July 2014 | Commentary | Reverse Logistics

Why Every Manufacturer Needs a Reverse Logistics Solution

Tags: Reverse Logistics, Retail, Legislation, Public Policy, and Regulations

The average manufacturer spends nine to 14 percent of total sales on product returns each year, according to an Aberdeen Group study. Yet an estimated 45 percent of manufacturers do not have a reverse logistics solution. They rely on retail or wholesale partners to deal with customer returns, recalls, and seasonal overstocks.

Until the mid-1990s, most manufacturers accepted all returned products, whether they were customer returns, overstocks, or product recalls. Today, that is not the case. When the U.S. manufacturing base moved offshore, many factories closed, and the facilities used to process returned inventory shut down.

Manufacturers made deals in which retailers and wholesalers would get credit for returns, and could charge a fee to cover disposal costs, or liquidate the product on the secondary market and keep the proceeds. Retailers could liquidate these goods for 10 to 30 percent of retail, making the arrangement a great way for them to generate additional revenue. The percentage of returns liquidated grew quickly from 20 percent to more than 50 percent of all goods processed.

This arrangement worked well for both retailers and manufacturers—until environmental regulations began dictating how goods could be disposed of. Today, manufacturers face significant liability if their products end up in the wrong landfill, or if the liquidator buying the goods from the retailer does not properly sell them.

Wrong Place, Wrong Time

If a retailer improperly disposes of inventory, the Consumer Product Safety Commission, the Food and Drug Administration, and/or the Environmental Protection Agency will come after the retailer—and the manufacturer. The case law is clear: The manufacturer is always responsible for its products, regardless of the terms and conditions on the purchase agreement.

Significant fines and bad press can follow. In 2010, a computer manufacturer was fined $22 million because the state of Rhode Island found a trailerload of the company's product illegally dumped in a landfill. The manufacturer did not put the product there, but it had to pay cleaning costs and fines for violating the state's hazardous material laws.

Emphasis on sustainability, and concern over the fate of liquidated goods, are prompting some retailers to change vendor return terms and conditions. They want to send all customer returns and overstocks back to the manufacturer. If the manufacturer does not have the reverse logistics capabilities to accept the returns, however, the retailer will either dispose of the product and charge for the service, or liquidate the product and keep the revenue. In every case, the manufacturer is still liable.

How can manufacturers best manage the risk? It is worth their time and resources to develop a reverse logistics solution. By maintaining control over returned product, they would improve customer satisfaction ratings with their largest retail customers; increase recovery rates on returns by as much as 60 to 80 percent of wholesale cost; potentially reduce their carbon footprint; and reduce regulatory risk.

Manufacturers that do not deal with their returns or overstocks should take the time to investigate their options. Developing reverse logistics solutions can significantly boost the bottom line, improve customer satisfaction, and reduce potential regulatory liabilities.