The 7 Deadly Sins of Reverse Logistics
In reverse logistics, it’s important to do the right things in the right way to obtain competitive advantages and lower costs. Here’s how to avoid seven common pitfalls.
by James R. Stock, Professor of Marketing and Logistics, University of South Florida
According to estimates, reverse logistics (RL) costs in the U.S. are about $35 billion per year, or 4 percent of total logistics costs. Product returns, a large proportion of RL activities, average about 6 percent of sales, although this varies. Returns are much higher, for example, for books, greeting cards, some electronics, and merchandise from mail order or on-line catalogs. During the 1999 holiday season, approximately 25 percent of all on-line purchases were returned.
Most published lists of "important" logistics attributes rate reverse logistics low. Such ratings are misleading. Factors like product quality, competitive prices, order cycle time consistency, on-time pickup and delivery, and low damage will always be important. However, in a competitive marketplace, these factors are merely the "price of admission" to the playing field; competitors have reached parity on them. Firms that do not meet customer standards on these attributes do not even get considered in purchasing or outsourcing decisions.
The newest differentiator is reverse logistics. Many companies offer some kind of program, but few provide optimal solutions.
As is often the case when there are more issues that need addressing than time to do them, reverse logistics is usually left to chance or considered as an afterthought. Logistics executives would generally say that RL deserves attention, but that other issues have priority and demand their immediate focus.
Reverse logistics is a broad concept, encompassing many activities within, and outside of, logistics. It has been defined as "the term most often used to refer to the role of logistics in product returns, source reduction, recycling, material substitution, reuse of material, waste disposal, and refurbishing, repair and remanufacturing."
Finding sufficient time to properly plan, implement and control RL strategies and programs is difficult. The problems, dilemmas and errors that often accompany RL strategies and programs can be likened to the "seven deadly sins," as so graphically presented by Dante in his epic masterpiece, Divine Comedy. According to Dante, the sins (pride, envy, anger, sloth, avarice/greed, gluttony and lust) progressed in severity, with the latter sins being the worst, and with punishments being more severe for the more serious sins.
Many errors can occur in RL because it involves a large number of tasks, including returns and exchanges, warranties and repairs, recycling, reusable containers, recalls, trade-ins and product upgrades, remanufacturing, waste disposal, and others. Each of these tasks has marketing, logistics, financial and environmental implications.
The present state of logistics
Before examining the seven deadly sins of RL, let’s examine some generalizations based on what firms are doing today.
• First, the state of awareness and development of RL is analogous to that of inbound logistics 10 to 20 years ago. Where firms once only concentrated on physical distribution and gave little attention to inbound material management, so, too, do many organizations give little attention to RL.
At the same time, however, more firms are setting down and "mapping" the RL process to understand its scope and complexity. Process mapping helps firms better understand what it takes to develop effective and efficient RL strategies and programs.
• Although reverse logistics is often a small percentage of a firm’s costs, in competitive industries, savings can give a competitive advantage.
• Product returns are a large part of RL. Thus, logistics is often a responder to, rather than an initiator of RL efforts. Returns can be caused by the actions of manufacturing through product defects or over-production, and by marketing because of product misallocation, incorrect forecasts of demand and overly generous return allowances.
• Products tend to remain longer in reverse channels than in forward channels, resulting in higher costs in inventory, transportation and warehousing, and decreased revenues because of product obsolescence and degradation.
• Economies of scale are important. Thus, for small to medium-size firms, it can be difficult to develop optimal programs without sufficient item quantities involved in the process.
• From a financial perspective, many firms do not accurately or quickly capture costs from RL activities, nor do they properly value the assets recovered through the process.
• RL activities are usually managed within a single firm or between a few firms (e.g., vendors, logistics service providers), but rarely across members of the supply chain.
• Reverse and forward logistics decisions made for reasons of cost and service efficiencies almost always have positive environmental benefits.
The deadly seven
The following list of reverse logistics "sins" is offered as a means of identifying major problems, errors and difficulties associated with the planning, implementation and control of RL strategies and programs. Like Dante’s list, they are listed in order of increasing severity.
Deadly Sin No. 1
As many firms near competitive parity, achieving an advantage is more difficult. Even on-time pickup and delivery are quickly becoming the "price of admission to the playing field." Thus, firms must search out other opportunities for gaining competitive advantage.
Because product returns are a part of almost every firm’s operations, cost savings and service improvements here can have positive benefits for firms that do a better job. In such a context, a good reverse logistics program becomes a differentiator and a means of gaining market advantage.
Deadly Sin No. 2
It has become painfully evident as a result of service failures in the e-tailing and Internet arenas, that efficiently and effectively handling product returns is as important as delivering them in the first place.
Taking a life-cycle approach to product distribution is vital, especially to firms trying to optimize customer service at all stages of the buying and return processes.
