A Closed-Loop Returns Management System

A Closed-Loop Returns Management System Turning Failures into ProfitsWinner of the 2006 GMA Unsaleables Innovation Award Finalist for the CSCMP Supply Chain Innovation Award

Copyright© January, 2006 Kellogg’s and Inmarwww.inmar.com

All rights reserved

No part of this book may be produced in any form without written permission from the author and the publisher. Inquiries regarding permission for use of the material contained in this book should be addressed to:

Inmar2601 Pilgrim CourtWinston-Salem, NC [email protected]

Published by: Inmar

Disclaimer: These documents do not constitute legal advice. Inmar advises all reviewers to seek advice from legal counsel based on specific business needs.

Table of Contents

Introduction ............................................................................................................................. 1

Overview of Innovation ........................................................................................................... 2

Results and Benefits............................................................................................................... 5

Applicability to Other Companies ........................................................................................... 9

Conclustion ............................................................................................................................. 11

Contact Information ................................................................................................................ 12

IntroductionSince the beginning of unsaleables management, the goal has been to reduce them.

Retailers and manufacturers assigned a person within their organization whose re-sponsibility was to do just that, reduce unsaleables. While both the goal and the action were a start for improvement, to make the really significant changes that can affect the

bottom line long term, there had to be a new goal and a new approach.

Kellogg’s did just that. Rather than set a goal to just reduce unsaleables, the goal became to in-crease profitability. Profitability in terms of achieving objectives to improve process efficiencies, improve customer and consumer satisfaction, and reduce costs for both Kellogg’s and their cus-tomers. Rather than keep the unsaleables reduction the responsibility of one person, it became a company wide approach with all departments owning a piece of accountability for unsaleables reduction.

Kellogg’s calls this innovative approach their Closed-Loop Returns Management System. Through determination, focus, and company wide commitment, this innovative system delivered a 75% reduction in damage over a five-year period. It also delivered millions of dollars of pro-cess improvement efficiencies.

The following report will share how Kellogg USA successfully achieved a 75% reduction in dam-age and how Kellogg’s functional areas and their customers benefited from the process and the changes that took place to achieve such significant long term results. Results that met the profit-ability objectives of improved process efficiencies, improved customer and consumer satisfac-tion, and reduced costs.

The road to get there was not easy, but the results were well worth it. With results that made such a huge difference in the bottom line and gave unsaleables management the long overdue visibility, this innovative approach called the Closed-Loop Returns Management System will likely become the new model for unsaleables reduction. Make that increased profitability!

© Inmar & Kellogg’s 20061

Overview of InnovationThe GoalIn 2000 the damage rate of Kellogg USA Morning Foods products (cereal and Pop-Tarts), as measured at customer pick slots, was .8% of sales. Morning Foods represented the largest op-portunity to focus and embark on a new approach. While the goal was simply to reduce the rate, at the same time, there was clear direction that any change to reduce unsaleables had to also improve process efficiencies, improve customer and consumer satisfaction, and reduce costs. For that reason, management did not set a specific timetable, nor did they mandate a specific reduction amount. They realized that to meet all objectives and to ensure long-term results, an evolving business process change would be required to continue to take the program to higher levels over time.

The InitiativeFive years prior to implementing their key initiative, Kellogg’s invested the time and resources in building a base by learning the business and understanding the landscape. Once the learnings and understanding were gained, Kellogg’s began implementing their key initiative, the Closed-Loop Returns Management System in 2000. A Closed-Loop supply chain includes traditional forward supply-chain activities and the additional activities of Returns Management. Returns Management can be defined as the process of enhancing the role of supply chain management for the purpose of increasing profitability, for the manufacturer and retailer. By conducting failure analysis on returned product and evaluating product condition at customer warehouse and re-tail, the Returns Management Process creates opportunities to improve the product, packaging, distribution, marketing and sales processes.

Kellogg’s innovation was that they did not stop with just data collection. They expanded the Closed-Loop Supply Chain to be an action oriented results model embraced by all functional areas. The model turns data into knowledge/information, measures it, and then closes the loop with accountability. Without this, the findings in the first link of data collection would never turn into actionable results that meet the objective of improved profitability.

