Rethinking Reverse Logistics

Companies have become more aware of the benefits of managing reverse logistics. But now it’s time to decide between merely managing returns more effectively and rethinking reverse logistics’ role as a supply chain strategy.

Businesses across all industries are increasingly looking at ways to streamline their supply chains by investing in technology, developing better operational processes, and outsourcing specific logistics functions to third-party intermediaries to efficiently and cost-effectively meet the demands of end users.

Logically, this entails expediting the forward flow of product from a supplier or manufacturer through warehousing and distribution channels to retail outlets or direct to consumers.

When it comes to returns management, however, supply chain order grows chaotic. Product is being pushed back upstream, timeliness is no longer an imperative, and volume is unpredictable and difficult to forecast or control. Simply, reverse logistics defies forward-thinking logic.

“Moving backward through the supply chain is more difficult and complex because there isn’t a priority and products are moving against the normal flow,” says Dr. Dale Rogers, professor of supply chain management, University of Nevada.

Successful enterprises instinctively look forward, forecasting changes in consumer demand to manage exceptions and better match supply, while at the same time concentrating resources on profitable growth areas rather than cost containment and negative margins.

“Logically a company should be concerned with the full product lifecycle, including managing the back-end process,” says Joan Starkowsky, president of Roadway Reverse Logistics, Akron, Ohio.

“That logic, however, doesn’t always play out because of reverse logistics’ inherent nuances—reverse logistics is seen as a cost within the company compared to forward-thinking logistics, which centers around profit-driven processes.”

But while reverse logistics may be an inevitable growing pain, and a difficult one to assuage, it also promises to become an even greater part of supply chain management and a potential revenue stream for businesses that do it right.

“In the last few years, many companies have restructured their internal units to become leaner. Now, as they realize they’ve shaved off as much as they can, they’re starting to look in the closet for cost savings—and they are finding returns management hidden there,” Starkowsky adds.

Economic constraints, environmental stewardship, a more holistic vision of supply chain management, and in some cases federal legislation have all triggered a higher awareness of reverse logistics processes and the role they play in the supply chain.

As a result, many businesses are gradually coming to terms with the “reverse reality,” focusing more attention on managing returns. But some experts question whether this approach is enough.

Dr. Marisa P. de Brito, research associate at the University of Cambridge and author of Managing Reverse Logistics or Reversing Logistics Management? suggests that businesses today are facing growing pressure to rethink the way they embrace the reverse flow of product within the context of the entire supply chain and product lifecycle—or as she titles it in her thesis, reversing logistics management.

“Reverse logistics is also logistics, so lessons from traditional logistics management can be transferred to the management of reverse logistics,” she writes. “On the other hand, traditional logistics management mainly thinks ‘forward.’ Logistics managers are ultra-focused on dispatching the goods, on moving them forward to the client.

“They are not to blame; after all, this has been the formula to keep businesses going, and many companies have reward schemes based on it. But this will not be enough in the future, where companies are eager to add value to their products by providing more service and becoming ‘corporate citizens.'”

Opportunities for Growth

Lean inventory processes place a premium on velocity and visibility within the supply chain and excess inventory is an obstacle to growth. But surplus is also unavoidable and businesses must account for demand and volume changes to efficiently shift product to alternative resale channels and markets to maximize profit and eliminate dead inventory.

Opportunities abound for better application of reverse logistics systems, says Starkowsky. Among other things it helps grow customer relationships, contain costs, enhance profitability, and amplify corporate citizenship and responsibility.

“Nobody likes a return, and improperly handling returns can cost you business,” she notes. “A lot of companies look at returns as simply a cost—and it is. But there are also opportunities to create value.

“Investment recovery is a very important area,” Starkowsky adds. “That’s where remanufacturing and refurbishing old products and putting them into secondary markets—such as donating to charities, leasing used parts or equipment, auctions, and liquidation—can create new revenue streams. All this contributes to better corporate citizenship, especially with the push toward environmental awareness.”

