How to Advance In The Reverse Channel

Feb. 1, 2004
There are many alternatives for managing returns. Whether you re-use them, re-sell them, or leave them to a third party, you're more likely to benefit if you make use of the information that comes back with them. (Part 1 in a series).

It's easier to go forward than reverse. That applies to distribution as well as it does to driving and dancing. It doesn't have to be so difficult. The benefits of good reverse logistics management may make it worth your while to get over the obstructions.

The biggest benefit is cost avoidance. But upper management is often the biggest obstruction to achieving that benefit because they just don't understand what returns are costing them. First, you're paying the freight both ways. You're paying for the handling. You're paying for disposal. And even while you're taking the time to decide how to dispose of returns, you're paying holding costs. If you choose to dispose of goods rather than recover their asset value, you may be losing a lucrative revenue stream.

These problems have turned into opportunities for a number of organizations looking to make it big with asset recovery. That's good news for you because there are now several options that can help you make reverse logistics pay:

--secondary markets

--third party partners

-- information management tools

Making money, handling costs

"The cost of returns hits your budget in several different places," says Dale Rogers, professor of supply chain management, University of Nevada, and chairman of the Reverse Logistics Executive Council (RLEC). "You can't really see the cost of it because it's all over the place. So people are starting to build innovative ways to deal with it. For example, the secondary market is becoming more formalized. The biggest secondary market of them all is eBay. It's not just for consumers any more, because companies are disposing of stuff working with e-bay's category specialists."

Rogers says some industries are leading the way in asset recovery and doing a fine job by themselves.

"Now all the big auto companies are selling remanufactured and refurbished parts themselves, they're not leaving it to auto dismantlers and refurbishers," Rogers continues. "H-P and Dell are selling reconditioned printers and computers.

Greeting card makers send their products to Mexico to be refurbished. The day after mother's day you don't need those cards so they have the stores put them in a box, send them to a return center, match envelopes, smooth out the edges and corners and get them ready for next year. It all depends on the cost of refurbishing vs the cost of throwing it away. The financial and environmental costs of land filling combine to form a major motivator to improve reverse logistics management."

There's a fair amount of money to be made from the refurbishing/remanufacturing market because you can buy very low and sell higher. Logistics execution software companies like Optum are developing packages for organizations like the Home Shopping Network in this regard. But before you look into upgrading your warehouse management system (WMS) or buying a new package, you need to know the dollars surrounding reverse logistics processes - i.e., the costs and the likely payoff if you decide to refurbish or remanufacture. One of the major costs is material handling. If your material handling system is nothing more than a small fleet of lift trucks, you're probably not set up to accommodate those messy pallets and broken cases coming back into your facility. In fact, you may need another facility to handle your return stream.

"Using the same DC for both forward and reverse flows usually doesn't work very well," Rogers says. "The big retailers all have central return centers that only handle returns. Using one facility for forward and reverse flows could work, logically, but in practice it usually doesn't. A forward DC doesn't work well in bringing returns back. It makes more sense to have centralized return centers if you can afford them. It's a housekeeping issue to some extent, but the priority for stuff going forward is always going to be greater than the stuff coming back. When you have a messy pallet coming back that needs to be handled, for the most part you're not going to put stuff back on the shelves right away and it becomes a mess."

You also need to determine the extent of reverse logistics in your supply chain. Does it mean moving stuff backwards from the dock of your warehouse back into storage or does it entail screening products at the retail store level to determine what should come back?

Know the return's history

There are tools being developed to help you manage the information supply chain associated with the return of a product or asset.

Siras, for example, is one of the first companies to implement a process which registers products at the point of sale. By having store clerks scan serial numbers at the retail level, retailers and manufacturers will have better access to an item's history, thus reducing the number of improper or fraudulent returns.

"The purpose of determining the age of a product once it's returned to the manufacturer is to reduce returns through the retailer's return policies," explains Peter Junger, president of "You can negate, in an eye blink, the profits you generate at the front end. Business is competitive and margins are low, so if you're not managing every phase of logistics, the profits can evaporate very quickly."

Say a product was purchased at Wal-Mart and the customer tries to return it six months later. It is well beyond the retailer's 90-day return period. The Siras software provides the manufacturer's warranty information so even though it can't be returned to the store, the customer is still entitled to full product warranty for up to one year. The system also provides the factory authorized repair locations where the retailer can send that consumer to get serviced properly. That way the retailer can still provide customer service.

