The Back & Forth of Reverse Logistics
Companies that have reverse logistics processes and systems in place to capture all the value possible can beat competitors coming and going.
Consumers return some $260 billion of goods each year, or about 8 percent of the purchases they make in brick-and-mortar stores, reports the National Retail Federation. While figures for online purchase returns are harder to pin down, estimates run as high as 30 percent. That would add about $102 billion to the 2015 returns figure, based on U.S. Census e-commerce sales data.
These numbers illustrate why companies need processes and systems that capture all the value possible from the goods reverting to them. Supply chain managers who can leverage their reverse supply chains gain an edge over competitors. “Reverse logistics is becoming one of the most important factors to differentiate a company,” says James Stock, professor of marketing, University of South Florida.
After all, consumers have grown increasingly comfortable returning goods, especially in e-commerce transactions. It’s not unusual for customers to buy several similar products, perhaps in different sizes or colors, with the intent of returning a portion of the purchase. Many online shoppers check the company’s return policies before even initiating a purchase, notes Paul Steiner, vice president of strategic analysis with consulting firm Spend Management Experts, based in Atlanta.
Not only do online retailers tend to have higher return rates, but they often carry more SKUs, from more vendors, than their brick-and-mortar counterparts. The result? “Returns are much more complicated than forward logistics,” says Jerry Davis, managing director with the Reverse Logistics and Sustainability Council, a trade association.
Overstock.com, for instance, features more than 1 million products on its website. “Our network consists of thousands of drop-ship suppliers that range from mom-and-pop businesses to large corporations,” says Carroll Morale, vice president of logistics and transportation for the online retailer.
The growing number of voluntary and mandatory product recalls also is boosting interest in reverse logistics, says Bob Iaria, general manager of reverse logistics with Eden Prairie, Minn.-based C.H. Robinson, a third-party logistics provider. The U.S. Department of Agriculture lists 150 recalls in 2015, compared to 70 in 2010, and 53 in 2005.
While some companies consider the reverse logistics function a necessary evil, those with well-managed programs can boost both their top and bottom lines. They find ways to resell more returned products, and are able to dispose of those they can’t resell more efficiently and with less harm to the environment. “It’s a profit play,” says John Benardino, vice president of supply chain operations with media and technology company Comcast.
Davis provides the example of a national retailer whose annual landfill bill totaled tens of millions of dollars. By implementing a reverse logistics program, the retailer slashed the landfill expense and sold the goods for approximately 40 percent of their retail value. “The profit was substantial,” Davis adds.
A reverse logistics program that gathers data on the reasons for returns can help companies learn more about their products. The insight gained can inform future product development.
At Overstock.com, more effective analytic tools and better communication with the company’s brand partners allow for more quickly improving a product’s performance. “Previously, a quality issue may have led to the product’s removal from the site,” Morale says. “Now, we often reach resolution without losing sales.”
Handling returned or excess merchandise in a way that helps the community and environment also can help companies maintain brand integrity. The nonprofit National Association for the Exchange of Industrial Resources (NAEIR) solicits donations of excess or returned office, maintenance, and industrial supplies, among other goods. It funnels these to qualified churches, nursing homes, and other qualifying groups. The suppliers gain a deduction for their contributions, avoid the costs associated with storing these goods, and don’t have to worry the products will show up on eBay, says Gary Smith, NAEIR’s president and chief executive officer.
These trends are converging to focus more attention on reverse logistics. “For years, companies did not place a lot of emphasis on reverse logistics,” says Norman Brouillette, vice president and general manager of technology and healthcare with Miami-based 3PL Ryder System Inc. “Returns used to happen in a distribution center’s back room. Now, they are a focal point.”
Challenges in Reverse
While reverse logistics enjoys a higher profile, it has also become more challenging. Leading companies want their return process to be customer friendly, but they don’t want it so easy that people abuse it. “There’s a subtleness required to identify the right balance,” Benardino says.
The variety of products consumers return creates complexity. Overstock.com “learned early on how returning a sectional sofa, a 70-inch flat screen TV, or a hot tub is a much different experience than returning a book or a sweater,” Morales says.
Returns of soft goods typically require a point-of-sale credit to a customer, and the ability to check the item back into inventory and possibly route it to a warehouse or distribution center, says Tom DeVroy, product evangelist, service management with IFS, an enterprise software provider. Some companies also need processes that support the resale of these items to a downstream channel.
“With hard goods, the challenges grow more complex,” DeVroy says. The company may need to route and track the product itself, as well as any repairs or testing, and its shipment back to the consumer. It also may need to calculate and maintain optimal repair stock levels, ensure it meets any service agreements regarding turnaround time, and keep the customer informed of the item’s status. Some product returns, including electronics and pharmaceuticals, need to comply with specific government regulations.
