Reverse logistics

Olaf Schatteman
2.12

A critical area of the supply chain is reverse logistics. Traditionally Reverse logistics moves
defined as the process of moving product from its point of product from the point of
consumption through channel members to the point of origin to consumption to the point
recapture value or ensure proper disposal, this chapter uses a more of origin to recapture
holistic definition. Reverse logistics includes activities to avoid value or ensure proper
returns, to reduce materials in the forward system so that fewer disposal.
materials flow back, and to ensure the possible reuse and recycling of
materials.
Returns can affect every channel member from consumers, retailers
and wholesalers to manufacturers. Returns are caused for different
reasons depending on who initiates them – end consumer, wholesaler
or retailer and manufacturer – and on the nature of the materials
involved – packaging or products. Reusable packaging is becoming
more and more common, especially in Europe where manufacturers
are required to take back packaging materials. This chapter will focus
mainly on reverse supply chain for products.
The size of reverse logistics is considerable. According to Stock et al
(2001), reverse logistics costs are as high as 4 per cent of total logistics
costs, which amounts to an estimated $35 billion in 2001 for the US
alone. Consumers cause most product returns. According to a survey
of 311 logistics managers in the US in 1998, average consumer returns
across retailers are 6 per cent. Table 2.12.1 shows the return
percentages for different industries.

Characteristics of reverse logistics

The reasons for returning products can be distinguished by where the
returns initiated. Listed below are the main return reasons for each
supply chain partner.

267
268 Operational excellence

Table 2.12.1
Percentage of returns by industry
Industry Percentage
Book publishing 10–30%
Magazine publishing – special interest 50%
Computer manufacturers 10–20%
Direct to consumer computer manufacturers 2–5%
Apparel 35%
Mass merchandisers 4–15%
Auto industry (parts) 4–6%
Internet retailers 20–80%

Source: Adapted from Dawe, 1995

Customer not satisfied

Consumers may take Most manufacturers and retailers allow customers to return products
advantage of a money- if they do not meet their demands within a predefined period. Money-
back guarantee, have back guarantees are standard practice for most direct sales channels.
problems with product Consumers and retailers will sometimes abuse the return policies of
installation or return a manufacturers. Consumers wanting to try a new product will
product because it is sometimes abuse the ‘not satisfied, money-back’ guarantee and
faulty. simply return the product within allotted return period and receive
their money back.

Installation or usage problems

Some customers experience problems with installation or usage of
their recently acquired products. They perceive the product to be
defective, while the reason for dissatisfaction is actually caused by
difficult set-up or installation procedures or unclear instructions. This
is a common problem in the computer industry where in some
categories such as CD-ROM drives, return rates of 25 to 40 per cent are
not uncommon. Complicated installation procedures and a lack of
clear and simple instructions exacerbate the issue.

Warranty claims
Defective products or parts can be sent back to retailers or the
manufacturer for repair. Products might either be dead on arrival, not
working according to specifications or cosmetically damaged. This
could happen either to the retailer or the end consumer. Alternatively,
products might break down during the course of their life cycle. If
the product is still within the warranty period extended by the
manufacturer customers might return their product to the manufac-
turer or if that period has expired, customers could take up other
options such as taking the product to a specialist repair center.
 Reverse logistics 269

Faulty order processing

Both end consumers and retailers can experience shipping problems. Shipping problems,
Products need to be delivered in full and on time or customers can unsold stock, the end of a
make claims against manufacturers and return (part of ) their life cycle or serious
shipment. Examples of delivery problems are incomplete shipments product flaws can
or missing parts, wrong quantities, wrong products, duplicate prompt the return of a
shipments and untimely delivery, which can cause the customer to product.
miss out on the intended use of the product.

Retail overstock
Manufacturers can provide resellers with the luxury of returning
unsold stock. This is a common practice in the book industry, for
example. Retailers that need to make their accounting figures look
good for the end of quarter or month will sometimes send significant
amounts of unsold stock back for credits, only to reorder it again after
the end of a financial period.

End of product life cycle or product replacement

Once a product has reached the end of its lifecycle, many
manufacturers want to get it out of the retailers’ shelves as soon as
possible to prevent sales cannibalization of the new version. This
means that the old products have to be disposed of. Manufacturers
either have to take the stock back, based upon the conditions agreed
with the retailers, or the latter need to dump the old version quickly.

