The Supply Chain in Reverse

By John Reece

Reverse Logistics, also known as Returns Management, can be defined as the science of taking something back into “forward-available” inventory in a documented, orderly fashion.

For plant-based shredding facilities and warehouses, automating the Reverse Logistics process is becoming more important as original equipment manufacturing companies today look to maximize the value of returned consumer electronics, computers and peripherals, and telecommunications equipment.

Reverse Logistics can be broken down into two general categories. The first category is warranty returns. Companies with warranty programs are set up for returns, because they learned early on to think in reverse. Though quantities vary, they are fairly predictable because they're based on products' historical service lives. As items are repaired, they are repurposed in forward logistics mode, because for warranty items there is a natural drive to be “forward-focused.” That's what logistics officers do: Move goods out of the warehouse and into the demand chain, as companies historically make money selling things, not taking them back into warehouses.

The second category accounts for $50 billion each year, fully half of the value of goods in the Reverse Logistics system, which overall is .5 percent of GDP. These goods have never been used, are not in need of repair, and are available for immediate resale; these items can be readily restocked and resold, e.g. dozen of pallets of hard drives returned by a computer maker who over-ordered for seasonal manufacturer. Or overstocked products returned because the distributor didn't want to keep them in inventory: 150,000 feet of coax, 15,000 empty containers. These items at no penalty to the end-user are often shipped back and arrive, sometimes unexpected, on a “forward-facing” loading dock. Workers are often baffled by what to do with returned perfectly good items, often in mixed lots.

What so difficult about just putting items away? Well, today's ERPs, CRMs, and WMS-RMAs are not set up to take back new products. As simple as it seems, inbounding products through Reverse Logistics is a data management challenge. Items come back as fractional pallets, or mixed lots. Though the outbound shipment process may have had a rigorous system for allocating and organizing SKUs and printing compliant labels, the end-user you shipped the product to may not recognize your system. Mixing of batches, mixing lots, and mixing categories of products is common. Pallets can come back with just 10 percent of their inventory used, yet the SKU initially assigned to that pallet does not allow for a quantity adjustment. So, for lack of the flexibility required to deduct an item from a gross amount and issue a new SKU, a nearly full pallet of goods sits “unavailable” on the warehouse floor. Someone has to take on the relatively tedious process of breaking that pallet down, separating out the mismatched items, generating the proper labels and repositioning that pallet, or fractional pallet, so it can be resold.

According to AMR, it takes twelve steps to process inventory inbounded through R everse Logistics Management for every one step required in forward logistics. And the impact on even small companies can be dramatic. For industrial equipment, the return rate is over 8 percent and the total revenue impacted by returns is $105.6 billion in 2005, in just the U.S. alone. For computers and network equipment, the return rate reaches as high as 20 percent, for a 2005 total of $65.8 billion, up from $61.4 billion in 2004.

So, the opportunity is large, and recovering returned good-as-new products can have a dramatic impact on a company's bottom line. In the past, this has often been overlooked by supply chain managers, but it has not been lost on CFOs and CEOs who see Reverse Logistics as one of the last frontiers where waste can be squeezed out to make the overall numbers look as positive as possible. What supply chain managers view as an annoyance, C-level officers see as a potentially huge profit center when handled properly.

According to the Reverse Logistics Executive Council , the percent increase in costs for processing a return, compared to a forward sale, is an astounding 200-300 percent. It costs three times as much to process the Reverse Logistics of new items as it did to process the forward logistics to sell it. According to Gartner, the percent that net profits are reduced by improperly handled returns is 35percent, so it pays to get Reverse Logistics right.

Automating the Reverse Logistics Process

Many insightful companies have been highly disciplined about returns authorization in the form of an RMA label. But this practice seems to be contained to companies that do nothing but Reverse Logistics. The Logistics Manager is already “thinking in reverse,” and it is rare – though less and less rare – to have this level of automation at the industrial level for the return of a new large quantity of otherwise saleable products.

A few approaches to Reverse Logistics have already been tried and shown to be inefficient . Pre-printed return labels: This guarantees only that returned inventory will be shipped to the proper address. But these labels don't declare quantities or lots. Other companies have tried call centers. But human invention in a returns process is costly. However, if you were to automate your Reverse Logistics with a web interface that demanded an RMA and compliant label before any return – it would save 50-70 percent over a live call center, according to Gartner. If you were to set up an entirely web-based RMA system that linked directly to your ERP, your company can save 50-80 percent over pre-printed return labels, again according to Gartner. So, that is clearly the path for insightful companies. Indeed, the C-level officers are eager for it, and the return-on-investment for an Enterprise Returns Management (ERM) system can be achieved in a remarkably short time, given the margins at risk. Set up a web-based RMA system, link it to your ERP, and train your customers to respect and adhere to your rigorous returns process, as enforced by web services. This need not alienate your customers, nor be perceived as inflexible. Indeed, returns can be made remarkably easy, given the flexibility built into powerful ERPs for manipulating highly granular data, the wide availability of “distance printing” of customized “returns compliant” labels, and the availability of sophisticated web services that can access and distribute data from a central ERP… and update that ERP with awareness of inventory that is heading back to the warehouse, and better yet, what to do with it once it arrives.

John Reece is president and CEO of ClearOrbit. The company provides real-time supply chain execution (SCE) software solutions. ClearOrbit was founded in 1994 and currently serves more than 250 leading manufacturing and distribution companies including Cisco Systems, and Texas Instruments. www.ClearOrbit.com.

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Summary Facts About Reverse Logistics

1) Percent of total U.S. logistics costs consumed by Reverse Logistics management: 10 percent.

2) Percent of goods sold returned to computer manufacturers: 10-20 percent.

3) Percent of goods sold returned to catalog retailers: 18-35 percent.

4) Number of steps required in Reverse Logistics management for every one step required in forward logistics: 12.

5) Percent increase in costs for processing a return as compared to a forward sale: 200-300 percent.

6) Percent that net profits are reduced by improperly handled returns: 35 percent.

7) Savings that an automated, online return template can save over “live call center” costs: 50-75 percent.

8) Savings that web-based returns merchandise authorization (RMA) can save over pre-printed return labels: 50-80 percent.

9) Industrial equipment return rate: 4-8 percent.

Total revenue impacted by returns $105.6 billion.

Computers and network equipment return rate 8-20 percent.

Total revenue impacted by returns: $63.8 billion.

10) The overall average returns rate is 8.46 percent, but high tech returns can be as high as 20 percent.