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Reverse Logistics in the “Age of Entitlement”

As e-commerce flourishes, product returns have become even peskier. At the same time, those in the third-party logistics space who aren’t afraid to get their hands dirty are helping shippers create new revenue streams by accommodating the booming demand.

The word reverse has long had a negative connotation, as linguists place it in the same grimy nook as “return,” “retreat,” “retread” and “rerun.” Indeed, for many logistics and supply chain professionals, reverse logistics for years has been regarded as pejorative expression.

But in today’s era of the fickle e-commerce customer, the reverse loop represents an untapped opportunity for hard-working, imaginative logistics managers and their third-party logistics partners.

Tony Sciarrotta, executive director of the Reverse Logistics Association (RLA), maintains that with the return rate of e-commerce purchases being three to four times higher than that for brick-and-mortar purchases, the reverse sector is only going to grow in future years.

“With consumers insisting on free returns, reverse logistics is going to be under a lot of pressure to satisfy consumer expectations and demand,” says Sciarrotta. “Furthermore, consumers feel entitled to return goods when they realize that they don’t want or need them.”

Jess Dankert, vice president of supply chain for the Retail Industry Leaders Association (RILA), agrees with Sciarrotta, maintaining that while reverse logistics is not a sexy issue, it certainly provides a solution for the ever-growing return conundrum. “Retailers are problem solvers first and foremost,” she says. “So even though returns are significantly higher when the transaction is done through e-commerce, we find that there are many hidden opportunities to be gained.”

According to Dankert, RILA is encouraging its members to collaborate more closely with their warehousing and third-party logistics provider (3PL) partners to turn the current reverse challenges—driven by our trending “culture of entitlement”—into opportunities.

“Third parties can help us gather and aggregate more information on consumers, and thereby identify growing secondary markets,” observes Dankert. “Predictive analytics can also be jointly developed to get a read on future buying patterns as well as future return patterns. There’s only opportunity ahead if you’re ready to put in the work.”

Transference risk

Ever the contrarian, Dr. Dale S. Rogers, ON Semiconductor professor of business at Arizona State University, says that this culture of entitlement is really nothing new. In fact, he insists that the “transference of risk” from consumer to retailer dates back to early in the last century.

“Sears Robuck became a retail juggernaut when it introduced returns with no questions asked,” says Rogers. “They realized that this was the best way to keep a loyal customer, and also offered them cash-and-carry services that exist to this day.”

More to the point, says Rogers, is the game-changing trend underway today in warehouse and DC design used to buttress and support the new generations of retailers (see sidebar).

Meanwhile, the IHL Group, a global research and advisory firm for the retail and hospitality industries, maintains that a more concentrated focus on reverse logistics is simply another way to save money.

“Retailers opened 4,080 more stores in 2017 than they were closing and plan to open over 5,500 more in 2018,” says IHL Group analyst Lee Holman. “We recently reviewed over 1,800 retail chains with more than 50 U.S. stores in 10 retail vertical segments, and found that for every chain with a net closing of stores, 2.7 companies showed a net increase in store locations for 2017.”

Holman acknowledges that, regardless of reverse logistics, retail is undergoing some fundamental changes, noting that the “build it and they will come” era is over. “Still, retailers that are focusing on the customer experience, investing in better training of associates and integrating IT systems across channels will continue to succeed,” he adds.

Shifting industrial landscape

The industrial landscape is undergoing profound change as well due to the growth of reverse logistics demand, say real estate experts.

In a recent report titled “E-commerce and the Rapidly Rising Rate of Return,” David Egan, CBRE’s head of industrial and logistics research, notes that the problems posed by the growing return habits of today’s consumer translate into a serious business challenge for retailers of all types. “Likewise, the desire to make the return experience seamless for the consumer has created immense complexity on the back end,” he says.

According to Egan, the right returns fit is different for every company depending on its service promise, margin leverage and existing infrastructure. “Regardless of the solution, they all require supply chain and industrial real estate as part of the answer,” he adds.

Joe Dunlap, managing director of CBRE’s supply chain advisory consulting practice, says that the current culture of heightened expectations is not transformational, but rather, evolutionary.

“As time goes on, shippers will develop new systems and efficiencies that leverage warehouse space and configurations,” says Dunlap. “Meanwhile, we’ll see more 3PLs entering the market to address specific reverse needs.”

