Reverse Logistics: The Least Used Differentiator

by Rodney Moore, UPS Supply Chain Solutions Consulting Services

Reverse Logistics Magazine, Fall 2006

An opportunity to generate additional revenue, differentiate market position and support product demand is available to companies in the form of reverse logistics. It is estimated that reverse logistics costs account for almost one percent of the total United States gross domestic product and is rapidly becoming an integral component of retailers' and manufacturers' profitability and competitive position. Product returns are the most common aspect of reverse logistics; yet, most companies do not handle returns well because it is not a part of their core competency.

While many companies are working closely with third-party logistics providers, many others are still considering the best way to handle reverse logistics. A primary reason for this is the massive shift in revenue opportunity that now follows each product sale. Customers spend 5 to 20 times the initial sales price on subsequent services and consumables. This leaves some companies seriously considering a "closed loop" approach to the supply chain that includes product returns, service contract returns, product recalls, used equipment and replacement parts for refurbishment, as well as reuse or sale as raw material.

Increasingly, reverse logistics must be considered part of a successful growth strategy. Today, having a solid disposition plan is an essential aspect of an asset-recovery strategy. Returns, repairs and used items can also have brand implications. For some companies, brand protection is paramount and most companies want to ensure their goods are not sold in secondary markets or end up in discount stores. The Center for Logistics Management at the University of Nevada conservatively estimates that 6 percent of all goods may be returned, but concedes that the true number may be closer to 8 percent.

Companies often mistakenly believe that outbound operations can also handle returns by running everything in reverse. Not so. Reverse logistics operations must manage a number of unique functions that are not included in outbound operations: collection of outdated, unwanted or damaged products as well as packaging. It is also true that the more complex the product, the higher the percentage of returns due to several factors including more variables that can go wrong, greater numbers of unqualified operators, and often regulated end-of-life disposition. While many companies have begun to recognize the need to address reverse logistics, few have strategically examined the opportunity or established explicit contribution objectives and formal processes/metrics for asset refurbishment, resale or disposal.

Difficulties of Reverse Logistics

Many companies do not have an awareness of the current costs associated with reverse logistics. The reasons for this may include poorly defined processes and lack of system support. Due to the variable nature of returns, both processes and systems must maintain a degree of flexibility to manage the returns process. Most products are engineered to incorporate manufacturing efficiencies (postponement of manufacturing and modularization), but few product designs take into account the impediments to disposition that a product's lifecycle should incorporate. And while business partners often play key roles in the disposition of a product, all parties need to be well-informed about the true costs and possible revenue opportunities, so when entering into an agreement the financial and marketing goals are clearly understood.

If customer service representatives and/or sales personnel are not trained or encouraged to manage the reverse logistics needs of customers, they can become impediments to operating a successful returns logistics process. But, if properly motivated, these personnel can be gate keepers for the process. They can often walk consumers through set-up and early usage issues and, in effect, talk them out of returning products. Company policies and employee incentives must not be barriers to offering an advantageous reverse logistics program.

Reverse logistics programs are also typically complicated by a number of factors. Paperwork and poor workflow processes tend to plague reverse logistics operations. This is exacerbated by the multiple entities – customer, manufacturer, reseller and disposer – that need to partner to develop a smooth reverse logistics program.

Improving Reverse Logistics Operations

Complex business systems, such as reverse logistics and the decisions affecting it, are often not made inside the operational process.

Improvements must happen well before operations and even before a product reaches production. Marketing should define:

• How the secondary market affects original equipment demand
• What customer experience is sought

Once these numbers are determined a manufacturer can focus on the operational improvements needed to achieve results.

Once these numbers are determined a manufacturer can focus on the operational improvements needed to achieve results. By working with customers to trade up to replacement or new products, companies are able to elude inefficiencies and costs by avoiding product obsolescence. This also releases capital and display or storage space for replacement products.

Reverse logistics can be used as a differentiator to distinguish one company from another, which further increases "switching costs" to competitors. A well-defined reverse logistics program can be used to capture customer opinions and needs that can deepen the collaborative relationship. Key incentives to implement and conduct an effective reverse logistics program include: customer retention/ satisfaction; container reuse, recycling, damaged materials returns, asset recovery/restock; downstream excess inventory; hazardous material programs, tracking obsolete equipment and recalls.

