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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. The difference is that reverse logistics encompasses all of these activities as they operate in reverse. Therefore, reverse logistics is:
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 consumption to the point of origin for the purpose of recapturing value or proper disposal.
More precisely, reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal.
Remanufacturing 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.
Reverse logistics also includes 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.
Leading-edge companies are recognizing the strategic value of having a reverse logistics management system in place to keep goods on the retail shelf and in the warehouse fresh and in demand.
The reverse logistics process can be broken into two general areas, depending on whether the reverse flow consists primarily of products, or primarily of packaging. For product returns, a high percentage is represented by customer returns. Overall customer returns are estimated to be approximately six percent across all retailers. Return percentages for selected industries are shown in Table.
In each case, return percentages were established by several different firms.
Sample Return Percentages
Magazine Publishing 50%
Book Publishers 20-30%
Book Distributors 10-20%
Greeting Cards 20-30%
Catalog Retailers 18-35%
Electronic Distributors 10-12%
Computer Manufacturers 10-20%
Mail Order Computer Manufacturers 2-5%
Mass Merchandisers 4-15%
Auto Industry (Parts) 4-6%
Consumer Electronics 4-5%
Household Chemicals 2-3%
Clearly, return rates vary significantly by industry. For many industries, learning to manage the reverse flow is of prime importance.
Comparatively, direct or catalog companies have higher return rates than most other retail channels. It is not unusual for a direct retailer to have return rates above 35 percent. The mean level is approximately 25 percent. These catalog firms have had to improve their management of the return process. An exception to this is build-to-order, direct computer manufacturers that have lower rates of return than computer manufacturers that sell through traditional retail channels.
Most catalog firms have developed returns programs internally. They utilize their reverse logistics capabilities strategically. As the old saying goes, necessity is the mother of invention. Because return rates for many of the catalog retailers have traditionally been high, a reduction in both the number of returns and the cost of those returns was needed.
One particularly good example of skillful reverse logistics management is the J.C. Penney Catalog Division. They struggled for many years with high rates of return. Their catalog division operated independently from their retail store division. By thinking about the profitability of the whole corporation, and laying aside some difficult accounting practices, they have been able to develop a system that rewards the retail store managers for working to reduce expensive returns. When consumers decide to return a catalog purchase, they bring it back to the nearest store.
The store managers are incented to disposition the item through the retail store. If the item is not sold in the store, then it is sent back to the catalog distribution center.
Reverse Logistics Activities
Typical reverse logistics activities would be the processes a company uses to collect used, damaged, unwanted (stock balancing returns), or outdated products, as well as packaging and shipping materials from the end-user or the reseller.
Once a product has been returned to a company, the firm has many disposal options from which to choose. Some of these activities are summarized in Table 1.3. If the product can be returned to the supplier for a full refund, the firm may choose this option first. If the product has not been used, it may be resold to a different customer, or it may be sold through an outlet store. If it is not of sufficient quality to be sold through either of these options, it may be sold to a salvage company that will export the product to a foreign market.
If the product cannot be sold "as is," or if the firm can significantly increase the selling price by reconditioning, refurbishing or remanufacturing the product, the firm may perform these activities before selling the product. If the firm does not perform these activities in-house, a third party firm may be contracted, or the product can be sold outright to a reconditioning/remanufacturing/refurbishing firm.
After performing these activities, the product may be sold as a reconditioned or remanufactured product, but not as new.
If the product cannot be reconditioned in any way, because of its poor condition, legal implications, or environmental restrictions, the firm will try to dispose of the product for the least cost.
Reverse Logistics Activities:
Return to Supplier
Sell via Outlet
Generally, packaging materials returned to a firm will be reused. Clearly, reusable totes and pallets will be used many times before disposal. Often, damaged totes and pallets can be refurbished and returned to use. This work may be done in-house, or using companies whose sole mission is to fix broken pallets and refurbish packaging.
Once repairs can no longer be made, the reusable transport packaging must be disposed of. However, before it is sent to a landfill, all salvageable materials will be reclaimed.
