What is Reverse Logistics?

by Karen Hawks Logistics is defined by The Council of Logistics Management as: The process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements. Reverse logistics includes all of the activities that are mentioned in the definition above. The difference is that reverse logistics encompasses all of these activities as they operate in reverse. Therefore, reverse logistics is: The process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. More precisely, reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Remanufacturing and refurbishing activities also may be included in the definition of reverse logistics. Reverse logistics is more than reusing containers and recycling packaging materials. Redesigning packaging to use less material, or reducing the energy and pollution from transportation are important activities, but they might be secondary to the real importance of overall reverse logistics. Importance of Reverse Logistics If no goods or materials are being sent backward, the activity probably is not a reverse logistics activity. Reverse logistics also includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, and excess inventory. It also includes recycling programs, hazardous material programs, obsolete equipment disposition, and asset recovery. Software Industry In the software industry, distributors are attempting to cut down retailer returns by implementing just-in-time delivery. However, retailers generally overestimate demand because there is not much incentive for them to forecast carefully. Software manufacturers want the product on the retailer shelves, and often agree

to stuff the channel. The cost of a box of software is low compared to the price. In one extreme example, a software manufacturer contracted with a third party to destroy 50 million copies of one software product. While this particular manufacturer would have preferred to not produce an excess of 50 million, the company believes that it is better to guess higher than lower. Because of these kinds of practices, return rates in the software industry recently hovered around 20 percent. Additionally, releasing more software titles forces returns, because the product life cycles of those titles are contracting. Because their risk is low, some retailers will accept software purchased elsewhere. Other retailers, such as Sears, are trying to reduce returns and improve inventory turnover by reexamining channel relationships. Some of these retailers have begun setting up 30-day return policies. Retail Industry The retail industry, under great competitive pressure, has used return policies as a competitive weapon the greater the pressure, the more innovative the solutions. Within the retail industry, it appears that necessity, indeed, is the mother of invention. Grocery retailers were the first to begin to focus serious attention on the problem of returns and to develop reverse logistics innovations. Their profit margins are so slim that good return management is critical. Grocery retailers first developed innovations such as reclamation centers. Reclamation centers, in turn, led to the establishment of centralized return centers. Centralizing returns has led to significant benefits for most firms that have implemented them. Over the last several years, retailers have consolidated. Now more than ever, large retail chains are the rule. These large retailers have more power in the supply chain than retailers did a few years ago. In general, the large retailers are much more powerful than the manufacturers. Few manufacturers can dictate policy to large retailers such as Wal-Mart or Kmart. If a manufacturer will not accept returns, it is unlikely that the large retailer will accept those terms easily. In some exceptional cases, retailers will make allowances for a manufacturer's products that they believe are not replaceable with similar products. Returns reduce the profitability of retailers marginally more than manufacturers. Returns reduce the profitability of retailers by 4.3 percent. The average amount that returns reduce the profitability among manufacturers is slightly less, at 3.80 percent. Survey respondents were asked how they disposition returns. On average, retailers use a centralized return facility to handle returns much more frequently than manufacturers. Retailers are also found to be more likely to sell returns to a broker or similar entity. They were less likely to remanufacture or

refurbish than manufacturers which would seem logical given that manufacturers are better at manufacturing than retailers. Manufacturers are significantly more likely to recycle or landfill returned material than retailers. It appears that retailers are further advanced than manufacturers when it comes to asset recovery programs. For other disposition options, such as resold as is, repackaging, or donation; retailers responses were quite similar to manufacturers. In the table below, a comparison of disposition options between retailers and manufacturers is presented. Disposition Options between Retailers and Manufacturers Disposition Sent to central processing facility Resold as is Repackaged and sold as new Remanufactured/Refurbished Sold to broker Sold at outlet Store Recycled Land Fill Donated Retailers 29.2% 21.4% 20.5% 19.9% 16.8% 14.5% 14.1% 13.6% 10.6% Manufacturers 17.7% 23.5% 20.0% 26.7% 10.1% 12.8% 22.3% 23.8% 11.8%

Source: Going Backwards: Reverse Logistics Trends and PracticesUniversity of Nevada, Reno Center for Logistics Management. Rogers and Tibben-Lembke

Technology It is clear both from the interviews and the survey instrument that retailers have made larger investments in technology to improve their reverse logistics systems. In fact, manufacturers lag behind retailers in almost every technology category. This difference between manufacturers and retailers does not appear to exist in all facets of an operation. Nearly twice as many retailers as manufacturers included in the research implemented automated material handling equipment. Retailers are also more likely to use bar codes, computerized return tracking, computerized returns entry, electronic data interchange (EDI), and radio frequency (RF) technology to enhance their reverse logistics management. A comparison of reverse logistics technology adoption is presented below:

