Maximizing reverse logistics for profits

Published: Thursday, February 14, 2019

An average manufacturer spends 9 to 15 percent of total revenues on return which creates a huge impact on customers, resources and bottom line. In fact, improving reverse logistics can help company increase revenue up to 5 percent of total sales. Poor reverse logistics functions could have a very bad effect on customer relationship and on the financial health of the company.

Businesses are generally profit-driven. Companies are always on the lookout to save expenses on operations and personnel to ensure profit whilst providing customers quality service.

But no matter how much planning is done some companies still incur losses in different ways. That’s where reverse logistics could potentially reduce waste and contribute to company profits.

Defined as dealing with all things related to the reuse of products and materials, reverse logistics is more precisely the process of moving goods from their typical final destination for the purpose of capturing value or proper disposal as well as the management and the sale of surplus or returned items from the hardware leasing business.

The entire supply chain gets reversed in the reverse logistics process where companies have to correctly identify and categorize returned products for disposal. If done properly and wisely, waste could be turned into profits.

Dealing with returns

Reverse logistics seldom receive attention until something important goes wrong. Many executives go out of their way to avoid dealing with returns because it can be ugly and is thought of as nothing more than a cost of doing business.

An average manufacturer spends 9 to 15 percent of total revenues on return which creates a huge impact on customers, resources and bottom line. In fact, improving reverse logistics can help company increase revenue up to 5 percent of total sales. Poor reverse logistics functions could have a very bad effect on customer relationship and on the financial health of the company.

Companies lose a huge amount in profits, customer equation is severely dented and the external liabilities that get created have big impact on the business. But if reverse logistics is efficiently managed, companies can earn profits, improve customer relations and minimize liabilities.

Some companies are highly cognizant of the importance of reverse logistics in the supply chain and offer tailor-made end-to-end return solutions to customers.

“We give its due relevance to reverse logistics and understand how much impact it creates on profitability of a company,” said Ryan Oliver, National Head-Contract Logistics, Agility Logistics Pvt Ltd.

Oliver explained a high level of coordination and route planning among the warehouse team helps to optimize the vehicles and resources being developed on the daily basis. Load consolidation helps to bring down high transaction cost, enabling the company to trickle down the savings to customers.

Most companies face huge challenges in the management of reverse logistics despite having a robust primary and secondary distribution network. It is usually found that vehicles used for distribution of finished goods can seldom be used for customer returns.

More often than not such returns accumulate overtime causing congestion at the end user. It ultimately delays accounting and passing of credit notes to the end user.

Harpreet Kholi, Zonal Head-Operations, Future Supply Chain Solutions limited, said: “There are many challenges organization has to face while processing the reverse logistics, the team who packs and processes reverse for the point of sale are not from the supply chain background, and they are not specialized in packing, etc. which increases the probability of damage/ shortage in transit.”

Optimizing reverse supply chain

Agility maintains a high level of competition between the warehouse team and its customers.
“We help the team in route planning and in optimizing vehicles and resources deployed of the management of reverse logistics,” Oliver explains.

“It is important to understand that a large part of the company’s finished goods, particularly equipment and appliances right from the mobile phones to air conditioners, refrigerators, engineering products, etc., are dependent on a strong ‘service back-up’. A strong service backup is totally dependent on a reliable reverse logistics solution and network.”

Inefficiency in reverse logistics has a cascading negative impact on sales, forward logistics and the supply chain as a whole. A poor reverse logistics network leads to erratic vehicle deployment which results in high cost of transportation. Moreover, unprocessed credit notes due to poor reverse logistics, leads to customer dissatisfaction and reduces level of reorders from end users.

Reverse profit

Mismanaged reverse logistics has a horrendous impact on customer relationship and the financial health of a company. Often companies tend to ignore reverse logistics process until something goes wrong.

If reverse logistics is resourcefully managed then companies can explore hidden profit possibilities, improve customer relationships and minimize liabilities all in a single shot.

Executives often have the perception that if they invest the amount spent on processing returns to other supply chain activities to elsewhere they would yield greater results. Therefore, they just focus on trying to reduce the cost of return processing. In reality, reverse logistics costs are less than 4 percent of total supply chain costs for most companies.

And while maximizing efficiency is always important. Reverse logistics can also provide a wide variety of opportunities for improvements, from customer service and returns processing to supplier relations and an unexpected revenue source.

There are several key areas where companies can positively impact their revenue with reverse logistics activities. Returned products are good source of revenue. Companies save more and earn more when they ensure timely delivery which is a result of proper time management involved in processing of return of goods.
There are activities like refurbishing, repackaging and reselling to parts reclamation and recycling. With the secondary, discount market for products continuing to grow, there are even more reasons to think about returns as revenue opportunities.

If the company knows about products which will be returned and the potential place where it lands, then it becomes easier to deal with regulatory issues and evaluate returned stock for possible secondary sales channels. There are also other beneficial byproducts to disposing of products, such as avoiding excess inventory carrying costs, minimizing taxes and insurance and managing staff levels.

Mishandled or completely misplaced returns affect the efficiency of any reverse logistics process, but it also means that products could end up being a total loss for a company instead of an opportunity for resale, or a spare parts resources.

Warehousing is crucial

The need for efficient reverse logistics just can’t be brushed off and warehouses have always an important role to play in the process. Process involved in reverse logistics like return, processing, repair and replacement of products create a huge impact on customer services. Warehouse is the nerve center for al above mentioned operations.

Few important roles which are performed in the warehouse include: streamline turn-in procedures; route items with an eye to what happens to them next, and; integrate the forward and reverse pipelines

Bill Tyng, sytems consultant with Forte Industries of Mason, Ohio, gives some insights on the warehousing business of the international market.

“One hundred percent of WMS packages were designed to get the stuff out, they also had to be adapted to get stuff back in,” he says.

The situation is more critical in Europe where retailer policies tend to be more relaxed and returns can account for 30 percent of a business.

In the United States, reverse logistics is getting more attention and had also given rise to a number of niche vendors offering software or services specifically to handle returns while the larger integrated vendors are also scrambling to adjust.

“Reverse logistics can be the black hole of your warehouse,” says Mary Haigis, Chief Marketing Officer of Optum Inc. in White Plains, N.Y. “The return process involves huge inefficiencies, but they are manageable with the help of the right technology and processes.”

She cites an example of a large retailer and customer of Optum that piloted a reverse logistics application at a pair of its DCs throughout the Christmas Season.

“The company typically has a high rate of return but realized incredible savings and efficiencies with the help of a formal system,” she said.

The generous return policies offered by most major retailers these days ensure there are always a given percentage of returned products working their way up back to the supply chain. As such, reverse logistics also has different names like Aftermarket Logistics, Retrogistics, or Aftermarket Supply Chain.

Business owners have to deal with the pain of reverse logistics and its importance is further magnified in the e-commerce business. Most warehouse managers consider returns a necessary evil, thus, assign a low priority in reverse logistics. This can often result in inefficient supply chain practices such as ordering new inventory while returned products are still kept in the warehouse.

Reverse logistics could certainly deliver profits given the right attitude and planning.