Time to embrace reverse logistics
Bloated inventories have come to characterize the current state of U.S. manufacturers and retailers for the first quarter of 2016, forcing logistics managers to apply classic reverse strategies to wring out supply chain waste.
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Last year was pretty much a bust for durable goods makers, say economists, and the first quarter of 2016 may place added pressure on shippers to squeeze out profits in the supply chain. That explains why many analysts contend that a fully integrated loop means that reverse logistics can even contribute to the “top line” on a balance sheet.
Outside of construction materials and motor vehicles, almost no other business sectors performed up to expectations last year. According to IHS Global Insight U.S. economist Michael Montgomery, industries faced stiff competition from foreign rivals for U.S. market share, and exporters—like construction equipment makers—faced intense pressures abroad. Further exacerbating circumstances for U.S. companies included not having a secondary market for unsold goods.
“Orders excluding defense and private aircraft slid by 1.9% in the 2015 annual tally,” Montgomery says. “Durable goods makers entered 2015 like a lamb and exited like a sheep—a tad older, but just as docile.” And he predicts that at least the first half of 2016 needs to be more of the same for inventory levels to adjust.
“The inventory correction is far from over, and the robust greenback continues to strengthen, with the euro about the only major currency that seems able to hold its own in the past few months—but that’s at a level below a year ago,” says Montgomery. “Machinery makers and raw material producers face a very tough slog this year since both require decent worldwide growth in order to thrive, and the world has not been cooperating by only serving up mediocre growth.”
The consequences for U.S. retailers with global distribution networks is every bit as profound, logistics experts add, noting that the “reverse loop” has never been so vital.
Asset recovery growing
According to Dr. Dale Rogers, professor of logistics and supply chain management at Arizona State University, reverse logistics is going to become increasingly popular with logistics managers seeking a process to achieve proper disposal of excess inventory.
“Remanufacturing and refurbishment activities are a critical part of that procedure,” says Rogers. “Reverse logistics also includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, excess inventory, recycling programs and asset recovery—all vital procedures that need to be top of mind.”
For a practitioner, says Rogers, the disposition choice is determined by the most profitable alternative:
Reconditioning: When a product is cleaned and repaired to return it to a “like new” state.
Refurbishing: Similar to reconditioning, except with perhaps more work involved in repairing the product.
Remanufacturing: Similar to refurbishing, but requiring more extensive work; often requires completely disassembling the product.
Resell: When a returned product may be sold again as new.
- Recycle: When a product is reduced to its basic elements, which are reused, also referred to as asset recovery.
By way of a case study, Rogers observes that a business printer field service and reverse logistics model helps explain how an operating system works. “The process for such a firm starts when a business customer with a problem calls an original equipment manufacturer (OEM) or third-party customer support contact, both of which are used in an attempt to diagnose the problem and provide problem resolution instructions if applicable,” he explains.
An OEM field technician or third party certified technician attempts to repair the equipment on-site. If unable to make the repair, the unit is sent to the OEM or certified third party repair facility where a regional-based loaner or exchange program may be available. The unit is then repaired at the OEM or third party repair facility.
The OEM then ships the returned unit or comparable unit back to the customer, or places the unit in used stock if an exchange is previously provided. A field technician is then scheduled to install the loaner unit, exchange units, or repair equipment at the customer site.
“As an example, consider firms involved in the aftermarket sales and services business, and how reverse logistics plays a role,” says Rogers. “Products in this business can include accessories, replacement parts, and repair and service parts. The services could include: product and technical support, training, product documentation, warranty and claims management, and field service repairs.”
As an adjunct to these products and services, reverse logistics fits the definition by providing for exchanges and in-warranty repair and out-of-warranty repair. Other reverse functions include maintenance, upgrades and retrofits, remanufacturing, and end-of-life asset recovery and hazardous material disposal.
Industry analysts say that in the aftermarket business, field services and reverse logistics are generally considered one of the harder areas to manage, coordinate and operate efficiently. Indeed, the area is often forgotten or given little consideration regarding launch of new products, importance to overall customer satisfaction and loyalty, and company profits.
