE NETWORKING RETAIL/BANKING EQUIPMENT IMAGING & DOCUMENT Mgr. TOTAL U. S. HIGH-TECH SERVICE Permission by Blumberg Associates Source: D. F. Blumberg Associates, Inc

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Magnitude of Returns • Managing the reverse supply chain is a very different and much more complex matter than trying to make an organization’s forward supply chain more efficient and cost-effective - Dr. Ho Kim (2003) • Scale: US companies spend roughly $45 Billion annually on returns logistics • Impacts Many Customers: According to Consumer Electronics Industry survey, the average returns rate is 8. 46%, but high tech returns can be as high as 20% in some sectors • Evolution: Reverse Logistics is shifting from being seen as a “necessary evil” to being recognized as a strategic asset – reducing costs, improving customer care and helping to grow the business Source: Prasad Thrikutam, Sandeep Kuman

Magnitude of Returns • “There are up to 12 times the number of transactions involved in the returns process than in selling the product in the first place. ” - AMR, Nigel Montgomer • Enterprises are struggling with excess inventories, suboptimal performance levels, diminished customer satisfaction & missed opportunities for cross-selling and up-selling aftermarket service & parts - Aberdeen Group • “The cost of processing a return can be two to three times that of an outbound shipment. ” - RLEC • “Improperly handled returns erode 30 -35% of potential profits. ” - Gartner

Magnitude of Returns $100 billion in goods returned each year . 5% of GDP 10% of total US logistics costs (est. at $1 trillion) Dr. James R. Stock, Product Returns/Reverse Logistics in Warehousing, 2004 Dr. Dale S. Rogers and Dr. Ronald S. Tibben-Lembke Going Backward: Reverse Logistics Trends and Practices, 2000

Dispelling RL Myths “Belief” • Returns have little value and should be scrapped Actions to Fit the Reality • Change your company’s default setting to finding “highest and best use” for each return • Returns are largely defective goods • Most returns are not defective. Get into the detail of why consumers return – and know the true value of each product stream you’re recovering so that you can drive a plan and timeline that specifically fits that product • Knowing your reverse logistics operations inside-out is essential to controlling environmental and brand risk – Know the details of your operations – Know your subcontractors – Audit! • Our reverse supply chain is probably good enough Source: Cisco Systems

Myths – Cheap Labor Cost Comparison Examples - USA vs. China Expenses Landed Cost Labor Time - Hours Labor $ Delta Insurance Per Month Freight To China Freight From China Market Devaluation 75% Recovery Additional Cost China Solution Average Printer $ 12. 50 $ 3, 700. 00 $ 5, 000. 00 - $ 150. 00 0. 35 $ 4. 38 $ 0. 75 $ 2. 96 $ 4. 01 $ 37. 13 $ 40. 47 27" Color 32" Color CRT TV LCD TV $ 180. 00 1 $ 12. 50 $ 0. 90 $ 23. 72 $ 32. 05 $ 7. 43 $ 51. 59 $ 2, 000. 00 1. 5 $ 18. 75 $ 9. 96 $ 35. 58 $ 48. 08 $ 105. 00 $ 179. 86 Cost Comparison Examples - USA vs. Mexico Expenses Landed Cost Labor Time - Hours Labor $ Delta Insurance Per Month Freight To Mexico Freight From Mexico Market Devaluation 75% Recovery Additional Cost Mexico Solution Average $ 10. 00 $ 1, 600. 00 - Printer 27" Color CRT TV 32" Color LCD TV $ 150. 00 $ 180. 00 $ 2, 000. 00 0. 35 1 1. 5 $ 3. 50 $ 10. 00 $ 15. 00 $ 0. 12 $ 0. 15 $ 1. 66 $ 1. 28 $ 10. 26 $ 15. 38 $ 6. 19 $ 7. 43 $ 105. 00 $ 5. 38 $ 18. 09 $ 122. 43 Source: Ozark & New Age