“Each industry has a need to be smarter and faster in managing their surplus because they all have different pain areas. Networking technology gets hit by obsolescence; the retail industry by seasonality,” adds Ben Brown, technology advisory chairperson and chief technology officer, Government Liquidation LLC, a subsidiary of Liquidity Services Inc., based in Washington, D.C.

While these pains are palpable, many businesses are so consumed with the challenges of pushing product to market that they often don’t perceive the synergies of managing returns within the context of the entire supply chain.

“Companies don’t see where returns hit their budget because their systems and processes are designed to support the forward flow of goods,” says Rogers. “Also, technology in general doesn’t support returns. No ERP systems or diagnostic and analytic tools support backward-moving inventory.”

There also exists the misconception that companies that manage as-needed inventories are predisposed to better managing returns.

While closely matching supply to demand may help some businesses identify whether products are selling or not, manage recalls or new product lines, and scale supply accordingly, if they don’t bring a similar approach to the back end of their supply chain they are not properly addressing returns management.

“Just because a business operates under the guise of a lean inventory model doesn’t necessarily mean it is properly managing returns,” says Starkowsky. “The percent of returns to a sale will remain the same, regardless of how much inventory a business carries.”

Roadway Reverse Logistics helps businesses control and drive down costs in their reverse supply chain by integrating the management of product returns for remanufacturing, redistribution, cleaning, and/or disposal. As an outsourced service provider it has a firsthand view of problem areas.

“We go to a lot of ‘lean inventory’ companies that are leasing warehouses to stuff returns in, and because it is such a hassle, they don’t even bother with it,” says Starkowsky.

By contrast, “lean concept” companies—those that look at streamlining processes within the entire spectrum of a product’s lifecycle, rather than fragmented pieces—have much better visibility and a clearer idea of how returns impact productivity and profitability elsewhere in the supply chain. Therefore they are more competent at managing both the forward and backward flow of goods through their supply chains.

As de Brito says, “in managing reverse logistics, one also has to be capable of reversing traditional logistics management: Logistics cannot go forward without thinking reverse.”

Pooling Resources

The growth of e-commerce has clearly had a marked impact on how retailers and manufacturers market and sell their products, but it has also created a viable resale channel for overstock inventory and used goods.

Liquidity Services Inc. (LSI) has capitalized on the demand for asset recovery solutions by creating an online portal to help businesses liquidate surplus inventory. It leverages online marketplaces, business-to-business product sales, and value-added services to deliver value to manufacturers, wholesalers, distributors, retailers, service companies, and government agencies.

LSI markets and sells surplus assets and wholesale goods to more than 170,000 buyers worldwide via online auctions, online sealed bids, or online negotiated sales, while managing more than two million square feet of warehouse space.

“We began the company in 1999 to help government agencies and private entities with what we felt was a need in a fragmented market—the surplus liquidation segment,” says Brown. “We saw the demand for an online solution that could disintermediate a lot of buyers and sellers, raise returns for sellers, and give buyers greater access to product.”

For customers such as U.S. Cavalry, a retail outlet and online cataloger that sells equipment to military, law enforcement, and government agencies, partnering with LSI to offload surplus inventory has brought substantial benefits.

“Dead inventory is dead money and has a large impact on our bottom line,” says Darrell Hatter, director of purchasing for U.S. Cavalry, based in Radcliff, Ky. “After every effort—such as discounting, and using alternative sales channels and markets—has failed to move items, liquidation is our final stop.

“We are making every effort to improve inventory performance with supplier programs, system updates, and reporting. At the end of the day, bad inventory is still bad inventory and better reverse logistics recovers some of our costs.”

Retailers such as U.S. Cavalry are increasingly seeking third-party expertise to manage their returns simply because it’s easier to outsource that function than dedicate manpower and capital away from their core expertise. Businesses can outsource negative margin or pain inventory to LSI.

“We then move the customer’s assets to our facility, warehouse and break down shipments if need be, then create, run, and launch auctions,” says Brown.

