What is Reverse Logistics?
“The process of planning, implementing, and controlling the efficient flow of recyclable and reusable materials, returns and reworks from the point of consumption for the purpose of repair, remanufacturing, redistribution, or disposal”
Reverse logistics includes any of the following activities:
- Managing returned merchandise (see Types of Returns)
- Green activities (ie. recycling packaging)
- Reconditioning, refurbishing, remanufacturing of returned products
- Disposing of obsolete inventory
- Hazardous materials recovery and electronic waste disposal
Types of Returns
- Damaged goods
- Excess Inventory
What Reverse Logistics Looks Like
The process is dependent on several variables, as a result, the reverse logistics network can be used for a variety of purposes.
Repairs and Refurbishing
- Common with warrantied products
- Repairs often apply to service-based products
- Refurbishing is applied to damaged, defected, or under-performing goods
- Free during warranty
- Also exists after/without warranty on a chargeable basis
- Operates through service centers
- Collection is performed through a dealer network
- Products are then sent to the nearest service center
- Typical in packaging such as glass bottles, plastic containers, and print cartridges
- Delivers bottles, then picks them up to refill, redeliver, repeat
- “Hub and spoke” delivery system
Emergency situation where products are called back to the factory for any of the following reasons:
- Product not giving the guaranteed performance
- Quality complaints from the many customers
- Defective products causing harm to human life
- Products beyond the expiration date
- Products with a defective design
- Incomplete product
- Violation of government regulations
- Ethical considerations
- Save the company image
Recalls create a large financial burden on a company but can increase customer satisfaction
- Worn-out parts are replaced by new ones
- Equipment can be checked after use to the remanufacturing process
- Can be justified on the basis of economies of scale
Recycling and Waste Disposal
- Leftover materials, used products, and the packaging is causing environmental pollution
- In many countries, governments have regulations making manufacturers responsible for minimizing waste through recycling products
Returns Vary by Industry
Returns can be the entire purpose that some industries have a reverse logistics system, here’s a look as to why some industries have such a high return rate.
- Highest rate of unsold copies (28% average)
- Due to the growth of large chain stores
- To secure a prominent display publishers must supply a large number of books
- Superstores sell less than 70% of the books they order
- Books have a relatively low shelf life
- Computers have a short lifecycle
- Many opportunities to reuse computer components
- Recycling of e-waste (lead, copper, aluminum, etc.)
- Also exists in TVs, cell phones, audio equipment, and batteries
- Remanufacturing toner cartridges is a huge industry
- 12,000 remanufacturers
- 42,000 workers
- $1 billion of remanufactured cartridges annually
- Working parts can be immediately resold (ie. parts from junkyards)
- Components such as engines, alternators, starters, and transmissions are refurbished before resale
- Material are reclaimed/recycled through scrapping
- Automotive recycling makes up 37% of nation’s metal scrap
- Remanufactured auto parts market is $34 billion annually
- Low-profit margins mean returns must be avoided at all costs
- Returns reduce the profitability of retailers by 4.3%
- Some companies give refunds and let consumers keep the product (because of the cost of returns)
Reverse Logistic Costs
The costs associated with reverse logistics come from many activities such as:
- Merchandise credits to customers
- Transportation costs of moving items back
- Repackaging items for resale
- Additional warehousing costs
- Disposal of items
5 Steps to the Reverse Logistics Process
Lack of information about the reverse logistics process can result in the process being out of control – “If you aren’t measuring it, you can’t manage it.”
- Receive – Product returns are received at a centralized location, usually a warehouse or distribution (after being gathered from retail stores or returned by customers)
- Sort and Stage – Returned products are received & sorted for further staging in the returns process (generally takes 3 days or less to accomplish)
- Process – Returned products are then sub-sorted into items, based on their stock keeping unit (SKU) number.
- Analyze – The value of the returned item is determined by employees to see whether it should be repaired or refurbished.
- Support – Returns in good condition are returned to inventory
Reverse Logistics as a Strategy
- Returns-to-Revenue: Companies that ensure timely delivery and processing of returns, position themselves to save more or earn more from the returned product
- From refurbishing, repackaging, reselling parts, reclamation, and recycling, returned products are often untapped sources for revenue
- Protecting Profits: Handling returns properly and tracking all activities
- Critical to helping companies avoid fines and penalties from various government regulatory agencies
- Customer Loyalty: Companies considered best in class in reverse logistics enjoy a 12% advantage in overall customer satisfaction
- Disposal Benefits: Knowing what is returned and where it ends up makes it easier for companies to deal with regulatory issues
- Other benefits are such as avoiding carrying cost, excess taxes, insurance, and staff
- Maximize Recovery States: Mishandles or completely misplaced returns affect the efficiency of any reverse logistics process
- Could also mean that products could end up being a total loss for a company instead of an opportunity to resell
Reverse Logistics System Design
Product location | Product collection system | Recycling or disposal centers | Documentation system
- Product Location: First step in the callback process is to identify the product location in the physical distribution system if the firm.