Bottom-Line Contributions

Business Drivers of RL External Legislation Business Strategy • EC distance selling directive • Customer Retention/Loyalty • WEEE EU directive • Corporate citizenship • Potential EU legislation on re-use of packaging material • Market/customer behavior analysis • Reduce risk forward channel • Ro. HS directive • Drive sales • Sarbanes-Oxley • Feedback to new product development/IT Customer Service Initiatives Economic Benefits • Return of defective products • Recover assets • Product disposal after end-of-life • Recapture value • Product upgrades • Control gray market • Product recall • Global Labor Cost • Warranty returns Internal • Product defect analysis Operational Strategic Source: Infosys & Cisco Systems

Globalization Is • Cost Savings • Quality, Performance Improvement • Highly skilled motivated labor pools (cultural factors) • Capital Cost Avoidance & Variable Cost Structure • Speed & Flexibility • Revenue Generation • New Products and Services • Resolve Skills Shortage • capacity expansion • • • Source: HP Is Not Just cost arbitrage Just low-level back office work Creation of organizational inflexibility Just the “India” or the “China” thing Addition of hidden costs Centralized/Decentralized decisions

Legislation • Sarbanes-Oxley – – Officially – “The Public Company Accounting Reform and Investor Protection Act” – July 30, 2002 • “To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws and for other purposes” • Section 302 – The CEO and CFO shall each certify: » “The appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial conditions of the issuer. ” • WEEE Directive • Ro. HS Directive • People's Republic of China - Rules for repair, exchange, and return responsibilities Source: Rapid Results

Legislation / Sarbanes-Oxley

Business Strategy • C-Level Executives: It’s your freedom – Need to establish downstream equivalent ownership and accountability – Need to maintain control system integrity in a dynamic, fast changing environment – Reverse Logistics-Related • Who affects the accuracy of your income statements and balance sheets? • Who has your inventory/credits and affects what is received or issued and when • Who controls your IT systems Source: Rapid Results

Business Strategy • 3 rd Party Service Providers – How do I provide solutions to my clients in a SOX world? – How do I provide the assurances needed to maintain my clients’ SOX integrity? – How do I partner with my clients to provide the access to the information /data / personnel they require without impeding my operations? – What can I do proactively to head off issues before they become problems? Source: Rapid Results

RL Movement is Costly The fewer trips a returned product makes, the more value there is in the unit – A centrally located reverse logistics depot is an important element of maintaining value – Excessive freight costs can be abated – The opportunity for damage decreases – Market devaluation costs can be diminished Source: Ozark & Newage

RL Outsourcing 100 60 67 64 69 56 38 23 13 13 0 Transportation Warehousing 1) Repair Planning Procurement Inventory Ownership Percentage share of companies which outsource this function today Percentage share of companies which believe that this function could be outsourced in the future Source : DHL

Aging Awareness As the price of a product declines over time, decisions surrounding warranty service must change to ensure prudent cost management. Source: Motorola

Value Of Returned Product ($) Bottom-Line Contributions Product returned Minimal loss of return product value Optimized Evaluation and Re -distribution Process Substantial loss of return product value; exact value depends on sophistication of process Baseline Evaluation and Re -distribution Process Returned product has lost any real value and should be scrapped No Evaluation/ Re-distribution Process Time Source: "Reverse Supply Chains for Commercial Returns". Joseph D. Blackburn, V. Daniel R. Guide, Jr. , Gilvan Souza, Luk N. Van Wassenhove. California Management Review, Winter 2004.

Brand Protection

Brand Protection Brand Management • Strong brands -Are built through an interrelated system of aspirations, conveyors and customer perception -Contribute directly to the bottom line -Need to be continuously managed The Gray Market Affects your Brand • Diminishes value -Poor Quality -Reduced price point erodes margins • Interferes with customer’s business • Erodes customer loyalty -Increases cost of service -Liability -Reduces confidence in reseller -Less reason to buy your brand Source: Cisco Systems 25

Return Experience on Brand Impact of a negative returns experience. Impact of a positive returns experience. 85% of customers WILL NOT shop again if the return process is not convenient 3/15/2018 X – Source: Harris Interactive Poll, 2004 Source : Newgistics 95% of customers WILL shop again if the return process is convenient