Manufacture recall programs

Serious flaws in a product can lead to a recall, instigated either by the
manufacturer or a government agency. Common recalls appear in
the automotive, pharmaceutical, and the toy industry. Aside from the
safety issues in such situations, getting the discredited product out of
circulation and into designated storage centers as soon as possible is a
crucial part of damage limitation strategies. It is a grim deadline that
any company would prefer not to have to meet, but many do. The US
Consumer Product Safety Commission in 1999 reported 304 corrective
actions involving over 75 million consumer product units of various
types that either violated mandatory safety standards or presented a
substantial risk of injury to the public.

Other complications

The green factor

New environmental laws are being enacted worldwide and more Environmental and
stringent compliance to these laws is required. The laws are often economic considerations
accompanied with serious financial implications. The few managers have led to
who implemented reverse logistics in the past usually did so because manufacturers taking
it was environmentally responsible. Today, the green factor has their products back at the
evolved to a bottom-line issue. In the past once a product left the end of their lifetime.
270 Operational excellence

manufacturer’s factory doors the responsibility to dispose of the

product also disappeared. However, legislation in Europe and in the
US is changing, sometimes even making manufacturers responsible
for disposal of the product at the end of its life cycle, such as in
Germany.
Previously manufacturers could easily dispose of products in a
landfill; today there are strict environmental regulations as to how
much and what can be dumped. Certain hazardous materials such as
chemicals and heavy metals are banned from disposal in landfills,
while other products are banned because they can be recycled and
therefore should not take up valuable landfill space. Landfill costs
have also increased steadily. These environmental reasons along with
economic considerations cause a growing number of manufacturers to
take their products back at the end of their lifetime.

Electronic commerce
The emergence of selling via the Internet has led to many companies
focusing on their reverse logistics capability; with the rise of electronic
business channels, there has been a significant increase in consumer
returns. Some electronic retailers estimate that up to 50 per cent of
their goods sold on the Internet are returned. e-commerce has
propelled the amount of returned products to levels demanding
every executive’s attention.
For electronics and high-technology products, electronic retailers
report return percentages in certain product categories of up to 80 per
cent. Any manufacturer not paying attention to reverse logistics is
basically siphoning profits from the bottom line. With online
transactions growing fast, independent analysts, Gartner and Jupiter
Media Metrix, expect overall returns to increase drastically over the
next few years. The emergence of e-business does not only pose a
threat but also an opportunity to improve the total cost of returns.
New business models also allow companies to redesign their entire
reverse logistics capability in their own and their customer’s favor.
How this can be done will be discussed later in this chapter.

Shorter product life cycles

Product life cycles of many products, especially in the electronics and
high technology industry have reduced drastically. This has led to
advanced supply chains to move product out to customers with
minimal stock, because obsolescence rates are high and the value of
finished goods inventory of computer equipment loses up to 12 per
cent per month. Equally important, therefore, are the speed and cycle
time with which returned products can be turned around. This will
have a tremendous impact on the company’s bottom line. Very few
companies, however, appear to be giving the manufacturer inventory
visibility on returned items. Manufacturers often only learn when the
products hit the unloading docks at their warehouses.
 Reverse logistics 271

Complex and underdeveloped area

The traditional view, however, is that reverse logistics adds no value to When logistics managers
the supply chain and places retailers and manufacturers under suddenly have to throw
additional financial pressure. The state of awareness and development their supply chain into
of reverse logistics is analogous to that of inbound logistics 10 to reverse, they face all
20 years ago. Where firms once only concentrated on physical kinds of problems.
distribution and gave little attention to inbound materials management,
so, too, do many organizations give little attention to reverse logistics.
This is demonstrated by the fact that there are few dedicated resources
in charge of managing the entire returns process.
Many departments own a piece of the process, customer service,
logistics, operations, accounting and sales. Behind every returned-
goods transaction are complex inventory control, information
management, cost accounting and disposal processes. It especially
becomes complex in the pharmaceutical industry where returns
management is placed under strict regulations of drug enforcement
bodies. Organizations handling returns must be licensed and are
subject to audits. When there are discrepancies between what a
pharmacist claims has been returned and what the manufacturer
received investigative procedures take place and parties can be fined.
Another key issue is that most supply chains are specifically
designed to go forward. When logistics managers suddenly have to
throw their supply chain into reverse they face all kinds of problems
that have not been accounted for in the logistics system. This is
especially the case with recall programs. When a company does not
have the right solution or does not have a plan at all, it could lead to
serious problems, particularly if the consumer’s safety is involved.
Dr R. Dawe (1995) has described a number of symptoms that
indicate whether a company could have a problem with its reverse
supply chain. They are: returns arriving faster than processing or
disposal; large amount of returns inventory held in the warehouse;
unidentified or unauthorized returns; lengthy processing times;
unknown total cost of the returns process; and customers losing
confidence in the repair process. Supply chain executives recognizing
any of these symptoms should find some ways to alleviate their
organization’s problems in the next section.