"We provide models and spreadsheets to retailers so they can do their own analysis and plug in their own numbers," Junger adds. "Some of the larger retailers see how many millions of dollars they would have to sell at retail just to make up for lost profits at the back end. A manufacturer may make profits on a large projection TV but be totally in the red on DVD players because of large returns percentages. We all pay for those excessive returns. Not only does it benefit the manufacturer to reduce returns but it benefits the consumer because if the returns are 10 percent and you can only recover half the value at the back end, somehow you need to make up for that lost five percent. That goes back into the price of the product where all consumers have to pay."

Siras started as a subsidiary of Nintendo. Junger says that depending on what the return rates are, a manufacturer could reduce returns between 20 to 50 percent. He adds that in the video game category, manufacturers can reduce returns by 60 percent.

Tracking assets

The computer industry provides another example of how information management can make returns more efficient. Provia Software designed a system for Cisco Systems that manages the return of demo units. Cisco allows a customer to demo a product for 60 to 90 days before invoicing them for it.

"Everything Cisco has in its sales warehouse has an asset tag," explains Bill Reilley, director of logistics consulting for Provia. "They ship it out, and on that day they have an understanding that it will be returned. This had been a fairly manual operation that was error prone. Stuff was never returned, it got lost in the process - it was more manhours than appropriate. This is not classical warehouse management system, it's really more of a rental operation. We made a couple changes to the system that we rolled into our standard WMS product. For certain order types we automatically create the inbound order. When shipped complete we acknowledge its shipment out of the WMS, and we create the expected receipt back. We know the inventory that was on that receipt. That can be used by our retail customers who have exceptionally high rates of return. The inbound order is created with zero quantity expected returned, but when someone calls to arrange a return, the order is there and all the manufacturer has to do is enter the quantity. They're not entering SKU numbers."

The other data managed in this transaction includes the number of times out for every product, how long the material had been out and the engineering rev level.

"Cisco had been tracking this information manually before," Reilley says. "Now we create an asset file in the WMS and they have all this information on line."

This method also helps in the returns of kits with multiple SKUs.

"Because we're seeing more postponement and kitting on the outbound side, returns have to be broken down on the inbound," Reilley concludes. "You have a de-kitting process. It may come back as a single line item or SKU but when I re-warehouse it I have to break it down into its component parts. The more postponement is done on the outbound side, the more complex the reverse logistics becomes."

Dell, another giant in the computer field, decided to work with a third party logistics firm, Genco, to handle disposition of returned products. The computer company realized that if it could provide customers with an affordable and convenient reuse and recycling program, it would give Dell a significant competitive advantage. Dell is also a partner in the Environmental Protection Agency's national education campaign "Plug-In To E-cycling," so the opportunity to make an ecological difference made this partnership even more practical.

"We're seeing a migration to comprehensive disposition management," says Mike O'Donnell, vice president of manufacturing services for Genco. "It's not just handling returns but achieving the data visibility to allow one touch point to deal with those elements which are typically managed by standalone silos. Working with Image Microsystems, Genco can provide one management team to help reduce the cost of goods sold, reduce inventory levels and improve shareholder value."

Sell utility, not assets

Another approach to returns is to eliminate the idea of asset ownership all together and deal in terms of asset utility. You sell the use of the product rather than the product itself.

"This is one of the biggest growth areas because the business model is changing to a product services orientation from a build and sell model," says Ron Giuntini, executive director, OEM Product-Services Institute. "You have performance based contracts in which you maintain a 98 percent availability threshold. That stuff is not on a balance sheet. There are tax ramifications for the customer because they don't own it and may not have to pay personal property taxes. Who cares about ownership? UPS has a capital finance division which finances the acquisition of inventory. If you put a value on utility, there is no warranty. On the computer side it's called utility computing. IBM plunks down a piece of hardware and says you'll only pay for the percentage of the server you use. Here's a server that can process 1,000 transactions a minute, but if you only use 200, I'll only charge you for 200. You're starting to see that on the software side and on the aerospace side."

Giuntini maintains that if you adopt this model with customers, it's in your best interest to control the reverse channel and avoid leaving it to a third party or liquidator.