- Product Collection System: Once the product location is identified, the collection mechanism gets into operation
- Ex: Online Stores, Auctions, Refurbishment, & Recycling
- Recycling or Disposal Centers: These may be the company’s plants and warehouses or some fixed location in the reverse logistics network
- The called-back products are inspected before they are further processed for further repairs, refurbishing, re-manufacturing, or waste disposal
- Documentation System: Tracing the product location becomes easier if proper documentation is maintained at each channel level
Reverse Logistics Challenge
- Retailer-Manufacturer Conflict: Inefficiencies in a reverse logistics process can lengthen the time for processing returns, such as the condition and value of the item and the timeliness of response
- The buyer and seller have to develop a good working partner relationship to derive mutual benefit
- Problem Returns and Their Symptoms
- Returns arriving faster than processing or disposal
- Unidentified or unauthorized returns
- Large amounts of return inventory held in warehouse
- Long cycle time
- Cause and Effect: Poor data collection can lead to uncertainty about return cases
- Improving the return process makes it possible to decrease costs
- Reactive Response: Government regulation or pressure from environmental agencies has forced companies to begin to focus on an area that is not one of their core competencies
Managing Reverse Logistics
A research team at the Reverse Logistics Executive Council identified key reverse logistics management elements and examined the return flow of product from a retailer back through the supply chain toward its original source or to some other disposition. These elements can either positively or negatively impact a company’s profitability.
- The screening of defective or unwarranted returned merchandise at the beginning of a reverse logistics process.
- It is the first critical factor to ensure that the entire reverse flow is both manageable and profitable.
- Companies have given very little time to reverse logistics in the past
Compacting the Distribution Cycle Time
- One of the major goals of reverse logistics process once an item has entered it is to reduce the amount of time to figure out what to do with the returned products once they arrive.
- It is important to know beforehand what to do with the returned goods. A lot of the time it is hard to tell if returned items are defective or can be reused.
- Employees have a hard time making decisions when the decision rules are not clearly stated and exceptions are often made.
Reverse Logistics Information Technology Systems
- One of the most serious problems that the companies face in the execution of a reverse logistics is the scarcity of good information systems.
- The system should create a database at store level so that the retailer can begin tracking returned product and follow it all the way back through the supply chain.
- The information systems should also include detailed information programs about important reverse logistics measurements.
- Useful tools such as Radio Frequency (RF) and Radio Frequency Identification (RFID) are helpful in these systems.
Centralized Return Centers
- Centralized Return Centers (CRCs) offer many benefits including:
- Consistency in disposition decisions and minimizes errors.
- A space-saving advantage for retailers who want to dedicate as much of the shop floor as possible.
- Labor cost reductions due to specialization.
- Transportation cost reductions because of empty truckloads returning from store deliveries are used to pick up return merchandise
- A convenient selling tool for the easy disposition of returned items.
- Easier to identify trends in returns, which is an advantage to the manufacturer, who can detect problems sooner.
- A company may have a program that does not accept returns from its customers.
- Instead, it gives the retailer an allowable return rate and proposes guidelines as to the proper disposition of the items.
- This type of policy passes the returns responsibility to the retailer while reducing costs for the manufacturer and distributor.
- The drawback is that the manufacturer loses some control over its merchandise
Remanufacture and Refurbishment
- The advantage of remanufacturing and refurbishment is using reworked parts, resulting in cost savings.
- 5 categories to remanufacture and refurbishment:
- Make the product reusable for its intended purpose
- Retrieve reusable parts from old or broken products
- Reuse parts of products for different purposes
- Make the product reusable for its intended purpose
- The classification and disposition of returned goods, surplus, obsolete, scrap, waste and excess material products, and other assets.
- Objective of asset recovery is to recover as much of the economic value as is possible which in turn reduces the final quantities of waste.
- This can be a good cash-generating opportunity for companies, who can sell the goods that would otherwise end up in the trash.
- Because of the inherent lack of expertise on product returns, negotiations usually are informal and approached without formal pricing guidelines.
- This is one of the most difficult parts of reverse logistics but is also one of the most important.
- Returns are sometimes charged against sales, but accounts receivable are also impacted by returns.
- In many cases it makes much more sense for the firm to outsource their reverse logistics functions than keep those in-house.
Reverse Logistics and the Environment
Today, many companies focused on reverse logistics because of the environmental concerns and the impacts they may have.
Supply Chain Sustainability
- Refers to the management of environmental, social, and economic impacts.
- The objective is to create, protect, and grow long-term environmental, social, and economic value for stakeholders.
- Minimizing the ecological impacts of logistics
- Example of this is a reduction in the energy usage of logistics activities and a reduction in the usage of materials.
- Reducing the carbon footprint in a supply chain is a priority for logistics
- Some products are banned from being placed in landfills and need special consideration
- Motor oil, household batteries, household appliances, paper products, tires, and some medical and electrical equipment.
- Companies must look at the total life of a product and find ways to recycle them
- Closed-loop supply chains are designed to manage both forward and reverse flows activities in a supply chain
- The four R’s of sustainability
- Samsung is monitoring its downstream e-scrap movement with GPS tracking service from the Basel Action Network (BAN)
- They will being using BANS’ EarthEye service
- This will help maintain the standards for responsible recycling
Blockchain implications on reverse logistics
- 30% of all products ordered online are returned
- Applying blockchain technology to reverse logistics can reduce costs and better streamline the customer experience
- Allows for better tracing and transparency of a product’s full lifecycle from the manufacturer’s sourcing of component materials to final disposal
USPS, FedEx, UPS
- Returned products do not always make it back to the brand
- Depending on the product’s condition, may discount it, auction it, donate it, recycle it, or even destroy it
- Merge all current couriers into one
- Lessen traffic, improve efficiency, and minimize environmental impact