Turning Returns into Revenue:
Why Leaving Your Reverse Logistics to the Experts Puts More Cash in Your Pocket

by Ron Cain, TMSi Logistics

Reverse Logistics Magazine, May/June 2008

Every manufacturer understands the priority of getting their product to market. For over 20 years, the logistics industry has worked to improve, streamline, and rationalize supply chains in order to deliver products as effectively and cost-efficiently as possible. When designing supply chain solutions, however, companies rarely put the same priority on planning for returns, items that are faulty, damaged in shipping, or shipped to the wrong client.

The work of handling these returns is called reverse logistics. The Reverse Logistics Association, the industry’s leading trade group, defines reverse logistics as “all activity associated with a product/service after the point of sale, the ultimate goal to optimize or make more efficient aftermarket activity, thus saving money and environmental resources.”

Progress in this area has been slower than the practical work done in the rest of the logistics industry. It was not until the early nineties that the Council of Logistics Management created a comprehensive definition of reverse logistics, and since then the defining qualities of reverse logistics have continued to prove elusive. Marisa P. de Brito and Rommert Dekker of the Rotterdam School of Economics recently observed that:

“The definition of Reverse Logistics has changed over time, starting with a sense of ‘wrong direction,’ going through an overemphasis on environmental aspects, coming back to the original pillars of the concept, and coming finally to a widening of its scope.” (A Framework for Reverse Logistics, 2004).

The considerable impact that reverse logistics has on a company’s bottom line has generated a greater awareness of the importance of reverse logistics. Respected financial and business magazine Forbes estimates that US firms spend $100 billion annually on returns and that returns represent up to 7% of a company’s gross sales. But money isn’t the only reason companies should effectively manage their return supply chain. Companies are only as good as the relationships they establish with their clients, and the management of customer returns is a significant contributor to the satisfaction of a company’s clientele. One frustrating experience with a poorly-handled reverse logistics process can result in the loss of a key client, which can significantly hurt a business’ bottom-line.

The explosion of internet retail options has also contributed to the increased awareness of the importance of reverse logistics. For example, Home Depot, the number one home and garden e-retail website, joins a growing group of internet retailers who allow customers to return anything for any reason as long as it is “returned within 90 days in unused, like-new condition.” Ikea, the Scandinavian furniture and accessories maker, has a similar policy, and popular clothier Land’s End offers a lifelong unconditional return policy to their customers. As more and more on-line vendors offer easy, no-fault returns, an ever-greater amount of merchandise ordered online will be sent back, potentially flooding a company’s reverse logistics supply chain.

As a result of the growing demand for effective return logistics operations, it is time that more companies consider outsourcing their reverse logistics to a third-party logistics provider (3PL). Research shows that while most companies recognize the need for third party logistics management of their primary supply chain, many do not recognize the cost of ignoring their reverse logistics operations.

Let’s consider an example of how a 3PL would help handle the reverse logistics challenges created by a large flow of returns. Kodak, the venerable camera company, offers nine different, models of disposable or “single-use” cameras, including special models for weddings and underwater use. These cameras, which are used once, taken to a photo finishing shop, and returned to Kodak from the photo processor, represent a huge stream of returns to Kodak. According to Kodak, 80% of the weight of their cameras will be used or recycled.

Undoubtedly, a company in this position is motivated to build an effective reverse logistics supply chain to capitalize on the potential value of its high-volume of returns. In a situation like this, a 3PL will begin by analyzing the existing supply chain for ‘low-hanging fruit’ or easily-realized costs savings and efficiencies. After a detailed analysis of the current supply chain, a 3PL will begin finding ways to reduce costs at every point in the process. This includes reviewing current trucking costs, warehousing costs, and the price of time spent in transit.

After determining where cost reductions can be achieved, a 3PL will begin retooling the supply chain. This routinely means changing distribution centers (DCs) and warehouse locations as well as making the necessary staff changes. In this case, a 3PL might renegotiate the small package pickup contact that picks up the cameras at photo processing facilities. Then, a 3PL could realign the DC and warehousing system to make long-haul shipping more timely and effective. This can be accomplished by cross-docking plans at DCs, making schedule changes to reduce costly less-than-truckload (LTL) shipments, and shortening the time spent in warehouse by the single-use cameras.

For some clients, a 3PL may also decide to make aggressive staff changes to improve performance through incentive-based changes in the workplace culture. As an outside firm, a 3PL has the flexibility to make changes that manufacturing firms often find difficult. Consequently, a 3PL is able to reduce costs in the short-term while also delivering consistent cost-savings year after year.

The success that a 3PL achieves is often the result of years of specialized logistics experience. A firm that chooses to outsource their reverse logistics has an opportunity not only to reduce costs and improve service, but to also create a genuine partnership with their service provider that will improve results throughout their operations. By putting a qualified provider in charge of their return supply chain, a company gains the opportunity to focus on its core competencies and stimulate its bottom line. Consequently, any company wishing to achieve excellent service and reduced costs by outsourcing their reverse logistics should consider the experts – third-party logistics providers.

Ron Cain, author of “Turning Returns into Revenue: Why Leaving Your Reverse Logistics to the Experts Puts More Cash in Your Pocket”, is the President / CEO of TMSi Logistics with locations in New Hampshire and Florida.

Reverse Logistics Magazine, May/June 2008