Today we continue our series on all things reverse logistics by speaking about the benefits of setting up a reverse logistics program in your supply chain. In the first post we covered what is reverse logistics and how it differed from traditional logistics, and then we spoke of the long history of reverse logistics. We came to find out that really, reverse logistics has been in the world of supply chain for a long time, but until recently became a more formalized practice. This practice often requires setting up a reverse logistics program, and like with anything, setting up core key performance indicators to judge the success or failure points for continual improvement, and thus continual benefits. For those seeking out information on the benefits of a reverse logistics management program, this post is for you. At Cerasis, especially with such a large automotive aftermarket client base, we are able to provide the following benefits discussed here, for our clients every day. If you are interested in the set up of a reverse logistics program and a holistic custom logistics solutions program for inbound and outbound freight management, make sure you set up a free logistics consultation with us today.
Reverse Logistics Management Program Benefits
As shippers strive to wring every cent out of their logistics costs, they’re increasingly taking a hard look at their reverse logistics management practices. And no wonder, they may find a motherlode waiting to be mined.
Companies can no longer afford to treat reverse logistics management as an afterthought. It needs to be a core capability within the supply chain organization. For years, most shippers paid little attention to returns.
That has changed as companies increasingly realize that understanding and properly managing their reverse logistics programs can not only reduce costs, but also increase revenues. It can also make a huge difference in retaining consumer loyalty and protecting the brand, as we explain more fully below.
Just how big is the opportunity? According to the Reverse Logistics Association, the volume of returns annually is estimated at between $150 and $200 billion at cost.
This represents approximately 0.7 percent of GNP and 6 percent of the Census Bureau’s figure of $3.5 trillion total U.S. annual retail sales. It has been estimated that supply chain costs associated with reverse logistics average between 7 percent to 10 percent of cost of goods.
#1: Reverse Logistics Management Gives Increased Customer Satisfaction
Customer satisfaction occurs when an organization’s products or services meet or exceed customer expectations. In fact, all things being equal, customers typically care more about having their product, service and support requirements met, and much less about how their vendors do it. What customers really want is to have their voices heard, and then, have their suppliers actually do something about it (i.e., they want to see results). Many shippers, or shippers who have employed a third party logistics provider, use their logistics and reverse logistics management capabilities as market differentiators. The intent is to keep customers so satisfied with their products and services, before, during, and following the original delivery, that they remain loyal to their suppliers, repurchasing their products and/or services again, and again, and again.
However, customer satisfaction may be viewed in two very different ways: either as event-specific, or cumulative. In the former, the emphasis is on the customer’s evaluation of a specific product/service event (i.e., product sale, service call, part order, return merchandise, etc.). However, in the latter, the evaluation is based on the customer’s total pre- and post-purchase experience with the company’s products, services and support over time (i.e., the “total customer experience”). Firms that integrate new technologies, such as RFIDs, etc., into their logistics services are generally more likely to establish and maintain strong customer relationships over the long haul as a result of their technology-enhanced capabilities.
The main characteristics that ultimately differentiate one logistics organization (and its reverse logistics management processes) from another may be categorized essentially as follows:
- Agile Adaptability, or how well (and how quickly) the organization can respond to changes in its customer/market demands and, as a result, develop the new logistics processes, products and services required to meet (and exceed) them;
- Inventory Management, or the ability to manage both the cost and the availability of inventories effectively;
- Cycle Times, or the time it takes the organization to routinely fill customer orders and related activities—both on the inbound logistics management and reverse logistics management sides;
- Key Performance Indicators (KPIs), or the use of the most appropriate, timely and accurate metrics for measuring performance (and customer satisfaction) on an ongoing basis; and
- Market Position and Presence, or the ability of the organization to establish, maintain and promote its logistics capabilities and strengths both to its existing customers, as well as to the marketplace as a whole.
According to the Aberdeen Group, “very few companies are more than marginally satisfied with their current reverse logistics approach, with nearly 60% reporting that they are somewhat or not satisfied.” This does not suggest a satisfied marketplace.
Market research has shown that customers believe the following attributes to be of the greatest importance for both forward and reverse logistics management:
- Elimination of slow or lost shipments
- Elimination of shipment discrepancies
- Improved profit margins through the use of optimization tools
- Reduction of inventory carrying costs for the customer
- Support for its customers’ efforts to reduce inventory investments
- Significantly reduced product/part returns
- Improved customer service and satisfaction through:
- Improved delivery reliability
- Improved efficiencies in customers’ shipping/receiving operations
- One version of the “truth” for dispute resolution
However, for there to truly be a “bond,” or “partnership,” between the reverse logistics management services provider and its customers, there must also be the following shared attributes:
- Mutually high expectations for the success of the partnership
- Mutual loyalty
- Framework/capability for technical data/information exchange (e.g., EDI)
- Willingness to share risks/provide assistance in critical situations
- Willingness to negotiate/mediate differences of opinion/interpretation
- Use of joint provider/user task forces/teams
- Two-way, frequent communications and feedback channels
- Joint performance monitoring and tracking (i.e., against pre-set goals)
Overall, regardless of market segment or size of the organization, the most widely acknowledged benefits derived from the use of reverse logistics services may generally be categorized in the following areas:
- Increased product/service revenues and profitability
- Enhanced product/service uptime or availability
- Reduced inventory/parts acquisition costs
- Improved efficiency, time-sensitivity, and ability to troubleshoot problems
- Improved customer satisfaction and retention
These are the primary factors used by the marketplace to evaluate the benefits of the reverse logistics management services, and providers, they use to manage this portion of their respective businesses.
