Home Depot, Kmart, Sears Focus on Logistics

Retailers this year are seeing a raft of new, or newly available, technologies that among other things allow them to update software at all POS devices chainwide instantly from headquarters, cut costs out of the returns process and protect themselves from credit card terminal downtime.

Waltham, MA-based On Technology has signed deals with major retailers Staples and Home Depot over the past few months which allow them to update all POS terminals and store-based PCs with new software at the push of a button. According to Bob Doretti, chairman and ceo of the company, Home Depot will be able to update all 150,000 of its POS stations instantly, saving untold millions in laborious manual software installation and testing. "The average retailer has to send out technicians to every store whenever software has to be updated," Doretti says. "The cost in airfare and hotel rooms alone is exorbitant, particularly for a national chain."

The potential savings extend even further, he notes, because software that directly affects sales can be updated nationwide, instantly, along with price changes and new product information. Staples, for instance, uses the technology to update its in-store kiosks to keep on top of new product introductions and price changes, while also transporting new software to POS devices and back-office computers. Home Depot is also using the OnCommand CCN for new and rapidly changing applications, such as custom paint-mixing and kitchen and bath cabinet and fixture design. "As they add and delete products, every store can be updated instantly," he says.

Returns have long been a major thorn in the side of retailers. The costs associated with simply accounting for and disposing of a returned product alone reach as high as $32.40 per item, according to Geri Spieler, research director and analyst for Stamford, CT-based Gartner Inc. But as retailers began automating the process, the costs have plummeted. She estimates that retailers now save 73% of the cost of a return in an automated system compared to handling returns manually. "It is still expensive, but it averages out to about $8.69 per return."

Now retailers and their vendors are developing new and potentially profitable ways of dealing with returns. Genco, a Pittsburgh-based distribution company, is testing new methods of disposing of this merchandise, which often cannot be returned to the manufacturer or restocked in a client's stores.

The latest wrinkle is the online auction, where retailers can offer bulk merchandise to a worldwide audience, and get higher prices for the goods. And, in the case of smaller quantities, they can go directly to consumers on auction houses like eBay.

According to Pete Rector, senior vp of Genco, so-called reverse logistics has boomed over the past decade, as retailers came under increasing price pressure. While many goods, like dud apparel items, are still baled up and sold for almost nothing in the third world, retailers are finding ways to maximize their asset recovery. "Our customers can get back three to four times what they would have through conventional means," Rector says.

The company's Product Assist business-to-business auction site can boost asset recovery to virtually break-even by exposing the goods to a huge number of potential buyers, Rector says. The average is reaching 76% of value vs. only pennies on the dollar a decade ago.

And in individual sales on consumer auction sites like Ubid and eBay, retailers can often sell "scratch-and-dents" at a profit.

Merchants have also discovered the benefits of de-manufacturing. Like the automobile, many electronics items, such as computers and microwave ovens, are worth far more for their parts than as a whole. "A damaged or obsolete computer is worth almost nothing on the market," Rector says. "But when you pull out sound and video cards, hard drives, printers, monitors and so on and sell them individually, retailers can actually make a significant profit."

Ed Winter, Kmart's director of return logistics, notes that Kmart is not a second-hand merchant. "Our objective is to pull used or obsolete merchandise out of our stores, then look at what we can do with it. We're not talking about defective goods, which we send back to the manufacturer, but more often discontinued merchandise, scratch-and-dents, or goods that might sell well in one region but not in another. It's a very complex process."

In some cases, particularly in the area of electronics, Kmart signs brand protection agreements, which means that it can't simply mark goods down and clear them out. Other products, due to environmental concerns, can't even be thrown away. And some products, already ticketed with Kmart price stickers, are too dangerous to simply sell to the highest bidder.

"That's always a concern," Winter says. "We don't want these coming back to our stores as returns. So we'll take a lower offer that allows us control over where the goods are sold. In that case, we're not looking to maximize dollars, but rather to make sure the merchandise goes offshore and stays offshore."

Kmart has another problem: its Web site BlueLight.com often sells merchandise at prices lower than at its retail stores, or products that its stores don't sell at all. "We tell online shoppers that they can return items at any Kmart store, so obviously, we have to keep that merchandise segregated. We have 2,100 stores out there, and it's our job to make this as simple as we can for our associates." Kmart tags all merchandise with a code that tells an associate whether a product was purchased online and at what price to prevent over-refunding for those products.

Gus Pagonis, executive vp, supply chain for Sears, Roebuck and Co., probably feels like he has the easiest job in the world after his previous assignment. Prior to joining Sears in 1993, he directed all logistics for the armed services during the Gulf War, reporting directly to Gen. Norman Schwartzkopf.

Sears has some major challenges individual to its operations. For instance, it delivers some five million major appliances each year through Sears Logistics Services. "A surprising number come back," Pagonis notes. Most often, they're returned because they don't fit into a customer's kitchen, or the wrong color was delivered, or the customer has second thoughts. Some products are simply restocked at a warehouse, but Sears operates 33 outlet stores to clear out problem merchandise.

Returns, Pagonis says, are only part of the problem. "What we're trying to do is keep goods a step up in the supply chain, so that we don't have to move merchandise from store to store," he says. For instance, expensive and bulky items like snowblowers, will be stockpiled at a distribution center, allowing Sears to react quickly to regional weather conditions.