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 . . . but in reverse! Reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Re-manufacturing 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 better placed in the realm of “green” logistics. If no goods or materials are being sent “backward,” the activity probably is not a reverse logistics activity. In the retail industry, reverse logistics primarily deals with 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.
 
Increased Interest in Reverse Logistics
Awareness of the art and science of logistics continues to increase. Companies that previously did not devote much time or energy to the management and understanding of reverse logistics have begun to pay attention. Similar to the benchmarking of IR programs by many members of the Investment Recovery Association, forward-looking firms involved with reverse logistics are benchmarking return operations with best-in-class operators. Some firms are even becoming ISO-certified on their return processes.
 

Third parties specializing in returns have seen a great increase in the demand for their services. The Reverse Logistics Association is a trade association focused on third-party service providers (3PSPs) who are providing aftermarket supply chain services. The Association monitors 1,400 such companies in its database of worldwide industry suppliers primarily supporting the automotive, computer, consumer, IT, medical, pharmaceutical, retail, telecom, and WiFi industries.

 

Recovering Assets One Customer at a Time
For companies dealing with consumer goods (either as manufacturer or retailer), reverse logistics is mostly focused on returns. Reverse logistics starts with making the returns process easy for consumers, while imposing sound and fair return policies. Depending on the nature of the business, companies may choose to accept returns via Web site or phone, and/or in-store. In each instance, products can either be taken back as is or may require a return merchandise authorization (RMA) number. This permits the return of the product by providing an inbound tracking number to assist in the receiving process. Businesses also have the option of including a return label with an RMA in the original packaging. While RMAs are optional, they provide authorization, verification, and automation benefits not found with blind returns.

 

Before a B2C return is accepted, a verification process must take place to ensure that unauthorized returns are not taken back. In 2003 alone, Philips Consumer Electronics billed back $4.5 million to retailers for unauthorized shipments of returned goods by capturing information at the point of sale. Having a system in place that can check to see if an item fits specific time constraints (often companies will have a 30-day return policy), is under warranty, or is in fact a product that was bought from that specific company can help stop unapproved items from moving through the point of return and avoid unnecessary shipping and processing costs.

 

RMAs can further expedite this process by providing real-time historical information on items. Once authorization is received, goods move through the remainder of the reverse logistics process. The return history provided by RMAs helps reduce fraudulent returns, minimize human error, cut costs, and improve customer satisfaction levels. According to Geri Spieler of Gartner Research, in online sales alone, automating the front end of returns offers an opportunity to reduce costs as much as 73%. This is because automation provides insight into what goods are on hand, helping companies lower shipping costs and labor dollars and increase asset recovery.

 
End-to-end visibility and control of the returns process are necessary in order to maintain constant communication flow and achieve the highest level of net asset recovery. In the returns industry, net asset recovery is defined as the value for which a returned product is sold minus all costs incurred to make the sale. This includes labor, refurbishment, etc. With constant control from start to finish, companies are in a better position to determine which category a particular item fits into along the asset recovery spectrum—something that is often dictated by the types of goods being sold.
 
For example, durable products such as band-aids or tires can easily be resold since they do not lose value over time. However, food and medicine, which have short shelf lives, are likely to have to be destroyed, leaving only the packaging to potentially be recycled. Some industries, such as high-tech/electronics, may even require an assessment phase, where returned products are examined to see whether they are truly defective or simply need a new component such as a battery.
 
Because requirements vary by industry, it is critical to have the flexibility to track and act on information in a way that suits individual companies’ needs. It is this ability that allows companies to move up the asset recovery scale. The percentage of money recovered increases as you move up the asset recovery spectrum.
 

A successful reverse logistics program goes beyond simply being able to process returns, to doing so in a timely manner. Half of all returned goods take between one and two weeks to be processed; another 25% sit for more than a month. Turnaround time can mean the difference between profit and loss, especially with time-sensitive items. For instance, holiday and seasonal merchandise such as Halloween costumes and bathing suits can only be sold for a brief period of time. In order to expedite the returns process and recover funds, companies must have insight into this returned inventory and the ability to execute against the actions that will yield the highest asset recovery.

 
Businesses Think Ahead, Take a Look Backward
Just as with consumers, B2B returns may be necessary for a variety of reasons. If goods are damaged, defective, or under warranty, manufacturers and distributors are obligated to take them back, just as individual stores would accept an item from a consumer. However, B2B returns differ in that they also may include overstocked goods and vendor buybacks.
 

For example, a company may purchase a certain number of a particular item based on past sales, but be unable to reach that same sales level again. Instead of losing money by having the goods sit on shelves, these companies want to return them for a refund or for credit toward future purchases. This is where the B2B returns process can become more complex.

 
Authorization continues to be a necessary, but challenging, component of the returns process for B2B returns. Distributors and manufacturers typically form agreements with their sales channels to outline the quantity or dollar limit of acceptable returns as part of contract negotiations. This can be impacted by the volume of business transactions between the two companies, past number of returns, and/or the type of goods. Once set, only returns falling within the established parameters would be authorized to be accepted.
 

This system works great on paper, but in the past, distributors and manufacturers did not have the visibility to track this information and ensure that customers were in compliance. Returns were handled by specialized personnel—each with a different responsibility—leaving no centralized resource for information gathering. As a result, distributors and manufacturers would accept returned goods without verification in order to maintain customer service levels.

 

Fortunately, technology and reverse logistics management have evolved to the point where companies can combat this issue. Policy engines in reverse logistics software can establish and execute against an accurate, real-time tracking system to ensure that only authorized merchandise is returned. This technology allows vendors to enter all contract rules and regulations into a system that is accessible by both parties. The system then automatically informs both parties whether a request qualifies for a return. If the return request meets the guidelines established by the distributor/manufacturer and the vendor, rules-based determinations can optimize shipments and transportation costs and coordinate potential backhauls. If the return is not approved, the system can provide an explanation as to why—e.g., already met the agreed-upon dollar limit, need to wait until accruing ten of that particular item before returning, etc. Not only does this save manufacturing/distribution companies from accepting unauthorized returns and losing money, it also prevents the companies making the returns from spending money on shipping only to have the items sent back because they fall outside of established requirements.

 
Turnaround time is extremely important to a successful B2B returns process. For example, PCs lose approximately 5% of their value for every week they are not sold. That means that by holding a return to ship back only when a specified quota is met, both vendor and manufacturer are losing money. Trading partner visibility gives the manufacturer insight into this and enables it to make adjustments and minimize financial losses for both parties. Since many goods, like PCs, decrease in value significantly over time, it is important to have a system that can consider this and other factors and determine alternate processes to maximize value.
 
With a better understanding of B2C and B2B return processes, it is easy to see how the benefits of a reverse logistics management solution can extend beyond initial asset recovery. By providing historical data and reports that specify which items sold, which didn’t, how often goods were damaged, the number of inaccurate orders, and the amount of recaptured value, a solid returns process can have a major impact on an overall logistics program.
 
 
 
Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 4, 2007

© The Investment Recovery Association