The Other Side of the Supply Chain Street: Reverse Logistics

Stephen DeAngelis

February 16, 2012

Steve Sensing, Vice President and General Manager for Ryder’s Hi-Tech/Electronics vertical, believes “reverse logistics has become an area of high priority for companies looking to reduce costs, add efficiencies and improve the customer experience.” [“Reverse Logistics: The Untapped Revenue Stream,” Logistics Viewpoints, 4 August 2011] Clyde Mount, President of 3PL Worldwide Inc., agrees with Sensing. He writes, “In these days of liberal return policies, satisfaction guarantees and customer rights, there are increasing opportunities to build a relationship with your customer, save the sale and even increase order values through creative up-sell and cross-sell programs.” [“The Supply Chain is Not a One-Way Street,” SupplyChainBrain, 1 February 2012] Mount continues:

“For most supply chain professionals, the main focus on the flow of goods lands somewhere between the procurement of raw materials and their delivery to the customer. Lately there has been considerable attention paid to modeling, simulation and analytics within the supply chain, ensuring initial deliveries will meet demand and that replenishment can be timely and achievable at a reasonable cost. But an often overlooked part of the process relates to reverse logistics—the process of managing returns, processing refunds and the various customer touch points visited along the way.”

Mount indicates companies should leverage their reverse logistics processes. Doing so presents an opportunity “that directly affects revenue and the bottom line, but is often overlooked within the supply chain industry.” He offers a “few basic rules” for providers, beginning with policy. He writes:

Build a fair return policy into your P&L and reserves. Quality customers should always be top of mind when writing your return policy. Consumers want easy returns, including reasonable time frames, the ability to receive credit and no penalties for making the return or refund. How quickly should customers expect to receive credit or a new product? What condition does merchandise need to be in for it to be returned? These questions and more must all be detailed in your policy.”

In today’s world of multi-channel commerce, building customer loyalty is becoming more difficult. Fair return policies foster such loyalty. Mount’s next recommendation is to communicate your return policies clearly and broadly. He writes:

Clearly state your policies in all your sales channels. Articulated standards around returns and refunds should be laid out clearly for customers and potential customers wherever the company has had a presence – online, in print, on sales collateral, and so forth. In general, a ‘click-to-agree’ or other affirmative button signifying acceptance of your policy should be displayed on any online checkout screens. Clearly communicating your return policy to customers prior to a sale can help prevent chargebacks and reinforce your case if a dispute does occur – and it is simply good customer service, too. Create your policy in as many places as possible and enforce without exceptions.”

I agree that a “click-to-agree” button is a good thing to have for on-line purchases; but don’t require your customers to make multiple clicks to find out what they are agreeing to. A short, clear policy (like the signs used in brick-and-mortar stores) should be right above the “click-to-agree” button. Mount’s next recommendation is to make sure you fully understand the system you are using.

Understand how your payment processor and merchant bank view returns, refunds, and calculate their reserves. Most merchant banks require that return and refund policies are made conveniently available to customers to prevent misunderstandings. All merchant banks maintain a chargeback threshold. For instance, if a bank’s threshold is 2 percent, it may sever ties with you once your chargebacks reach 2 percent of your sales for a given period. When shopping for a bank to partner with, take their section on thresholds into consideration. Ask if the bank has a chargeback management staff to aid in customer disputes. Most importantly – especially if you are doing most of your business online – ask whether or not your business would be considered a high-risk merchant account. If so, this would likely necessitate a reserve account being set up in your name, which can in some cases severely inhibit company growth, including funds for marketing, capital investment and cash flow.”

Business executives shouldn’t have to be told that the devil is in the details; but, I guess we all have to be reminded occasionally of that age-old adage. The details about cash flow, working capital, cash reserves, etc. are always important for a business. Mount’s next recommendation involves processing returns. He writes:

Process returns and refunds promptly. Within the supply chain, everyone is affected by customer dissatisfaction, returns and refunds, which can cost two to three times a standard order depending on the product – but merchants are affected the most. The actual return is not the risk; rather it’s the lack of issuing timely credits that can negatively affect the merchant. The smartest supply chain providers utilize advanced order management systems that benefit merchant account relationships by simplifying a return and refund process, preventing chargebacks and maintaining high levels of customer satisfaction. When a customer is unhappy, the merchant runs the risk not only of losing the customer but their merchant account altogether if too many refund requests pile up and are not processed in a timely manner. Streamlining the return and refund process and cutting risk is an essential and attainable goal – one any successful marketer must drive to achieve.”

Cash flow is no less important for your customers than it is for you. Whether that customer is the end-user or the merchant selling a product, refunding owed money sluggishly is going to create irritation if not anger. On the other hand, as Mount implies, prompt refunds can foster customer loyalty and satisfaction and, in the long run, save you money. Mount’s final recommendation involves saving the sale and building relations by maintaining a good reverse logistics process. He writes:

Use each of these customer touch points as an opportunity to save the sale and build a relationship. It is considerably less expensive to build on an existing customer relationship than acquire a new one; it is also a missed opportunity when you do not transform the return process into a moment for customer satisfaction. It is also beneficial to offer the customer free shipping, special customer discounts or delayed payments on a case-by-case basis. The opportunity to up-sell and cross-sell during the refund and return process is an important consideration to drive revenue and profits up as well. Following up with an e-mail thanking customers for contacting you with their issue is also a great way to drive sales and continue to build the relationship.”

