How Does Effective Reverse Logistics Reduce Costs Business Essay

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It is believed according to many authors that the practice of reverse Logistics has expanded over the last decade due to increased awareness about the potential economic, environmental and social benefits of product, packaging and material recovery. Reverse Logistics involves material management and physical distribution at all levels of supply chain. These levels are included somewhere within the supply chain subcategories of design, manufacture, distribution and recovery.

Advancement of reverse logistics (RL) concepts and practices are more relevant now than ever before due to Green Energy concerns economic, regulatory and consumer pressure. It has also gained momentum because of fierce global competitiveness, heightened customer expectations, pressures on profitability and superior supply chain performance. The growing concerns about environmental issues, sustainable development and legal regulations have made organizations more responsive to RL. Increased competition, growing markets and a large base of product users in developing countries imply that buyers are getting more power in the supply chain even in these countries. Thus, managing product returns in an effective and cost-efficient manner is of increasing interest in business as well as in research. It leads to profits and at the same time increased customer service levels and higher customer retention. (Srivastava & Srivastava)

In the first major study of reverse logistics published by the council of Logistics management (Kopicki, 1993) focused on adding "substitute" to this framework to give - Reduce, substitute, reuse and recycle. The council of Logistics management published another review of reverse logistics programs which identifies some activities which are specific to reverse logistics, which is also known as the six R's (Stock 1998)

One of the main activities in reverse logistics is the collection of the products to be recovered and the redistribution of the processed goods. Although this problem resembles the standard forward distribution problem, there are also some differences. There are usually many points from which goods need to be collected, the product packaging is generally problematic, cooperation of the sender is much more needed and the goods tend to have a low value. As reverse logistics is quite new, in many cases new networks need to be constructed. Major issues in creating new networks are the determination of the number of layers in the network, the number and location of depots or intermediary points, the use of drop points in the collection, the issue of integrating the reverse chain with the forward chain and finally the financing of the network. (Stock 1998)

The products or the items that are returned can be classified based on the reasons for which they are returned. Some of the common reasons are due to commercial returns, service returns, end-of-use returns and end-of-life returns.

Commercial returns

Commercial returns occur in a wholesaler - retailer or in a retailer - customer setting, where the buyer has a right to return the product, usually within a certain period. The reason behind the return option differs between the cases. In the first setting, the retailer faces the problem of how much he might sell and giving him a buy-back option lowers this risk for him. The returns are likely to be in bulk at the end of the season. In the second case the reason for the return option is that the buyer might not be sure whether the product (or the amount of products) really meets his/her requirements.

Service return cases

Service returns generally arise due three reasons. First of all the products themselves may be brought or sent to a center for repair. If the repair is successful, they are brought back, else a new product or system needs to be bought and the failed one is discarded. Secondly, if one needs a continuous functioning of the product or system, one may directly replace the system or part by a spare one. The part will be repaired later, after which it will enter the inventory of spare systems or parts. Finally, in order for such a replacement scheme to be successful, service engineers need to have replacement parts with them to do the repair. This requires a sophisticated logistic system for ordering and delivering the parts (frequently using in night services). Beforehand however, it is not always clear which new parts are needed and as a result often the engineers order more parts than needed. The leftover parts then need to be returned to the parts warehouse. This is the third stream of returns. (Stock 1998)

End- of-use returns cases

This type of returns is basically concerned with items or products that are temporarily needed by the consumer. The product may either be leased, rented or temporary given into the authority of the recipient. The latter is the case with distribution items, that is, products like containers, bottles, railcars and crates, which are used for distribution purposes. The main issue that can arise due these kinds of returns is that there can be a mismatch between returns and demands in time and place. How much are needed at which location and how much should be relocated within a certain time interval. Most items issued come back, but it is not always known when. (Stock 1998)

End-of-life returns cases

The difference between end-of-life and end-of-use may seem to be smaller but it not the case. End-of-life refers to the intension of recovering valuable parts only whereas in the end-of-use case similar products were made with the returned products. Products and systems not only age intrinsically, but also because their environment puts higher requirements on them. This can be seen in computers and electronic equipment. End-of-life returns are products that are aged and that their functionality (if available) is far below actual standards. Yet they may still function satisfactorily and hence they can be used as source for spare parts for similar systems.

One study by an expert describes the dismantling of returned, end-of-life computers into useable spare parts with IBM. This source nicely combines with return obligations and it s a cheap source for spare parts for systems on which one does not want to spend too much. The problems identified were a lack of knowledge of what actually was in the computers as well as an insufficient information system to handle the operations.

