Closing the Supply Chain Loop: Reverse Logistics and the SCOR Model

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With product returns on the rise, many companies strive to formalize the reverse logistics process.

Reverse logistics is the backward flow of what we all wish would be a forward-only process. If you expect zero product returns in your supply chain, you are living in dreamland. Given the growth of online shopping, direct-to-store shipments, direct-to-home shipments, and the complexity of global sourcing, delivery mistakes are increasing exponentially.

Thus, reverse logistics is becoming more important. Mastering the returns or reverse logistics process will have a direct impact on your costs of doing business, on your company's ROI, and on the level of customer service required to compete in today's economy.

Reverse logistics has not always been in the forefront of enterprise planning. The negative aura that surrounds planning for product distribution failures and/or product rejection is, in itself, off-putting. It is a case where everyone loses—your customer who sends the product back dissatisfied, your supplier who gets your parts back, and the manufacturer who wasted enterprise resources creating and distributing products that are unneeded or unwanted.

The hope is that somewhere out there lies a solution to all those disappointments and their attendant costs.

Recently, however, the tide has turned and reverse logistics is beginning to receive proper attention. When supply chain professionals consider reverse logistics, they will reap not only the direct rewards of rationalizing return product flow, but also the corollary benefit of optimizing the business process.

The most recent Supply-Chain Council SCOR model (www.supply-chain.org) reflects this trend. The model designates eight specific return points:

  • Three return points at the supplier and supplier's supplier level.
  • Two return points at the manufacturing company level.
  • Three return points at the customer and the customer's customer level.

That's a lot of return points.

Tough Economy or Good Business Practice?

Is the increasing importance of returns a reflection of a tough economy, or is it just downright good business practice? In hard times, companies tend to search for resources in areas they overlook—such as rejected and returned products.

Visit a large retailer after Christmas and the return lines are often longer than the checkout lines. You might wonder if the retailer's business is all returns. The length of the returns line may also be a function of the complexity of the forward product delivery process, even for simple consumer items.

But it also reflects the complexity of the reverse logistics process: processing credit cards, giving cash back, dealing with customers returning the wrong item to the wrong store, the possibility of fraud and theft, and the return of defective products.

Those returns may appear to affect just the retail business. But remember, the products being returned reach all the way back to manufacturers and raw materials suppliers across the country and around the world. This can't be good for business. It makes sense, then, that the latest SCOR model, as well as industry experts, place such an emphasis on reverse logistics.

An Emerging Practice

"The practice of reverse logistics has been growing rapidly in the past few years," says Donald Maltby, executive vice president of logistics, Hub Group. "In the past, companies did not pay special attention to transportation and handling costs associated with returns."

Reverse logistics is an emerging practice, he notes, and one that requires information technology and resources to execute and manage the reverse portion of the supply chain.

"As more companies and retail customers purchase products online and through catalogs, they do not get a chance to see the product before they purchase it. Once it arrives, the product may not be exactly what they wanted, so they return it. Or, once they order and receive it, they may get buyer's remorse and return it," adds Maltby. Despite an increasing number of returned products, many companies have typically pushed aside the issue of returns, preferring to focus only on the forward flow, or on practicing inbound logistics—matching demand signals to their supply.

"Two major factors have contributed to a lack of attention to reverse logistics," says Marc Mitchell, transportation practice director, Enterprise Information Solutions. "First, companies reap much of the low-hanging fruit in terms of improvements in more positive areas of logistics. Who wants to draw attention to the screw-ups and incorrect decisions that returns represent when improvements can be made in other places?

"Second," he says, "the intangibles such as labor savings and quality are easier to tweak and improve, but a returned item can't be hidden. It's there. Your mistake is staring you in the face."

But this lack of corporate emphasis on returns is changing. "Reverse logistics is an area of the supply chain that has been relatively ignored until recent years, as far as costs are concerned," says Bill Wascher, president and CEO of SEKO Worldwide. "As the supply chain assumes a more important role in a business enterprise, companies are scrutinizing logistics costs to eliminate redundancies, and returns.

Real Returns, Real Costs

"Returns play an important role because real costs are tied to them, which affects the profitability of the enterprise," says Wascher.

How well a company manages returned goods, whether in the manufacturing or the retail sector, impacts the enterprise's ability to provide total customer service. A manufacturer can have great service and meet its product delivery deadlines, only to have customers return the product due to a change in the buyer's needs or a logistics failure.

If the experience of returning product is overwhelmingly negative, all the forward logistics customer service is overridden and the manufacturer may lose future orders.