When product returns occur, firms must ensure they meet customer requirements of proper handling and administration, credit or refund of purchase price and substitution of defective products.
Deadly Sin No. 3
Most information and administrative systems installed by firms were done so with forward distribution in mind. Thus, firms developed near-optimal logistics systems for inbound and outbound product flows. Reverse product flows, however, usually received less attention. Activities such as transportation, warehousing and inventory control are similar throughout the logistics process, but they are not identical in forward and reverse flows. These differences must be incorporated into information systems, programs and processes for best results.
E-commerce — "click-and-mortar" — firms are especially vulnerable to system deficiencies because product returns are typically higher than they are in traditional "brick-and-mortar" environments. As the number of returns increases, reverse logistics deficiencies and problems magnify.
Deadly Sin No. 4
Part-time effort usually brings less than optimal results. Firms that are good at forward distribution are not necessarily good at reverse distribution. There are enough differences that make it difficult for firms to administer reverse flows well. It is important that sufficient time, money and personnel be assigned to reverse logistics tasks if a firm wishes to attain optimum efficiency and effectiveness of the process. Adding the responsibility to managers and employees with already full plates will only result in high costs, problems and delays.
Deadly Sin No. 5
Inventory carrying costs accumulate whether products are distributed to customers as first-time sales or come back as a return. Costs incur in both instances.
The value of returned items is usually lower than finished goods sold for the first time (unless the returned item can be resold "as is"). But as a percentage of product value, inventory carrying costs are higher for returns.
As returned goods languish in a logistics system, these costs increase (due to obsolescence, pilferage and damage), reducing overall product value. In addition, inventory-carrying costs as a percentage of product value increase, further reducing profit margins.
In some firms, returned products are assumed to be somehow less important than finished goods sold for the first time. Such items receive less management attention and administrative oversight, because they may be handled when time permits and after other tasks are complete. The result is that these products are generally in a firm’s logistics system for longer and more variable time periods.
Deadly Sin No. 6
Problems typically do not go away by themselves. Unfortunately, customers do! Reverse logistics requires some specialty skills. For example, finished goods and returned goods are transported and stored, but they have different requirements for handling, maintaining and accounting for them.
To illustrate, products sent out to customers are usually arranged in neatly stacked and palletized groups. They are easily transported and stored.
Conversely, returned items may come back with or without packaging. That packaging may or may not correspond with the product contained in them. On top of this, multiple product types, sizes and quantities are often returned on a single pallet.
Also, once returned to the warehouse or distribution center, how are returns identified and recorded, and where are they stored? Obviously they cannot be mixed with "new" products. But, should they be assigned a separate part of the storage facility, handled at different times than outbound finished goods, and how should they be dispositioned? Enough differences exist that any problems not specifically addressed will likely remain and worsen with time.
Deadly Sin No. 7
The importance of inventory carrying costs in reverse logistics has already been mentioned. However, the revenue side of the equation is equally important. All assets have value, and can generate returns that can be measured with the same financial ratios (such as return on assets, asset turnover ratio) used for finished goods. Some relevant questions relating to these issues include: What are the costs of processing returns? What are the costs associated with product refurbishment? Can the item be repackaged, and if so, at what cost? Should the reverse logistics process be outsourced and at what cost?
On the revenue side, the following are relevant issues: What are the values of items returned that are ready to be resold, repackaged, refurbished or remanufactured? How long does it take for returned assets to show up on a firm’s income statement and balance sheet?
From an asset management perspective, firms need to know when, how many, and what kinds of products are returned. Additionally, they must also know the length of time returned items remain in the reverse logistics system before their disposition.
None of these "sins" is "unpardonable."
Organizations can improve their processes simply by creating recognition among employees, suppliers, vendors and customers that RL is important and deserves full-time attention.
Many of the good practices of forward logistics can be applied on the reverse side, often with great initial success. Because many managers have not attended to RL, any improvements made can have a significant impact. Here are a few general and specific strategies:
• Allocate sufficient resources to reverse logistics and environmental initiatives.
• Map or flow-chart the reverse logistics processes to understand their components and interrelationships.
• Implement educational programs for customers, associates, suppliers, vendors and others in a firm’s supply chain.
• Ensure the economies of scale are sufficient to make reverse logistics and environmental programs viable.
• Several programs in RL, like environmental, may need the involvement of multiple organizations to achieve optimal results. Consider partnerships and other relationships.
• Develop and implement measurement systems to track program performance.
Whether a firm operates in a traditional way, over the Internet, or a combination of both, product returns and related RL activities can be the difference that distinguishes one competitor from another. In reverse logistics, it’s important to do the right things in the right way. Avoiding these common pitfalls will help firms create that differentiation, and help create opportunities for competitive advantage through lower costs and increased revenues from RL programs. MHM