Making Returns Profitable

Returning goods to the supply chain is equally as important as moving goods to market, so assigning key executives to manage and improve the asset-recovery program is fundamental to achieving profitable results.

Each center should have an executive team to handle administrative functions relating to facility management, material flow and marketing efforts, while contract labor can be used to perform sorting functions. A company might find it more beneficial to outsource the post-production environment completely. Materials being returned from customers and distributors might be handled by various contractors with assigned territories, while the product disposition is coordinated with a network of decision matrices set forth by the central outsourcing company.

When developing a reverse logistics program, process responsibilities should be clearly defined. While a company's logistics division may coordinate the product return operation, the production department may manage asset recovery. Therefore, the production department would handle the material that has fallen out of the system prior to reaching the customers. Well documented approaches benefit both consistency and traceability – which leads to greater efficiencies.

High-level Example of an Effective Reverse Logistics Program

Each point below represents a step in how a reverse logistics program can work. It is important that each company define how an effective reverse logistics program will affect customer experiences and original equipment demand while contributing to revenue. Each step requires more detailed characteristics to be defined:

• At the installation site, authorized personnel complete the appropriate forms and attach them to the items being funneled to the recovery operation. (Customer service and logistics processes must be defined and communicated.)
• Supply trucks bringing new products and materials to nearby sites can backhaul the older parts and materials to the local supply location. (Schedules, transportation, networks must be established and effectively managed.)
• Dedicated staging locations at all supply locations as well as at some customer locations specifically for materials bound for the processing centers. (Customer processes and expectations must be clearly defined and communicated.)
• An intranet connection that facilitates communications between the processing centers, supply centers and customer locations. (Communication processes and infrastructure must be established.)
• A database of buyers categorized by certain classes of materials should be maintained. (New processes must be developed to support new revenue streams.)
• When the trucks arrive at the processing centers, sort the material, categorize it according to buyer, then notify the appropriate buyers that the material will be placed for silent bid. Processing centers may also include company stores, where customers can shop among the items that make the journey through the processing center and are determined by site managers to have purchase appeal. (Processing center network, operations, and organization needs to be established and managed for on-going improvement.)
• Each lot of material is described and placed for auction on a medium such as the company's web site. The lots generally remain up for bid for a specified time, e.g., five days (Sales techniques and mediums must be identified as well as processes, business rules and metrics.)
• The winning bidder typically gets a specified time, e.g., an additional five days to pay for and pick up the material. Buyers are responsible for transport. (Expectations and business rules must be developed and communicated.)
• Track materials inbound and through the sorting, bid, sale and release processes with a central accounting system. All cash collected from sales should be sent by the buyer to a central clearinghouse, which authorizes release of the material and performs all the reporting, accounting and reconciliation activity. (Central tracking system should be developed and analyzed.)

Solutions to Reverse Logistics Obstacles

Depending on your current operation, proven solutions exist that can improve customer retention through a reverse logistics program. These answers could be strategic in nature from process development and expansion to improvement portfolio development. The solutions include: possible options for reclaimed product; refurbish (improve product beyond original specs); recondition (return product to original specs); salvage (separate components for reuse); repair (prepare for sale as a used product); sell to third-party or recycle (discard/liquidation) to a landfill.

Conclusion

First, develop a strong reverse logistics strategy. Second, clearly outline financial, corporate, brand, marketing and other objectives. Treat the reverse logistics function as a business; it is not the returns department, it is an operation. Give it goals, give it objectives, support it with resources, assign executives to manage it and let it be part of the "lifecycle" design for your products and your customers.

About the Author: Rodney Moore is a senior consultant with UPS Supply Chain Solutions Consulting Services, where he focuses on supply chain optimization with an emphasis on procurement and inventory analysis. His experience includes leading teams through process improvement and technology enablement of the supply chain while working on supplier connectivity, inventory management and e-procurement. He possesses a deep knowledge of and experience in program management including the rational unified process methodology used for application development.

Reverse Logistics Magazine, Fall 2006