According to Klausner &Hendrickson product take-backs of consumer products is generally expensive, especially reverse logistics. Usually in take-back programs the cost exceeds revenues for recycling the products itself. The best way to make profits is to combine profitable remanufacturing and unprofitable materials recycling. The Profit from remanufacturing could cover the loss from recycling as well as the costs of reverse logistics, allowing the manufacturer a Profit. Since Remanufacturing requires a continuous flow of returned postconsumer products. Firms could control the flow of returned products, by buying back end-of-life products. (Klausner & Hendrickson)

According to Dennis and Chwen Sheu the practice of reverse logistics involves three stages each stage has a set of people or organizations involved with the reverse logistics process, each having their own special interests.

Stage 1: Retrieval

This stage is described as the process of collecting and removing goods from a customer. This stage is affected by the type of product picked up and who does the retrieval from the customer. There are several different operations of the retrieval process. These operations include:

Store level returns retrievals-Store level returns are those returns that are retrieved from any type of store/outlet. This type of return is made up of product recalls, inventory returns, warranty returns, core returns, reusable containers, damaged goods, seasonal items, hazardous materials (HAZMAT) and stock adjustments.

Consumer returns retrievals-Consumer returns are collected from the ultimate consumer. These returns include product recalls, warranty returns and damaged goods.

Collection center retrievals- these retrievals involve product recalls, warranty returns, inventory returns, core returns, reusable container returns, damaged goods, seasonal items and hazardous materials

Stage 2-Transportation

The second stage of the reverse logistics process is considered to be the actual movement of goods from one location back to another location. The transportation stage is extensively involved in all aspects of reverse logistics, since manufacturers are often unwilling to be the final destination of their returned goods. Instead, they prefer to have an outside source or third party logistics company dispose of these goods. As a result, transportation companies are often left holding the goods waiting for disposition information. These companies are recognizing the profitable situation of handling otherwise unwanted returned goods.

Stage 3-Disposition

The final process involves decisions and actions associated with the fate of a product once a customer demonstrates product dissatisfaction. There are two types of disposition, on-site and off-site. Onsite disposition involves activities that take place at the customer's facility to handle issues related to product concerns. The product may be repaired or replaced on-site. Off-site disposition involves shipping the defective product to a different facility for repair, replacement, or disposal.

Reverse Logistics is one of the five processes in Reverse supply chain as mentioned by C. Prahinski, C. Kocabasoglu, the five processes are organized sequentially as product acquisition, reverse logistics, inspection and disposition, reconditioning, and distribution and sales.

Reasons for Returns

In a survey, customers were asked why they returned their products

Eighty-nine percent of online buyers say return policies influence their decision to shop with an e-retailer •

The three leading products returned were clothing (27 percent), computer software (20 percent) and books (15 percent). Source: RLprofessional

2.1 How does effective reverse logistics reduce costs or increase profits?

How reverse logistics increases profits for the organization is explained by Joseph & Daniel. According to their study the flow of product returns is becoming a significant concern for many manufacturers. In many cases the Cost efficient supply chains are not necessarily fast; and, as a result, returns undergo a lengthy delay until they are re-used, either as-is or remanufactured. The longer it takes to retrieve a returned product, the lower the likelihood of economically viable reuse options. Their research suggests that significant monetary values can be gained by redesigning the reverse supply chain to be faster and reduce costly time delays. These monetary values are higher in fast clock- speed industries such as consumer electronics, where the average life cycle of a personal computer (PC) is expressed in months, as opposed to a slow clock speed industry such as power tools, with life cycles of around six years. The research highlights the process of handling returns for ABC Company in USA with volumes over 100,000 units of products such as PCs and computer peripherals are returned every month. The company estimates the annual total cost of product returns to be between 2 and 4 percent of total outbound sales, where the cost of product returns is defined as the value of the return plus all reverse logistics costs minus revenue recovered from the product. The study highlights that the flow of returned products represents a sizeable asset stream for many companies, but much of that asset value is lost in the reverse supply chain, For $1000 of product returns nearly half the asset value (>45%) is lost in the return stream. Most of the loss in asset value falls into two categories: the returned product must be downgraded to a lower-valued product--a product once valued as new must be remanufactured, salvaged for parts, or simply scrapped as not repairable or obsolete; or, the value of the product decreases with time as it moves through the pipeline to its ultimate disposition. Of these two loss categories, much of the first is unavoidable because only a fraction of returns can be restocked as new items (20% in the example).

