In today’s business context, companies can not longer afford to neglect reverse logistics as an integral part of their supply chain strategy and operations.
Reverse logistics can be defined as “the process of planning, implementing and controlling backward flows
of raw materials, in process inventory, packaging and finished goods, from a manufacturing, distribution or use point, to a point of recovery or point of proper disposal” (source: Reverse Logistics Executive Council,
www.rlec.org).
A recent survey of Deloitte & Arvato shows that reverse logistics represents a significant part of a company’s cost structure, ranging from 0.1 to 1% of the sales value of a product and averaging 0.5%, leading to an annual cost in the U.S. of 200 billion USD. Compared to the cost of goods sold, an average of 7 to 10% is directly or indirectly attributable to reverse logistics.
Next to that,a properly managed reverse logistics flow on average has the potential to reclaim 32% of the original product value.
And the significance of the reverse supply chain is growing! Exponentially increasing return volumes due to more complex devices and changing shopping patterns (e.g. online sales), pressure on process efficiency to reduce costs per incident, the impact of environment consciousness on brand perception and reputation are just a couple of challenges that companies need to deal with in today’s business reality.
A key milestone in successfully mastering these challenges is the transformation of what used to be a solely cost-driven reverse logistics function into a strategic differentiator and profit center. Current business reality demands an increased managerial focus on the return flow as the final piece of the supply chain puzzle.
Some key success factors
• Optimize forward logistics – Although it sounds contradictory, minimizing customer returns by implementing
the correct strategy within the forward logistics will limit the impact on resources needed to support the reverse flow. Often a reverse logistics process is set up as a necessity in response to hidden mistakes in the forward product flow, such as inadequate packaging, inferior raw materials, poor delivery
performance.
• Synergies – Merging forward and reverse flows efficiently allows to fully benefit from synergies
between both flows.
• Product return policy – In a highly competitive environment, companies sometimes tend to encourage the return behavior of their customers by granting e.g. extended warranty time or after warranty service. Equally so, in times of increasing internet sales, companies are sometimes forced into a return culture when the government for example extends the right of return for internet retailing. Product return policies should not only be looked at from a commercial perspective though should be considered from a logistics and operational point of view as well.
• Shorter product life cycle – While return rates vary per industry, common to almost all industries are the
shorter product life cycles, resulting in faster returns. A successful reverse logistics is agile and allows for a
speedy response.
• Consolidation of three flows – Similar to the forward flow, the success of a reverse flow depends on the
degree of convergence between the financial flow, operational flow as well as the information flow.
Pitfalls
• Narrow scope – Within a reverse logistics context, companies tend to focus on ad-hoc transportation
and storage of returned products. Often, the broader aspects of a reverse supply chain are left untouched,
such as designing an effective collection network balancing cost-efficiency (minimal transport expenses
and returns inventory) with market proximity (to lower the consumers’ barrier to return products) and availability
of valorization options (e.g. recyclers, repair centers, etc.); supply chain cooperation and relationship management; and business process design.
• Uncertainty in reverse flow forecasting & planning
– The trigger for the reverse flow comes from far downstream the supply chain. Reverse logistics
happens in response to an action of a customer or supply chain actor and as such is extremely difficult to anticipate or plan for by a company. Amongst others following product parameters may need to be taken
into account: average lifetime of the product, product sales versus expected return areas, capacity of collection
infrastructure, etc.
• Reverse logistics budgeting – A financially sustainable business needs to account for future reverse
logistics expenses. Companies face the difficulty to estimate today what the impact will be on their
margin, budgeting, liabilities, and short to long term financial planning. Transport and valorization costs, sales volume, customer take-back behavior, government incentives, reverse technologies, and so forth
need to be considered in this exercise.