Liquidation, auctions reduce bottom-line hit from surplus inventory

From June 2007

By Len Lewis

It’s been a week since the Memorial Day event that produced a near-record sales weekend. But customer returns have already started to clog up the backroom; unsold seasonal inventory is spreading to every nook and cranny of the store – and the cost of shipping all this back through the supply chain threatens to undo the bottom line for the quarter.

Faced with scenarios like this, many retailers are choosing different paths for surplus merchandise – liquidation or online auctions. These are methods that can work to the advantage of both buyers and sellers.

Veteran retail reporter Len Lewis recently spoke with Bill Angrick, CEO of Washington, D.C.-based Liquidity Services, an online wholesale marketplace. Its authorized buyers and sellers from more than 100 countries have access to about 500 categories of merchandise.

STORES: How big an issue is unwanted or returned merchandise in retailing?
Angrick: Well, you have to think about the whole issue in a couple of different ways. Since the advent of big-box retailing, there has been a value proposition created for the consumer in returning merchandise to the store for any reason. This whole “no-questions-asked” return policy stimulated returns in virtually every category.

STORES: Can you put a number on that?
Angrick: Based on statistics we’ve seen, about 5 percent of everything sold in the bricks-and-mortar retail channel is returned – and twice that in online retail. And returns are creeping up.

Companies that sell online have a major issue. People go online and see product images. There’s no actual tactile experience. They get the product, whether it’s apparel or electronics, and it doesn’t come up to expectations or they come up against a technical barrier in electronics. Then it goes back to the online retailer.

STORES: How does all this impact the flow of goods?
Angrick: For one thing, once something is returned, the bar code on the box is no longer valid. Consequently, the systems designed to track and manage the flow of goods forward is mismatched for goods that are open. In many cases unmanifested, unsorted goods accumulate at stores.

STORES: How hard is it for DCs to accept returned goods?
Angrick: When companies look at the reverse supply chain, they realize how difficult this part of the business would be to automate. The billions of dollars of IT investment in the past two decades have really been focused on forward supply chains.

There are good reasons for that: The vast majority of enterprise value means getting the right product with the right price on the shelf at the right time. Meeting sales goals is the main focus of the forward supply chain among both large retailers and suppliers.

STORES: Are returns particularly prevalent at holidays?
Angrick: In reality, we have found a consistent flow of reverse supply chain goods throughout the year. There is a surge of activity in December, for example, but it is a less-seasonal business than you might think.

STORES: Have retailers ignored the reverse supply chain?
Angrick: Not ignored it, but it hasn’t been a center of excellence within their companies. Everyone wants to allocate the majority of their resources to the forward supply chain; they want to implement Six Sigma processes.

The reverse supply chain is an afterthought in terms of investment. And since it is not part of the business that’s easily automated, it lends itself to an outsource provider that can maximize the value of the goods.

STORES: Are companies starting to pay more attention to this part of the business?
Angrick: You have a steady and consistent amount of product innovation that makes sell-through hard to forecast, and that increases the dollar volume of returned merchandise. In parallel with that you have increasing environmental and regulatory concerns about landfill items.

So, all these things combined put the onus on companies to have a comprehensive approach for tracking and managing the sale of reverse supply chain goods.

STORES: What are they doing?
Angrick: We’ve observed that companies are more receptive to service providers that can focus on these issues to help retailers track this throughout their organization. This is a very decentralized process, so you can end up with distribution centers or stores each dealing with these goods differently.

That’s not good for publicly traded companies: They would prefer a single way to screen and review all reverse supply chain activities throughout the U.S. Over the last decade, companies like Liquidity Services have given them this option.

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