However, the loss due to time delays represents a significant opportunity for asset recovery? These losses include not only the deterioration in value of a returned product with time, but also the force downgrading of product due to obsolescence. (Joseph & Daniel)

20% new restock product ($190)

Loss in Asset Value >45% Value

15% Scrap ($0)

Flow of Returns


10% Salvaged Components

10%"Low Touch" Refurbished ($ 75)

45% Repair &

Remanufacture ($250)

According to Joseph & Daniel the other main challenge while increasing profits or reducing losses is the effect of time delays and product downgrading on asset loss in a return stream. The upper line in the Figure below represents the declining value over time for a new product. The lower line indicates the declining value over time for a remanufactured version of the same product. In the example, only 20% of product returns would remain on the upper curve, losing value due to time delays; 80% of the returns would drop to lower values and the product that is ultimately scrapped would fall to values near zero. Products near the end of their life cycle will show sharp increases in the rate of value deterioration.

Joseph & Daniel represented time value of returns in percentage terms to facilitate comparisons across products and product categories with different unit costs. The research carried out by them shows that the time value of returned products varies widely across industries and product categories. Time-sensitive, consumer electronics products such as PCs can lose value at rates in excess of 1% per week, and the rate increases as the product nears the end of its life cycle. They highlight the fact that, at these rates, returned products can lose up to 10-20% of their value simply due to time delays in the evaluation and disposition process.

Value of Returned

Product ($)

Product Return

Processing delay

$ Cost of delay

New Product

Return stock


Value after Remanufacturing

T T Time

Start Shipping Begin Product

Phase out

The other factor mentioned by Joseph & Daniel in their study in order to minimize losses in the asset value is marginal value of time. Because products are broadly classified into functional and innovative, roughly corresponding to products with low and high marginal values of time respectively. Innovative, short life-cycle products such as laptop computers have a high marginal value of time, whereas products such as power tools or disposable cameras are said to be less time-sensitive and are considered have low marginal values of time. (Fisher's strategic model)

Therefore when products classified by time value, Joseph & Daniel consider using Fishers supply chain structure to maximize the value of recovered assets in the return stream. And since the objective is to maximize the net value of recovered assets, the cost of managing the reverse supply chain must also be considered. To use Fisher's terminology, efficient supply chains sacrifice speed for cost efficiencies and, in a responsive chain, speed is usually achieved at higher cost. The study explains how reverse supply chain design is a tradeoff between speed and cost efficiency. For products with high marginal time values (such as laptop computers), the high cost of time delays tips the tradeoff toward a responsive chain. For products with low marginal time values, delays are less costly and cost efficiency is a more appropriate objective. They also suggest a supply chain design structure similar to the one Fisher proposes for forward supply chains; it is displayed as a two-dimensional matrix below. (Joseph & Daniel, RSC for comm. returns)

Time-Based Reverse Supply Chain Design Strategy

Efficient Chain Responsive Chain


No Match

No Match


Low MVT Product

High MVT Product,

"Reverse Logistics is a process whereby companies can become more environmentally efficient through recycling, reusing and reducing the amount of materials used. Viewed narrowly, it can be thought of as the reverse distribution of materials among channel members. A more holistic view of Reverse Logistics includes the reduction of materials in the forward system in such a way that fewer materials flow back, reuse of materials is possible and recycling is facilitated". (Carter and Ellram, 1998,) The fact of reducing materials used in the processes according to some authors is (Rogers and Tibben-Lembke, 1998) considered as Green Logistics and not Reverse Logistics, although the same authors agree in that the bound line between both concepts is not always clear. On the other hand, Carter and Ellram seem to keep tight to the same channel in which the forward flow was generated, against the more broad view in which other companies outside the business chain could be favored from the returns flows.

But at some point, preventing returns becomes more costly than it would be to handle them. Getting good at handling returns is the better option. It can lead to more sales because customers know they can return unwanted merchandise easily. It can also improve customer relationships across the supply chain, improve profits through reduced costs, and lead to greater efficiency and higher recovery rates for returns. Managing returns wisely means thinking about the returned goods not as costly mistakes but as products still waiting to be sold profitably-an opportunity to be exploited. (James Stock, Thomas Speh, and Herbert Shear, Many Happy Product Returns)

2.2 How Reverse Logistic increases customer satisfaction?

Firstly to satisfy a customer Parasuraman identified the service quality gaps in satisfying the customer. Particularly relevant gaps in managing returns are the gap between customer expectations and customer perceptions of service quality, and the gap between customer expectations and managerial perceptions of those expectations. He further explains that the gaps in service quality lies in the retailers' recent shift to more restrictive return policies and the customers' perceptions of a business are based on past experiences, media promotions and word-of-mouth discussions. When the customer becomes aware of a more restrictive return policy, the policy shift could negatively influence their perceptions of service quality. Consequently, the changes in the policies are likely to widen the gap between customer expectations and their perceptions of the quality of the service. In addition, the more restrictive return policies could be due to managers' lack of perception as to how their customers view return policies and how it influences their expectations, thus widening the gap between customer expectations and managers' perceptions of those expectations. (A. Parasuraman, Valarie)