Send it Back! The Role of Reverse Logistics

Toughening Up Return Policies

Not only is it of utmost importance to have clear return policies, the key is to stick to the established policies and make sure the customer is aware of them. Consistent, universally enforced return policies are reducing some retailers' return rates by up to 20 percent. Offline retailers have found that simple measures, such as clearly posting return policies at cash registers and in all departments, are very effective. One consumer electronics chain places large signs displaying the return policy every 8 feet within stores and prints the policy on the back of customer receipts. Others have begun to set up on-site service centers to address customer education issues and prevent potential problems. In training, sales associates are being encouraged to be completely candid about the usefulness, as well as any shortcomings, of the items they're selling. Other solutions merchants are experimenting with in-store testing centers and electronic registration of product serial numbers.

Reverse Logistics and Environmental Impact

The conventional view of the flow of goods in a supply chain usually ends with the consumer. Waste disposal, probably the most basic post-consumer activity, is notably absent on most supply chain flowcharts. This lack of awareness is changing, however, in large part due to growing consumer awareness of recycling, coupled with more stringent federal, state, and local regulations on waste disposal-particularly disposal of environmentally hazardous materials such as motor oil, vehicle batteries, paint, and tires.

Many companies are realizing that a reverse logistics system combined with source-reduction processes can not only achieve cost savings and regulatory compliance, they can enable the companies to be perceived as good citizens that are committed to protecting the environment.

For example, one of the major cosmetics manufacturers used to dump about $60 million worth of its products into landfills each year, destroying more than a third of the name-brand cosmetics returned by retailers. The manufacturer tackled this monumental problem by developing processes and a proprietary IT system that reduces the volume of destroyed products by half.

Today, with the new IT system, boxes of returned merchandise are scanned as they come into the warehouse. The scanned data provides expiration dates for products, and the receiving system calculates whether items can be sold in other markets or at employee stores, or given away to charities instead of being discarded. Inventory levels of the returned items are kept according to their eventual disposition until sufficient goods have been returned to make it economically worthwhile to ship them out.

During the system's first year, the manufacturer was able to evaluate 24 percent more returned products, redistribute 150 percent more of its returns, and save $475,000 a year in labor costs. The company destroyed 27 percent of returned products because they were beyond their shelf life-down from 37 percent in 1998. The manufacturer expects to reduce that percentage by mid-2000 to just 15 percent as the new systems enable the company to process returns in a timelier manner. This is a cosmetics company with a goal of beautifying the environment as well as its customers.

Developing a Reverse Logistics Strategy

Whether you're a pure Internet-only retailer, a pure bricks-and-mortar, or a hybrid clicks-and-mortar company, developing a reverse logistics strategy is a significant effort and usually requires hiring outside consultants. Effective planning is based on a "walk-through" of the reverse logistics process you are designing. First on paper and then on-site, diagram a theoretical shipment, step by step from the origin of the returns process (the phone call from a customer) to the final disposition of the waste or product. Most importantly, try to foresee every problem that's likely to be encountered and to plan how the system you are designing would handle those situations. Several excellent books have been written on this incredibly complex topic. Here are some very basic questions and issues that should be addressed. These are compiled from a variety of reverse logistics experts.

What Are Your Priorities?

Analyze your reasons for starting a reverse-logistics program.

• Why is there a need to do reverse logistics at my company?

• Is it for the environment? If so, you will have to address how to manage waste disposal and develop recycling programs.

• Is it for better customer service? If so, product returns should be designed as an integral part of customer relationship management systems.

• Is it for economic reasons? If so, you must design programs to retrieve and refurbish salable products, and must incorporate a repair operation.

What Resources Are You Willing to Commit?

A reverse logistics program is not merely a side job for an employee-it must be made a top priority and allocated sufficient resources.

• How much time are you willing to commit to properly conduct a reverse logistics program?

• How much of the company's budget will you allocate?

• What are the personnel resources you will commit?

• Will reverse logistics be a tactical exercise or a true strategy for your company? The difference between a tactical program and a strategic one can be summed up in one phrase: a strategic initiative is one where the CEO is committed and involved.

• Realizing that the level of potential benefits will influence how much a company will invest in a reverse logistics program, how will you forecast potential cost savings? What is an acceptable level of return on investment?

• Who will proactively manage the process? Even if you decide to outsource the function to a third party or a transportation company, someone needs to manage their efforts; otherwise, it's bound to result in higher costs and missed opportunities for savings and profits.

• If you decide to utilize third parties, how much of the process should be outsourced to them?

Communicate Clearly with Customers

A key part of any reverse logistics program is deciding how and what to communicate with customers.

• When your customers call about returning an item, whom should they deal with? Will you set up an in-house call center, or outsource the function? Alternatively, will you send the customer directly to the manufacturer for a return authorization?