“LSI runs a turnkey operation. When you deal with multiple outlets, handling product two or more times and collecting payments is just not worth doing. By the time you have completed the sale you have ultimately spent more in labor than the items will ever bring in recovery. With LSI you pull it, pack it, ship it, and wait for a check,” notes Hatter.

Finding Secondary Markets

For some manufacturers and retailers, finding secondary markets for used or refurbished products helps drive further value on the reverse side—especially when the alternative is sending product to a landfill.

One problem for Vancouver, Wash.-based exercise equipment manufacturer Nautlius is that its equipment doesn’t wear out easily so there is even greater incentive for reuse.

“For the commercial-strength side of the business we have an active trade-in program,” says Cindy Rudy, controller at the manufacturer’s Independence, Va., facility. “We provide a trade-in discount on a one-for-one basis for any new machine purchase. We pick up the trade-in equipment when we deliver the new equipment to the customer facility, utilizing our own trucking fleet.

“We then bring that equipment back to our manufacturing and distribution facility and refurbish it as necessary. An in-house sales person sells that equipment into other facilities that might not be able, financially, to purchase new. That’s how we recycle our product back into the market,” she adds.

While the Internet has enhanced the speed and efficiency with which shipments can be ordered and received, it has also given manufacturers and retailers a platform to communicate product information, return policies, and warranty information, as well as answer customer service queries.

In some cases managing returns begins with the sell, making sure consumers know what they are buying and are aware of the retailers’ or manufacturers’ policies.

“From a retail perspective, the more structure in a returns policy and process the better. Consumers are willing to put up with tighter policies if they know what they are,” says Rogers.

For Nautilus, it’s a matter of creating multiple channels of discourse with the consumer to eliminate confusion and enhance customer service.

“We try to communicate heavily with the customer on the front end,” says Rudy. “We confirm needs between the direct sales force and inside sales force and the customer. After we receive an order we communicate confirmation from the factory and ensure delivery dates and products. We also phone the customer prior to delivery for confirmation. This up-front communication is key to customer satisfaction and cost effectiveness.”

Cradle to Grave

If Europe is any harbinger of things to come, U.S. businesses are only on the periphery of properly addressing and reaping the true value of reverse logistics. Europe’s ratification of the Waste Electrical and Electronic Equipment Directive, expected to be enforced by year’s end, legislates that electronic equipment and appliance manufacturers are accountable for end-of-life disposal of their products—including refrigerators, computers, TVs, and cell phones.

This will give product lifecycle management a whole new spin and greatly shift the way global manufacturers approach concepts and designs, even to the point of specifically manufacturing products with recycling in mind.

It’s no longer simply a matter of pushing product to the consumer, then managing returns; it’s a matter of managing a product’s entire lifecycle. As such, corporate strategies must support this holistic vision.

This trend is a pivotal watershed in how enterprises embrace reverse logistics, according to Mark Elliot and Jonathon Wright, authors of The Future Direction of the Supply Chain: Mastering Reverse Logistics and consultants for Accenture’s London office.

“Put the twin imperatives of reverse logistics and recycling targets together, and it doesn’t take much to imagine the challenges involved,” they say. “For both manufacturers and retailers, reverse logistics and recycling are outside of what might realistically be considered their core areas of competence. Even if the skills could be recruited or acquired, issues around practicality remain.”

The authors cite material handling as an example, where supply chains are used to managing brand-new, neatly packaged goods through highly automated distributions centers—not rusting washing machines or old refrigerators.

“Retailers also don’t have the space to store end-of-life goods,” Elliot and Wright note. “Not only is retail space expensive, and consequently devoted to goods for sale rather than goods for recycling, but also significant image and safety problems exist in mixing the two flows of goods—one heading forward to consumers, and one heading backward.”

Given the unique challenges Elliot and Wright address, companies will continue to focus attention on their core strengths and outsource reverse logistics management to a growing cadre of service companies dedicated to the task. The advantages of rethinking reverse logistics will extend well beyond corporate citizenship and responsibility as retailers and manufacturers build a more dynamic and fluid supply chain.