The ApproachWhen Kellogg’s decided to tackle reducing the Morning Foods unsaleables rate, they put together an unsaleables team that included members from many functional areas. Members who have participated have been from Customer Service, Distribution Centers, Logistics, Mar-keting, Marketing Promotions, Packaging, Plants, Remarketing and Returns Management, Re-search, Retail Sales, Sales, Quality, and packaging suppliers. Under the direction of the Director of Remarketing and Returns Management, the team reviewed the key findings from the data and the conclusions from Inmar Supply Chain Services, their third party supplier. This effort to break down the silos between departments was critical to assess the findings and turn them into agreed upon actions. Without doing that, one area of the organization could recommend to cut costs and then end up creating more losses than savings. Kellogg’s experienced this first hand. In the late 90’s, they realized that a reduction in corrugated costs had increased unsaleables by more than the amount of the savings.


Kellogg’s developed the model for the Closed-Loop Returns Management System as illustrated in the continuum below. The continuum consists of four key links, each feeding into the others.

Link 1- Data Collection: The first link of the Closed-Loop Returns Management System is collecting significant data at regular intervals. Kellogg’s and Inmar Supply Chain Services developed a plan to collect data for Kellogg throughout the Kellogg supply chain and at the customer, including the customer warehouse, retail store and reclamation center. The plan included guidelines for what data to collect, how to collect it, and what measurement standards to use. Kellogg’s collected data for two years to establish a baseline before attempting to make any significant changes.

Link 2- Information/Knowledge: The second link of the Closed-Loop Returns Management System is turning the data into information and knowledge. To accomplish this, Kellogg’s and Inmar Supply Chain Services’ senior level people worked together to gain knowledge about each others’ operating processes, including knowledge of the complete Inmar Supply Chain Services audit process, the customer and Kellogg’s processes, and the internal structures of the Kellogg’s organization. Together Kellogg’s and Inmar Supply Chain Services developed the key analysis tools that allowed the data to be sorted and analyzed in infinite combinations to convert the data into actionable information. This continues to be an evolving link in the continuum as more knowledge is gained.


Link 3- Measurements: The third link of the Closed-Loop Returns Management System is developing ongoing measurement scorecards. Having converted the data into information and knowledge, it became evident that there was an opportunity to put measurements in place in key areas. Summarized below are some examples.

Manufacturing Plants & Distribution Centers -• A scorecard system was implemented that measured and ranked manufacturing plants and distribution centers on an ongoing basis. The scorecard showed the issues that were driving defects by measuring their ability to produce, build and deliver defect free shipments to customers. This allowed all parties to know where to focus their improvement efforts. Marketing/Sales/Quality - • The rates of expired products at retail were calculated to show executives and technical disciplines the relationship of ship life, shelf life, and product sales velocity. Mathematical models of ship life, shelf life, and expired product were developed for different products, SKU’s and sales channels to project expired product costs and recommend improvements to the model. The annual savings that could be obtained by lengthening shelf life or restricting ship life could be calculated.

Link 4- Accountability: The fourth link of the Closed-Loop Returns Management System is holding all functional areas accountable. Using the data, the information/knowledge, and the measurements, the Unsaleables Management team was able to gain full support of senior management to hold all parties accountable for their performance. The ranking of manufacturing plants and distribution centers also generated healthy internal competition. Everybody wanted to be the best and no one wanted to be last. What gets measured gets attention, focus and ultimately improves.

While Kellogg’s could have stopped the initiative with their initial Morning Foods findings in the first couple of years, the result would not have been as great as the 75% reduction in damage. Kellogg’s commitment was continuous improvement to ensure they could increase profitability, improve business understanding, and strengthen customer/consumer satisfaction in all business units.

Throughout the process, Kellogg’s found many opportunities for improvement. However, imple-menting those opportunities can take an upfront investment to achieve the long-term cost sav-ings and profitability. The way Kellogg’s unsaleables team was able to gain influence effectively was to explain issues from a financial perspective, showing all decision options in dollars as a return on investment. By speaking this common language and involving Senior Management and Finance in the decision making process, they were able to influence the decision makers and secure the funds.

The Investment Kellogg’s spends over $12 Million annually, compared to pre-program levels, on improved packaging, transportation carriers, platforms, and auditing processes. Kellogg’s invests in auditing programs and has four full-time employees, with over 100 years of combined Kellogg experience, leading the Returns Management Team.


Results and Benefits“A picture is worth a thousand words.”

The above improvements are critical because damage is the primary unsaleables driver for Morning Foods products.


ResultsSummarized below are examples of improvements obtained by following the Returns Management Action Continuum.

Finding: Adhesive on one of the products failed at retail with addi-tional handling.Solution: Increased (doubled) the strength of the adhesive to meet retail handling practices.Key Learning: Successful companies follow their designs from manufacturing to home use, for survival verification.Continuous Improvement Step: On-going retail audits to measure performance.