• Whether you outsource customer service or keep it in-house, you'll need very clear policies and procedures, as well as scripts for the service representatives to use when handling calls. Who will develop these tools?

• Will you include systematic, written return instructions in the original outbound shipment? When you leave it up to the customer to decide where and how a return shipment is supposed to go, it could return to the billing address rather than to the warehouse location. Once it gets there, if it's not properly marked the people who receive it won't know what to do with it.

• Some companies even include detailed packing instruction and preprinted labels. Will you? Product damage can be avoided if customers receive detailed packing instructions. Customer ignorance can result in returned goods' suffering more damage coming in than they did going out, making it difficult to reuse or resell the item.

• Some companies that want customers to call for a return authorization often fax instructions once the authorization has been issued. How will you handle this?

• What kind of email will be used to communicate with customers, and at what points in the process? Will any of the email be generated by autoresponders?

• What about updating stores and field offices on new policies and procedures? Will you issue a newsletter, set up an intranet, or use email?

• What kind of training will you offer? On-the-spot training may be necessary; for example, provide hazardous-materials training to a customer that recycles batteries.

• How will you handle and communicate return freight charges? Most often, the manufacturer pays the freight for returned goods, yet typically the customer estimates the weight, guesses at the bill-of-lading description, and routes the shipment via a carrier that has no pricing agreement in place with the manufacturer. As a result, incorrect weights and product classifications can lead to thousands of dollars in excess freight charges. One way around this is to have the customer-service representatives complete the bill of lading for the customer, showing the carrier routing, correct weight, description, and class to customers when they call for a return authorization.

Planning Key Reverse Logistics Management Elements

In their book, Going Backwards: Reverse Logistics Trends and Practices, Dr. Dale S. Rogers and Dr. Ronald S. Tibben-Lembke have identified ten key reverse logistics management elements:

• Gatekeeping

• Compacting Disposition Cycle Time

• Reverse Logistics Information Systems

• Centralized Return Centers

• Zero Returns

• Remanufacture and Refurbishment

• Asset Recovery

• Negotiation

• Financial Management

• Outsourcing

Here are some of the questions and issues surrounding each element that can also be used in developing a reverse logistics strategy.

Gatekeeping

Gatekeeping is the screening of defective and unwarranted returned merchandise at the entry point into the reverse logistics process.

• What resources will be set aside for the gatekeeping function?

• Who will do the screening of the returned merchandise?

• What criteria will be developed to determine what is defective and what constitutes an unwarranted return?

• How much authority will you give to the gatekeepers?

• How will you screen merchandise at the store level? Employees typically have no incentive or authority to screen merchandise. Without training, employees can unwittingly contribute to customer abuse of product returns.

Compacting Disposition Cycle Time

Returns are exception-driven processes, making it difficult to reduce cycle times related to return product decisions, movement, and processing. The mechanics of decision-making when determining product disposition need to be carefully defined.

• When a product comes back in to a distribution center, how will you determine whether the item is defective, can be reused or refurbished, or needs to be sent to a landfill? Often this is a very difficult decision that can impact profitability and slow down cycle time.

• How will you reward employees for taking responsibility and making a timely decision as to how a product should be dispositioned? Employees have difficulty making decisions when the decision rules are not clearly stated.

Reverse Logistics Information Systems

Software specifically designed for supporting the reverse logistics process doesn't exist, leaving businesses with the choice of developing proprietary systems or building reverse-logistics capabilities into existing systems. Most IT departments within companies are already stretched to their limits, so developing a system in-house is virtually impossible.

Even if a company did have the resources to build a system, it has to be flexible enough to handle the many exceptions in the reverse logistics process, and complex enough to work across boundaries between business units of the same company. A successful reverse logistics program depends heavily on gathering meaningful information that can help manage the returns process while tracking costs. It also allows a firm to obtain credit for a returned product, improving cash flow management.

An effective reverse logistics information system should also be able to track the reason for each return and to assign a code for final disposition. Rogers and Tibben-Lembke have developed some potential codes for each of these steps, shown in Tables 10-3 and 10-4.

TABLE 10-3 Return Reason Codes

Source: Roger and Tibben-Lembke

TABLE 10-4 Disposition Codes

Source: Roger and Tibben-Lembke

Centralized Return Centers

Centralized return centers (CRCs) are processing facilities devoted to handling returns quickly and efficiently. In a centralized system, all products for the reverse logistics pipeline are brought to a central facility, where they are sorted, processed, and then shipped to their next destinations. CRCs have been utilized for many years, but in the last few years, they have become much more popular as more retailers and manufacturers have decided to devote specialized buildings and work-forces to managing and processing returns. Reasons for this trend include

• increased salvage revenue,

• improved returns processing,

• focused and experienced teams,

• reduced inventory levels and improved inventory turns,

• increased consumer approval by reducing landfill use and promoting environmental awareness, and

• improved bottom-line performance.