Attacking the returns challenge

The volume and the method of processing returns drive the total cost Companies can use their
of returns. Companies can reduce the costs associated with returns returns process
considerably through a number of different ways and even use their capabilities as a
capabilities as a competitive weapon. The most important levers an competitive weapon.
organization can use to make their returns work best are outlined
below. Companies can change the way they are organized to manage
returns, alter the way they process returns, use advanced technology
272 Operational excellence

Local
Collection Sorting Disposition
Screening

Figure 2.12.1
Four key steps in the returns process

to process more efficiently and to prevent returns or ultimately

outsource their entire returns supply chain.

Improving the process

The four key steps involved in a returns process are local screening,
collection, sorting and disposition, as shown in Figure 2.12.1.

Local screening
Screening products at the Local screening is done at the point of collection of the returned
point of collection helps products. Often products enter the supply chain that should not enter
to ensure correct in the first place and cause unnecessary transportation, administration
decisions are made and and handling costs. In an ideal reverse supply chain, products are
excessive costs are screened at the point of collection according to specifications of the
avoided. manufacturer. Disposition, however, changes based on the product (or
its version), the vendor and the retailer. Therefore, complex decision
mechanisms need to be maintained to allow disposition of product
based on customer agreement on a product-by-product basis. With the
ubiquitous presence of the Internet plenty of opportunities exist to do
this in a cost efficient and effective way. This will be discussed in more
detail in the Technology section.
A good example of effective local screening is the process
implemented by Nintendo, the video game manufacturer. Nintendo
rewarded retailers financially for registering the product and name of
the purchaser at the time of sale. This allowed the retailer and
Nintendo to determine when the warranty of a product had expired
and also whether the product was returned within the allotted time
window. To facilitate this process, Nintendo designed special
packaging with a see-through opening for retailers to scan the product
serial number when the product was sold.
Another example of innovative local screening is a global copier
manufacturer in Europe. It provided its field service technicians
throughout Europe with a scanner connected to a handheld device,
which determined if technicians had to return their defective spare
parts to a central location in Europe for repair or refurbishment or
whether they could dispose of the parts locally. On top of the system
they worked with colored stickers that indicated the destination of the
part to facilitate processing. They were able to reduce half the amount
of parts returned through the system, which resulted in significant
transport savings.
 Reverse logistics 273

Collection
There are many different ways to collect the products that are destined Different systems are
to enter the reverse supply chain. Retailers often have to send their needed to process
return products back to their suppliers’ different warehouses returns, particularly
throughout the country. Different processes need to be set up to because of the complexity
facilitate timely processing of these returns. This can often be very of the process and the
complicated and confusing for both retailers and manufacturers as multiple parties
they are dealing with multiple parties, many of whom are involved.
concentrating on getting products out to the customer, rather then
back to the source.
Many companies have trouble running a logistics system in
forward, let alone running one in reverse in parallel at the same
time. Some companies have set up central collection centers for
collecting and sorting returns, which have proven to be very effective.
Ford in the US, for example, is now using one single carrier to handle
all its returned spare parts. Simultaneously, it has provided the dealers
with one single 800 number for all their issues with returned parts.
Subaru of America has gone one step further: it has outsourced the
entire returns collection to Roadway Express’ reverse logistics
subsidiary, Rexsis. The dealers call one toll-free number regardless
of the issue and Roadway Express handles all inquiries.