“If the product is defective and the customer wanted to return it, the manufacturing firm would have to organize shipping the defective product, testing it and lastly, disassembling or disposing of the product,” observes Curtis Greve, principal at Greve Davis, a reverse logistics consultancy. “The defective product would travel in reverse through the supply chain network in order for the manufacturer to retain any use from it.”
Cathy Roberson, an analyst with the freight transportation consultancy Spend Management Experts, agrees, noting that now, more than ever, retailers have made larger investments in technology to improve their reverse logistics systems.
“When logistics managers combine the theory of reverse logistics with powerful software and general financial prowess, the supply chain can
be analyzed to find deficiencies in the chain itself rather than in the products,” says Roberson, adding that the ultimate goal is to optimize aftermarket activity to save money and environmental resources.
“It’s important to audit your shipping carrier bills and even renegotiate your original contract to refund your money in any areas in which you overspent in the past,” adds Roberson. “This should continue to save you time and money in the future. Having fewer resources tied up in transportation frees them up to be reallocated for things like labor and quality control.”
Adam Robinson, who oversees the marketing strategy for Cerasis, a third-party logistics provider specializing in “last mile” shipping, says that the reverse loop presents one of the biggest operational challenges in the world of e-commerce freight logistics due to the sheer volume and cost of processing returns.
“Effective reverse logistics is believed to result in direct benefits, including improved customer satisfaction, decreased resource investment levels, and reductions in storage and distribution costs,” Robinson says. “But our studies indicate that returns generated in many companies range from 3% to as high as 50% of total shipments across all industries.
Furthermore, says Robinson, other studies indicate the real costs of the returns take up roughly 3% to 5% of total revenue. “Surprisingly, for the traditional bricks-and-mortar retail operations, returns are three to four times more expensive than forward—outbound—shipments. In some industries such as book publishing, catalog retailing, and greeting cards, over 20% of all products sold are eventually returned to the vendor,” he adds.
In omni-channel, the fluidity of inventory between channels enables retailers to reallocate merchandise to the point of demand, observes Will O’Brien, a supply chain analyst with Sedlak Management Consultants. He says that online order fulfillment can pull from stock in warehouses, stores, returns and in-transit, yet only one third of companies have a fully integrated inventory management strategy linked to reverse logistics operations.
“The failure to include returned goods into available inventory for sale will likely result in purchasing more inventory than is needed, higher volumes of unsold merchandise, excessive markdowns and more goods to liquidate at the end of each season,” says O’Brien.
To avoid this, retailers need visibility into inventory at all stages of its lifecycle—including in-transit—to establish capabilities to transfer product to the point of demand. “Today, with the consumer in charge, returns are more than a cost of doing business,” says O’Brien. “Returns management is a strategic consideration, requiring technology investment, operations planning and labor allocation.”
A crack in the foundation of the strengthening retail industry is that the programs put in place to lure shoppers back are creating unintended consequences—once an expectation is set it’s hard to turn back. And once the shopper begins to return products to the stores, the retailer needs to have a process in place to handle those products or costs will escalate quickly.
Gartner analysts agree. In a recent report titled “Returns–The Ticking Time Bomb of Multichannel Retailing,” 55% of respondents considered “Improving the efficiency of the returns process and technology” as very or extremely important. Conversely, only 42% believed that they do this well or extremely well.
“The notion of delegating returns back into stock for the stores or on-line orders only alleviates a portion of the returns volume,” says O’Brien. “Few companies measure the%age of returns that sell at full retail once back in stock. For those that do, 48% of returned merchandise selling at full price is the current North American market benchmark.”
Finally, it’s how retailers handle the other 52% of returned merchandise to gain a greater understanding of why the reverse logistics process is so vital to controlling losses and maintaining value of returned goods.
About the AuthorPatrick Burnson, Executive Editor Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at [email protected]
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