December 2011

Reverse LogisticsParts Recovery Center

NorthGate provides complete reverse-logistics services. This Report chronicles our solution for a large client with complex Returns Management needs.

OVERVIEW

The multi channel market leaders have changed the landscape for accepting returned goods. They have allowed customers the flexibility of returning goods with a “no – hassle” guarantee in order to get a competitive selling advantage. As a result, return rates have increased in the past 7 to 12 years and it is our belief the rate will continue climbing upwards.

“…market segments often experience returns of 10 to 15 percent. The costs and the loss of value of returned goods, often amounting to more than 20% in terms of profit impairment for online traders…” *

The trend is increasing as more shoppers rely on the internet to purchase, while suppliers find easier ways to make the return process user friendly for the customer. It has been estimated a manufacturer spends on average 9% to 14% on sales returns. One out of six parts shipped ends up being returned. Here is a summary of the main reasons a customer will return the parts they ordered;

The product was not needed, ordered the wrong item or more than they needed Catalog error The installation was more significant than the “do it yourself installer” anticipated Defective in material or workmanship

*http://e-commercefacts.com/background/2011/08/10-tipps-to-reduce-return/

Do you as a manufacturer or retailer know how much returns are costing your bottom line?

Why outsource reverse logistics? - Disruption of the regularly schedule flow of goods and services - Expansion or space limitations- Manpower constraints, including compensation and/or benefit expenses- Your receiving department is already stretched thin and backlogged - Customers’ complaints regarding the length of time it takes you to process the credit- The high cost to process a return- Don’t forget to include re-work and re-packaging time, materials and labor expenses

to recover the cost of the goods being sent back- Scrapping the return parts is easier than the time and hassle to try and recover some

of the losses- We sell new goods - the recovered return parts will hurt our brand image or infringe

upon our new sales initiative

What would be the benefit to using a third party logistics company to centralize the returns process?

- Develop a customer friendly return process to improve brand loyalty and customer satisfaction

- Improve business controls through tailored operations- Get better recovery rates and investigate proposed alternative solutions - Reduced cycle times- Add measurable Quality Control and process improvement metrics - Damage research- Root cause analysis to find saving potential- Consistency and improved image- Improve cash flow- Case studies and actual data to support sales and marketing efforts - Quick to respond and to adapt improvement and cost saving changes

A return management system provides visibility and report capabilities in order to maximize the value of the returned goods and ultimately improve the cash flow of the business.

NORTHGATE SOLUTION

NorthGate manages a customer’s Parts Recovery Center for after-sales service parts. The returns originate from 4,300 dealer locations, managing 50,000 SKU’s and 150,000 individual parts.

TYPES OF RETURNS

NorthGate receives a wide range of products from our customer, including automotive accessories, small and large parts, chemicals, nickel-metal hydride (NiMH) batteries, packaged and bulk unpackaged parts, packaged and unpackaged sheet metal parts, headlights, bumpers, engines, axles, and small items such as switches, and fasteners.

An additional service we handle is Parts Distribution Center (PDC) recovery work. The PDC’s occasionally have product damaged from natural causes, weather conditions, and building and/or equipment failures. NorthGate is tasked with the re-work and asset recovery for the

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product which allows the PDC to continue functioning without disruption to servicing the normal daily flow of orders.

HOW THE PROCESS WORKS

Returned parts occur for many reasons, and managing them is often a complex, business function. Speed, efficiency, and cost-control are critical to satisfying customer demands.

The dealer requests a return from the OE manufacturer. The OE grants the return and issues return goods authorization for the location and the specific part number item being returned.The OE sends NorthGate an electronic Material Return (MR) applications detailed report that lists all of the approved return authorizations.

The parts are returned to NorthGate.

Physically receive the parts and match the returns to the customers Material Return (MR), Return Goods Authorization (RGA) or Returned Material Authorization (RMA) documentation. The metric is to unload and receive all trailers returned within 48 hours of receipt.

Inspect and determine the following Packaging damage – re-package and warehouse Concealed damage, repairable, scrap or return to vendor Unitized incorrectly, validate the claim and reconcile paperwork Identify “lost” parts that were returned undeliverable Inspect the part for transportation damage

Every Problem Report and Resolution request gets the same 100% inspection. Types of claims include damaged or defective material, shorted quantities, incorrect part numbers, and non-compliant packaging

If there is a 100% match, NorthGate sends the confirmation to the OE as approval to issue the credit for the return as it is matched and reconciled to the Advanced Shipment Notification (ASN) files.

When a matching process discrepancy is identified a Dealers notification takes place within 24 hours

Our customer service representatives work to resolve these discrepancies within a 48 hour time period.

Once the upfront dealer credit process is finished the second phase of the return process is implemented. This is called the recovery portion.

CENTRALIZED PARTS RECOVERY

Centralizing this function reduces business risks, saves time, and preserves marginal revenue. It also assists in determining potential improvement to the flow of goods thus minimizing the returns ratios and improves the quality and margins upfront.

As part of our asset recovery program for the customer, we inspect claims and process requests and look for improvements in part packaging, quality and labeling.

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The Centralized Parts Recovery Center provides the following services: Manage a flexible, rule-based receiving and disposition system

o Dispose/Scrap Scrap parts upon receipt (under a certain $ value, or age of the part,

thus minimizing the handling and cost treatment for the return. NorthGate evaluates parts to be scrapped to determine if any residual value is available before releasing to the salvage yard.

o Return to a Vendor or specified sourceo Set aside to re-work / re-package and return to stock for future sales o Salvage parts with residual value such as coreso Initiate “Green/Recyclable” and precious metals recovery

Process all documentation and the physical handling/warehousing requirements for Hazardous Materials in accordance with U.S. Department of Transportation regulations

After the parts are sorted, they are routed according to their disposition coding. Parts are re-labeled and returned to a designated PDC center for inventory and resale. Some of the parts need minor re-work before being send back to a PDC location.

