Can Your Supply Chain Work in Reverse? What You May Not Know (But Should) About Reverse Logistics

by John Reece, President, ClearOrbit

Reverse Logistics Magazine, Spring/Summer 2006

Reverse Logistics—the science of taking something back into "forward-available" inventory in a documented, orderly fashion—can be broken down into general categories, one that companies are generally prepared for and one that they are not. The first category is warranty returns. Companies with warranty programs are set up for returns, because they learned early on to think in reverse. Though quantities vary, they are fairly predictable, because they're based on products' historical service lives. As items are repaired, they are repurposed in forward logistics mode, because for warranty items there is a natural drive to be "forward-focused." That's what logistics officers do: Move goods out of the warehouse and into the demand chain, as companies historically make money selling things, not taking them back into warehouses.

The reverse logistics second category accounts for $50 billion each year, fully half of the value of goods in the reverse logistics system, which overall is .5% of GDP. These goods have never been used, are not in need of repair, and are available for immediate resale; these items can be readily restocked and resold, e.g. dozen of pallets of hard drives returned by a computer maker who over-ordered for seasonal manufacturer. Or overstocked products returned because the distributor didn't want to keep them in inventory: 150,000 feet of coax, 15,000 empty containers. These items at no penalty to the end-user are often shipped back and arrive, sometimes unexpected, on a "forward-facing" loading dock. Workers are often baffled by what to do with returned perfectly good items, often in mixed lots.

What so difficult about just putting items away? Well, today's ERPs, CRMs, and WMS-RMAs are not set up to take back new products. As simple as it seems, inbounding products through reverse logistics is a data management challenge. Items come back as fractional pallets, or mixed lots. Though the outbound shipment process may have had a rigorous system for allocating and organizing SKUs and printing compliant labels, the end-user you shipped the product to may not recognize your system. Mixing of batches, mixing lots, and mixing categories of products is common. Pallets can come back with just 10% of their inventory used, yet the SKU initially assigned to that pallet does not allow for a quantity adjustment. So, for lack of the flexibility required to deduct an item from a gross amount and issue a new SKU, a nearly full pallet of goods sits "unavailable" on the warehouse floor. Someone has to take on the relatively tedious process of breaking that pallet down, separating out the mismatched items, generating the proper labels and repositioning that pallet, or fractional pallet, so it can be resold.

According to AMR, it takes twelve steps to process inventory inbounded through reverse logistics management for every one step required in forward logistics. And the impact on even small companies can be dramatic. For "industrial equipment" the return rate is over 8% and the total revenue impacted by returns is $105.6 billion in 2005, in just the U.S. alone. For computers and network equipment, the return rate reaches as high as 20%, for a 2005 total of $65.8 billion, up from $61.4 billion in 2004.

So, the opportunity is large, and recovering returned good-as-new products can have a dramatic impact on a company's bottom line. Though that fact may have been lost on (or hopefully overlooked) by supply chain managers, it has not been lost on the CFOs and CEOs. They see reverse logistics as one of the last frontiers where waste can be squeezed out to make the overall numbers look as positive as possible. What supply chain managers view as an annoyance, C-level officers see as a fantastic profit center, if they were just handled right.

According to the Reverse Logistics Executive Council, the percent increase in costs for processing a return, as compared to a forward sale, is an astounding 200-300%. It costs three times as much to process the reverse logistics of new items as it did to process the forward logistics to sell it. According to Gartner, the percent that net profits are reduced by improperly handled returns is 35%, so it pays to get reverse logistics right.

Automating the Reverse Logistics Process

Many insightful companies have been highly disciplined about returns authorization in the form of an RMA label. But this practice seems to be contained to companies that do nothing but reverse logistics. The logistics manager is already "thinking in reverse," and it is rare—though less and less rare—to have this level of automation at the industrial level for the return of a new large quantity of otherwise saleable products.

A few approaches to reverse logistics have already been tried and shown to be inefficient. Pre-printed return labels: This guarantees only that returned inventory will be shipped to the proper address. But these labels don't declare quantities nor lots. Other companies have tried call centers. But human invention in a returns process is costly. However, if you were to automate your reverse logistics with a web interface that demanded an RMA and compliant label before any return—it would save 50-70% over a live call center, according to Gartner. If you were to set up an entirely web-based RMA system that linked directly to your ERP, your company can save 50-80% over pre-printed return labels, again according to Gartner. So, that is clearly the path insightful companies should take. Indeed, the C-level officers are eager for it and the return-on-investment for an "enterprise returns management" (ERM) system can be achieved in a remarkably short time, given the margins at risk. Set up a web-based RMA system, link it to your ERP, and train your customers to respect and adhere to your rigorous returns process, as enforced by web services. This need not alienate your customers, nor be perceived as inflexible. Indeed, returns can be made remarkably easy, given the flexibility built into powerful ERPs for manipulating highly granular data, the wide availability of "distance printing" of customized "returns compliant" labels, and the availability of sophisticated web services that can access and distribute data from a central ERP…and update that ERP with awareness of inventory that is heading back to the warehouse, and better yet, what to do with it once it arrives.

Summary Facts About Reverse Logistics

The pricing of electronics fluctuates quickly, so it's imperative that when merchandise is put into return mode it's handled in an expeditious manner. The challenge for retailers and vendors is to process returns at a proficiency level that allows quick, efficient and cost-effective collection and return of merchandise. Customer requirements facilitate demand for a high standard of service that includes accuracy and timeliness.

It's the logistic company's responsibility to shorten the link from return origination to the time of resell. One major challenge for logistics providers is performing all tasks for the retailer, including:

• Percent of total U.S. logistics costs consumed by reverse logistics management: 10%
• Percent of goods sold returned to computer manufacturers: 10-20%
• Percent of goods sold returned to catalog retailers: 18-35%
• Number of steps required in reverse logistics management for every one step required in forward logistics: 12
• Percent increase in costs for processing a return as compared to a forward sale: 200-300%
• Percent that net profits are reduced by improperly handled returns: 35%
• Savings that an automated, online return template can save over "live call center" costs: 50-75%
• Savings that web-based returns merchandise authorization (RMA) can save over pre-printed return labels:50-80%
• • Industrial equipment return rate: 4-8%
  • Total revenue impacted by returns $105.6 billion
  • Computers and network equipment return rate 8-20%
  • Total revenue impacted by returns: $63.8 billion
• The overall average returns rate is 8.46%, but high tech returns can be as high as 20%.

About the Author: John Reece is president of ClearOrbit, which provides real-time supply chain execution (SCE) software solutions. ClearOrbit was founded in 1994 and currently serves more than 250 leading manufacturing and distribution companies including Cisco Systems, and Texas Instruments. www.ClearOrbit.com.

Sources

1 Dr. James R. Stock, Product Returns/Reverse Logistics in Warehousing, 2004; 2 & 3 Dr. Dale S. Rogers and Dr. Ronald S. Tibben-Lembke, Going Backward: Reverse Logistics Trends and Practices, 2000; 4 AMR, 4/12/04; 5 Reverse Logistics Executive Council, 6 Gartner; 7 Gartner 2001; 8 Gartner 2001; 9 Going Backward: Reverse Logistics Trends and Practices, Dr. Dale S. Rogers and Dr. Ronald S. Tibben-Lembke; 10 According to Consumer Electronics Industry.

Reverse Logistics Magazine, Spring/Summer 2006