REVERSE LOGISTICS: Five Steps to Success

Careful management of these five issues is the foundation of a cost-effective reverse-logistics program.

By Toby B Gooley -- Logistics Management, 6/1/1998

Do you think of recycling as being just for newspapers, cans, and bottles? If you do, you should think again. The need to manage waste materials and returned goods is growing in all kinds of industries. Today, companies like Xerox, Eastman Kodak, Mobil, Home Depot, and Ethan Allen Furniture--to name just a few--have recycling programs that meet the needs of their individual industries.

There are many reasons for the explosive growth of what's come to be known as "reverse logistics" over the past five years or so. The most prominent is increasing public awareness of the social costs of excess waste. A large-scale recycling program, therefore, generates goodwill among consumers and industrial customers. As support for recycling grows, moreover, companies want to be perceived as good citizens that are committed to protecting the environment.

Another important reason is the need to control costs. Frequently, manufacturers treat recovery of products and packaging as an afterthought. A well-managed reverse-logistics program, however, can bring enormous savings in inventory-carrying, transportation, and waste-disposal costs.

For these and other reasons, more and more companies are launching reverse-logistics programs today. Unfortunately, it's often assumed that reverse logistics is simply a matter of reversing the outbound distribution process. In fact, recycling and returns management have their own unique and complex issues that affect logistics operations. A brief overview of those issues highlights the five main areas you should consider before starting a reverse-logistics program.

Drawing Up a Step-by-Step Plan

1. Analyze your reasons for starting a reverse-logistics program. "Ask yourself why is there a need to do this? Is it for the environment, because of public opinion, or for economic reasons?" suggests Gary Manning, vice president, essential services sector for Atlanta-based third party Burnham. This information has an enormous impact on the scope and design of any reverse-logistics operation. A program that is intended primarily to recover packing material, for example, will need to address how to manage waste disposal. A program that is designed to retrieve and refurbish salable products, on the other hand, must incorporate a repair operation. Customer-service goals also will influence program design.

A related issue is what kind of resources you are willing to commit to a reverse-logistics program. The obvious answer is that the level of potential benefits will influence how much a company will invest in such a program. Too often, though, companies shortchange themselves by failing to devote sufficient time, money, and personnel to the project. "A lot of times, [reverse logistics] becomes a side job for somebody. It's not their focus or a high priority," says Cindie Vaughan, supervisor of reverse logistics for Consolidated Freightways.

If no one is proactively managing the process, it's bound to result in higher costs and missed opportunities for savings and profits. A solution for many companies that have limited resources for reverse logistics is outsourcing that function to third parties or transportation companies. It's up to the shipper, though, to examine the cost and service benefits, then decide how much of the process should be outsourced. "As with any outsourcing decision, it's a matter of being able to focus on your core competencies and freeing up your people to work on products rather than expend your assets on [reverse logistics]," suggests Brett Chyatte, senior marketing specialist for reverse logistics at Federal Express.

2. Decide how and what to communicate with customers. When your customers call about returning an item, who should they deal with? Chyatte believes the authorization of a return can be a delicate decision that is best left up to the manufacturer. Some shippers, though, are willing to allow a third party to perform this vital customer-service function while following specific guidelines provided by the shipper. Retailer Service Merchandise, for example, uses Redwood Systems to handle phone calls from stores wanting to return items.

There are several ways to communicate instructions to customers efficiently and clearly. One that has proved to be very successful for businesses selling directly to consumers is to include step-by-step, written instructions in the original outbound shipment. Some even include preprinted labels, making returns as trouble-free as possible for consumers. Companies that want customers to call for a return authorization often fax instructions once the authorization has been issued. E-mail also can be an efficient way to communicate. A number of companies use newsletters--often prepared by their third-party providers--to update stores and field offices on new policies and procedures. In some instances, on-the-spot training may be necessary: Burnham sent a team of trainers to Alaska last year to provide hazardous-materials training to a customer that recycles batteries.

The importance of providing clear, specific instructions to customers can't be overemphasized; without it, unauthorized returns, product damage and liability problems, and inefficient operations are guaranteed. "When you leave it up to the customer to decide where and how [a return shipment] is supposed to go, it could return to the billing address rather than to the warehouse location," says Richard Faber, manager, express logistics solutions for FedEx. "Once it gets there, it's not properly marked and the people who receive it don't know what to do with it."

Product damage can be avoided if customers receive detailed packing instructions, says consultant and Logistics columnist Ray Bohman. Customer ignorance can result in returned goods' suffering more damage coming in than they did going out, making it difficult to reuse or resell the item, he observes. He recommends following the example of one furniture manufacturer that provides packing instructions with helpful diagrams in every outbound shipment.

3. Plan the mechanics of your reverse-logistics operation. This is the "meat" of the planning process, and it may take several months to design and implement all the necessary steps.

Effective operations planning is based on a "walk-through" of the process you are designing. First on paper and then on-site, it's important to follow a theoretical shipment step by step from the very origin of the returns process (the phone call from a customer) through to the final disposition of the waste or product. It's also crucial that planners try to foresee every problem that's likely to be encountered and to plan how the system they're designing would handle those situations.

The primary components of the reverse-logistics operation are retrieval, transportation, and disposition. The retrieval stage deals with where the waste or products should be picked up and by whom. Much depends on the nature of the item being returned; if it's clothing, for example, a carrier can handle all of the pickup and documentation tasks at the consumer's door.

