Look forward in reverse

July 17, 2006
Business changes in the area of reverse logistics are slowly working their way upstream to the manufacturer. When the manufacturer fully realizes the

Business changes in the area of reverse logistics are slowly working their way upstream to the manufacturer. When the manufacturer fully realizes the extent to which reverse logistics affects the bottom line, perhaps the solution will be to design and build better products to reduce returns, suggests Emily Rodriguez, senior consultant for The Results Group, a firm specializing in reverse logistics. Improvements in product quality certainly could reduce the number of returns. However, the issue most likely won't ever go away completely. Opportunities for managing returns have seen several recent positive developments and there's promise of more to come.

Use new options
While it's still necessary for someone to physically handle returned merchandise, there are greatly expanded choices when it comes to disposition. These choices allow manufacturers to recover considerably more of the value of a product than they used to, according to Dale Rogers, professor of supply chain management and director of the Center for Logistics Management at the University of Nevada. " Auctions such as eBay are creating a giant new secondary market. There also are private auctions between wholesalers and returns brokers to expand the market for returned or unsold merchandise. The past few years also have seen phenomenal growth in outlets stores featuring goods that did not sell in retail stores."

The good news for manufacturers is that the value recovered typically exceeds the cost of reaching those secondary markets, Rogers emphasizes. He cites the example of college book stores that make more money on used books than on new ones. "And eBay brings sellers a pretty high return on product," he adds.

Aim for speed
With more options for disposing of returns profitably, companies are moving toward using these secondary markets right away rather than letting returns sit for long periods of time. "This represents a big cultural change," claims Rodriguez. "Management is aware of the financial advantage of moving quickly and of the breadth of market options. In fact, the companies leading the charge to take advantage of the new options are the smaller companies that couldn't afford to sit on product," she explains.

"As larger companies discover the financial advantage derived from managing returns efficiently, they can afford to invest in software solutions, whether proprietary or through a third party supplier. Returns amount to so much money," Rodriguez stresses, "companies have to find a solution."

Software choices
Development of technology tools that work in reverse logistics is complicated because returns are not a standardized process. "There are so many exceptions it's difficult to automate," says Rogers. "Returns come from different places, in different conditions, with different potential dispositions. And reverse logistics has not been an area where a business typically invests precious IT dollars. As returns increase in priority, the needed investment makes more sense."

"Current software choices for managing reverse logistics come with limitations," Rodriguez suggests. However, shippers should not be discouraged. She predicts much smarter reverse logistics software will be introduced over the next six months. "Now that companies finally understand what's needed to manage reverse logistics, the software will better serve those needs," she adds.

Power to the retailer
Attention to the reverse logistics process has become a higher priority for manufacturers in part due to the increasing size and power of retailers. "As retailers become more powerful, manufacturers are forced to take back more product," Rogers notes. "And as retailers become fewer and stronger, they carry more clout. If a manufacturer has 1000 customers, it's easier for the manufacturer to set policy. If it has five large customers and 30 smaller ones, and one of the five has more than 30% of the business, that customer sets policy," he states.

One of the side benefits of retailer clout has been an increase in the number of service providers emerging to handle returned product. "Over the last two to three years, new third party providers have been springing up to handle reverse logistics," says Rodriguez. "Providers are, in part, responding to the increasing number of end-of-life choices manufacturers can opt for. Rather than end of life, we should call it end of the first cycle. Options for the next cycle have increased dramatically in the last few years.

This awareness and need for solutions has spurred emergence of service providers targeting aspects of reverse logistics."

These service providers bring specialized services such as private auctions, offerings to the general public, or repackaging, re-labelling, and transporting. "Companies that provide the latter have been around for some time," says Rodriguez. "Now there are specialized reverse logistics management firms that never touch the product."

Make early decisions
Perhaps the best thing to come out of increased 3PL participation is an increase in available information. While disposition options are expanding, the companies that actually do the physical handling are getting much more efficient and manufacturers can exercise more control if they can receive information on what is being returned and its condition.

Manufacturers might ask the retailer to accumulate returns and ship them weekly via a manufacturer-selected carrier. Retailers, on the other hand, lack space to store returns, so they are turning to third party service providers to handle the accumulating, storing, and shipping elements of the returns process. As this arrangement evolves, manufacturers might further negotiate with that third party to sort returns and send advance information as to what is being returned and its condition, according to Rodriguez.

"In actual practice, many manufacturers still don't know what is being returned," says Rodriguez. " However, if a manufacturer can receive a list of goods being returned and their condition, managers may be able to reduce handling and shorten cycle time by making disposition decisions earlier in the process."

"If, for example, product is in like-new condition, it may be returned to the shelf immediately. If the third party can verify the condition of the product, it can be sent to another market or disposed of rather than returned all the way to the manufacturer," Rodriguez notes. " Manufacturers can opt to put returned product in an outlet store or auction or ship it overseas. Often, using these secondary markets allows a manufacturer to recover most of a product's value."

Manufacturers have created their own secondary markets that don't encroach on new-product sales. Dell's online store, for example, makes it clear the products offered are refurbished, Rodriguez reports.

Tech aids
"Deciding how to dispose of returned goods is a subjective process that should be made as routine as possible," says Rogers. "To make decisions earlier in the process, companies need a set of rules that can be automated." Technology solutions can help with that process.

Ideally, the returns management process would include information directly from the retailer. "That's the real hope and potential of radio frequency identification (RFID) tags," Rogers insists. "If there is an RFID tag, the type of container doesn't matter. Even if retail products don't have individual RFID tags when they are sold, tags can be added when the product is returned and the customer service rep can program the tag with the product's ultimate destination."

"The more advanced operations are bar-coding and presorting returns and taking steps to control costs. They are being more proactive and less reactive," Rodriguez adds.

Whether a company invests in its own technology solution or uses a third party reverse logistics provider, it's time to look at the new options and begin to recover more of a returned product's value.