How to Profit from Outsourcing
More companies outsource the reverse logistics function than any other part of the supply chain. In fact, most Fortune 1000 retailers and consumer goods manufacturers outsource part or all of their reverse logistics processes, and experts expect this trend to continue growing globally over the next 20 years.
Why do companies such as Walmart, Dell, Target, HP, Unilever, Pfizer, The Home Depot, and Dollar General outsource reverse logistics when they have well-developed forward supply chain capabilities? Why would some of the sharpest supply chain minds in the world decide to outsource reverse logistics?
The answer is: profits.
The average customer return rate for North American retailers is 8.1 percent of sales, according to the National Retail Federation. Add mandatory product recalls, removal of overstock and seasonal goods, fixtures, obsolete equipment, and recycling, and you get a sense of reverse logistics’ true impact.
Many executives, however, never evaluate the effect of returns on their company until something goes wrong, and they take a major financial hit. For many, it takes one of these events to get their attention and force them to look at the true cost of returns.
Processing returns is not like running a distribution center. There are no purchase orders to tell you what you will be receiving. There is no standard packaging for the goods customers return. You cannot simply use your warehouse management system in reverse.
In fact, the only thing reverse logistics and distribution processes have in common is the type of building used for storage and processing.
Worth the Effort
The potential bottom-line impact of process improvements can be much greater for reverse logistics than distribution. While distribution enhancements can reduce payroll and transportation costs, improving reverse logistics can significantly increase the recovery rate on the value of the inventory processed. This can have a much more significant impact on an organization than simply boosting productivity.
Consider this: If a retailer had 1,000 stores that averaged an 8.1-percent return on sales, and it could increase the recovery rate on customer returns by 10 percent, the impact on the bottom line would be the same as opening eight new stores.
Manufacturers have a similar opportunity. The average manufacturer spends between nine percent and 14 percent of total sales on returns, according to an Aberdeen Group study. Many manufacturers are driven by strong financial incentives to develop a quality reverse logistics process that could increase the bottom line by one or two percent of total sales.
Three Good Reasons
But why outsource reverse logistics? Three good reasons: focus, flexibility, and financial benefits.
- Focus. Companies outsource reverse logistics to qualified third-party logistics (3PL) providers because 3PLs offer the focus and core competencies required to operate a state-of-the-art reverse logistics program. Companies that hire 3PLs gain the software, leadership, and experience required to start and maintain a reverse logistics process that delivers bottom-line results.
For most North American retailers and manufacturers, the "build or buy" analysis is an easy one. Outsourcing reverse logistics to an experienced 3PL can enable them to have an efficient process up and running in months, as opposed to the years it might take to develop similar capabilities in-house.
- Flexibility. 3PLs offer retailers and manufacturers the flexibility needed to quickly implement an efficient returns process without impacting capital budgets. Most 3PLs either have existing facilities that can be leveraged, or will open facilities in the best locations to minimize transportation costs. These 3PLs provide all the infrastructure required, and build all facility, software, and equipment costs into their price.
- Financial. 3PLs provide liability protection—for example, capping worker compensation at a standard monthly cost, regardless of the accident rate in the facility. They also build into their contracts a shrinkage allowance over the inventory they process. Most 3PL reverse logistics contracts include some form of price-per-piece cap. All these factors make budgeting and planning easy for those who outsource.
Outsourcing reverse logistics enables companies to focus on doing what they do best: produce and sell goods. Meanwhile, their 3PL focuses on processing returns, and provides all the reporting and recommendations needed for an integrated, effective reverse logistics solution.
Reverse logistics is often treated like the unwanted stepchild of the supply chain family. Yet the financial impact of focusing resources on reverse logistics can significantly affect a company’s profits and share price.
Do you know how much your reverse logistics process is costing you? Now is the time to find out—and enlist help.