Process part number change requests by relabeling and updating inventory to allow for resale

Re-package parts going back to a PDC locationo Our operation includes equipment for labeling, bar coding, heat sealing in

poly bags, adding paper dunning, stapling, stretch wrapping, and pallet handling.

Occasionally, it is determined that a part needs to be re-packaged and warehoused for resale purposes; however the sales volume is very low. In these cases, in order to preserve the cost, NorthGate becomes a warehouse / fulfillment center for the OE. We place these items into inventory in the re-work condition. If an order is received, we pull the part and perform the re-work at the packaging /shipping stage. This saves time and money. A portion of the inventory is scrapped every year and the OE therefore does not incur the re-work cost piece.

Additional services provided to the OE are; Order fulfillment – pick, pack and ship parts to customers, suppliers, other

distribution centers and/or to other third party service providers o We pull orders hourly from our customer’s order-writing system. Based on

the order, we pick, package for shipment, and communicate the order status to the customer. Over 9 years we have handled over 830,000 multi-line customer/dealer orders.

Packaging for shipment includes:o Merchandise and/or Distribution packagingo Palletizing and preparation of large orderso Shipping container and container closure requirementso Labeling productso Bar codingo Graphic and imprinting standardso Environmental and rust-free ferrous part requirements

We bar code all outbound containers for efficient handling and tracking. We coordinate logistics, transportation, and delivery of parts to customers.

Orders ship the same day via cross docks, LTL carriers, Fed-Ex or UPS

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When necessary, we affix “country of origin” labels and ensure compliance with all relevant U.S., Canadian, NAFTA, and international regulations.

Typical outbound destinations include:o US and Canada customers, distribution centers or vendorso International customerso Core remanufacturing facilitieso Recycling and scrap facilitieso Hazardous disposal facilities

Hazardous Materials - all NorthGate employees are trained for hazardous material handling, and we abide by federal regulations that govern the shipping, packaging, and storing of hazardous materials

Manage the inventory and provide inventory reports, audit cycle counts and an annual physical inventory count

Receive inbound parts from suppliers, or other distribution centers for: o De-unitizing, and repack worko Provide disaster recovery re-work

Return to a Vendor processing to maximize asset recovery programs

WAREHOUSE MANAGEMENT SYSTEM

NorthGate provides a state-of-the-art Warehouse Management System (WMS), a combination of physical facilities, software and other amenities, including dedicated professionals responsible for assisting our customers in lowering the cost of handling returned products.

Our WMS software manages the complexity of parts returns. WMS defines and assigns stocking locations by area, zone, and commodity code. We define single and multiple-item locations and freeze stock in a location. WMS uses rule-based processing to define picking paths and zones by order type,

size of order, bundled orders, and customer order groupings. It has flexibility and detailed capabilities to define other rules suitable to meet the most stringent demands of a customer. It adds up to increased speed, more efficient throughput, compact use of space, and overall reduction in costs.

The NorthGate Warehouse Management System software interacts with the customer’s systems to exchange data using industry standard file formats.

WMS receives dealer orders, update inventory, post order status, and the sending of Advanced Shipment Notification (ASN).

WMS relies upon an extensive part-attribute file—nearly 1 million part numbers with many attributes per part—used in combination with custom processing rules to sort and process parts upon arrival at warehouse.

Radio frequency (RF) and bar code scanning provide complete processing and location management throughout the warehouse.

We provide dedicated IT project management to optimize real-time system operations and control.

Complete system redundancy and data backup to ensure 100% availability.

QUALITY ASSURANCE

We audit every process including trailer receiving, product receiving, scrap handling, shipping, repackaging, MR quality claims and PRR processes, inventory cycle counts, and security. We audit and conduct performance reviews and report monthly to ensure the processes and documentation are accurate and efficient.

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Every program has target improvement metrics established. NorthGate consistently exceeds all performance measurements for customer claims including incorrect part, incorrect quantity, unitized incorrectly, and concealed damage. The chart below summarizes the total non-conformance measurable metrics and yearly service improvements progression.

2007 2008 2009 20100

0.51

1.52

2.53

3.54

Total Non-conformances

Metrics Limit Actual Performance Metric

Met

rics

In the last 3 years, we identified and introduced 9 additional cost saving initiatives. They were created from our constant desire to improve our efficiencies and effectiveness as well as performing root cause analysis after seeing patterns develop. In total, $415,000 of annual saving was generated from these initiatives.

RACKING and STORAGE SYSTEMS

Certain commodities have specific storage requirements, and we provide storage for unique items such as bumpers, doors, exhausts systems and piping, fenders, hoods, and other specialized configurations.

We keep all parts in a separate stocking location in plastic bins, baskets, or containers. Our storage bins and racks have ample capacity for the quantity of parts stored, which allows for safe maximum bin density and compact use of warehouse space.

Our fenced trailer yard consists of 16 acres and stores up to 250 trailers.

CONCLUSION

NorthGate provides sophisticated, efficient, and cost-effective reverse logistics for large and complex applications. Our employees, systems, facilities, and processes combine to create a state-of-the-art Parts Recovery Center.

We achieve superior customer satisfaction using a combination of technology, facilities, equipment, expertise, processes, and internal quality assurance practices. Our commitment to the job ensures rapid processing, correct actions, cost-savings, and timely reporting every time.

Our goal is to provide brand protection while yielding the most productive saving for our customers’ bottom line.

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