Finding: Observed that manufacturers that used gap flap cases had more vertical creasing damage, plus the inner packages were more exposed to the elements.Solution: Decided to maintain the RSC container of full regular slot-ted cases and not use gap flaps.Key Learning: During the 1990’s many manufacturers downsized their packaging as a cost savings initiative. One method to save money on cases is to “cut back” the width of case flaps. This is com-

monly referred to as “gap flaps”.Continuous Improvement Step: On-going customer retail and warehouse audits to measure performance.

Finding: Found that product shipped on slip-sheets had 160% more damage in their customer warehouses. Solution: Discontinued their customer slip-sheet financial incentive program and changed to ship product on pallets only. Key Learning: Kellogg was losing much more on unsaleables costs due to damage than it was saving on platform costs. Continuous Improvement Step: Conduct ongoing measurements of platform type and unit load dimensions on damage level. Work is underway to develop a model to predict damage levels based on

unit load design and dimensions, platform type, and method of shipment.

Finding: Unsaleables costs and defect type were traced back to the manufacturing plants indicating that older equipment played a part in certain defects. Solution: Created a payback analysis to justify replacing older equipment and used unsaleables costs as a payback component. Key Learning: Unsaleables cost reduction can be used in a ROI model. Continuous Improvement Step: Measure results to verify ROI.


Finding: Sweating was occurring on the frozen food cases at the warehouse dock of customer’s frozen warehouses. Sweating weakens the corrugated board and may cause product and package damage. Solution: Through trial and error, developed a table showing at what point warmer temperatures begin to impact frozen products. Warehouse dock tem-

perature and unloading/ warehouse dock staging time are the key variables. Different recom-mendations are made for highly sensitive items such as ice cream, meat and fish products and less sensitive items such as Kellogg’s Eggo and Morningstar Farms product lines.Key Learning: Communicating the appropriate dock temperatures was needed at customer warehouse level. Continuous Improvement Step: The Kellogg team measures dock temperatures with a laser measuring device and shares the results.

Finding: During transition from closed to open code dating for Product X, projected unsaleables costs showed a high expired product rate at the current internal shelf life standards. Solution: Product Development changed the formula to extend the shelf life by nearly 100 percent. This has resulted in a low expired component unsaleables rate and has helped increase sales of the product.Key Learning: Express ship life/shelf life standards from a financial impact. Continuous Improvement Step: Strengthen knowledge with audit data by sales channel.

Finding: Hidden damage was greatly reduced with stronger corrugat-ed board in cases. Solution: Invested over $5 million annually in stronger containerboard. Key Learning: Investment in stronger packaging saves money and delights customers. Continuous Improvement Step: A star was placed on these cases to help identify them in the customer’s warehouse to monitor improve-ments. In time, Kellogg’s decided to leave the star on the container as a form of “branding” to show customers its commitment to having the highest quality packaging available.


BenefitsOne key finding was that if you participated in the process, then you received a benefit.

BenefitstoKellogg’sKellogg’s found that the participation of an internal cross-functional team was essential to an effective Returns Management organization. Each team member brought their own understanding to the data, converted the data to information that their own organization understood, and then used the data to empower their organization to make those improvements. This cross-functional Kellogg team became “believers” by participating in the audits. This helped them to understand Inmar Supply Chain Services audit results better and to see first hand their improvement opportunities and the positive results of previous improvement initiatives.

BenefitstoKellogg’sCustomersFor every improvement that Kellogg’s implemented to reduce unsaleables, their customer benefited as well. By demonstrating a sincere effort to improve Kellogg’s processes and helping the customer to improve their processes, a stronger trading partner relationship was developed. The Kellogg Returns Management Team often collaborates with unsaleables, reclamation, or operations experts at the distributor. Kellogg’s provides the customer with an analysis of the opportunities, which are identified by the Kellogg team plus a complete Inmar Supply Chain Services report. Kellogg’s also shares how the data collected at the customer compares with the average of data collected at Kellogg’s customers audited in the last 12 months. The study findings are always shared with the customer and process changes that will improve quality, reduce unsaleables, increase efficiencies and profitability are also discussed. This process strengthens the trading partner relationship between Kellogg and their customers.

