Handling the movement of goods from the end user back to the retailer, distributor, or manufacturer has never been easy for shippers. Where supply chains are set up to manage the flow of goods from point of manufacturer to end user, reverse logistics takes the opposite approach. Without the right transportation, product tracking, and returns processing infrastructure, reverse logistics can quickly become a significant cost center for shippers.
For companies that struggled with reverse logistics pre-COVID, the global pandemic quickly turned into a major driver of better systems, partners, and processes for this aspect of the supply chain. With e-commerce sales up by 44% in 2020—and with online returns more than doubling between 2019 and 2020—companies are taking a closer look at how they manage the reverse logistics for their supply chains.
Managing $102 billion in returns
According to the National Retail Federation (NRF), e-commerce sales accounted for $565 billion (14%) of total retail sales in the U.S. in 2020. During that 12-month period, customers returned approximately $102 billion worth of merchandise purchased online. These realities put companies in the unfamiliar position of having to put as much energy into their reverse logistics as they do their forward logistics.
“E-commerce sales were growing exponentially prior to the pandemic, and COVID-19 really accelerated that pace,” says Alec Hicks, Group Director, Supply Chain Excellence, at Ryder. “Along with meeting e-commerce fulfillment demands and getting products to customers, there’s a correlation between the volume of product that consumers buy, and how much of it they’ll be sending back to shippers.”
Customer expectations around product returns and exchanges have also shifted in recent years, with most now expecting a simplified way to return a garment that doesn’t fit as expected, a defective appliance, or a floor rug that’s not quite the right color. And, it’s not enough to simply be able to return the item; customers want to know that they can do it quickly, easily, and at no additional charge.
“Consumers care about the ability to return items that they’ve bought online,” says Hicks. “Among other factors, this makes having an effective reverse supply chain extremely important for shippers right now, and also going forward.”
Operating cost-effectively while running backwards
When you put a supply chain in reverse, it suddenly becomes less of a value center and more of a cost center. Returns can cost retailers between 9% and 15% of revenue And while today’s consumers are demanding easier, free returns processing and/or exchanges, the reverse logistics process itself has yet to become a revenue driver for the typical organization.
“Unless you’re running a third-party logistics company (3PL) that’s charging to handle the processing, you’re probably not earning revenues from the reverse supply chain,” Hicks points out. “For shippers and retailers, it’s basically something you have to do in order to drive sales.” Because of this, he says reverse logistics has historically lagged behind fulfillment operations when it comes to attention, energy, and investment.
When done correctly, reverse logistics also requires a supply chain that can operate cost-effectively while running backwards in a forward-focused network. Making this happen requires systems designed to handle return merchandise authorizations (RMAs), provide customer-friendly interfaces, manage product aggregation (i.e., upon return to the warehouse, 3PL, or retail location), and address the physical returns process (e.g., can the product be resold through a secondary channel? Will it be cleaned and refurbished first? And if not, how can it be disposed of sustainably?).
As they go through these motions for every single product that comes back to their facilities, Hicks says companies also have to think about brand protection. For example, there may be an opportunity to sell some returned goods on the secondary market, but some brands may avoid this step in lieu of protecting the image of their brands in the eyes of the consumer.
Combined, these factors paint a fairly complex reverse logistics picture in today’s marketplace, where Hicks says, “some companies are doing better than others.” Higher-end electronics and appliance retailers, for example, are fairly good at minimizing the impact that returns have on their product costs. “These shippers are also good at maximizing the portion of that product that they get back,” Hicks explains, “and then reselling it as new as part of a new order.”
Many other industries are still playing catchup on the reverse logistics front, where Hicks says up to 40% of all products sold online will come back for return or exchange. Organizations that ignore this reality could wind up paying a steep price for this oversight. “It’s a simple math calculation,” he explains, “as e-commerce continues to grow in the double digits, the need to manage returns profitably is going to increase exponentially.”
The five components of a reverse supply chain
When working with shippers to perfect their reverse logistics processes, Ryder addresses the situation on five different fronts: systematic returns, transportation, recalls, repairs/refurbishments, and sustainability. Here’s how the managed services provider helps companies effectively manage each of these critical components:
1) Systematic returns. Consumers need authorization to complete a return or an exchange, and companies need the right systems in place to handle this customer-facing reverse logistics component. “This is usually done systematically,” says Hicks, “with many of our customers just including a returns label with the shipment itself.” By providing an online, self-service portal where customers can get an RMA, shippers can cut down on paper and manual intervention. “Make it easy for the consumer to get the RMA and get the return going,” Hicks says. By integrating these actions into an enterprise resource management (ERP), warehouse management (WMS), or transportation management system (TMS), shippers can gain high levels of visibility over the reverse logistics process while also ensuring that it runs systematically and smoothly.
