Getting Started in Reverse Logistics

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An integrated approach to reverse logistics an improve customer satisfaction, reduce costs, drive continuous improvement, and maximize return on assets.

As companies strive to wring every cent out of their logistics costs, they're increasingly taking a hard look at their reverse logistics practices.

And no wonder—they may find a motherlode waiting to be mined.

For example, reverse logistics costs accounted for an average of more than nine percent of total logistics costs for the companies studied by Patricia J. Daugherty and Chad W. Autry of the University of Oklahoma and Alexander E. Ellinger of Villanova University. Their study was published in the Journal of Business Logistics.

Real money is at stake; returns are big business. The Reverse Logistics Executive Council (RLEC) estimated several years ago that reverse logistics costs exceeded $35 billion a year for U.S. companies.

Returns are an important part of the fulfillment process for e-tailers. For example, product returns cost web merchants $3.2 billion in 2001, according to estimates from Gartner Research, Stamford, Conn. Returns of merchandise bought over the Internet are expected to escalate as online sales grow. Jupiter Media Metrix predicts that U.S. consumers will make 90 million such returns in 2005, representing nearly $6 billion worth of goods.

"Reverse logistics has been around for years," notes Jeff Maddock, manager, reverse logistics for FedEx Services, Memphis. "Historically, though, companies have made reverse logistics a low priority."

In fact, four out of 10 respondents to a survey conducted by the Reverse Logistics Executive Council point to reverse logistics' importance (or lack of it) as one of the barriers to effective management (see chart below). More than 25 percent of respondents identify management inattention as another barrier.

"Returns are a huge customer service opportunity that a lot of businesses are missing out on," says Geri Spieler, director of research for Gartner Research. " These companies are just turning a blind eye to returns, and don't want to pay a lot of attention to them."

" Most firms do not view reverse logistics as a core competence, but as something to be ignored as much as possible," observed Ronald S. Tibben-Lembke, assistant professor of supply chain management at the University of Nevada, at the recent Council of Logistics Management conference. "Reverse logistics should be a set of business processes that add value."

The tide, however, is turning, says Maddock. " A growing number of companies have demonstrated that managing returns well can generate revenue, improve customer satisfaction, achieve significant cost savings, and deliver a competitive edge."

Some examples:

A prosthetic leg manufacturer—shipping five different sizes of prostheses for one operation to ensure that the right size is on hand—revamped its returns process to speed the prostheses back into inventory. The result: a healthy $5-million savings.

A computer manufacturer accelerates and automates its returns process, enabling it to quickly credit customers' accounts and help them select other products that fit their needs.

A grocery manufacturer receives empty plastic containers from its retail customers, sterilizes them, then re-uses them to ship new orders out to customers.

A medical equipment manufacturer repairs malfunctioning equipment under warranty and speeds it to a hospital or medical center, reducing the time the equipment is out of commission.

Cosmetic manufacturers' distribution centers process millions of dollars of unsold merchandise returned by retailers.

These are just a few examples of the diverse activities that make up reverse logistics today.

Product recalls, recycling, and refurbishing are also part of reverse logistics, which RLEC defines as " the process of moving goods from their typical final destination to another point, for the purpose of capturing value otherwise unavailable, or for the proper disposal of the products."

Remanufacturing Reduces Costs

Reverse logistics are a higher priority in some industries than in others, particularly those where returned product can be recycled or remanufactured.

For example, 70 to 90 percent of the goods sold in the motor vehicle aftermarket have been remanufactured, reports the Remanufacturing Industrial Council International.

And, the market for remanufactured parts is $36 billion, according to the Auto Parts Remanufacturers Association.

Getting parts from a dealer or repair shop back to the manufacturer, or on to a remanufacturer so that the parts can be rebuilt and resold, requires sound reverse logistics processes. Just ask Cummins Engine, a diesel engines manufacturer headquartered in Columbus, Ind.

Cummins' aftermarket group works with 31 regional distributorships to support engines once they're out in the field. Distributors are given a financial incentive to collect and send back broken or damaged parts to Cummins for remanufacturing.

When the core products—parts coming back to be remanufactured—are ready to be returned, the distributor electronically sends an order to Cummins. Core products are returned via a dedicated fleet of trucks operated by Ryder System Inc., Miami.

The returns are part of a continuous loop. The dedicated fleet delivers stock orders of new and remanufactured parts to these distributors weekly, and picks up core products to be returned to Cummins' distribution center in Memphis.

" We constantly run with full trucks that way," says Dan Hoffman, operations manager for Cummins. In addition, Cummins utilizes a plastic reusable container for outbound shipments.

" The core product is shipped back to us in those containers. It's a continual loop of product, packaging, and transportation, which helps maintain lower costs," he says.

At the Memphis DC—which is operated for Cummins by KM Logistics, an associated company of third-party provider Kenco Logistic Service Inc., Chattanooga, Tenn.—warehouse associates use a dedicated part of the receiving area to sort incoming parts. They process 400 trailers a month, sorting perhaps 180,000 core parts. After inspecting the returns, associates confirm receipt of the part so that the distributor can receive timely credit for the return.