Sorting
Some large retailers have been using centralized return centers (CRCs) CRCs are often more
for many years. They have selected centralized return centers efficient and result in
dedicated to handle their entire reverse logistics operations. The better asset recovery and
advantages of using centralized return centers are numerous. When a higher customer
company dedicates an entire facility, organization and system to satisfaction.
optimize the handling of returns, benefits arise from a whole range of
areas. Some of the key benefits are: efficiency can increase as
employees occupy positions full-time and can focus on handling
returns only, experience in the sorting process will help employees
make better and quicker disposition decisions, and cycle times will
improve, resulting in better asset recovery and higher customer
satisfaction. GM in the US, for example, has in cooperation with UPS
centralized its parts return center. Dealers once returned parts to some
200 locations, which was very confusing. Today all returned parts –
30 000 a month – go to the Orion facility.
In any case, whether it happens in a centralized way or not, sorting
is a crucial step in the reverse logistics process because employees
make decisions on what ultimately happens to the returned product.
Complex business rules underlying these decisions need to be
updated continuously and designed so that employees can implement
the rules easily. Use of bar code scanners connected to a database that
contains those business rules speeds up the process and avoids
judgmental errors. Information technology is a key in this process and
will be discussed in more detail later. In the near future use of radio
274 Operational excellence

frequency (RF) tags can automate this process even further. RF tags are
already used on expensive products, however their current price does
not yet allow them to be applied to mass consumer goods.

Disposition
Disposition should Three ways to dispose of product can be distinguished: sell as-is,
maximize the value of repair or reuse (part of it) and ultimately dispose of the product. Some
reclaimed goods or key activities within each of these categories are:
dispose of the goods in
. Sell as-is:
the most cost-effective
– resale (as new)
way.
– sell via outlet or discount store
– e-auction, and
– sell to secondary market
. Repair or reuse:
– repair
– refurbish or remanufacture
– modify and
– recycle
. Dispose:
– scrap
– donate (to charity), and
– dispose in secure manner (for example, certain drugs).
Disposition should be done to maximize the value of reclaimed goods
or dispose of the goods in the most cost-effective way. Below are some
innovative ways leading practice companies have adopted to improve
the disposition of their returned items.

Create profit centers

Some companies have gone as far as to create profit centers around
their returns process. This focuses the organization on maximizing
the prices they will get for the goods by exploring innovative ways
to sell their returned goods. Manufacturers refurbish the product
and auction it through the Internet or redeploy it to, say, outlet
stores. A key problem in selling returned goods is price setting.
Experts in sales and marketing techniques usually set prices for new
products. Returned goods prices are frequently determined through
negotiation.
Organizations need to be However, one thing organizations need to watch out for when
wary of cannibalization reselling their returned items in general, and in particular when setting
when reselling their up profit centers around returns, is cannibalization; the returned
returned items or setting goods channels can potentially steal clients away from the primary
up profit centers around products and channels. A clearly defined channel and pricing strategy
returns. needs to take this into account. More brand-sensitive companies for
example will take back returns to keep them from being sold through
alternate channels, and then sell them in their own highly profitable
outlet stores. In the publishing industry, some publishers have
 Reverse logistics 275

contracts with certain authors that prohibit their titles going to

alternate channels to protect their ‘brand’ name.

e-auction
To obtain the highest prices for returned items, some service providers
have set up capabilities to coordinate returns and help manufacturers
recoup some of their costs by reselling returned goods on Internet
auction sites. One example is ReturnBuy.com, a Virginia-based
company in the US that serves the high technology and computer
industries. The company uses an Internet-based yield optimization
technology to resell goods online. It claims it enables its customers to
obtain a much higher price for the goods than through the average
liquidator. Another example is the industrial automotive industry,
where some manufacturers have set up B2B web sites where
customers can buy second hand equipment or certain spares from
each other, negotiating on the web site. The selling customer then
simply ships the equipment or part directly to the web site buyer.