European firms are required by law to take back transport packaging used for their products. To reduce costs, firms attempt to reuse as much of these materials as possible, and reclaim the materials when they can no longer be reused.
Reverse Flow of Goods
The activities shown in Table are the types that are generally considered the core of reverse logistics processes.
Each of these activities gives rise to some interesting questions, many of which will be addressed in this research.
However, from a logistics perspective, the larger issue common to all of these activities is how the firm should effectively and efficiently get the products from where they are not wanted to where they can be processed, reused, and salvaged. Also, the firm must determine the "disposition" of each product. That is, for each product, the firm must decide the final destination for products inserted into the reverse logistics flow.
Strategic Use of Reverse Logistics
Reverse Logistics as a Strategic Weapon
When companies think about strategic variables, they are contemplating business elements that have a long-term bottom line impact. Strategic variables must be managed for the viability of the firm. They are more than just tactical or operational responses to a problem or a situation.
Not long ago, the only strategic variables a firm was likely to emphasize were business functions, such as finance or marketing. During the late 1970s and 1980s, some forward thinking companies began to view their logistics capabilities as strategic.
Although more and more firms have begun to view their ability to take back material through the supply chain as an important capability, the majority of these firms have not yet decided to emphasize reverse logistics as a strategic variable.
There is no question that the handling of reverse logistics challenges is an essential, strategic capability.
Most retailers and manufacturers have liberalized their return policies over the last few years due of competitive pressures. While the trend toward liberalization of return policies has begun to shift a little, firms still believe that a satisfied customer is their most important asset.
Return Policy Changes
Some firms have begun to take a more aggressive stance with customers, and have attempted to reduce the number of returns. Because of customer service pressures, it is difficult to make a preemptive step, if other firms operating in the same industry have liberal return policies. If one player in the industry has a liberal return policy, it is difficult for other firms in that industry to tighten their return policies.
Some retailers are beginning to rethink liberal return policies, and balance their value as a marketing tool against the cost of those policies. Return policies are tightening3, as retailers look for ways to analyze the returns process, and to recapture dollars that were previously written on the expense side of the ledger.
One reason for a generous return policy is that it leads to improved risk sharing between sellers and consumers. In some channels, consumers can return anything to the retailers, the retailers and wholesalers have liberal return arrangements with manufacturers, and manufacturers end up taking responsibility for the entire product life cycle.
These liberal return policies occasionally turn into "Return Abuse" policies, where the manufacturers end up taking an inordinate amount of risk.
Reverse logistics competencies are also used to clean out customer inventories, so that those same customers can purchase more new goods. Auto companies have fairly liberal return policies in place, and a large reverse logistics network which allows them to bring back parts and components from their dealers. These parts are often remanufactured, so that value is reclaimed. If new parts held by the dealer are not selling well, the auto companies will give the dealers a generous return allowance, so that they can buy new parts that they really need, and therefore, service the ultimate consumer better. Most auto dealers, and many dealers in other industries, are family-based businesses with limited supplies of capital to invest in inventories. They often have less than state of the art inventory management capabilities. It is in the best interest of parts suppliers to clean out their inventories, reduce credit-line constraints, and improve customer satisfaction.
This strategic usage of reverse logistics is closely related to cleaning out the channel. Firms cleanse their inventories and the inventories of their customers and their customers' customers utilizing reverse logistics processes. Some firms are proactive in their management of downstream inventory, as opposed to merely being reactive. These firms have programs in place that maximizes inventory freshness.
Fresher inventories can demand better prices, which in turn, protects margin.
While many companies have yet to recognize the strategic potential of efficient reverse logistics, it is clear that the tide is beginning to turn. There is more interest in reverse logistics now than ever before. Firms are beginning to make serious investments in their reverse logistics systems and organizations. One clear indication of the strategic importance of a business element is the amount of money spent on managing that element.
Given the volume of returned products experienced in some industries, it is not surprising that the firms in those industries consider returns a strategic and core competency.
It appears likely that companies in industries that generally do not place much value on good reverse logistics practices, will, over the next few years, find that making investments in their return systems will enhance their profitability. It is clear that for many firms, excellent reverse logistics practices add considerably to their bottom line.