This is a crucial step in the process, Hoffman says. KM Logistics does all the physical handling of the parts, while Cummins personnel handle financial matters and discrepancies.

" It has been very effective for us," says Hoffman. " Cummins' expertise is in remanufacturing the product, not in staffing the warehouse properly. Manpower management is a different challenge than understanding how to manage core product."

Customer-Focused Returns

The precise nature of reverse logistics can vary widely by industry. But whether it takes place in a business-to-business or business-to-consumer environment, reverse logistics strategies and plans should focus on the customer first.

Customers return a product for a variety of reasons—it was received damaged, is broken, or no longer works. Or, unordered product, the wrong product, or an inaccurate quantity of product was shipped. Customers may return goods that are outdated, of unacceptable quality, didn't sell as expected, or they simply don't want. In addition, reverse logistics may involve recalling a defective, sometimes potentially dangerous, product.

" By their very nature, product returns can be a negative experience for customers and have a significant impact on their satisfaction, as well as the company's credibility," says FedEx's Maddock. "Companies that manage returns well, and have customer-focused policies in place, can transform a potentially negative experience into a positive experience for the customer—and for themselves."

Understanding customer needs and their expectations of returns are key to developing your reverse logistics strategy, notes Rolando Mandujano, distribution manager for Ormco Corporation, an orthodontic/endodontic manufacturer headquartered in Orange, Calif.

" Speed and simplify returns for customers" are key goals of Ormco's reverse logistics process.

Leveraging Returns

A customer-focused strategy makes it easy for customers to return products, and speeds processing of credit for returned merchandise.

In the B2C environment, this may mean shifting the responsibility for handling returns from the customer to the supplier.

For B2B companies, it may mean implementing streamlined, no-hassle policies, and fast crediting of the customer's account.

Managing returns, however, " isn't just about making a return as pain-free as possible for your customer," says Gartner's Geri Spieler. " It's about the opportunity."

" The key to reverse logistics is to get more money out of returns," notes Patrick J. Sedlak, vice president of Sedlak Management Consultants Inc., Richfield, Ohio.

Companies can do this by reintroducing returned merchandise into the selling stream, disposing of it more efficiently, identifying the root causes of returns, and ultimately reducing the number of returns.

Core components of reverse logistics operations include:

Preventing returns. This involves collecting data that will enable a company to eliminate or minimize future returns—and the accompanying customer dissatisfaction.

" Effective reporting and analysis of consumer data are the keys to identifying trends early in the reverse logistics process," according to Jupiter Media Metrix research on returns of merchandise purchased online.

Significantly lower costs may also be within reach. Daugherty, Autry and Ellinger's survey of catalog retailers selling electronic products found that " defective, damaged, and/or incorrect merchandise shipped to consumers accounts for more than 40 percent of all returns, and all are problems that could be significantly decreased with more efficient distribution and tighter quality control. The elimination of such mistakes could represent a significant reduction in total logistics costs."

Companies can eliminate a large portion of returns by using returns data to uncover and remove the causes of product defects, investigating loading and packaging practices that lead to damage, and improving shipping accuracy—all well within reach of a typical logistics operation—the researchers say.

In addition to improving internal processes to reduce damage and inaccurate shipments, minimizing returns may involve working with trading partners in a collaborative effort.

For example, a major consumer goods manufacturer last year introduced incentives that would motivate its retailer customers to be more efficient in their ordering, including a bonus program that enabled retailers to share in the cost savings realized through reduced returns.

Another example is the joint grocery industry initiative that is targeting the reduction of unsaleable products, complete with a pan-industry steering committee whose activities include investigating the root causes of unsaleables, collecting and publishing unsalesables data, and creating educational programs.

Tracking vendor performance. Returns data can also be used to track vendor performance so that a company can work with its suppliers to improve quality or resolve other issues.

For example, after identifying poor vendor packaging as the root cause of a particular product being damaged during shipment, one multi-channel retailer worked with the vendor to improve the packaging while having the product repackaged at its distribution center as a short-term solution.

Streamlining operations. Then there are the high costs of not managing returns well. Organizations that do not do a good job of handling returns may have hundreds of thousands of dollars—or more—in inventory stacked on warehouse shelves waiting to be processed. When they finally do get around to disposing the products, chances are they can only recoup a fraction of their assets' value.

Nearly two-thirds of respondents to the Reverse Logistics Executive Council survey " initiated reverse logistics as a strategic variable for competitive reasons." Reverse logistics helps maximize return on assets, which in some industries can make a significant bottom-line difference.

The optimal returns strategy will vary from company to company. Whatever strategy is developed, it must align with the corporation's overall mission and vision. This means that companies positioning themselves as service leaders will implement customer-focused, hassle-free returns policies and practices.

" Returns touch many parts of an organization—including marketing, sales, finance, merchandising, customer service, warehousing, transportation, and quality assurance," says FedEx's Maddock.

