There's one thing you can say for certain about reverse logistics: It's totally different from other logistics activities. Conventional wisdom simply doesn't apply. In fact, trying to manage returned goods the same way you do other merchandise can actually get you into trouble. (See "The 7 deadly sins of reverse logistics," Logistics Management, June 2002.)

Because reverse logistics is so different from conventional, "forward" practices, a question that often arises is what type of facility is best for handling returns. That is, is it necessary to have a separate facility that's dedicated to reverse logistics, or can an existing distribution center that handles the normal flow of inbound and outbound shipments do just as well?

Finding the right solution for your company depends on the "who, what and where" of reverse logistics: who you are, what you're handling and where your returns will end up. With that information in hand, you'll have what you need to analyze the pros and cons of both approaches.

Defining who you are (or more properly, who your company is) is of fundamental importance when deciding where to handle returned goods. Is your company a manufacturer or a distributor, a retailer or a wholesaler, a supplier to a larger manufacturer or a direct seller to the end user? Your company's position in the supply chain relative to its business partners creates contractual obligations regarding returned goods, so the facility you choose for handling returns must be capable of fulfilling those commitments.

More subjectively, how your company views itself in terms of its corporate image, value proposition and relationship with its customers also influences where you manage returns. If your company considers returns management to be a top priority because of its impact on customer relations, then it also needs to be a top priority in the facility that processes those returns. If that's the case, says Ed Frantz, senior vice president for Pittsburgh, Pa.-based GENCO Distribution Systems, a provider of reverse logistics services, then a dedicated returns center may be the best choice. "A stand-alone facility gives you the benefit of a high degree of focus on reverse logistics," he says.

That level of attention may be difficult to achieve in a forward distribution center, says Dr. Dale Rogers, professor of supply chain management at the University of Nevada, Reno, and co-author with Dr. Ronald Tibben-Lemke of Going Backwards: Reverse Logistics Trends and Practices. "If you put [reverse logistics] inside your current forward distribution network, will people really care enough about it?" he asks. "Are their incentives tied to how they perform relative to products coming back, or is (reverse logistics) always the forgotten stepchild?"

The specific needs of the industry to which your company belongs also influences the choice of reverse logistics facility. Industries that impact consumer health and safety, such as groceries and pharmaceuticals, for example, must segregate returned goods to prevent them from mingling with or contaminating new merchandise, says Denis Reilly, president and CEO of Dallas, Texas-based USF Processors, a provider of reverse logistics services. Using separate returns processing centers guarantees segregation. It also facilitates physical handling procedures and record keeping that are required by federal regulations in certain industries, he says. (For more on industry-specific reverse logistics practices, see "Diminishing Returns," Logistics Management, June 2001.)

There's a big difference in the facility layout, equipment and labor needed to handle returned goods compared to the normal flow of products. Most forward distribution centers are designed to efficiently handle cases and pallets, but returns typically arrive as "eaches" or individual packages, notes Reilly. If your forward DC stores and ships small, individual orders, such as mail-order catalogue items, it may easily handle returned goods, but a DC that only ships unit loads may be inefficient for handling returns.

Products that have a very short shelf-life or that can be restocked without further handling may do best if they return to the originating distribution center, says Jack Kuchta, executive vice president of warehousing consultants Gross & Associates in Woodbridge, N.J. One example is catalogue sales, where items that come back unopened or unused can almost immediately be returned to inventory and become available for sale.

Not only what but also how much is being returned plays a major role in the facility decision. A high volume of returns, for instance, may be inappropriate for a forward distribution center, since it could draw attention away from or even physically obstruct outbound operations, observes Brian Hudock, a principal with warehousing consultants Tompkins Associates of Raleigh, N.C. A significant returns volume, moreover, is needed to justify the considerable costs of establishing a separate reverse logistics operation, including the expense of a building, materials handling systems, information system and a large workforce, says Frantz. That is true even when you outsource returns management to a third party, he adds.

