The Power of Leveraging Outsourcing with Out-of-the-box Thinking
At first the right-of-way areas on both sides of the railroad tracks being built to connect the Atlantic and Pacific Coasts of America appeared to be just vast, empty stretches of land. But the speculators saw something different. They could make money by selling those railroad acres as farmland to settlers moving west. Then they could create even more revenue by building boomtowns near the tracks, for the towns would grow to be a lucrative source of passengers and freight for the trains.
It’s not unlike the unique combination of Sears and GENCO Distribution System in using logistics to create a new source of revenue. Through their innovative ideas and commitment to operational best practices and each other’s success, they jointly built an entire industry — reverse logistics.
Throwing Money Away
Their venture started in 1993 when Sears was working with consultants on how to improve its operations. One idea was to centralize the giant retailer’s customer return merchandise process. The plan was to transport the merchandise from more than 2500 Sears locations nationwide to centers where the return items could be consolidated and processed efficiently. At the time, most of these items had been going into landfills around the country, and Sears had actually been paying money to throw the stuff away.
Only one company then had a little experience in this area of distributing unwanted merchandise: GENCO. It was involved in transporting expired-date grocery items off the shelves and either disposing of them in the trash or taking them to a food bank. “We could have chosen to develop this idea with any number of companies,” comments Clay Valstad, Sears’ Director of Reverse Logistics. “But what drew us to GENCO was their attitude to partner with us and commitment to make it happen.” So they signed a five-year contract (which, because of their excellent relationship, has since been renewed).
Valstad, who has been with Sears for 33 years, describes the outsourced process as a “logistics channel.” The distribution channel for customer-returned products now shuffles those items into one of six dispositions:
- Back to a vendor for credit;
- To salvage, where it is sold in the secondary market;
- To be donated to charity;
- To be destroyed under a “guaranteed destruction agreement,” but credit is received from the vendor who didn’t want the product back;
- To be refurbished for resale in the Sears service stores; or
- To be recycled.
GENCO’s nationwide network cost effectively ships the merchandise from Sears’ locations to one of three Central Return Centers, where GENCO’s staff processes and distributes the products, resulting in revenue back to Sears. At the start of their relationship, GENCO worked with Sears and its vendors to make it happen, developing the technology system and the operational pieces.
“There is a tremendous amount of information that we have to know for every single item, besides the eventual disposition of the product,” explains Valstad. “Who is the vendor? Where do we send the item? Who is the contact person there? How often do we send them things, and are there a certain number of pieces or dollars or certain days that might be involved? Is a return authorization required; if so, does it need to be faxed, emailed, hard copy, telephone? Who do you call to get that authorization and what’s the phone number?”
He continues, “That’s why the stores couldn’t handle this process effectively. We deal with thousands of vendors and millions of items. And it changes daily, as products and vendors come and go or business rules and contact names or phone numbers change. No individual store could stay on top of that.” The system was designed to accumulate the dynamic data in Sears’ master relational database daily, and then the data is uploaded to GENCO.
When the merchandise arrives at a GENCO center from a Sears location, the item identification scan reaches out to the database, outputting all the current information GENCO needs to process that item all the way to its final destination. The system also drives vendor credits back to Sears. Added value from this innovative system is that Sears also uses the results-oriented data to track product quality and vendor performance.
The system and GENCO process also gives Sears the ability to handle all its different types of businesses, many not even using the Sears name, let alone the Sears systems. There’s Orchard Supply Hardware, for instance; The Great Indoors chain; the National Tire and Battery chain; and a series of direct marketing, online and catalog sales. “They may have different processes and different vendor agreements,” Valstad explains, “so GENCO worked with us in developing the necessary system and operations to handle those needs through the same three Central Return Centers.”
Finding New Money in “Stuff”
With the infrastructure in place, they began discussing other ways to leverage the economies of scale in this outsourced process. What else could ride on that same pallet in that same truck? How could Sears take work, square footage and expenses out of the retail stores so that the folks in the stores could focus their effort, payroll and assets on taking care of customers more cost effectively? Because of the infrastructure, Valstad says, they now can consolidate “stuff” in the three centers, not just returned merchandise.
So they’ve added new projects to the process. Now they can process new merchandise back to vendors for credit when it’s recalled for quality, safety or stock balancing issues. And Sears has a new revenue stream from recycling.
Since it’s illegal in many parts of the country to throw apparel hangers into landfills because of the plastic content (and expensive in other parts of the country), Sears now recycles 100 million hangers each year through the GENCO infrastructure. “We turned what used to be an expense into a responsible environmental program and also into profit,” Valstad exclaims. They did the same thing with apparel plastic. “We consolidate two million pounds of it, bail that up and sell it as raw material that is then made into patio furniture or toys.” They also recycle Craftsman Lifetime Warranty Tools. Because they carry a lifetime warranty, this prevents someone from retrieving it from a landfill and taking it to a Sears store to collect on the warranty. “We make sure that metal is ground up and melted so that it can’t be returned – and that’s another seven and a half million pounds a year,” he adds.
The Sears-GENCO venture keeps growing by leveraging the process economies of scale and expertise and working together on innovative ideas. Now they are able to handle special processing. Computers are one example. “Because of the value and requirements of vendors, a computer requires much more extensive processing than a shirt or screwdriver does. It has to be controlled by serial number as well as item number, and we have to do an inventory of the components. There are a lot of special things that have to be done,” says Sears’ Reverse Logistics director.
It’s More than Innovation
It all happens in the GENCO Central Return Centers, but it takes a partnership effort to make it happen. Both companies bring ideas to the table, and they work together flexibly to make them happen. Valstad says, “GENCO is the industry leader now, and they provide this service to many of our competitors and to vendors. They are very good at executing what they do. But anybody can do a good job. We place more value in our partnership and their cooperative attitude in working with us to make Sears successful.”
Seven times since 1993, GENCO has been awarded the Sears Partner in Progress Award, recognizing excellence in the top one percent of Sears’ 10,000 vendors. Two of the seven awards were for Vendor of the Year, and one was for Quality Source of the Year. How does GENCO feel about their relationship? They say it exhibits the true benefits of an outstanding win-win outsourcing relationship, for it empowers both companies to do what they do best, enabling both to grow in their respective industries.
Lessons from the Outsourcing Journal
- A reverse logistics operation for a retailer with multiple locations requires economies of scale and a technology system that can more cost effectively be provided through an outsourcer.
- Outsourcing relationships work best when they move beyond the vendor-customer approach to working together to make each other successful.
- Outsourcing a logistics process can remove some of the operational expenses of a buyer’s organization so that its staff can focus on core processes of providing better services to its customers.