While fiscal pressures may ultimately compel some to seek cost-cutting measures, paying attention to returns management makes good business sense regardless of the economy.

“We have found that the business is really not cyclical or based on good or bad economic times,” says Brown. “In lean times, companies have a need to take surplus product and convert those assets into cash as quickly as possible. In good times, these same companies will manufacture more product. The rate of returns rises as volume grows, and the same value applies.”

Enterprises may still be conflicted by the complexity of returns management, but where there is pain there is also opportunity for gain. In the broader scope of global supply chain management, reverse logistics is starting to make more sense.

Dealing with Dealer Returns

Reverse logistics in the automotive sector has its own unique challenges given the over-sized nature of the freight and the cost of moving parts back upstream in the supply chain. For Hyundai Motor America, headquartered in Fountain Valley, Calif., one of its greatest pains has been properly managing returns from dealers.

“In general, reverse logistics in the automobile industry applies to dealer returns,” says George Kurth, director, supply chain and logistics, Hyundai Motor America. “Every automotive company has a policy that allows dealers to return products they no longer need. Typically, they are allowed to return a certain percentage of orders.”

Hyundai cars and sport utility vehicles are distributed throughout the United States and are sold and serviced by more than 640 Hyundai dealerships nationwide. In the past, dealers would mostly send returns to core brokers. When they did send them back to Hyundai, the returns usually arrived sight unseen, and the corporate office gave credit without knowing what they were crediting for.

“This created a major bleed to the bottom line,” says Joan Starkowsky, president of Roadway Reverse Logistics, Akron, Ohio.

To better account for return credits and streamline its transportation costs, Hyundai Motor America partnered with Roadway Reverse Logistics to manage the returns of automatic transmissions for remanufacturing.

Now, once a transmission has been removed from a vehicle at the dealership and a new or remanufactured one put in, Roadway picks up the core or defective unit, inspects it at its facility, and issues credit to the dealer for sending the core back. Roadway then batches the cores on pallets, ships them via rail to San Diego, then on to Tijuana, Mexico, where they are remanufactured.

“We get the remanufactured transmissions back into our inventory and can ship them to dealers to use again,” says Kurth. “Roadway’s service also allows us to cut shipping costs by using intermodal. And dealers get their credits much faster.” Batching returns and shipping via intermodal reduces Hyundai’s freight costs by about $250,000 a year, according to Kurth.

Currently, Roadway only handles Hyundai returns for automatic transmissions. For other units and parts, the auto manufacturer relies on dedicated carriers. Moving forward, Kurth sees more opportunities to improve its returns management, and is working with Roadway on a possible alternative to using dedicated fleets.

“Roadway has access to a huge fleet of trucks. Dealers can call in their returns, and Roadway will pick them up, take the shipments to its sort center, throw away the junk, and debit the dealers for damage,” explains Kurth. “Then it ships a clean return back to our warehouse where we can restock it. That’s our primary option versus dedicated delivery.”

With transportation accounting for 60 to 75 percent of total return costs, the ability to partner with a reverse logistics provider that also has access to an extensive multimodal transportation network is compelling.

“As a subsidiary of Roadway Express, we don’t make a margin on transportation as 3PLs do—transportation is another revenue stream for them. Because we’re asset-based, we provide value-added services to our customers,” says Starkowsky.

“Having a major national and international transportation network at our fingertips makes it easy for us to pool return products from a national retailer or dealer group in a time-sensitive circumstance—whether it’s a recall or a merchandise change-out.”

Another benefit is the convenience of outsourcing returns to one core provider, rather than trying to control myriad independent contractors with different systems and processes. Aside from the clear-cut cost differences, Kurth sees Roadway Reverse Logistics’ true value within the four walls of its enterprise.

“Roadway’s proposition is attractive because it takes work out of our warehouses. We hate nothing more than processing dealer returns at our facilities. It is unproductive work that takes up space,” concludes Kurth.

Outsourcing the dealer returns process allows Hyundai to give all the grunt work to Roadway, and just wait for the “smooth, clean” returns receipts to come back to them.

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