Consider a consumer’s cable box. About 60 percent of the time, the box a consumer receives from the cable company has been used before. “We do our best to reuse it two or three times,” Benardino says.
To initiate the return process, a customer can drop off a cable box at a UPS or Comcast store, or can have a technician pick it up. Once a box reaches the collection point, employees separate those that are reusable from those that aren’t. Boxes that can’t be reused are broken down to capture the value of the materials.
The boxes that can be reused are tested against factory standards. The information they contain, such as customers’ TV preferences, is cleaned and refreshed. The box is brought up to the current factory standard, and any stickers or labeling are removed. The goal is get the boxes to look and perform like new, Benardino says.
Dealing With the Unknown
Across all types of returns, the inherent unknown creates challenges. “Returns come back hodgepodge,” Benardino says. A returns processing center rarely knows what goods are coming back, what shape they’ll be in, or how they’ll be packaged. This makes it difficult to automate the process.
Royal Philips, the company behind Sonicare toothbrushes, Norelco shavers and other products, receives returns from its retail partners in a number of ways. Some retailers consolidate returns in a distribution center, while others send multiple shipments from each store.
“There’s not one way of working,” says Julie Brown, reverse supply chain manager for Royal Philips. “We have to accommodate the differences.”
Also in contrast to forward logistics, reverse supply chain professionals typically have to decide between a variety of resale or disposal options for returned items. “Do we put it back on the shelf? Remanufacture it? Sell it for scrap? What if the customer returned a product they weren’t supposed to?” says Steve Ludvigson, co-founder and president of Cerasis, a provider of transportation management solutions based in Eagan, Minn.
When an item purchased online is returned to a store, but typically not sold in the store, the retailer must weigh several additional options, says Ryan Kelly, vice president strategy and communications with FedEx Supply Chain, a Pittsburgh-based provider of supply chain solutions. The company can sell the product in the store as a one-off, perhaps at a lower price, or can return it to the fulfillment center. That increases handling costs, but also makes it more likely the item will be sold at full retail price.
On the positive side, customers who return online purchases to brick-and-mortar locations look for other items, potentially generating more sales, Kelly says. And the retailer can quickly place the returned product back in stock, again helping to drive additional sales.
Given the range of ways in which returned items can be handled, employees working on returns need to be skilled, says Paul Steiner, vice president of strategic analysis with Spend Management Experts. They should be able to determine why a product was returned and decide how best to handle it.
Of course, not all employees are hired with a background in reverse logistics. Training becomes key. Some firms have nearly 100 options for disposing of returned goods, each with a different return on investment. Employees need to understand the options and their benefits.
For instance, apparel and other soft goods returned late in the season frequently are sold to discount merchants, rather than restocked. That’s because the cost to return the items to store shelves may exceed the potential profit, especially if the item ends up on the sale rack.
Savvy return logistics professionals also leverage the data collected. Most retailers now ask customers to provide the reason why they return an item. “Use that answer to drive decision-making,” Iaria suggests. If multiple returns indicate a product feature is hard to use, consider changing the feature or making the instruction manual clearer.
Also critical to an effective reverse logistics function is clear ownership of the process, which has been difficult to achieve in the past. Reverse logistics touches so many departments—transportation, customer service, finance, warehousing—that it has been hard to gain consensus or drive improvements.
This is changing, with more companies filling positions such as senior manager or director of reverse logistics. A quick LinkedIn search shows more than 120,000 individuals with “reverse logistics” in their titles or experience. “That wasn’t the case even five years ago,” Iaria says.
Along with frontline employees, management needs to pay attention to reverse logistics because it can affect financial performance, as well as customer relationships. “Reverse logistics is not a backroom issue; it’s a boardroom issue,” Davis says.
An open, honest partnership between retailers and vendors also benefits the reverse logistics function. Manufacturers need to recognize that some returns result from the way products are built or packaged. For example, a producer of bread-making machines experienced an abnormally large number of returns. Davis tested the machine and discovered it produced round loaves of bread, rather than the oblong ones pictured on the box. The manufacturer changed the packaging and return rates plummeted.
Lean methodologies and the practice of continuous improvement can benefit the reverse logistics function, just as they do other areas of an organization. Philips and Ryder have worked together to embrace Lean methodologies and drive a culture of continuous quality improvement within Philips’ reverse logistics function.
Using Lean’s common processes and measurement practices, communication between suppliers and customers became more focused. To drive change and increase productivity, Philips and Ryder evaluated cycle times, distances traveled, and wait times. The launch of a recent Kaizen initiative (the practice of continuous improvement) improved ground parcel processing by 50 percent and reduced operator handling time by more than 30 percent.