Brand Convenience Most American households Look for Convenience for Returns » 94% visit a post office each month » 46% have 3+ visits » 14% visit a private mail center (eg. , UPS Store, Pak. Mail) » Returns Marketing Services » Returns Operation Services Source : Newgistics

Retailers Never Get Their Returns A tangible benefit of deploying a convenient returns process is that it eliminates “trunk time” - the days between order receipt and return mailing. Lower trunk time helps retailers get the product back in stock, improve order fill rates and increase asset recovery. Order Shipped Order Received Return Mailed 4 24 Return Delivered A convenient returns process 29 days (avg) 5 “Trunk Time” 4 0 31 4 8 12 16 Typical returns processes 5 20 23 26 Days Source: Monthly return analysis of Smart. Label retailer data 31 36 days (avg) 37

OEM/Retailers Look for Support • Single Source Solution – They want someone to handle it all • Lower Costs – Minimize Places you need to send products • Better Controls – Complete accountability through infrastructure software • Faster Disposition – Provide more services under one roof • Fewer Vendors – Develop Partners • Better Reporting – Global Visual Consolidation and consistency Source: Motorola

Brand Protection Actions • Protect the brand promise by focusing on customer satisfaction • Audit your internal processes, third party vendors, and all subcontractors to ensure you know where and how every product is being dispositioned • Ensure your returns disposition strategy does not “fuel” the gray market • Take a zero tolerance approach Source: Cisco Systems

Hidden Cost

RL Costs are Hidden • A complex and costly problem to manage – mostly manual – touches the entire company with no recognized business owner – no single budget to capture & track costs – traditionally no designated corporate “watchdog” ensuring customer satisfaction while protecting company margins – hard to accelerate asset recovery – each area does “the best they can”

Why Costs are Hidden • Urgent needs driven by quality, relationship and market issues – manual processes often create “kneejerk” responses that may create additional problems – changes may not be wellcommunicated throughout the company • causing confusion, duplicate effort and needless expense • negative impact on an already unhappy customer

Hidden Cost Impact Customer Service Finance Sales Traffic • Return policies • Warranty policies • Record of RMA • Account management • Carrier control • Customerspecific issues • Service contracts • Financial impact • Ineligible returns • Product rules • Process, approval rules • Revenue recognition • Noncontract rates • Product eligibility • Credit timing issues • Warranty support • Perception • Credit rules • Advance replace • Special customer needs • Debits • Problems found in Receiving • Ability to reconcile • Write-offs • Margin protection • Special programs • Quality impact • Return rate forecasts • Transit damage – claim recovery • One-off shipment issues • Inability to track, route effectively Rcvng Whsing Repair • Facility and labor planning • Priority conflict • Very manual effort Asset Mngment • Repair – ship back • Replace • Credit • Invoice • Float stock • Ownership issues • Resale • Product std cost • Scrap and reclaim value • Internal visibility • “Green” needs

RL Adds to Bottom Line Products After tax Profits Are They Production Cost Revenue per Unit is $1 or $1, 000 Measured Right Reverse Logistics Management Returns Take Away From Bottom Line Profits Your Company Manufacturers 1 Million Units Per Year Profit per unit is 5% After Tax or $50, 000 Return Rate Average is 10% or 100, 000 units Returns Represents $100, 000 of Sales or $50, 000 negative to bottom line Reverse Logistics Recovers 80% of the Returns or $80, 000 to company bottom line Company’s After Tax Profit is $30, 000 So who is most important, the VP of Marketing/Sales that took $50 K from your Company or the Reverse Logistics Professional that gave you $30 K of After Tax Profit?

Strategic Advantages of RL • “Forward-looking business and operations executives who recognize the strategic advantage of proper returns handling will gain a significant competitive market advantage. ” • “Those willing to invest resources in implementing these …. solutions will bring millions of dollars in cost savings to their companies, while improving customer service and retention. ” Source: CLM/SF Newsletter 3/02

Data Collection & Surveys

Data Collection & Process Input to RL Process §End-of-Life §End-of-Use §Commercial Returns §Production Waste §Process By-Product §Damaged §Service Parts §Leased/Rented §New Market Trials Collection/Inspection/ Selection/Testing Repair/Refurbish/ Remanufacture/Reuse/ Recycle/Disposal/ Asset Recovery Redistribution Define Your RL Process Original Use/ Other Use Disposal Product Recovery