Change to leading practice organizational structure

One way of dealing with reverse logistics is to segment the supply Segmenting the supply
chain into separate forward and reverse organizations. If a logistics chain into separate
organization deals with both forward and reverse product flows, the forward and reverse
focus will predominantly be on forward product logistics. Often organizations can
physical constraints, such as the number of docks and processing improve efficiency.
space in distribution centers, can limit an organization’s capability to
effectively handle both logistics flows. When executives have to make
decisions around shipping new product out versus processing
returned goods, the decision is usually made in favor of the first.
As mentioned, the creation of profit centers around the returns
process is a way of maximizing the value from returned products.
Estée Lauder has, after a very successful reverse logistics project,
created a $250 million product line from its return goods flow, now
representing the third most profitable product line within the
company. Centralized return centers have also proven to be a
successful way for companies to handle returns more quickly and
efficiently. Cost savings most often are realized in labor, due to scale
and dedication, and transport, due to consolidation of freight.
Outsourcing is another way of effectively organizing the returns
process. Several leading manufacturers and retailers, such as Compaq,
Thomson, Target and 3M, have very successfully outsourced their
returns processes to competent, dedicated solution providers.
Ultimately, companies such as Dell have taken structural steps to
avoid the majority of returned products by developing a build-to-
order or configure-to-order operating model, which addresses the
underlying issues of why returns occur in the first place. These
business models are, however, not applicable to every industry or
product.
276 Operational excellence

Implement state-of-the-art information technology

Collecting the right Not many leading software manufacturers offer specialized capabilities
information to allocate to handle reverse logistics. The maintenance, repair and overhaul
and accurately calculate functions in enterprise resource planning (ERP) suites from vendors
debits and credits is such as Baan, Great Plains and Oracle provide some support for
crucial for manufacturers reverse logistics processes. A number of specialized companies have
and distributors. developed packages to deal with returns. While integration with back
office functions remains an issue, the widespread use of Internet
technology has substantially improved the way different supply chain
partners can communicate with each other. Online return capabilities
and electronic processing of returns drastically increase the speed with
which returns can be handled, increase customer satisfaction and can
reduce costs by more than 400 per cent. According to the Gartner
Group, electronic handling of returns costs $4.05 versus $25 if the
return is handled by a call center. Information technology should be
used in every step of the reverse logistics process, from local screening
right through to disposition.
In the local screening process, customers and retailers can simply
go to the manufacturer’s website, search by stock keeping unit (SKU)
or order number to identify the product to be returned, and check its
return parameters to see if it can be returned and how to do it. For
example, the customer can enter the details of the return on the web
site and drop the product in a specified location such as the local post
office. If the software can also capture the reason for return, it can
determine disposition up front, cutting transportation costs and
processing time.
Collection is also simplified as manufacturers have a much better
understanding in advance of how many products are to be returned
and where they are located so that freight can be combined. An
example of a sophisticated solution is Return Valet by catalog retailer
Spiegel Inc. In cooperation with Newgistics and local post centers,
Spiegel has developed a capability where customers can return their
mail-ordered product to a local post office. The clerk validates and
checks the return procedure online, prints a receipt with credit amount
and sends the product back to Spiegel’s distribution center, which
issues the credit when the product arrives. Collecting the right
information from customers and retailers in order to be able to allocate
and accurately calculate debits and credits is crucial for manufacturers
and distributors.
If product return information is entered into a system at point of
return and matched with the product’s bar code or product number,
it will considerably ease matching and issuing of credits before
sorting the goods. Managing returns online can contribute sig-
nificantly to this process by, for example, using screens that force
customers to enter required data, so receiving companies can keep
track of required information to process returns quickly and
accurately. In the disposal process, as described earlier, Internet
 Reverse logistics 277

technology can also contribute by providing online auction services

to maximize revenues from returned goods. Alternatively it can be
used to connect to third party logistics providers to arrange for a
quick and proper pick-up of returned products and transport to their
next destination.
In the central sorting process, information technology helps
employees in the complex decision making process of final destination
of the returned product. The computer maintenance company
DecisionOne, for example, uses Kirus software, which includes its
customers’ (Compaq, Dell, Sun) own decision rules for deciding
whether to repair, disassemble for parts, redeploy or scrap returned
products.
Finally new information technologies can be used to analyse return
reasons and provide valuable information to prevent future returns.
The next section will deal with this topic in more detail. Many
companies are, however, still developing proprietary software to
manage their reverse logistics process. Price of available systems and
cost of integrating existing packaged systems is often mentioned as a
reason for their internally developed systems.

