February 2008 | Commentary | Viewpoint

Reverse Logistics: It Pays to Do It Right

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Returns management and reverse logistics represent a significant source of untapped profitability for many organizations.

Specifically, reverse logistics is rapidly emerging as a core driver of competitive advantage and financial performance among leading manufacturers, according to a recent Aberdeen Group report, Revisiting Reverse Logistics in the Customer-Centric Service Chain.

Optimizing reverse logistics operations also can increase customer loyalty and retention, boost revenue, and improve product uptime and quality, states the report, which estimates overall reverse logistics costs at $100 billion annually in the United States.

Unwanted Products

The true volume of reverse logistics lies in industrial-grade returns that add up to more than $50 billion a year. Most of these goods have never been used, are not in need of repair, and are available for immediate resale.

The products tend to be grossly overstocked for various reasons and returned because the distributor doesn't want to keep them in inventory.

Many companies are wholly unprepared to take such items back, and forward-focused workers are often uncertain about what to do with perfectly good items, often in mixed lots, that are returned by the truckload.

If a company's operations and systems are unprepared to accept these items, they are often stored within the depths of a warehouse, only to be discovered at a later date during physical inventory counts. For items with expiration dates, this is avoidable waste.

The goal of any organization is to recover inventory for forward sales as soon as possible. Managing products through reverse logistics, however, is a data management challenge. It takes 12 steps to process inventory through reverse logistics management for every one step required in forward logistics, says AMR Research.

Further, improperly handled returns reduce net profits by 35 percent, note Gartner Research analysts. So it pays to get reverse logistics right.

A new category of returns management software is emerging that can provide the visibility, automation, and reconciliation required to effectively drive costs out of the returns stream.

Automating reverse logistics with a Web interface that demands a Return Material Authorization (RMA) and compliant label before any return, for example, can save 50 to 70 percent over a live call center, Gartner Research reports.

In turn, setting up an entirely Web-based RMA system that links directly to a company's ERP can save 50 to 80 percent over pre-printed return labels.

Hidden Costs

Recovering returned good-as-new products can have a dramatic impact on a company's bottom line. This opportunity is even greater when you consider that many other reverse logistics costs—claims processing, write-offs, freight charges, and credit reconciliation—are hidden throughout the organization, and not the responsibility of any one department or executive.

Therein lies the crux of the problem. Because no single department or executive owns the entire cost of poor reverse logistics, no one is held accountable for assembling the resources necessary to solve the problem.

These costs typically merge at the CFO's desk, but because they hit so many different line item accounts, the CFO doesn't recognize the root cause.

To address this problem, some companies are giving reverse logistics a name and a title. Two years ago, few supply chain executives were dedicated specifically to reverse logistics and returns management. But now, the number of reverse logistics executives is growing exponentially.

"Just a few years ago, only a handful of executives in our association had the words 'reverse logistics' in their titles," notes Gailen Vick, president and CEO of the Reverse Logistics Association. "Today, hundreds of such executives are responsible solely for returns and reverse logistics operations."

Many companies interviewed for the Aberdeen report attribute a large part of their reverse logistics success to having a separate and dedicated division within their operations to handle returns, exchanges, repairs, and refurbishments—under the direction of a senior director or higher.

Going Forward with Reverse

By separating reverse logistics functions from overall forward distribution processes, a company can give these activities the attention they deserve without drawing from supply chain resources to operate returns processing and repair/refurbishment activities.

What supply chain executives traditionally viewed as an annoyance is today not only a potential profit center, but also a critical organizational structure issue.

Once senior management becomes accountable for recognizing and managing reverse logistics costs, and responsible for automating the process, companies can transform returns management into a profitable, streamlined entity.

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