Data Collection & RL Process Design Prototype & NPI PCB Assembly Final Box Assembly BTO / CTO Distribution Services Serviceability & FA Feedback Sustaining Engineering Remarketing Repair / Refurbishment Returns Management Disassembly Recycling Source: Jabil Global Services Call Center (Outsourced) Reverse Logistics Environmental Disposal

Consumer Returns Surveys • Over 75% admitted product was “not defective” • Primary factory was “misinformation at time of purchase” – Sales staff knowledge – Point of sale clarity • Secondary factor was product not meeting expectations – Difficult to hook-up – Difficult to use/operate Source: Philips/retailer private returns survey

Using Surveys Product Category % Product Category Computers and peripherals 19. 85 Health and drugs 3. 05 Cellular phones and mobile 9. 16 Magazine and book publishing 3. 05 Audio Video Systems 8. 40 Medical equipment 3. 05 Office products and supplies 7. 63 Food 2. 29 Semiconductor 7. 63 Building and garden supplies 2. 29 Household appliances 5. 34 Apparel and accessories 2. 29 Automotive 4. 58 Catalogue merchandise 2. 29 Hardware and materials 3. 52 Plastic products 2. 29 General merchandise 3. 05 Other 9. 92 Survey data by RLA and San Jose State University %

Data Collection & Surveys Survey data by RLA and San Jose State University

Data Collection & Surveys Juvenile Furniture 40% Consumer Electronics 70% Computers 85 -90% Small Appliances 90+% “No Defect Found” rates Source: Philips/retailer private returns survey

Data Collection & Surveys Source: Frontline Today

Innovations & Entitlements

Innovation Lowers RL Cost According to A. T. Kearney, 70 -90% of every dollar generated through asset recovery goes straight to the bottom-line

Innovations of Online Auctions • Asset Recovery/Price • Returns 50 -200% higher than in-person, physical auctions - Bill Angrick , CEO, Liquidity Services • “Overall, we have found the private marketplace is advantageous to Motorola. We’re getting full value for the product and we can better understand buyer’s preferences”. Pam Arrigo, Motorola • Participation • Fortunately, online markets have developed over the past 5 years which facilitate the remarketing process. • Explore incremental channels and understand how they can drive corporate value - Jim Magnanini, Channel. Advisor Corporation

Innovations & Cost Recovery Merchandise Alternative Asset Optimization Model Online Bid Auctions Online Fixed Price Offer B 2 B Exchange Store Resale Placement Return to Vendor • Quantity • Time • Restrictions • Channel Demand Category Salvage Optimized Recovery Reporting Settlement Dynamic Optimization Source: Genco Bulk Salvage

Innovations & Entitlements Ineffective entitlement can lead to unhappy customers • Brand loyalty • Retail returns – Often refund, lost margin – Less often, exchange for like • Manufacturer returns – CE manufacturers allow return for credit Source: Philips/retailer private returns survey

Innovations & Entitlements Steps to Effective Entitlement • Create and use intelligent serial numbers • Provide end-to-end entitlement system infrastructure • Assure supporting point of sale practices • Enable robust point of return practices • Sustain effective contact center procedures Source: Philips

Initiatives to Reduce Entitlements • Collaborate for proactive returns management – Sales Quota Management • Establish inspection programs • Evaluate alternatives to return • Establish returns policies Source: Philips

Social Responsibility

Social Responsibility Photos courtesy of BAN. Copyright: Basel Action Network.