"Capital goods OEMs are stupid if they don't get involved in this," Giuntini says. "Why expose your marquis name to a third party who may make poor modifications, and what's worse, once you put those remarketed products in the hands of some of these independent service organizations, they'll know more about your products than you do. All of a sudden they become competitive OEMs. The best thing when it comes to used products is to get them back in the hands of the OEMs because if they think it's old, they can destroy it or remarket it outside the states to less developed nations who view that as state of the art."

To get the most out of a reverse logistics channel, you need excellent information management. If that channel includes re-use of the returned assets, you need to establish strict operating procedures and best practices on a broad scale to ensure a consistent level of quality. There's help available to accomplish all these things, but you'll be in a better position to direct the reverse channel if you're in the driver's seat.

(In MHM's May issue, Part 2 of this series will report on recycling best practices.)


Chep USA (

Frost & Sullivan (

Genco ( (www.

Optum (

Provia (

Reverse Logistics Executive Council ( (

OEM Product-Services Institute (


The complexity of returns management may make the case for dealing with a liquidator. provides services from inspection of assets to creating a manifest of the assets that it would take possession of, put in a warehouse and develop a plan to dispose of them.

"The net recovery of assets is usually the top goal of our clients," says Asad Haroon, vice president for business development for "The items we take in can be repaired and fixed or we might have products that can't be repaired but might be useful for parts. An OEM can use us if they're managing their return business themselves. For example, we deal with one of the top drugstore chains and one of the biggest department stores in the country. They manage their own returns and they use us to efficiently dispose of those returns. We think the manufacturer is better off not refurbishing the returns because they're cannibalizing sales of existing products and if you do the math it would make more sense from a business perspective to sell those through our channel. We're able to give clients an uplift of 20 percent to 25 percent in the recovery rate for their goods."

Returning pallets

Although the idea of managing the reverse logistics channel is seen as a daunting task by some supply chain managers, there are companies offering you their expertise from years of managing their own returns. Chep USA has been managing the return of their pallets for more than a decade. Now that they are researching the use of radio frequency identification (RFID) technology with those pallets, they've arrived at some conclusions about the state of reverse logistics.

"There's a bigger opportunity for our customers in the arena of RFID than there will be for Chep," says Dave Mezzanotte, Chep USA president. "Some of the RFID tags have write-to capability, so you can describe certain goods in addition to having an electronic serial number. This could enable cooperative reverse logistics allowing a variety of distributors to use a pool of equipment more efficiently in order to maximize the reverse portion of their supply chain. "Say you have 100 pallets that are tagged and they end up at a particular distributor location. One of the services Chep provides is on-site inspection, handling and management of a customer's pallets. We could inspect these pallets at that location, find out that 80 are ready for re-use, and make that information electronically available to others of our customers in the immediate vicinity who need those pallets. They may pick them up as part of their reverse logistics program with their own fleet. That increases our efficiency and the overall efficiency of the customer supply chain. That's enabled by the fact these pallets are tagged and we know where they are and we're doing this total pallet management program with a particular distributor. Our customers are determining their own business case and setting priorities for the ROI they want to get out of it. For some it might be loss prevention and for others it might be real-time tracking."

When to work with 3PLs

If you're not sure your organization has what it takes to handle the reverse logistics channel, here are some situations where working with a 3PL might be justified:

--When you don't have a strong geographic presence or a strong distribution network in a particular area;

--When you don't want to lock in a huge capital expenditure in facilities required for logistics services;

--When you want to concentrate on design/manufacturing or any other core competency while his logistics network remains seamless;

--When you want to reap advantages of advanced software packages and order tracking systems available with a third party provider.(Courtesy of Bhargava Attada, research analyst for Frost & Sullivan's Electronic Components and SMT divisions.)

Key Elements of Returns Management Systems – Manufacturers

Buying agreements for each item

Product/Supplier and Product/Customer database with decision rules

Processing rules

Disposition options

Fast credit reconciliation

Refurbishment/Remanufacturing (almost MRP)

Transportation planning

WMS elements

(Source: Dale Rogers, Reverse Logistics Executive Council)


Buying agreements for each item

Store level gatekeeping & disposition

Product/Supplier database with decision rules

Disposition options

Transportation planning

WMS elements

(Source: Dale Rogers, Reverse Logistics Executive Council)

About the Author

Tom Andel | Editor-in-Chief

Tom Andel is an award-winning editorial content creator and manager with more than 35 years of industry experience. His writing spans several industrial disciplines, including power transmission, industrial controls, material handling & logistics, and supply chain management. 

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