When Mount states that the supply chain is not a one-way street, he has more in mind than just the logistics of getting products returned. As his comments clearly indicate, he is also thinking about customer relations. He concludes:

“It is generally thought that good customer relationships are built in the beginning – when a customer orders a product of their interest and is satisfied upon delivery – but the truth is this relationship is strengthened when the marketer deals well with issues after the order, and the customer sees how effortless the return process can be. So put forth the energy to make yours as efficient as possible, advertise your policy clearly, train your employees to use these interactions as moments to not only satisfy customers but boost sales, then stand back – and watch your business thrive.”

Not all companies are equipped to adequately handle the reverse logistics on their own. If that is case, Steve Sensing recommends considering a 3PL solution. He writes:

“Once a supply chain afterthought, reverse logistics has evolved into a highly complex endeavor. This is especially true in the hi-tech/electronics sector, where product lifecycles have dramatically shortened, global service networks create more supply chain complexity, products are highly customized to consumer preferences and sustainable practices are increasingly required. For many companies, the whole reverse logistics/returns management process has been a kind of black hole; a cost center that offers little visibility into which products are in the pipeline, whether they should be repaired, repackaged, restocked, recycled or disposed of in some other way, or whether they belong in the reverse channel at all. However, effectively managing the reverse supply chain has increasingly become more important to the operational and financial performance of companies.”

On that last point, Mount and Sensing are in complete agreement. In fact, as you will see, they are in agreement on many points concerning reverse logistics. Sensing continues:

“More than ever, companies are using robust, efficient reverse logistics networks to:

  • Increase velocity
  • Reduce costs (transportation, administrative, aftermarket support)
  • Gain service market share
  • Improve customer service and retention
  • Meet sustainability goals”

Although Mount didn’t discuss what is done with products once they’re returned, I suspect he would agree with Sensing that dealing with them responsibly enhances a company’s reputation and bottom line. Sensing discusses how reverse logistics can help a company meet its sustainability goals. He writes:

“Reverse logistics is … intrinsically aligned with sustainability. Instead of carting products to landfills, companies are recovering the value of the assets through a variety of other paths, such as returning to stock, donations, secondary market sales and recycling. When companies maximize tons per mile, consolidate shipments, reduce returns and optimize product disposition/asset recovery processes, they are simultaneously reducing harmful emissions and energy usage, while increasing profitability and asset utilization. In today’s markets, the total cost of logistics is increasingly defined in terms of carbon impact. As ‘going green’ becomes a standard business practice, consumers are asking for measurements around climate change impacts, energy consumption and emissions.”

Although I agree that environmental and stockholder activists are worried about carbon impact, most consumers aren’t. Once they’ve returned a product, few consumers think about what happens to it. That’s why Sensing’s arguments about recovering the value of returned assets will likely have greater impact on a company’s policies than environmental considerations. Fortunately, as he points out, one benefits the other. As Sensing puts it: “The synergy is obvious: end-to-end reverse logistics/product lifecycle management solutions translate into energy savings, provide economic value and strengthen customer relationships.”

Since Ryder advertises itself as a “provider of leading-edge transportation, logistics and supply chain management solutions,” it’s only natural that Sensing should discuss the “advantages of outsourcing reverse logistics.” He writes:

“Companies that outsource some or all of their logistics services are looking for better control of their supply chains to drive quality, reduce costs, increase visibility and improve inventory management. For reverse logistics, this means increasing the speed and efficiency of recovering, inspecting, testing and dispositioning returned products. A growing number of companies are turning to 3PLs to meet those goals. Reverse logistics is well-suited for outsourcing. Unlike forward logistics, it is characterized by uncertainty of supply; no one can easily predict which products are coming back, when they’re coming back or in what condition they’ll arrive in. Adding to the complexity is the customized nature of reverse logistics supply chains, which operate under company-specific rules that can vary for thousands of different SKUs.”

When commentators discuss supply chain complexity, most of them are thinking about forward logistics and processes. Sensing makes a great point when he notes that there is considerable complexity involved in reverse logistics as well. He notes that “effective reverse logistics management requires a broad range of operational, technical and strategic capabilities.” He provides a list of those capabilities, which include:

  • Scale and flexibility to meet changing business needs
  • Industry and geographic expertise
  • Visibility into the full product life cycle
  • Refurbishment/distribution center management
  • Web-based technologies and data integration

If you don’t think your company is up to snuff on those capabilities, then outsourcing reverse logistics might be a good option. Sensing asserts that if you are considering outsourcing your reverse logistics operation, you should ask a few important questions about the providers you are considering. They include:

  • Do they have measurable performance standards?
  • Do they have the ability to shift fixed costs to a transaction-based environment?
  • Can they integrate forward and reverse logistics with overall supply chain strategies?
  • Do they have leverageable infrastructure and transportation resources and move products into secondary markets, e-waste streams or back into the forward supply chain?

Obviously, Sensing believes that 3PL reverse logistics providers can often generate a lot of added value for companies. He concludes:

“Companies … should keep in mind the cost reductions, supply chain efficiencies and improved asset recovery rates that a robust reverse logistics network can provide. In the face of ongoing competitive and economic pressures, companies should carefully weigh the benefits of working with trusted supply chain partners to navigate the complex world of reverse logistics/product lifecycle management. By doing so they can establish themselves as leaders in sustainable supply chain management, while at the same time, unlocking the hidden value of reverse logistics, one of the supply chain’s last untapped revenue streams.”

Mount would add that the other main value of a good reverse logistics process, one that is not so hidden, is improved customer relations and loyalty. When companies recognize that supply chains aren’t one way streets, they come to appreciate opportunities that exist on the other side of the road.