CSCMP's Supply Chain Quarterly
December 12, 2018
Monetary Matters
Monetary Matters

How to find savings in reverse logistics

Monitoring returns can cut credit issuance by as much as 30 percent, adding directly to the bottom line.

These days most logistics and supply chain professionals are familiar with the concept of reverse logistics—the process of removing unsold or damaged goods from store shelves or receiving them from customers and subsequently disposing of or repairing and reselling them. But familiarity does not necessarily equate to action. Although reverse logistics can be a significant source of costs—and therefore of potential savings—in many organizations, it still receives much less attention than it deserves.

Companies that overlook reverse logistics are missing an important opportunity. In 2005, Forbes magazine estimated the annual cost of returns in the United States alone to be around US $100 billion. Those costs undoubtedly have increased and will continue to grow as more commerce moves online.

Reverse logistics is a complicated process that requires the capture of numerous data such as the frequency, volumes, and types of returns. In order to properly understand and manage the process, each product should be traced from the point of return through final disposition. Warranties and service agreements must also be monitored, and credits must be applied where needed. The goal is always to minimize the number of returns as well as the cost of handling them—and do it without alienating customers. Here are a few thoughts on how to accomplish that goal.

Develop the right policies
The efficiency and cost of reverse logistics processes are greatly influenced by a company's returns policy. A stingy policy will keep costs low but may hurt customer relations, whereas an overly generous one, while attracting customers, will increase costs. Any policy should be benchmarked against industry standards. The usual standard in retail is a 30-day return, but policies are harder to benchmark for business-to-business companies and will require research.

Returned-product acquisition is fairly straightforward for retailers—the customer simply brings products back to the store. Sellers of larger items, such as furniture, often contract with their delivery providers for return services. Business-to-business companies must decide who is responsible for unsold products and compare the costs and benefits of picking up inventory themselves, having distributors pick it up and deliver it to the disposition site, or outsourcing the process to a third-party logistics company (3PL).

One economical strategy is to pick up unsold merchandise during the delivery of new inventory, creating backhauls for a private or outsourced fleet. Customers of Cummins Engine, for example, initiate returns electronically. Damaged engines are picked up for remanufacturing by a dedicated fleet operated by Ryder when making deliveries of new parts. Some companies have found that collaborating with customers to streamline the return process, including at times offering financial incentives to minimize returns, can greatly reduce the need for backhauls of unsold goods.

Whatever approach a company adopts, the key to successful product acquisition is full visibility from the moment the product is returned, so that responsibility and payment for the return can be clearly assigned. Monitoring returns can cut credit issuance by as much as 30 percent, adding directly to the bottom line.

Once returned items have been aggregated, they must be transported to a sorting facility. In this stage, consolidation and optimization of shipments can greatly reduce transportation and handling costs.

Policies regarding disposal will depend on the type of product involved. The trick is always to balance the costs of transportation, sorting, and disposal against any potential recoverable value. High-value items such as electronics and automotive parts may be inspected, remanufactured, and resold. Unsold consumer goods, by contrast, may be shifted to areas where sales are stronger. Items with a short shelflife, such as fashion apparel, are often sold to third parties that then resell them through discount outlets or to developing countries. Items that are not economical to refurbish in-house may sometimes be sold at auction. Should final disposal be necessary, one option is to find a recycler that is willing to pay to reuse any recoverable material.

A symptom of inefficiency
Smart companies and their suppliers recognize that returns are often a symptom of inefficiencies elsewhere in the supply chain. For example, a retailer may be ordering too much of a particular product, the product may not be arriving on time to meet peak demand, or the packaging may be insufficient to prevent damage, to name just a few of the possible causes of returns. To find out why products are being returned, appropriate data should be captured, analyzed, and shared with management throughout the organization. This information should also be fed back to the product design team, as understanding the reasons for returns and failures can lead to better product design—and, eventually, fewer costly returns.

The theoretical goal of reverse logistics is to have zero returns, eliminating the need for the process in the first place! By continuously working toward this goal, supply chain managers can uncover significant sources of cost savings, gain an edge in customer and supplier relations, and collect invaluable information for improving other areas of their business.

Natasha Horowitz is a consultant in the Global Commerce and Transport Practice at the economics research firm IHS Global Insight. Prior to her current position, she worked as an economic consultant and an economic analyst for the U.S. Department of Transportation's Volpe National Transportation Systems Center.

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