Reverse Logistics
Ted Pollock, Pollock Logistics Consulting
An REM Associates Network Affiliate
Burgeoning “remote retailing” sales – catalog and internet -- and liberal returns policies has resulted in increased visibility to what has always been an important logistics concern, the upstream movement of goods, or r everse logistics. “Reverse logistics, the handling and disposition of returned goods, used to be something that happened in the back room and wasn't considered strategic," says John Corrigan, VP and CIO at Estèe Lauder. "It's now being brought to senior management's attention and viewed as an addressable and important part of the business."
How big a deal is reverse logistics? Here are some projections and estimates:
Ø Sample product return percentages:
o Book publishers………..….50%
o Catalog retailers……….…18-35%
o CD-ROMS……………..…18-25%
o Computer manufacturers…10-20%
Ø Estimate of the value of returned merchandise purchased online: expected to reach an estimated $5.8 billion in 2005, representing 90 million items.
Ø Estimate by the Reverse Logistics Executive Council indicates of reverse-logistics costs: may exceed $35 billion a year for U.S. companies. (1999).
Ø Handling costs associated with returns: can reach as high as $50 per item, or up to three times more than handling outbound packages.
While elsewhere in our website we address Supply Chain Network Optimization, it is typically understood that it is the “forward” flow of goods from vendors to (perhaps) plants to distribution centers to customers that is “in play.” However, the volume of returns goods and the benefits to be derived from managing this pipeline reverse flow dictate that many manufacturers and retailers recognize their costs in this arena and the benefits to be derived by managing it thoughtfully. Some key benefits include:
Ø Reduction of production and inventory levels due to the increased ability to put returned goods back on the market and access to better data on why goods are returned
Ø Improvement in cash flow by shortening asset re-utilization cycle times
Ø Lowering of costs through more optimized inventory levels
Ø Enhancement of customer satisfaction…quicker credit, ease of returning goods
Ø Understanding of why customers are returning goods
Ø Better productivity because management spends less time dealing with product return issues
Ø Increased revenue (net sales) as returned goods are back into inventory, sold at liquidation centers, or broken down to component parts.
Again from Estèe Lauder:
"It literally used to take us months to sort through shipments that came to our warehouse," says Corrigan. Today, with the proprietary system in place, boxes of returned merchandise are scanned as they come into the warehouse. The scanned data provides expiration dates for products, and the receiving system calculates whether items can be sold in other markets or at Estèe Lauder's employee stores, or given away to charities instead of being discarded. Inventory levels of the returned items are kept according to their eventual disposition until sufficient goods have been returned to make it economically worthwhile to ship them out.”
During the system's first year, Estèe Lauder was able to evaluate 24% more returned products, redistribute 150% more of its returns, and save $475,000 a year in labor costs. The company destroyed 27% of returned products because they were beyond their shelf life. That's down from 37% in 1998, and they expect to reduce that percentage over the next 18 months to just 15% as the new systems allow Estèe Lauder to move through returns in a more timely manner.
Likewise, Scott Kiner, Manager of Distribution Operations for 3M states that "handling returned goods was not a core competency of 3M." Taking the flow of returned goods out of 3M's seven distribution centers and into the operations of two outsourcers made it easier to manage returned goods because of the outsourcers' economies of scale. The outsourcers also customized their systems to use 3M's business rules for determining what goods should be destroyed, sent back to 3M for refurbishing, or donated.
Lastly, to underscore the benefits of effective management of reverse logistics is BMG Direct’s experience. Executives at this music site realized that the bar codes used on packages of music CDs shipped to customers to meet shipment document requirements could be used to identify returned goods. The company then built a new bar-code scanning system and conveyor belt in a $2 million capital project to speed up the processing of returned goods. As a result, staffing requirements for returned-goods handling were cut in half to 70 people to handle the same volume of 40,000 returns daily. In addition, three to four days were shaved off the time it takes to update customer accounts, and returned CDs in "pristine" condition are now put back into inventory faster.
As more and more companies jump on the reverse logistics management bandwagon, new vendors of outsourcing solutions are emerging and existing ones are adding reverse logistics services to their portfolios.
Internet-supported vendors are emerging, designing and re-designing their business models to compete in this potentially lucrative win-win business environment. In general, their model includes (among other functions): a) use by consumers and businesses of the internet to initiate the returns process, b) a gate-keeping function to screen and direct product flows, c) transportation and processing facilities to move goods in small shipments to central points, process them and move them in large shipments to disposition points, and d) report on all these flows in a timely manner to their clients.
The maintenance, repair, and overhaul functions in enterprise resource planning suites from vendors such as Baan, Great Plains Software, and Oracle provide some support for reverse-logistics processes. Advanced planning and scheduling vendors are also beginning to address the need for manufacturers to be able to forecast returned goods.
Next steps for companies ready to tackle the challenge of optimally managing returns include:
Ø Understanding the costs to service this channel of reverse distribution…the “prize”
Ø Determining and gaining consensus on the need for change
Ø Developing a make or buy – that is, do it yourself or outsource – reverse logistics strategy
Ø Implementing the strategy
Ø Measuring results.
We can help. Our experience in Supply Chain Network Optimization – including total cost to serve assessments, network design and process re-engineering – is directly applicable to the requirements for developing an optimal reverse logistics program. We welcome an opportunity to discuss this timely subject with you.
For a comprehensive treatise on the subject, see:
Reverse Logistics ~ "Going Backwards: Reverse Logistics Trends and Practices"
http://unr.edu/homepage/logis/