2) Returns transportation. Next, the goods have to make their way back to the store, warehouse, or manufacturer’s location. This requires a well orchestrated handling and transportation process that Ryder manages effectively with its managed transportation network. Key steps include package pickup at the customer location (or, drop off at a designated depot); the aggregation of those goods; the line haul to an aggregation center; and then the line haul back to a returns processing center. Once there, the returns are processed and inspected. Then, products are either returned to stock, held for shipment to a secondary channel, or scrapped in a manner that protects the brand while also protecting any confidential information that may be associated with the product itself.
3) Handling recalls. Product recalls introduce a unique set of reverse logistics challenges that Ryder is well equipped to address. A “mass set of returns” that arrive all at once, recalls are often driven by product changes, product defects, regulatory changes, and other outside factors. “Managing recalls requires a network that can respond quickly and scale up to meet those needs,” says Hicks. “If a shipper doesn’t have a reverse supply chain and partners that can manage recalls, it may be brought to its knees.” The systems requirements are similar to those of a typical reverse logistics setup, he adds, but also include alerting consumers to send their products back and/or replacing those items. “You also need good visibility within the forward fulfillment framework,” Hicks adds, “to be able to inspect and segregate any recalled product that you want to withhold from shipping.”
4) Repairing and refurbishing returned goods. While low-value products may not be worth repairing and refurbishing, some electronics, appliances, furniture, and other high-end goods are generally worth the extra steps. This not only helps preserve the company’s profitability on each item, but it also keeps more goods out of the world’s landfills and helps shippers operate in a more environmentally-sustainable manner. “An effective returns process needs either a refurbishment capability co-located with a returns processing center,” says Hicks, “or one that’s consolidated into a standalone site.” In most cases, Ryder co-locates repair and refurbishment capabilities with returns processing in order to eliminate extra “touches.” There, it tests returned products to gain a clear understanding of its operational capabilities, decides whether it’s worth repairing (or not), and determines the repair cost. Then, Ryder either refurbishes the item for resale or selects a viable disposal method for it. “It can be as complex as swapping out circuit boards,” says Hicks, “or as simple as touching up a piece of furniture at one of our cross docks.”
5) Sustainability and brand protection. With much of the world focused on reducing carbon footprints and greenhouse gas (GHG) emissions, more companies are blending sustainability in their reverse supply chains. This not only includes repurposing returned items, but also utilizing packaging designs that 1) reduces the amount of material it takes to package a product to get it to a consumer and back, and 2) minimizes product damages during shipment. “Damage certainly has an impact on returns volume and is reflected in sustainability calculations,” says Hicks. For items that have to be disposed of, that action should be taken in an environmentally-friendly manner. “And, from a brand protection perspective,” he adds, “the shipper must also be able to validate that the product is destroyed properly and that it doesn’t wind up on the gray market.”
By including these five key pillars in the reverse supply chain, Ryder helps companies gain higher levels of consumer experience, save money, and minimize the number of steps it takes to get a product back from point B to point A.
“Minimizing shipping and handling costs as products move through the reverse supply chain is a huge win for shippers,” Hicks points out. “An effective process for moving the product through the returns process, managing the inspection, and doing the repairs offers substantial savings for companies.”
For example, one leading consumer electronics brand that was experiencing excessive supply chain and warranty costs within its network due to returns recently called on Ryder for help tackling these pain points. Working with Ryder, the company was able to consolidate six of its sites into a single campus solution that included both forward logistics, returns processing, and on-site repair.
This move paid off for the electronics brand, which posted significant savings via a reduction in inventory, obsolescence, and warranty returns costs due to integrated repair services. “The brand also has improved visibility across the supply chain,” says Hicks, “and is now saving substantial money on transportation costs.”
Companies can’t ignore reverse logistics anymore
From a strategic level, an ineffective reverse logistics process can throttle growth. It’s also expensive and cumbersome, and particularly as inventory starts to pile up in the stockroom or warehouse, waiting to be processed.
“You end up building up handling costs without giving the consumer resolution,” says Hicks, who expects these realities to hit home for a large group of companies as e-commerce sales continue to grow. “An effective reverse supply chain and returns process that consumers have faith in will be a key to profitable growth for retailers, distributors, and manufacturers for a long time to come.”
This article was first published by Supply Chain Management Review; and re-printed with permission.