Have you committed a deadly sin?

We're not talking about pride, sloth or greed. We're talking the seven deadly sins of reverse logistics—the process of managing product recalls and returns.

Returns have always been a fact of business life, especially for catalog retailers, whose return rates can run to 35 percent for soft goods like shoes and clothes. But with the growth of direct-to-consumer channels like catalogs and Internet sales, the reverse supply chain has exploded in recent years. "Returns to U.S. retailers now [amount to] over $100 billion per year," says Jim Stock, professor of marketing and logistics at the University of South Florida in Tampa. "That's greater than the GDP of two-thirds of the world's countries."

With those kinds of numbers, it's clear that reverse logistics should be as important as so-called forward logistics. But too often, the reverse logistics supply chain is viewed as a cost of doing business or a problem that will cure itself given enough time.

It doesn't have to be that way, says Stock, who has been researching reverse logistics since the '70s. In fact, he says, handled with skill, returns can be an important customer service tool.

But before you can manage the process, you need to understand the pitfalls. Here is Stock's list of seven deadly sins committed by companies that underestimate the importance of returns.

1 Failing to recognize that reverse logistics can be a factor in creating competitive advantage.

A successful reverse logistics strategy starts with the right mindset, says Stock. "If you don't think reverse logistics is important, it's not going to be," he explains. "And if you think reverse logistics is a necessary evil, you'll never view it as a potential profit center or a source of competitive advantage."

Think of the transformation of forward logistics since the 1980s. As the differences between the quality and price of competing products narrowed, a few industry leaders realized that the ability to deliver the right product in the right configuration and at the right time could set them apart from their competitors. That changed the way the game was played.

Today, providing excellent forward logistics is just the price of admission. Other operations, like reverse logistics, are emerging as today's competitive differentiators. Ignore them at your peril.

2 Believing that once products are delivered, your responsibilities have ended.

Creating a system to handle returns efficiently is important. But a better strategy is to reduce the number of returns in the first place.

One way to do that is to take a hard look at your company's customer education and service policies. "A lot of returns come back because the customer doesn't understand how to use the product," says Stock. That's especially true as retailers reduce staffing in their stores to keep down costs.

Stock says manufacturers can help reduce returns by taking a proactive stance toward customer service. For example, he says, "[Manufacturers] can [provide] better information about their products or set up customer service hotlines to answer consumer questions about using their products."

He also urges manufacturers to work more closely with their retailers to accept back product earlier in the sales cycle. "If you give a retailer 30 days to return a product, it's going to come back near the end of the 30 days," says Stock. "But if it's not selling, you'd be better off pulling it out of the stores earlier and while it's still in season, when you have an opportunity to resell it at a higher profit."

3 Failing to match internal and external systems and processes.

Most logistics systems are geared toward getting product to the customer, while returns are handled on an ad hoc basis after the product shows up at the dock.

That's a mistake. "To do reverse logistics well, you need quality information and processes just as you have in forward logistics," says Stock. "You still have to track product and processes at all times."

That begins with understanding how to create a reverse logistics flow. "You can't optimize reverse logistics if you don't understand what [the process] looks like," Stock says. "You have to put flow charts on the wall and find out what's going on in order to identify weaknesses."

The next step is to implement information systems designed to handle returns, like best-of-breed warehouse management systems and supply chain visibility systems with returns functionality. It also includes developing benchmarking systems to measure the returns process.

4 Assuming that a part-time effort is sufficient to deal with reverse logistics.

Reverse logistics is a full-time job. That is true whether you're handling returns with a dedicated team in-house or working with a third-party logistics provider (3PL).

"If you're a logistics manager responsible for inbound and outbound shipments, that's where most of your effort's going to go," says Stock. "You're going to put more time into that than into reverse logistics and it will show."

Stock urges companies that don't have sufficient volumes, or the willingness to make returns a core competency, to outsource to a third-party logistics provider specializing in reverse logistics.

"Most of the companies outsourcing today are doing it to avoid the hassle of dealing with returns," Stock says. "But if they crunch the numbers, I think they'll find they should probably outsource it anyway."

5 Believing that order cycle times for returns can be longer than those for new items.

When it comes to returns, faster is better.

That's because reverse logistics isn't just a logistics issue: It's also a customer service and a financial issue. Customers don't want to wait weeks before charges are removed from their credit cards, and returned goods sitting in a warehouse invite both higher carrying costs and the risk of obsolescence.

But according to Stock, half of all returned goods take between one and two weeks to be processed; another 25 percent sit for more than a month before processing.

"There's a very important truism on the forward logistics side that speed is important," says Stock. "Oftentimes you see forward logistics moving at light speed, while returns are processed at glacial speed in the same system."

Speed is another reason to consider working with a 3PL. Third parties have the volumes and systems in place to process returns and credits in a timely fashion.

"If a 3PL can turn around your returns in 10 days instead of 20 days," says Stock, "you not only have a significant impact on cash flow but also on costs."

6 Assuming that product returns will take care of themselves if given enough time.

Most small kids think that if they just close their eyes, the bogeyman will go away. That same strategy is at the heart of many returns programs, especially when it comes to addressing customer complaints that end up in returns: If we just ignore irate customers, they'll go away.

"Reverse logistics involves many touch points in an organization, including marketing and customer service," says Stock. "You need systems in place to address the problems that lead to returns at the first point of contact, because returns really get costly when customer service goes south and it takes multiple points of contact to resolve an issue."

Stock says a successful program includes processes to determine why returned goods are coming back, to work with customers to create a solution, and then to measure the results of those solutions.

7 Thinking that returns are relatively unimportant in terms of their cost, asset valuation and potential revenues.

The easiest way to deal with returns is the path of least resistance: Send them back to their point of origin and let the manufacturer or distribution center deal with the problem.

That's also the most expensive way to handle returns, resulting in lost sales and increased transportation and handling costs.

But returns don't have to be a necessary evil, says Stock. Indeed, a good returns program can be a profit center, especially when you realize that the profit margins on refurbished items can be greater than the margins on new items. With disposition rules in place, trained employees and a system to track inventory, you may find that you have perfectly good, salable merchandise that can be repackaged and put back on a retail shelf.

"A lot of additional costs are consumed if you don't manage the system," Stock says. "Those are costs that reduce your profit margins."

Stock may not be able to offer absolution for your reverse logistics sins. But, he says, companies that take the time to understand the pitfalls can alleviate a lot of the headaches associated with returns. "If you don't know what reverse logistics is costing you, it's probably not important to you," he says. "But once you start looking at the numbers, you'll find that [the amount is] sufficient to make a difference in whether a company is profitable or unprofitable."

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