Another area where volume has an impact is transportation costs. Shipping many small lots of returned goods over long distances to and from a centralized facility can be expensive, says Hudock. On the other hand, a centralized facility can consolidate large quantities of materials into palletloads or truckloads for disposal—shipment to a liquidator, for example. Handling returned goods at the originating DC also may offer significant savings on transportation bills if a carrier such as a private fleet can deliver outbound merchandise and pick up returned goods in a single trip, says Reilly.

What you intend to do with returned goods influences where you decide to handle them. Will you repair, refurbish or repackage them? Is your objective to resell products or to reclaim and recycle materials? Do you need to inspect and document them for regulatory or accounting purposes, or will they simply be thrown away? Each of those activities creates its own unique requirements in terms of space, transportation, labor and information systems.

Most companies that need to inspect, evaluate and repair returned goods choose to do so in a separate location, either owned or outsourced. One such company is Philips Consumer Electronics of Atlanta, Ga. Philips uses two centralized returns centers, in Greeneville, Tenn., and Siloam Springs, Ark. A primary reason for the separate facilities is that inspection and repair operations are very space- and labor-intensive, says Tony Sciarotta, director, returns management.

When a shipment arrives from a retailer, inspectors and technicians open every pallet and every piece to validate the contents. They then match individual items with returns authorizations; test each one to confirm or identify the reason for return; authorize or decline refunds or damage payments; and, depending on the product line, repair, refurbish, repackage, send back to stock, ship to a liquidator, recycle or reclaim parts, or scrap the item altogether. Such complex handling requires an enormous amount of space and staffing, so the decision to have stand-alone returns facilities was a relatively easy one to make, Sciarotta says.

Kuchta notes that it's sometimes possible to have the best of both worlds. His company designed a facility for a computer products distributor that needed to evaluate and test returned goods, but also wanted to quickly return saleable products to the normal distribution flow. The solution: build a forward distribution center and a reverse logistics center side-by-side. The two buildings are physically connected, so product can quickly and easily move from the returns center into the mainstream DC.

If your product disposition plans are less complicated, though, space and labor needs may be too small to justify a separate operation. In that case, using an existing DC may be more cost-effective because you can shift employees between forward and reverse logistics operations as needed, says Frantz. "If you don't hit that critical mass where you have enough to have a full shift of people working on [reverse logistics], it doesn't make sense" to have a separate facility, says Kuchta. It is critical, though, that reverse logistics receiving and handling be physically separated from forward operations, both agree.

Whatever route you choose, returns create data-collection needs that differ from those of a forward distribution operation. A stand-alone returns center, of course, would include information systems that are specifically designed for returns management operations. But can information systems in a forward distribution center also handle those specialized needs?

The typical warehouse management system (WMS) system can't do the whole job, the experts say. But Bob Carver, vice president of marketing for Charlotte, N.C.-based WMS vendor LIS, cautions against dismissing WMS products out of hand. "The ability to identify inbound returned product, inspect and record inspection details of that product, to link it to a specific customer or order, and to upload all pertinent data to a specific financial control application is there in most WMS [products]," he contends. Nevertheless, finance decisions regarding chargebacks, refunds and so forth should still be left with the shipper's financial management software, he believes.

There are many factors to consider when determining whether to manage returns within a forward distribution center or in a separate facility, and they often are interlocked to the point where few, if any, can be considered strictly on their own. That's why your decision should hinge not on one or two factors, but on what Sciarotta calls the "integral cost of returns." The cost of everything associated with returned goods, including handling, storage, transportation, inspections, repairs, repackaging, refunds, customer service and so forth, has to be figured in. When calculating those costs, moreover, it's important to recognize that a single returned item usually incurs costs such as handling, transportation and packaging twice or more in its lifetime.

Making the right choice also depends on a clear understanding of the differences between reverse logistics and forward operations. "It's a whole different culture," Sciarotta says. "Forward logistics is totally geared toward efficiency, cost reduction and making a profit on every step of the way. Reverse logistics is about the prevention of money loss."