December 2006 | Commentary | Viewpoint

The Six Hidden Costs of Reverse Logistics

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Due to both human nature and training, logistics professionals tend to be forward focused. They are learning, however, that their companies can realize dramatic cost savings by applying forward-focused processes and automation to optimize reverse logistics operations.

Reverse logistics is no small matter in the supply chain. Industrial equipment return rates are approximately 4 percent to 8 percent, while computers and network equipment have return rates of 8 percent to 20 percent. Total U.S. revenue impacted by returns is estimated between $52 billion and $104 billion.

The problem is, these costs are spread throughout the organization so no one is held responsible for them except, ultimately, the CFO.

To help manage returns costs, companies must be aware of the six following large, yet hidden costs associated with reverse logistics.

Hidden Cost #1: Labor. To perform tasks ranging from customer relations to Sarbanes-Oxley compliance, companies incur labor costs if their returns process is not automated.

A returns operation is automated if it uses enterprise returns management software (accessed freely by channel partners) that offers rules-based, product-specific protocols for handling returned items.

Companies should determine return eligibility for specific serial or part numbers by attributes drawn from the authoritative inventory, warranty policy, and accounting information housed in their central enterprise resource planning (ERP) system, not from a middleware or batch-process database.

Specific costs in this category are:

  • Customer relations labor costs: manually deciphering return policies on a one-off basis; excessive customer attrition rates due to poor returns experiences.
  • Customer service labor costs: determining applicable warranty policies and service contracts; identifying which credit rules are in place.
  • Financial reconciliation labor costs: issuing credits, and determining inventory reporting for Sarbanes-Oxley. Also, companies incur charges if a returned product is not covered by warranty.
  • Sales labor costs: revenue recognition, margin protection, account management, return rate forecasts.
  • Traffic and shipping labor costs: managing carriers, damage incurred in transit, one-off shipments, tracking—or attempting to track—returned items.
  • Receiving and warehousing labor costs: facility and labor planning with little or no information costs overtime pay, or is manifested in poor returns processing service levels.

Hidden Cost #2: 'Grey market' items. Companies face the risk of returned inventory ending up on the grey market, where goods are sold outside normal distribution channels. Assets designated as scrap may reappear for warranty service, and manual operations cannot quickly ascertain this. It is wasteful to refurbish a system that has little to no residual value.

Hidden Cost #3: Lack of visibility. Customers want access to returns status. If they don't have it, they'll call or e-mail repeatedly. Guess who pays for the time personnel spend answering customer questions?

Internally, your merchandising staff needs inventory readings, while the design team wants information on what products are returned and why. Your third-party service providers also desire visibility of returns in transit.

Hidden Cost #4: Inability to forecast accurately. With returns data trapped in Excel spreadsheets, your salespeople can't "see" enough to make accurate predictions, and the operations team can't prepare for a returns influx.

Hidden Cost #5: Credit reconciliation. Large customers often calculate their own credits—and take a debit on the next payment, which is time consuming to reconcile.

Also, if return requests are approved, but not matched against receipts, it prevents accurate accruals, claims recouping, and effective vendor management.

Hidden Cost #6: Poor response time and brand toxicity. Manual return request processing and validation cause delays in approving or rejecting return requests. This frustrates customers and communicates a lack of concern, which tarnishes your brand; so do delays in validation and discrepancies caught after receiving materials. Customers expect you to stand by your products during the entire lifecycle.

Automation to the Rescue

What is the solution to these hidden costs? Automate reverse logistics with a web interface that demands a return merchandize authorization (RMA) and compliant label for every return.

Using this method instead of a live call center cuts returns costs by 35 percent to 50 percent, according to research firm Gartner. A web-based RMA system linked to your ERP, which your customers are required to use, can cut costs by 50 to 80 percent over pre-printed return labels, finds Gartner.

Companies that implement automated enterprise returns management systems often achieve return on investment in a remarkably short time. There's no hidden cost in that.

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