Steve Banker, a consultant at the ARC Advisory Group, offers another view on why many companies neglect reverse logistics—it's just too hard.

"The reverse logistics process requires a great deal of attention and involvement, and is very complex," he says.

"Although well-handled returns result in better asset recovery or brand protection, most companies generally handle reverse logistics poorly. When goods come into a return center, they should be assessed. Based on the condition of returned merchandise and the manufacturer's or retailer's choice for disposition, the items should be automatically routed to their final destination," Banker adds.

Disposition options around asset recovery include repair, upgrade, refurbish (including repackaging), remanufacture, demanufacture (parts reclamation), and recycle (particularly pallets and containers). Disposition logistics also includes channel or routing logic, which means the returned items and components can be sent back to the customer, routed to a warehouse, or sold in secondary markets.

Another reverse logistics consideration is brand protection. "For many companies, brand protection is paramount," notes Banker. "A manufacturer of designer goods, for example, wants to ensure that its branded goods are not sold through secondary channels, such as discount stores. In these cases, the policy is product disposal.

"Ideally, this process controls the disposal of branded goods and makes sure those goods do not find their way back into the marketplace."

But while the recent emphasis on reverse logistics is warranted, intelligent caution should make us think twice about buying into anything that looks like another round of business enthusiasm. Therefore, it makes sense that in order for companies to benefit from reverse logistics, they must have plans, systems, and people in place to optimize the reverse logistics process.

The Bottom Line

"Regardless of the specifics, reverse logistics is all about costs," says Mitchell. "The cost of the goods themselves, the cost to move and store them, the cost of the potential impact on keeping non-returned inventory flowing."

One important way to control the reverse logistics process is to implement an information system that provides the business intelligence that allows adjustments to the marketing, manufacturing, ordering, and delivery process, identifying the true sources of reverse logistics issues.

"A significant amount of returns can be managed by Transportation Management Systems (TMS) software," says Maltby. "Returns should also be tied to a Warehouse Management System (WMS) to manage inventory."

"There is a high level of returns in the online ordering and catalog industry," notes Bill Wascher. "These retailers are becoming more experienced and educated on their customers' buying trends, and can predict the percentage of returns they will receive.

"Other industries may have products that need servicing. Those industries will often eat the costs to send the products back for repair in order to provide excellent customer service."

While most customers tend to return items they purchase online at a higher rate than those they purchase from a store, exceptions exist.

"While returns for products such as apparel are higher when purchased online than if purchased in stores, in other areas, the return rate is actually lower," says Banker.

For example, Dell Computer has about five percent of its B2C computers returned vs. 10 percent for CompUSA. The reason? Dell employs "gatekeepers." No computer can be returned unless a phone call is placed to a technical customer service representative. The agents can often walk consumers through setup and early usage issues, in effect, talking them out of returning the computers.

Banker offers the following suggestions drawn on the successful experiences of companies that have attacked the reverse logistics challenge:

  1. All logistics activities are supply chain activities. That also applies to reverse logistics. Cross-functional participation is needed to achieve better capabilities. For example, a manufacturer's product development staff should make periodic visits to return centers to learn how to design products that will be less likely to be returned.
  2. Outsourcing reverse logistics may be an option, due to its complexity.
  3. In most cases, reverse logistics should be done in a specially designed returns center rather than a distribution center.
  4. New technology solutions providers can help with the unique challenges of reverse logistics in general, and e-business returns specifically.
  5. Intelligent gatekeeping—return merchandise authorization (RMA)—can help reduce returns.
  6. Reverse logistics programs should also include provisions for product recall.
  7. Several WMS suppliers offer returns processing modules that contain disposition logic. But disposition logic is not enough. More advanced capabilities will contain tracking codes that specify the reason why goods are returned, contain Internet messaging features that help ensure customer satisfaction, and contain features that assign an estimated financial value to returned goods.

Reverse logistics should not be dismissed as the latest business fad, and it should not be undertaken on a corporate whim or in half-measures. And, although focusing on reverse logistics is difficult because it magnifies the enterprise's mistakes, it strikes to the very heart of a manufacturer's, distributor's, wholesaler's, and retailer's profitability. The SCOR model's emphasis on the return equation is right on the money.

It would be nice to live in a world where there were no returned products, or the need for them. But that world does not exist, and even with the best supply chain management systems in place, will never exist.

Any reverse logistics initiative should reduce real costs while better satisfying customers, and, as Steve Banker suggests, play a part in building sales.

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