Reverse Logistics

Reverse logistics refers to the process of moving goods from their final destination back to the manufacturer or supplier for the purpose of recapturing value or proper disposal. This cycle encompasses activities such as returns management, recycling, refurbishment, and disposal, which are essential for minimizing waste and maximizing resource efficiency. Companies engage in reverse logistics to improve customer satisfaction by facilitating returns and exchanges, as well as to enhance sustainability efforts by reducing the environmental impact of excess products.

The practice is increasingly important in today's economy, where e-commerce and consumer expectations for convenience drive demand for effective return solutions. Implementing a robust reverse logistics strategy can lead to cost savings, improved inventory management, and strengthened brand loyalty. Additionally, it supports the circular economy by promoting the reuse and recycling of materials, thereby contributing to environmental conservation.

Understanding reverse logistics can help businesses navigate the complexities of managing product returns and waste, while also addressing broader sustainability goals. As such, it represents a critical aspect of modern supply chain management that aligns economic interests with environmental responsibility.

Published in: 2021

By: Joseph Dewey, PhD

Subject Terms

Reverse Logistics

Last reviewed: February 2017

Abstract

U.S. companies lose $100 billion annually from products being returned or recalled. If forward logistics refers to a manufacturing company’s process that moves products from production through points of sales, reverse logistics refers to a company’s strategic management of the process undertaken if those products are returned by customers. The concept behind reverse logistics is that by designing the process a problem product takes back to the company, that company can not only save significant money from recycling workable parts of otherwise defective products but also, by studying customer dissatisfaction and product defects, maintain better quality control over its own production lines.

Overview

Returning goods has long been held as a special privilege of consumers in a free market. Stores often set regulations governing return policy, but most are more than willing to let particulars slide in return for establishing goodwill with a wide customer base. The willingness to accept returned goods helps create positive customer buzz. The impact, however, of returned merchandise—the sheer cost of the waste—is shouldered for the most part by the production company that must take ownership of the returned merchandise.

The process of returning merchandise is fairly familiar to consumers. If a purchase is defective—that is, it does not work according to expectations or company specifications, the customer does not hesitate to return the product to the store where it was purchased. In some cases, store policy governs the particulars of the return transaction, but generally the customer is awarded store credit or simply given a replacement. In turn, the customer service representative simply tosses the defective product into a handy shopping cart, and the customer, in turn, moves on with their day.

For the company responsible for producing that defective product, however, the process is just beginning. Somewhere in the forward logistics, the reasoning goes, the product underwent an unacceptable alteration that resulted in a negated sale. Where? What might be learned from the return? Were any parts of the defective product still usable? Maybe the customer’s dissatisfaction points to a wider design issue that can be addressed in an effort to ensure better sales. Conventional wisdom long held that the company must simply write-off defective merchandise, that the return transaction itself signaled a significant and systemic problem with the product. Maybe some parts might be salvaged, but the waste was the governing principle and returns became the dirty secret for companies engaged in manufacturing, the reality no one wanted to acknowledge.

In the 1960s, the average manufacturing company would expect to experience the return of somewhere between 5 and 10 percent of its sold products annually. With the advent of digital technologies and the dramatic rise of Internet shopping, social media, and websites that meticulously examined and compared new products, thus raising consumer expectations long before the purchase, and as products themselves became progressively more complicated as internal operations in the simplest products were run by digital technology, consumers were emboldened and began to take advantage of return policies at a far more accelerated pace.

By 2005, the American Retailers Association estimated that manufacturing companies in the digital marketplace faced closer to 40 percent of products being returned. Of particular concern were electronics, such as stereo equipment and televisions, DVRs and cameras, appliances and home repair devices, and information technology devices, such as personal computers, laptops, cell phones, and tablets. The problem was that more and more of these returns were not actually related to product quality. Items were being returned because customers had a change of heart and regretted the purchase—a shopper’s epiphany termed “buyer’s remorse.”

Sometimes the purchase itself was strategic and cynically timed. Returns of big screen televisions, for example, were shown to spike dramatically in the week immediately after the Super Bowl broadcast. Occasionally, technology-challenged customers could not quite figure out how to work the product. Other reasons for buyer’s remorse might be related to having made an unsuitable choice—another product turned out to have more or better features or it wasn’t the right color, the right size, the right dimensions. The time-honored reason for return—“I got two”—remained common as well. In any event, actual defects in the products began to account for less than 30 percent of overall consumer returns. That meant that 70 percent of returned goods were still, technically, perfectly usable if a purchaser could be found who didn’t mind the product’s brief history.