This summary of all of the findings and the implemented solution illustrates what is meant by a Closed-Loop Returns Management System. It is the result of gaining support of management and the cross-functional departments, following the four-link result process from data collection to accountability, and putting in the processes to ensure continuous improvement of the results. The combination of implementing all of these is what resulted in the 75% decrease in the Morning Foods damage rate, while also achieving the objectives of improved process efficiencies, improved customer and consumer satisfaction, and reduced costs for both Kellogg’s and their customers.


Applicability and Relevance to Other Companies in the CPG IndustryThis Closed-Loop Returns Management Process can benefit manufacturers, retailers, wholesalers, suppliers, consumers, and stockholders. It is process-oriented and results driven and can apply to many other processes besides returns. With five years of experience in implementing the Closed-Loop Returns Management Process in their organization, the Kellogg’s Returns Management Team can offer the following key pieces of advice:

1. Set a Realistic Expectation for ResultsThe key to remember is that to get the results that you want, it takes years to develop an effective Closed-Loop Returns Management process. Successful companies take a long-term approach and designate appropriate resources to ensure success. Just like there is no magic diet tablet for overnight weight loss, there is also no overnight solution for returns reduction.

“Kellogg’s results have exceeded our expectations and we are taking our program to the next level. A key learning is you have to have as Dr. Deming stated,” constancy of purpose”. This must be a key business initiative, simply the way to do business. It can not be another program that starts and stops, then starts again.”

Gary Piwko Director, Remarketing and Returns Management - Kellogg USA

2. For Internal Support, Identify, Measure and Present based on Financial Impact To get the internal support, remember that ultimately each decision comes down to financial impact. If issues can be identified and measured from a financial return on investment perspec-tive, functional silo barriers can be overcome. Each functional unit has to support the overall business to prove its value. Measuring performance and assigning a financial impact to each area’s performance creates a culture of awareness and accountability. The old adage “unless something is measured it cannot be improved” is true. Kellogg’s has found that good-natured competition between facilities generated significant improvements. “The Kellogg’s Closed-Loop Returns Management Program has challenged us to set clear damage targets with clear measureables. Our manufacturing plants have achieved success following these processes.”

P.R. (Randy) ByrdVice President, Convenience Foods Manufacturing - Kellogg USA

3.ForExternalSupport,Understandwhatdrivesyourcustomer’sprofitabilityandSHAREinformation with themA manufacturer must realize that the customer does not focus on its product and services. The customer cares how a manufacturer’s products and services will help drive the customer’s profitability. By understanding this paradigm, a manufacturer can:

Work with the customer to develop products which will be more profitable to the customer • and manufacturerAlign its processes with the customer’s processes• Assist the customer to strengthen its processes to be more profitable•


Always share the study findings with the customer. Use the opportunity to have open and productive discussions about process changes that will improve quality, reduce unsaleables, increase efficiencies and profitability. This step is imperative to strengthen the trading partner relationship.

In the future, progressive manufacturers and customers will work together to improve their Supply Chain processes to increase profitability and efficiencies. This should be referred to as Trading Partner Profitability. Employing an effective Returns Management operation will be essential to the process.

“Kellogg’s has approached unsaleables in the right way by doing their homework and then implementing continuous improvement processes. They proactively communicate and partner with us concerning opportunities and improvements. We applaud their efforts in increasing efficiencies, reducing unsaleables, and making long-term improvements that mutually benefit both Albertsons & Kellogg’s.”

Peggy McReynoldsVice President, Reverse Logistics/Instock Execution - Albertsons

“Kellogg’s program works because of their customer focus. They communicate, ask our opinion and share information, like a true partner should.”

Ted LechnerReverse Logistics Manager - HEB

“While most companies approached unsaleables with short term initiatives, Kellogg’s ap-proached by changing their entire corporate culture. Very few companies have put that kind of effort behind their unsaleables program and it shows- by a lower unsaleables rate compared to their peers and improved product on the shelf resulting in a better consumer perception of Kel-logg’s product and Food Lion stores.”

Chris Mead Reverse Logistics Manager - Food Lion


Conclusion

An effective Returns Management System measures system efficiencies, drives accountability and encourages improvements. It should also improve profitability, company image, strengthen trading partner relationships and improve consumer satisfaction. A Closed-Loop Returns Management program is not an expense, but an investment in future success. Kellogg’s has proven that it can happen with strong results.


For additional information on how to implement a Closed-Loop Returns Management program, please contact:

Inmar2601 Pilgrim CourtWinston-Salem, NC [email protected]

Disclaimer: These documents do not constitute legal advice. Inmar Supply Chain Services advises all reviewers to seek advice from legal counsel based on specific business needs.


Documents

A Closed-Loop Returns Management System