Social Environmental Issues The Scope of the Problem • 20 -50 million tons of electrical/electronic equipment waste are generated worldwide annually • 500 Containers of used electrical equipment enter the country of Nigeria each month. Each container contains about 800 computers • 50 -80% of electronic waste collected for recycling in the US was being disassembled and recycled under unregulated, unhealthy conditions in China, India, Pakistan and other developing countries • As much as 75% of imported used computer equipment is “junk” and not economically repairable or resalable • E-Waste/e-recycling will represent $30 Billion market opportunity by the year 2008 Source: Basel Action Network & D. F. Blumberg Associates

Social Responsibility Could your Company be at Risk? WOR LD 'S LA R GEST P ROCE SSOR OF CO , 2004 ber 23 Global eptem g 'E-Waste' S Finds ny lin Recyc Compa ore Singap Edge for g ready s gettin e world's k Lee i , " …th te uit Ng Tec ORE— m -- in "e-was lem. Mr. Ng q ng P SINGA t big boo rob ycli aste p cs rec the nex growing … w er for a plasti riv stfaste uck d as a tr his job y in 1989, , , n compa September 23, 2004 February 5, 2005 Source: The Wall Street Journal RPOR ATE E -WAS TE

Case Study of Citiraya: How Did It Happen? “Belief”: What Citiraya’s Customers Thought They Were Buying Customer Citiraya Logistics Depot Citiraya Secure Destruction Facility Certificate of Destruction Reality of Citiraya’s Operations Customer Citiraya Logistics Depot Citiraya Secure Destruction Facility Broker Gray Market Broker Counterfeit Product Assemblers Uncontrolled Scrapping Subcontractor Source: Cisco Systems Landfill

Social Responsibility Actions • Include final disposition in your product life cycle planning, all the way back to your product development cycles • Develop easy to use Trade-in and Take Back programs for your customers – these will proactively help recover older products • Leverage your channels of distribution to help manage your reverse logistics • Actively audit your corporate compliance to local, regional and international laws and regulations – down to the subcontractor level! Source: Cisco Systems

Customer Satisfaction

Customer Satisfaction The Consumer View Typical Consumer Electronics industry return rate: Distributors 10 -12 % Computer OEMs 10 -20 % Retailers 6% Online CE Products 20 % Consumers factor return policies into their shopping decisions -- convenience is key for many shoppers: • 88% state that a convenient return policy and process is somewhat important, important or very important to purchase decisions. • 92% of online/catalog shoppers are somewhat or very likely to shop again if the return process is convenient. • 85% are not very or not at all likely to shop again with a direct retailer if the return process is inconvenient. • 75% indicate that a convenient return policy is an important or very important factor when purchasing a gift for someone else. Source: Newgistics, Inc. , conducted by Harris Interactive.

Customer Satisfaction What Value Can Reverse Logistics Deliver? Function Key Objective How Reverse Logistics Can Help Finance Maximize profitability • Control costs with efficient operations • Recover value from returns Sales Grow the business • Make returns process painless, to increase customer satisfaction • Support growth by making product available to surgically resell Marketing Build the brand • Control the gray market Quality Improve customer experience • Feed returns data back upstream to drive process and product design improvements CEO All of the above, + Corporate Social Responsibility • Ensure environmental protection • Leverage returns to accelerate giving back to the community Source: Cisco Systems

Summary

Summary Strategic Value Of Reverse Logistics It’s Not Just Control Expense Control Product Re-use (Reduce new buys) X Quality Improvement X Product Life Cycle Mgmt (Dev Time) X Customer Intimacy/Information mining X Revenue X Customer Loyalty/Customer Service X Marketing: Service Sales X Sales Programs, Channel Policies X Brand Protection X Disposition to “Highest and Best Use” X Source: Cisco Systems

Summary Drive Reverse Logistics Cost Out Simple Model Product Return SCRAP Proactive Model Spares/Repairs Secondary Market Product Return Sort, inspect, and determine highest & best opportunity • Accelerate recovery of product returns • Enhance customer satisfaction • Optimize value of products – understand paths to Secondary Markets, Internal Reuse, Spares and Philanthropy before sending to recycling Source: Cisco Systems Internal Reuse Philanthropy SCRAP

RL Cost Compared to Forward Survey data by RLA and San Jose State University

Summary • Less handling, shipping, and touches means more value. • A centrally located repair depot reduces freight and time. • Service capabilities of your returns depot must be diverse, skilled, integrated, and quality driven. • Non Domestic “Cheap Labor” does not reflect the true cost of re manufacturing returned units. • A quality outsourced reverse logistics corporation can reduce costs, add flexibility, and control headcount. Source: Ozark & New Age

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