Bob Silverman, executive vice president with JLL’s supply chain and logistics solutions group, notes that with e-commerce sales and returns on the rise (15% annual growth rate) and many current distribution systems not optimized for the reverse flow, the need to develop a solid reverse logistics strategy is now paramount.

“It’s become an ‘arm’s race’ to see who can deliver the most optimized strategy for the circular economy,” says Silverman. “This is also a growth opportunity for the industrial real estate market in the U.S, as the two most likely solutions to a reverse logistics problem both involve warehouse and distribution centers and will ultimately drive demand.”

According to Silverman, if a logistics operation decides to handle the returns in-house, it will need to expand the company’s logistics footprint. “Whether it’s through expansion of existing space or building new space to accommodate a parallel reverse supply chain network, a completely self-managed reverse process will require additional real estate.”

Building 3PL trust

The more increasingly common course today, however, is to outsource some, if not all, of the reverse process to a 3PL partner.

“While retailers would continue to make inventory management decisions, the 3PL would oversee the collection, handling and distribution of the return goods,” observes Evan Armstrong, president of the 3PL analyst and consultancy firm Armstrong & Associates. “This has become a preferred choice for many retailers with a less-robust supply chain network, and it allows them to benefit from the best-in-class logistics systems and locations employed by most 3PL firms.”

Armstrong says that every major value-added warehousing and distribution 3PL has some returns handling capability, but it still appears that the leaders are going to remain FedEx/Genco, UPS SCS, and Ingram Micro Logistics. “Those players are in the top ranks of leading domestic reverse logistics players, where over 15% of returns are concentrated,” he adds.

In the end, the efficiencies gained by outsourcing result in lower costs and more excess-inventory value. And although online retailers are coming to terms with the high volume of returns that come with online shopping, reducing the cost associated with those returns remains a top priority.

In the end, for retailers that have both an online and brick-and-mortar presence, encouraging the customer to return an item in-store remains key.

Warehouse/DC Design:Urban locations going to new heights

In a recent report by the Arizona State University W. P. Carey School of Business, Dr. Dale Rogers and two other authors explain how “The Warehouse of the Future” will also have an impact the global reverse logistics industry.

According to Rogers, a transformational trend underway in warehouse and distribution center (DC) design today are very high ceilings. “In some cases, warehouses are being built that have 40-foot clear or higher ceilings,” he says. “While 30-foot clear ceilings have become the de facto standard for new facilities for the last 25 years or so, this is a large increase.”

A primary reason for these high ceilings is that real estate is more expensive in many new sites selected to handle the e-commerce fulfillment as well as the reverse loop. For buildings utilized in an urban center, for example, the number of square
feet on the ground is precious. For the same reason that skyscrapers were originally built in city centers, it makes sense to pack more product into urban distribution centers in taller buildings.

Rogers notes that, in the early part of the 20th century, many warehouses were in the city center and most of those facilities were multi-story and inventory was moved up and down the freight elevator between floors. Today, logistics managers know that multiple floors in a warehouse or DC is usually not very efficient.

“These high ceiling facilities in addition to requiring specialized material handling equipment, also require special sprinkler systems and support,” says Rogers. “Firms that move to these facilities find that they can better utilize physical footprint of building, but it comes at a cost of different types of equipment and a more complex picking system.”

Some firms included in the research said that, in general, even high-ceilinged distribution centers don’t work well handling both forward and backward product flows. Many distribution centers that attempt to efficiently process both forward and reverse supply chain flows struggle to manage the returns tasks well.

This problem may be related more to focus than to actual capabilities. If the DC manager must make a choice between efficiently executing forward logistics versus reverse logistics, it’s likely that the manager will emphasize the forward distribution
of new product.

Finally, says Rogers, cycle time processing can be negatively affected when a DC handles both forward and reverse shipments. “In facilities that only have a few dock doors and limited space on their docks, product coming back can be mishandled or processed slowly,” he adds. “In the end, the ‘circular economy’ is driving the need for PopUp distribution centers and on-demand warehousing following the Uber and AirBnB models—because what it comes down to is keeping the customer satisfied.” 

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About the Author

Patrick Burnson's avatar
Patrick Burnson
Mr. Burnson is a widely-published writer and editor specializing in international trade, global logistics, and supply chain management. He is based in San Francisco, where he provides a Pacific Rim perspective on industry trends and forecasts.
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