Analyse to prevent returns

Root-cause analysis should be at the heart of every reverse logistics Analysing data on why
system. A return goods management system provides a window into customers return goods
manufacturers’ faults. Companies need to look beyond the processing can provide insight into
of returns to reduce their reverse supply chain cost. The real benefit faults and help to reduce
comes from sharing information with design, production, packaging reverse supply chain
and other departments on such things as what products are coming costs.
back and why they are coming back. This way reverse logistics
systems can nip return problems ‘in the bud’. Companies that
concentrate solely on improving returns processes will miss significant
cost saving opportunities. A good reverse logistics system includes
proper data collection and effective reporting. To understand a
consumer’s reason for returning a good, companies must collect
structured and consistent data concerning the reason for the return
and the product and its condition. With this information, trends
should be analysed in individual products and consumer segments to
determine root causes.
Mitigating the front-end process by providing front-end customer
service and technical support can also help companies reduce returns.
Some manufacturers, for example, ask customers for a serial number
of their printer when they order cartridges to ensure they receive the
correct types. Another good example is Sharp consumer electronics.
At one time at least half of the products returned were in perfect
working order. To counter this they added simple but effective
elements to their reverse logistics program. Through analysing return
reasons Sharp could significantly reduce its VCR returns by making
products easier to set up. Now, for example, the clock on the VCR is
278 Operational excellence

set automatically, the owner’s manual has been simplified and

customers are encouraged to call a prominently displayed toll-free
number when they have installation problems.

Outsource the returns process

Outsource suppliers are Outsourcing of the returns process is also occurring on a more
reverse-flow specialists. frequent basis and seems to be an alternative to avoid high
They can achieve investments in reverse logistics e-capabilities. Manufacturers such as
economies of scale and Compaq, Dell, Cisco and 3M and retailers such as Sears have
also provide value-added outsourced the handling of the reverse flow of goods. These
services. companies decided the handling of returned goods was not a core
competency and saw significant benefits in taking the flow of returned
goods out of their distribution centers and placing it into the
operations of outsourcers. These outsource suppliers have become
specialists in managing the reverse flow of goods and can achieve
economies of scale. They are often in a much better position to handle
the returned goods and can provide value-added services such as
refurbishment.

Successful reverse logistics projects

Throughout this chapter many companies have been named that have
engaged in one way or another successful reverse logistics projects.
A good example of a complete reverse logistics program is a project by
cosmetics manufacturer Estée Lauder. The firm used to dump
$60 million of its products into landfills each year, destroying more
than a third of the name brand cosmetics returned by retailers. Estée
Lauder made a small investment of $1.3 million to build its
proprietary reverse logistics system of scanners, business intelligence
tools linked to an Oracle database. The company has apparently
recovered its investment in the first year through reducing labor and
other costs.
Estée Lauder has reduced its production and inventory levels
through its increased ability to put returned goods back on the market
and the availability of better data on the reasons for returns. In the first
year Estée Lauder was able to evaluate 24 per cent more returned
products, redistribute 150 per cent more of its returns, reduce the
destroyed products from 37 per cent to 27 per cent and save about $0.5
million in labor costs. After implementation, Estée Lauder even
considered making the system commercially available through a
consulting firm that could serve as a reseller of the software.
When companies decide to embark on a reverse logistics project
they can leverage knowledge, tools and processes from other
successful projects such as Estée Lauder’s, to prevent them from
reinventing the wheel. Together with specialist service providers in
the reverse logistics arena, significant improvements can be made to
reduce costs, improve customer service and increase revenues.
 Reverse logistics 279

Conclusion
The economic demand for reverse logistics capabilities is driven by Organizations have
two different factors; first, companies are starting to realize the many opportunities for
economic value of sound returns management, and second, legal improving the way they
environmental developments are requiring manufacturers to be fully manage their product
responsible for products over their entire life cycle. Online retailing returns.
and shortening product life cycles, mainly in the electronics and high
technology sector, have increased the pressure to build strong
capabilities in this area, or to outsource the handling of reverse
logistics flow. Organizations currently have many opportunities for
improving the way they manage their returns, from improving the
process and using more sophisticated software to changing the
organization or outsourcing the entire process. Smart executives will
be looking to capture the value that is locked within the reverse
supply chain.

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