There are many factors to consider in developing a centralized reverse logistics strategy. Some of the questions to address are:

• What reduction can you achieve in store labor processing costs?

• How much return goods inventory is being held in the stores? Most vendors require certain minimums (dollar volume, number of units, length of time, etc.) to be reached before they will authorize returns. These minimums are reached much earlier through use of a centralized facility, based on the consolidated volume from all of the stores.

• What opportunity costs are being incurred? Many stores do not place a priority on returns. This results in returns merchandise being thrown away since the stores do not want to handle it. A centralized facility makes it easy for stores to get rid of their returns and not spend a lot of time processing them. Instead of being thrown away, returned goods are either sent back to the vendor or become candidates for salvage, thus increasing revenues.

• What are the costs associated with operating a centralized facility?

• Do you have the resources and expertise to run a central facility?

• What volume of returns will be going through this facility?

• What credit terms have you obtained from your vendors? Typically, vendors will give retailers better terms based on the reduced costs associated with consolidating shipments.

• What transportation network will be used and how will transportation costs be impacted? Typically, shipment costs increase because merchandise is shipped to the central facility from the store and then shipped again to the vendor. However, consolidating these shipments will usually yield a much lower freight rate because the shipment sizes are larger.

• Who will develop the reporting and systems requirements to manage the information, track the returns, and ensure you meet the vendor minimums?

• How will the processes be integrated through the stores, returns facilities, MIS, and finance?

• Who will design the best practices for store processing and the returns facilities? Who will develop the policies you will follow with your vendors under a centralized returns operation?

• How will the information flow, and how will the processes in both the stores and returns facility be tested?

Zero Returns

In zero return programs, the manufacturer or distributor does not permit products to come back through the return channel. Instead, they give the retailer or other downstream entity a return allowance and develop rules and guidelines for acceptable disposition of the product. A typical return allowance in many industries is three-and-a-half to four percent of sales to the retailer. A zero returns policy, properly executed, can result in substantially lower costs, according to the research respondents. Firms using zero returns can reduce the variability of returns costs by presetting the maximum dollar amount of returned product. Stabilizing return rates using a zero returns program promotes planning and fiscal health.

Zero returns enables the firm to avoid physically accepting returns altogether, a strategy being adopted by some consumer product companies and several electronics companies. Interestingly, most retailers do not track the cost of returns. Instead, merchandise buyers factor the return allowance into their pricing, which ignores the cost of returns.

While zero returns release upstream channel participants from dealing with the physical portion of reverse logistics management, it does not reduce much of the physical burden placed on downstream channel participants.

In a typical zero returns program, a supplier tells its customers that no product will be accepted for return, once ordered. Instead, the supplier will give the customer a discount off the invoiced amount. Depending on the supplier, the retailer either destroys the product or disposes of it in some other manner. In another model being utilized in the computer industry, the retailer returns all products to a central point on open return material authorization (RMA). Usable product is paid for and shipped to a third party for refurbishment and disposition. Ineligible or unusable product is disposed of based on a predefined set of rules. In this model, the goal for the retailer is to enlist as many manufacturers as possible to participate, to enable centralized receiving, auditing, and payment processing. From the computer manufacturer's point of view, all product from the channel is returned to the refurbishing third party. The product is audited by an independent entity to determine its usability and the retailer's credit entitlement. All aspects of the RMA process and the disposition of the returned product are handled by the third party.

Remanufacture and Refurbishment

Thierry, et al. (1995) defined five categories of remanufacture and refurbishment. These five categories are repair, refurbishing, remanufacturing, cannibalization, and recycling. The first three categories, repair, refurbishing, and remanufacturing, involve product recondition and upgrade. These options differ with respect to the degree of improvement. Repair involves the least amount of effort to upgrade the product, and remanufacture involves the greatest. Cannibalization is simply the recovery of a restricted set of reusable parts from used products. Recycling is the reuse of materials that were part of another product or subassembly.

Remanufacturing and refurbishing of used product is on the rise. Even NASA spacecraft are being built with remanufactured and refurbished tools.

Asset Recovery

Asset recovery is the classification and disposition of returned goods; surplus, obsolete, scrap, waste, and excess material products; and other assets in a way that maximizes returns to the owner while minimizing costs and liabilities associated with the dispositions. This definition is similar to the one that the Investment Recovery Association uses to define investment recovery. The objective of asset recovery is to recover as much of the economic (and ecological) value as reasonably possible, thereby reducing the ultimate quantities of waste.