#2 Reduce Overall Total Costs with a Reverse Logistics Management Program
Reverse logistics are a higher priority in some industries than in others, particularly those where returned product can be recycled or remanufactured. For example, 70 to 90 percent of the goods sold in the motor vehicle aftermarket have been remanufactured, reports the Remanufacturing Industrial Council International.
And, the market for remanufactured parts is $43 billion as of 2011, according to the Auto Parts Remanufacturers Association. Getting parts from a dealer or repair shop back to the manufacturer, or on to a remanufacturer so that the parts can be rebuilt and resold, requires sound reverse logistics management processes.
A great example comes from a diesel engine manufacturer. This aftermarket group works with 31 regional distributorships to support engines once they’re out in the field. Distributors are given a financial incentive to collect and send back broken or damaged parts to the aftermarket group for remanufacturing.
When the core products, parts coming back to be remanufactured, are ready to be returned, the distributor electronically sends an order to the aftermarket group. Core products are returned via a dedicated freight desk of customer service reps who are ready to schedule pick ups using a set of preferred carriers.
The returns are part of a continuous loop within the reverse logistics management practices. The preferred carriers deliver stock orders of new and remanufactured parts to these distributors weekly, and picks up core products to be returned to the group’s distribution center in Memphis. In addition, the group utilizes a plastic reusable container for outbound shipments.
The core product is shipped back to the group in those containers. It’s a continual loop of product, packaging, and transportation, which helps maintain lower costs..
At the Memphis distribution center, warehouse associates then uses a dedicated part of the receiving area to sort incoming parts. They process 400 trailers a month, sorting perhaps 180,000 core parts. After inspecting the returns, associates confirm receipt of the part so that the distributor can receive timely credit for the return.
This is a crucial step in the process. The third party logistics company does all the coordinating, scheduling, communicating, freight payment, and auditing, while the manufacturer provides the routing guides and can then have full visibility over the process.
Use the Reverse Logistics Cost Equation to Understand How to Make Cost Reductions Impact your Bottom Line
For real cost reduction, you need to understand your reverse logistics management metrics. The Reverse Logistics Cost Equation is an assembly of the key cost components or categories related to the creation, handling, processing and final disposition of a return item. The equation is as follows:
+ Logistics Costs
+ Credits/Replacements Cost
+ Asset Depreciation
= Total Reverse Logistics Costs
It is very important to note that a reduction in any one of these Reverse Logistics Cost Equation components goes straight to your corporate bottom line profit.
Reverse Logistics Management Cost Components
- Processing Costs: are all costs incurred to process and handle your returns. For example, your returns process may start with the authorization of the return by a call center representative, followed by the receipt of the returned item at your warehouse and then the repair or refurbishment of the returned item.
- Logistics Costs: are all costs related to moving and handling the returning units as well as the cost related to the shipping of any replacement units. This may include freight costs for pickup and for shipping. It may also include warehouse handling and storage costs not already captured as a processing cost above.
- Credits/Replacement Costs: most products that are returned require the issuance of a credit or the exchange with the same or a similar replacement product.
- Asset Depreciation: most returned products have some value, whether it can be re-stocked, refurbished or even sold as scrap. Often these items have a higher recovery value than you may think. It is very important to consider the financial value that may be lost over time if these returned products are held too long and not dispositioned quickly.
Impact of a reduction in the Reverse Logistics Cost Equation Components
|Cost Component||Potential Savings Range
$ (very small) to $$$$ (very large)
|Processing Costs||$ – $$|
|Logistics Costs||$ – $$$|
|Credits/Replacement Costs||$$$ – $$$$$|
|Asset Depreciation||$$ – $$$$$|
Small improvements to processing often result in some financial savings that increases corporate profits. For instance, it may cost you $30/unit to process a warranty return. If you are able to improve the process and save 10% of your processing costs, you will send $3/unit to your corporate bottom line profitability.
#3: Maximize Return on Assets with an Effective Reverse Logistics Management Program
Small improvements in the area of credits/replacement or the area of asset depreciation can often result in much larger profit impact. The reason for this is often driven from the impact of your cost per unit. If we look at the example of one of your retailers returning one of your electronics items due to a product defect. The cost to issue a credit to the retailer is equal to the amount you sold that unit to the retailer for; let’s say $80 as an example. The impact of this return is an immediate reduction in your corporate profit of the full $80 for this unit. Hopefully, you will be able to recover some value from this returned unit, but the immediate impact to profit can not be overlooked. Nor can the immediate gain you could achieve by somehow reducing the credits issued to the retailer by one unit. In this case, the impact of issuing an $80 credit for a unit is certainly much greater than the $3/unit you achieved above with the small improvement in per unit processing cost.
Similarly, large opportunities are often available in the area of asset depreciation from a reverse logistics management program. The number of channels to dispose of returned goods (in any condition) has grown significantly over the past few years. The profit impact of this opportunity can be very significant. For instance an electronic manufacturer recently learned that they could dispose of returned items collecting dust in their warehouse at 80% of retail value. The per unit selling price was above their original manufactured cost, but since these were returned units their book value was already written off to zero, so the gross profit margin was 100%. The profit impact of returned asset depreciation is essential to monitor, because time can rapidly reduce the value of idle returned goods and their potential positive impact of corporate profits.
Have you run a reverse logistics management program in house or with a provider? What was your experience? Let us know in the comments section below!