Many logistics elements overlap. Deciding whether the customer or the supplier pays for the cost of shipping the return back to the company, for example, has implications for customer service, logistics, marketing, administration, and finance. That's why developing a returns strategy generally requires a cross-functional effort.

The team should focus on a number of strategic areas, including:

Integrating returns information with inventory management. Predictive models available today enable companies to anticipate as a percentage of sales how much of a particular item will be returned—and what percentage of those returns will be saleable, says Patrick Sedlak. This information can be incorporated in the firm's inventory management strategy and used to make more effective inventory decisions.

Maximizing return on assets. Compressing reverse logistics cycle times speeds resaleable products back into the sales channel. This can pay off significantly for companies selling products with short life cycles or perishable items.

Reverse logistics also enables companies that rebuild, refurbish, or repair products—whether automobile parts remanufacturers or telecom or computer companies—to more swiftly recapture value by getting these products back into the marketplace faster.

Some companies also enjoy success by reselling returned resaleable products through non-traditional channels, such as online auctions or to discount retail outlets.

Product recalls. Recalling defective or potentially hazardous products is a critical category of reverse logistics. Product recalls must meet the requirements of the appropriate government agency. Decisions on how product recalls are to be handled should take marketing and customer service considerations, as well as liability concerns and regulatory requirements, into account.

Multi-channel retailing. Companies moving into e-commerce are faced with complex returns questions. For instance, will consumers who purchase goods online be able to return products to stores?

" Customers must be able to return purchases without difficulty and without being charged for the service, either by mail or at the store," according to Ernst & Young's 2001 report, Global Online Retailing.

The ability to return or exchange at the store is one of the competitive advantages expressed by the multi-channel retailers interviewed. If the decision is made to allow merchandise purchased online to be returned at stores, companies need to set up effective mechanisms to streamline the flow of returns information into order and inventory management systems, and to recover and redeploy resaleable products back into the market.

Automating the process. Automating the front end of returns for product bought online offers a significant opportunity for reducing costs—as much as 73 percent—says Geri Spieler, citing Gartner research.

She recommends that companies integrate an electronic return order template on their web site. This template would link to customer order history, including order and transaction data, as well as to product warranty data and customer business rules.

The template would include codes to identify the reason for return, enabling companies to spot and address potential product and customer problems. Via the web site, customers would be able to obtain a returned merchandise authorization (if required), and a return label with a 3-D bar code containing all the necessary data.

Automating the Process

" Automation is a key to successful reverse logistics," says Ormco's Mandujano. Ormco has recently shifted from a manual process—in place for more than 40 years—to an automated process.

Today, customers call Ormco's customer service department, which enters information into FedEx's Internet-based NetReturn. The customer service department schedules a pickup of the product to be returned via the web. Shipping information is electronically transmitted to the courier, who prints a label and picks up the return.

The web-based application cuts steps and phone calls out of the returns process for Ormco and its customers. It also enables online status tracking and customized reporting.

The make or buy decision. A key strategic decision is whether to manage returns in-house or to outsource.

" A growing number of players provide software applications for reverse logistics, perform reverse logistics activities for clients, or do both," says Patrick Sedlak. " More options are available today than ever before."

Some third parties have made reverse logistics their core competence. They offer companies economies of scale, specialized expertise, facilities and systems, and often unique channels of product disposition.

Some third-party providers target returns of merchandise bought online. Demand for e-return management outsourcing will increase more than five-fold, from $1.2 billion in 2000 to almost $7.5 billion by 2004, according to IDC forecasts.

" One key factor when deciding whether or not to outsource your reverse logistics," says Sedlak, " is whether or not you will resell the product that's being returned."

A company that sells food products, for instance, which has a relatively low return rate and low potential for reselling returned goods, may be a good candidate for outsourcing. An apparel company with a high return rate and a significant percentage of returned goods that can be resold may be able to get the inventory back into stock most quickly by managing reverse logistics in-house, Sedlak says.

Managing reverse logistics is not an easy task. It requires significant management commitment and resources.

A number of fine points need to be addressed when implementing a reverse logistics process.

Customer service aspects include deciding whether the customer will be required to contact the company to obtain authorization to return the product and who will pay for shipping.

Financial aspects include deciding when and how the customer's account will be credited for the return and whether (and when) they will be assessed a restocking charge.

Sales and marketing aspects include deciding how customer friendly the overall returns policies should be, as well as determining whether to develop different policies for classes of customers. This might include providing immediate credit, no shipping charges, and no restocking fee for " A" customers, but including fees and charges for " C" customers.

Operational aspects may include deciding whether to use a centralized returns facility or to have products returned to regional distribution centers.

If returns are processed in distribution centers, who will be responsible for handling them? How can technology be used to streamline handling—for example, scanning bar codes that contain complete data that enable identification of the returned merchandise and its sender without having to open the package. What systems can be put in place to provide complete visibility of a return from initiation to delivery to disposition?

If reverse logistics has been near the bottom of your company's priority list, perhaps now is the time to refocus your attention. Fewer returns, increased customer satisfaction, lower costs, and greater return on investment may await.

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