Indeed, once a product had been opened and taken from its packaging, it began to depreciate considerably. Unlike how the product left its place of origins (all neatly packaged and boxed with all the necessary supplemental parts and wires in pre-designed compartments or numbered in plastic bags), the returned goods were more often carelessly repackaged, reassembled to give a proximate version of a new product. Parts had been attached but not reattached; wires had been removed; batteries had been used; packaging bags had been ripped open; packaging materials themselves had been lost. If a company wanted to resell that product, it was compelled to return it to retail sites marked as “refurbished”—as, fairly or not, a broad euphemism for “damaged.” The item would, in turn, be sold to a consumer at a discount.

A familiar variation on reverse logistics in regards to how a company minimizes losses by returning unsold or unsalable products to the product flow line, occurs in the clothing business in a process known as smart returning. Reverse logistics can be applied to styles and lines of clothing that simply go out of demand. Those products, unused, can be redirected into a different supply line to where the market might be interested, rather than simply taken as a loss. Sales of bathing suits, for example, in New England tend to drop significantly after mid-May; they can be marked down for clearance, but that represents a loss for the manufacturer. Alternatively, the unused bathing suits can be reintroduced into the product flow by allowing the retailer to return them and then reintroducing them to markets in Florida or Texas, where winter is far milder and swimming itself is a year-round activity. The products then can be sold with minimal profit loss.

Electronics. Companies in industries with short product life cycles, such as electronics, faced an extraordinary challenge” (Jain, 2012). Simply consigning these returned products to waste would create considerable financial stress in company operations; refurbishing recoups some but nowhere near all the expenses involved in assembling and transporting the products. Should an entire product line be found defective—as when in the fall of 2016, the new Samsung Note 7 phones started to catch fire—the company would post a general recall. Companies may recall defective product lines on their own initiative to avoid damage to their reputation or catastrophic lawsuits; if a company hesitates to issue a recall, it may be compelled to by the direct order of a government watchdog agency. Most defective products can be fixed and restored to the owner, but, as with the Galaxy smartphone with the incendiary battery charger, the company must simply accept the product back and offer some form of compensation. In this case, the manufacturer would be flooded with returned and unsalable items.

In 2014, more than 64 million automobiles were recalled. In 2015 alone more than six hundred suspected tainted food items were recalled nationally. Unlike cars and food items, however, most parts of a recalled electronics device can actually be recycled and some of the lost revenue recovered. That net recovery could mean a bottom line savings of millions.

To accomplish recoveries on returned items, a company must focus considerable attention of the logistics of the return process itself. This process, like the production process, involves planning algorithms, organized logistics chains, systems integration, sorting, and packaging (Krykawskyy & Fihun, 2015; Fernandes Goncalves & Esteves, 2016). The goal is to maximize the value of the good and, in turn, to maximize the net recovery. A successful reverse logistics stream can return as much as 40 percent of the product’s original value.

Reverse logistics is also able to minimize the time it takes for a returned product to be reintroduced into the supply chain. If the process is effectively managed and carefully monitored by a coordinated team, a product can spend as little as 48 hours out of the product flow—a remarkable advantage in a field where products can become obsolete in a single sales quarter. In the process, the company can gather critical information about its manufacturing protocols and where they can be improved.

Applications

Reverse logistics begins at the point of sales. A customer walks into an electronics store on a Monday to return a gift. The customer has attempted to replace the purchase into its original packaging and has the receipt. The product is still under warranty. The customer has complaints about the product’s functions; although the device works, it does not work to the customer’s satisfaction. Thus, this is a return of an undamaged product.

As a first stage in the process of reverse logistics, to help organize what has long been a neglected and potentially messy and inefficient process, the company responsible for the product has already arranged with the sales site to set up a basic computerized protocol to ensure speedy and effective feedback. The customer is asked for basic information about the purchase, and the clerk records the product’s serial number as well as its model and make. In addition, the return form asks specific questions about the product and its performance to direct the company’s response. The product is then assigned a Return Merchandise Authorization (RMA) to expedite the processing.