If, on the other hand, the items are oversized, heavy, hazardous, or very delicate, special training may be necessary for both customers and carriers. Burnham, for example, dismantles photocopiers for several customers that sell or lease the reconditioned machines. Drivers are trained to remove internal components that could cause damage in transit, protect glass, secure all moving parts, and pack them for transportation. Hazardous materials, meanwhile, must be flawlessly handled, but field locations and distributors may not have the necessary expertise. Michael LeMirande, business development manager for Redwood Systems, says he often tutors auto dealers in how to manage returns of such items as engines and transmissions. The battery and most fluids in automobiles are classified as hazardous, so there are specific procedures for preparing them for transportation, he says.

A company that does not control the transportation of returns is asking for trouble, says consultant Ken Miller of Gardner, Mass. Most often, the manufacturer pays the freight for returned goods. "Yet typically the customer estimates the weight, guesses at the bill-of-lading description, and routes the shipment via a carrier that has no pricing agreement in place with the manufacturer," he says. As a result, incorrect weights and product classifications can lead to "$500 bills that should have been $50." To prevent thousands of dollars in excess freight charges, Miller suggests that shippers provide the carrier routing, correct weight, description, and class to customers when they call for a return authorization. Better yet, he says, customer-service representatives could complete the bill of lading for the customer showing all three of those items.

The biggest questions related to product disposition are whether to handle returns in centralized or regional facilities and how incoming shipments should be processed. The answer depends on the type of product and what will happen to it after it is returned.

More and more shippers are opting for centralized returns processing because it increases their control over a product's life cycle and allows for better data collection. That is especially true for manufacturers of high-value goods with short shelf lives, such as computers and telecommunications equipment that need to be repaired and sold as quickly as possible, notes FedEx's Chyatte. It also creates opportunities for shipment consolidations, which can reduce transportation costs and ensure better utilization of reusable containers and other equipment. Centralized returns-processing also helps shippers document returned products that are exported to secondary markets overseas, supporting claims for duty refunds under U.S. Customs' duty-drawback program, adds "Buzzy" Wyland, executive vice president of GENCO Distribution System.

Reselling product overseas is just one of several possible ways to dispose of returned goods, he continues. "Essentially, you can refurbish, resell, recycle, repackage, or destroy returned goods," he explains. Whichever a manufacturer chooses, it should maximize what used to be unproductive assets that are eating up valuable inventory dollars and space, or dispose of an item in the most economical and environmentally responsible way, Wyland says. That decision will determine the design of a processing facility, what kind of training workers need, and the specific procedures for handling products as they arrive. Kitchen appliances that can be repaired and sold in discount markets, contaminated food products or expired pharmaceuticals that must be destroyed, and packaging that needs to be cleaned and reconditioned before being refilled all require different handling procedures and physical layout of the processing facilities.

4. Develop information systems to gather necessary data. A successful reverse-logistics program depends heavily on gathering meaningful information that can help manage the returns process while tracking costs, says Wyland. "You want software that will facilitate the smooth, efficient backflow of product from the customer-service desk all the way to the final disposition," he says. Too often, companies add the information component at the end onto a finished program, which can create bottlenecks and inefficiencies, he notes. "What's important is not to wait until you have a pile of returned stuff. You have to plan for it upstream and build the software into the system."

The Internet is becoming an effective tool for gathering and disseminating information in a reverse-logistics environment. Federal Express, for example, has developed a returns-management system called "NetReturn" that relies on the Internet to capture customer information, schedule pickups, arrange transportation, and track the status of returned goods. All the customer has to do is call the merchant and request a return authorization. Once the shipper transmits the shipment details, the information system takes over. It even prompts the merchant to follow up when items are not picked up as scheduled.

5. Know the tax, finance, and credit implications of the program. This is an area that may not be very visible to logistics managers, but it is one of the primary reasons upper management will support a reverse-logistics program. The act of returning goods sets off a flurry of finance-related activities, including issuing refunds and credits, accounting for inventory costs, and tracking tax liabilities.

Logistics can help make those activities easier and more accurate by collecting and providing the necessary information. For example, retailers and manufacturers traditionally have clashed over the issue of credits and refunds for returned products, says Wyland. "Retailers sent back a product and deducted for what they sent back from their payments. For manufacturers, it was an annual nightmare trying to reconcile the physical product with the paperwork," he says. Now, with the proper information gathering and dissemination, manufacturers can immediately reconcile their customers' claims. There are enormous financial benefits to managing returns this way, Wyland says. "Before, manufacturers didn't know their profitability until they reconciled at the end of the year." Now, they don't have to carry unreconciled claims and they don't have to build cash reserves to cover those claims. "The net effect is a reduction in the cost of doing business," he says.

Don't Cut Yourself Short

The benefits of a reverse-logistics program are legion. To get the greatest payback possible, though, shippers must devote the necessary time and resources to the project.

Reverse logistics, in fact, should be part of the overall business strategy for any manufacturer and retailer, says LeMirande of Redwood Systems. Companies today often don't consider reverse logistics when they plan their sales and operations strategies, he says, but they should: "If you're not including reverse logistics in your supply-chain strategy, you're cutting your supply chain off short."

Editor's Note: A useful textbook on reverse logistics is Reuse and Recycling: Reverse Logistics Opportunities, published by the Council of Logistics Management. The book examines approaches to recycling system design, applications for inbound and outbound logistics, and the use of third-party providers. For information on ordering the book, contact the council at (630) 574-0985 or fax (630) 574-0989.