Comparison of Technologies Utilized to Assist Reverse Logistics Processing by Retail and Manufacturing Segments Technologies Utilized Automated material handling Equipment Bar codes Computerized return tracking Computerized returns entry at most downstream point in supply chain Electronic data interchange (EDI) Radio frequency (RF) Retail 31.1% 63.3% 60.0% 32.2% 31.1% 36.7% Manufacturing 16.1% 48.7% 40.2% 19.1% 29.2% 24.6%

Conclusions Reverse logistics practices vary based on industry and channel position. Industries where returns are a larger portion of operational cost tend to have better reverse logistics systems and processes in place. In the book industry, where great change in the industry structure has occurred in the last few years, returns are a major determinant of profitability. In the computer industry where life cycles are nearly as short as grocery life cycles, the speedy handling and disposition of returns is now recognized as a critical strategic variable. Successful retailers understand that managing reverse logistics effectively will have a positive impact on their bottom line. Industries that have not had to spend much time and energy addressing return issues are now trying to make major improvements. Now, more than ever, reverse logistics is seen as being important. Process Improvement In attempting to improve reverse logistics processes, a firm can move along several fronts. Suggested improvements are listed in the table:
Streamline turn-in procedures Route items with an eye to what happens to them next Integrate the forward and reverse pipelines Explore the potential of commercial software applications or techniques for improving reverse flow management Align financial incentives with improvements

Key Reverse Logistics Management Elements Gate keeping Compacting Disposition Cycle Time Reverse Logistics Information Systems Central Return Centers Zero Returns Remanufacture and Refurbishment Asset Recovery Negotiation Financial Management Outsourcing

Equip Your Warehouse with a Reverse Gear It might be the most ignored aspect of warehouse operations today. But the need for efficient reverse logistics can not be brushed aside anymore. The return, processing, repair and replacement of products have a huge impact on customer service. And the nerve center of any such operation is the warehouse. One hundred percent of WMS packages were designed to get stuff out, says Bill Tyng, systems consultant with Forte Industries of Mason, Ohio. They had to be adapted to get stuff back in. The situation has been more critical in Europe, where retailer policies tend to be more lax and returns can account for 30 percent of ones business. But reverse logistics is taking on increased importance in the U.S. as well. The trend has given rise to a number of niche vendors, offering software or services specifically to handle returns, while the larger integrated vendors are also scrambling to adjust. Reverse logistics can be the black hole of your warehouse, says Mary Haigis, chief marketing officer of Optum Inc. in White Plains, N.Y.,) The returns process involves huge inefficiencies, but theyre manageable with the help of the right technology and processes. She cites a large retailer and customer of Optum that piloted a reverse-logistics application at a pair of its DCs through the Christmas season. The company typically has a high rate of return, she says, but realized incredible savings and efficiencies with the help of a formal system.

Reference Material
Warehouse Management Solutions ASupplyChainBrain.com Online MagazineUpdated: April 2004 Seeking Excellence Within the Four Walls of the Warehouse Going Backwards: Reverse Logistics Trends and Practices University of Nevada, Reno Center for Logistics Management. Dr. Dale S. Rogers, Dr. Ronald S. Tibben-Lembke 1998, Reverse Logistics Executive Council University of Nevada Logistics Council (UNLC) This UNR student organization assists logistics students with career planning, resume development, and industry relations. UNR Center for Logistics Management The mission of the Center for Logistics Management at the University of Nevada is to create and disseminate new knowledge in business logistics and related areas, educate students and practitioners in logistics excellence, and to contribute to the effective practice of logistics management. International Journal of Logistics Management (IJLM) Provides a global forum for the exchange of new ideas and practices in the dynamic field of logistics management and the emerging area of supply chain management. The Council of Logistics Management (CLM) The mission of the Council of Logistics Management is to serve the evolving logistics profession by developing, advancing, and disseminating logistics knowledge. The Educational Society for Resource Management APICS is a not-for-profit international educational organization respected throughout the world for its education and professional certification programs.

Karen Hawks is Vice President of Navesink Logistics Supply Chain Practice and brings particular expertise in operations process improvement, warehousing systems and logistics. For more information on Navesink Logistics, Inc., visit logjobs.com. To contact Karen, send an email to [email protected].