Asset recovery has become an important business activity for many companies. The importance of asset recovery to the profitability of the company depends on the ability of that company to recover as much economic value as possible from used products while minimizing negative impacts, such as environmental problems. The attitude of many firms towards used products has been to ignore them and avoid dealing with them after they are originally sold. Manufacturers in the United States typically are not responsible for products after customer use.

Reselling products overseas is just one of several possible ways to dispose of returned goods. Essentially, you can refurbish, resell, recycle, repackage, or destroy returned goods. Whichever a manufacturer chooses, it should maximize what used to be unproductive assets that are eating up valuable inventory dollars and space, or dispose of an item in the most economical and environmentally responsible way. That decision will determine the design of a processing facility, what kind of training workers need, and the specific procedures for handling products as they arrive. Kitchen appliances that can be repaired and sold in discount markets, contaminated food products or expired pharmaceuticals that must be destroyed, and packaging that needs to be cleaned and reconditioned before being refilled all require different handling procedures and physical layout of the processing facilities.

Negotiation

Deal-making is a key part of the reverse logistics process. In the forward flow of goods, prices are often set by brand managers and marketing specialists. Reverse logistics often includes a bargaining phase, where the value of returned material is negotiated without pricing guidelines. These negotiations may be handled loosely. In addition, one or more of the negotiation partners often does not fully understand the real value of the returned materials, creating opportunities for third parties to operate on the margin. These third parties often employ some of the sharpest logisticians. In other cases, the negotiations are handled by specialist third parties. These third parties act in an advisory capacity to the primary participants in the supply chain, who are working to transfer ownership of the material back to the original source.

Financial Management

Financial management issues are the primary determinants in the structure of a reverse logistics system and the manner in which product is dispositioned. Most firms need to improve internal accounting processes. Accounting problems drive the actions of managers. In a few firms included in the research, accounting issues drove store managers to sidestep normal return systems. In these cases, internal policies and controls moved them to inefficient, incorrect behaviors.

An example of a policy-created problem surfaced in the research. Merchandise designated to go back to the supplier due to overstocks, or because it is not selling, is earmarked for processing through a centralized return center. However, internal accounting takes a markdown on those items that move through the centralized return center, and stores expense those items. When the centralized return center processes the material, they get full credit, and the stores are punished. The stores do not want to be punished, so they slow the flow back to the vendor to postpone the negative financial impact for as long as possible. This delay causes a store-level backup of material that should be dispositioned. In addition, the loss of consolidation opportunities increases transportation costs. Often, the cost of returns is charged against the sales department. While this policy may generally be a reasonable one, it can complicate reverse logistics processes.

Know the tax, finance, and credit implications of the program. This is an area that may not be very visible to logistics managers, but it is one of the primary reasons upper management will support a reverse logistics program. The act of returning goods sets off a flurry of finance-related activities, including issuing refunds and credits, accounting for inventory costs, and tracking tax liabilities.

Reverse logistics programs can help make those activities easier and more accurate by collecting and providing the necessary information. For example, retailers and manufacturers traditionally have clashed over the issue of credits and refunds for returned products. Retailers sent back a product and deducted for what they sent back from their payments. For manufacturers, it was an annual nightmare trying to reconcile the physical product with the paperwork. Now, with the proper information gathering and dissemination, manufacturers can immediately reconcile their customers' claims. There are enormous financial benefits to managing returns this way. Before, manufacturers didn't know their profitability until they reconciled at the end of the year. Now, they don't have to carry unreconciled claims and they don't have to build cash reserves to cover those claims. The net effect is a reduction in the cost of doing business.

Outsourcing Reverse Logistics

Many companies are outsourcing most or all of their logistics activities. These firms are using their reverse logistics outsource supplier as a benchmark to help determine what and how reverse activities should be performed and how much those activities should cost. Often, these outsource suppliers perform reverse activities better, and their customers find that using these service firms reduces the administrative hassle of doing it themselves. These outsource suppliers have become specialists in managing the reverse flow and performing key value-added services, such as remanufacturing and refurbishing.

Out of this focus on reverse logistics, some third-party providers are offering a new type of warehousing service dedicated to the returns process. Here, returns are to be salvaged, disposed of, or returned to the manufacturer, depending on the customer's needs.

Turning the job of reverse logistics over to a third-party provider allows customers to concentrate on their core competency. Just because you use a third party, however, doesn't mean you abdicate responsibility. The level of success in a reverse logistics program is directly tied to your level of control. Very often, a virtual retailer will spend a lot of money in getting returns back just so they keep the customer happy, without really having a process or procedure that focuses on that particular piece of the business.

Another reason for outsourcing the reverse logistics process is that quality assurance also benefits. The outsourcer's software will usually provide retailers with computerized tracking of products, which merchants can use to alert vendors of problems. In addition, the merchants can use the information to make more-informed buying decisions, and so continue to bring the rate of returns down.