“With more than 2,500 pieces processed on this line per day, this reduced the FTE (Full-Time Equivalent—the number of equivalent employees working full time) requirement by half,” Brown says.
Putting Technology to Work
Technology will play a critical role in most reverse logistics functions. Software can boost efficiency and enhance the customer experience.
When choosing reverse logistics software, consider several important attributes. On customer-facing software, user-friendliness is key. “Make it easy,” Iaria says. The system should let consumers quickly initiate a return. It should receive and validate the returns, and then issue credits as soon as possible.
Interoperability also is critical. Most companies have multiple systems that will have to interact with the reverse logistics function.
The software also should track the product through the reverse logistics process. This could include the following capabilities:
- Match the UPC code to the stockkeeping unit (SKU).
- Maintain a database of proper disposal methods for each SKU. For instance, designer purses may revert to the designer, while others are sold in the secondary market.
- Identify the vendor and vendor return point, and the store from which the return originated.
- Calculate the credits to be applied to the store or billed to the vendor.
Mobile devices also can streamline the reverse logistics process. Iaria provides one example: a grocery store refuses a pallet of food because of a mistake on the purchase order. The delivery employee uses a mobile device to notify the manufacturer as soon as the refusal occurs. The company can decide right then what to do with the items.
“The old model was to ship it all back to the return center and then determine what to do,” Iaria says. Making the decision earlier can cut transportation costs and potentially achieve more value for the goods in question.
As many companies are discovering, it no longer makes sense to consider reverse logistics a necessary evil. The organizations that dedicate resources to the function can reap benefits. “The firms that do reverse logistics well have the cultural mindset that these items are assets and are worth something,” Stock says.
Reverse Logistics: Co-Locate or Dedicated Facility?
Should a company’s reverse logistics function have its own facility, or be housed with the forward supply chain? Both options can make sense.
Co-location, as it’s sometimes known, allows companies to leverage “the synergy between the forward and reverse” supply chains, says Norman Brouillette, vice president and general manager of technology and healthcare with Ryder System Inc. They can optimize existing labor, systems, and space.
Royal Philips decided to integrate its return logistics function into the ERP system used in its warehouse; previously it handled returns on a different warehouse management system. “For inventory control, it’s easier to have everything on one system,” says Julie Brown, manager of reverse logistics.
At the same time, it’s important that the returning merchandise be allocated sufficient space. Otherwise, returns and new merchandise are more likely to get mixed together, says Paul Steiner, vice president of strategic analysis with Spend Management Experts.
For companies with enough volume, a dedicated facility is optimal, says James Stock, professor of marketing with the University of South Florida and an expert on reverse logistics. Employees gain experience processing returns and deciding between disposition options, and any investment in systems or equipment can be applied across the larger volume of returns.
Outsourcing in Reverse
Some companies choose to outsource the return logistics function to providers such as DecisionOne Corporation, a Devon, Pa.-based technology support organization that offers reverse logistics, repairs, and advanced exchange services to a range of industries. Depending on the company, users can request a replacement unit—often, one DecisionOne previously repaired for the organization—and send a defective unit to DecisionOne for repair and future replacement within the organization.
Many of the non-functioning units require triage and parts replacement. If the device can’t be repaired, DecisionOne handles disposal of the device through an environmentally friendly reclaim process.
The company uses an in-house designed warehouse management system called Reverse Logistics Platform (RLP) to track items. “We can track a product the moment it enters our facility and through the entire process,” says Tim Yoakem, purchasing, logistics, facilities and security manager.
Here’s an example of how the process can work: DecisionOne receives a shipment of laptops from a client. They’re scanned into the RLP system by serial number. DecisionOne applies a unique license plate number, or LPN, to the entire shipment or skid. This is in addition to the serial number on each product. “The LPNs are used to move product from receiving to a designated staging location,” Yoakem says.
DecisionOne material handlers deliver the laptops to the appropriate department. Each department works on specific products, for a specific customer.
Once a product is in the repair process, it’s tracked by serial number individually. The original LPN that started with a shipment of laptops is continually adjusted downward as laptops are moved from the LPN to the repair cells. And as soon as the products move from the repair area to the finished goods area, the original LPN that had identified the shipment or skid is no longer required, and is removed from the system.
Throughout the process, DecisionOne customers can view the status of their product through a customer portal, and decide whether to have DecisionOne continue repairing the product and put it in finished goods for future orders, to return the product to its original user, or to have the product scrapped and recycled. “As a vendor-agnostic partner, we help companies reduce operating costs, extend technology life, and optimize their technology infrastructure,” Yoakem says.