The product is then carefully re-boxed for maximum protection and the box affixed with the appropriate identifying label that will, in turn, be scanned for necessary and helpful data at the factory, all keyed to a computer identification system. The product is then transported to the appropriate site, which is often the original factory but sometimes, as a way to eliminate the transportation leg if a company maintains a nationwide service region, a specific refurbishing facility closer to the sales sites.

When the information has been scanned at the factory, the team can begin its work. If the product was returned because of customer issues, the data needs to be reflashed. Any individual-identity information stored by the original purchaser—such as contact information, correspondence, work information, personal images—has to be removed. The software is reflashed to clear out such personal data. If the product was returned because of a malfunction, the unit can be put through stages of testing to determine where the reported problems occurred and whether any of the critical elements of the product can be recycled.

The team works to minimize the time the product is out of the supply line and to reduce the number of so-called touches—that is, how often and how many different people actually get involved with the re-purposing processes. The goal is to get the refurbished product and/or its critical internal parts back into the production lines. The facility designates the product ready for such re-use through a strenuous quality assurance inspection, a process that can be looped until the product is deemed reclaimed.

With the muscle of technology and the efficiency of a staff who understands the larger purpose behind reverse logistics, the process can minimize waste and, in turn, minimize the landfill space required for discarded parts, making reverse logistics itself an element of a company’s strategy to convert to green technologies that are environmentally friendlier (Mishra, Kumar & Chan, 2008). Within 48 hours, the received product can be returned to the supply chain.

Viewpoints

At the center of the burgeoning field of reverse logistics is control. Companies have sprung up to specialize in providing the service to manufacturing firms and managing the considerable challenges (Das, 2012). Increasingly, reverse logistics is being perceived to be a stand-alone system within a production facility and a field of interest that companies need to study (Rubio, Chamorro & Miranda, 2008).

Manufacturing companies use reverse logistics to do much more than conducting salvage operations on returned, presumably defective products. By listening to customer feedback, by carefully examining products that return to the facilities, by meticulously examining exactly how the product was assembled, a company can learn much about its operations. If conventional refund policies were designed to build customer loyalty, reverse logistics helps a company internally by creating optimum efficient operational organization. Marketing reused materials presents a challenge—who wants a cell phone made up recycled parts? The perception escalates in larger consumer units such as automobiles and airplanes (Chan, Chan & Jain, 2012).

In the end, manufacturing firms come to see reverse logistics as a fundamental element of the production process itself. The return of company products needs to be integrated into the production protocols themselves, a product needs to be perceived both going forward and coming back. Then the waste can be minimized and the supply chain better maintained.

Terms & Concepts

Integration: The action of combining related processes into a single process.

Liquidation: A company’s decision to unload unsold merchandise usually at cost or at a loss.

Net Recovery: The monetary amount a manufacturing company can recover from reclaiming returned merchandise.

Reflash: To clean the memory of a digital device.

Stand-Alone System: An on-site division or department that maintains its own integrity, its own personnel structure, and its own protocols.

Supply Chain: Metaphorically, the direct line connecting factory production to sales point.

Bibliography

Chan, F. T., Chan, H., & Jain, V. (2012). A framework of reverse logistics for the automobile industry. International Journal of Production Research, 50(5), 1318–1331. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=75047989&site=ehost-live

Das, K. (2012). Integrating reverse logistics into the strategic planning of a supply chain. International Journal of Production Research, 50(5), 1438–1456. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=75047996&site=ehost-live

Krykawskyy, Y., & Fihun, N. (2015). The place of reverse logistics in the modern society. Logistics & Transport, 25(1), 5–12. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=101582172&site=ehost-live

Fernandes Gonçalves, M., & Esteves Silva, Â. (2016). Reverse logistics: The Portuguese companies’ perspective. Brazilian Journal of Operations & Production Management, 13(3), 330–337. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=119135892&site=ehost-live

Jain, R. (2008). Editorial. International Journal of Environmental Technology & Management, 8(2/3), 113–116. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=31613868&site=ehost-live

Mishra, N., Kumar, V., & Chan, F. (2012). A multi-agent architecture for reverse logistics in a green supply chain. International Journal of Production Research, 50(9), 2396–2406. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=76312394&site=ehost-live

Morgan, T. R., Richey, Jr, R. G., & Autry, C. W. (2016). Developing a reverse logistics competency. International Journal of Physical Distribution & Logistics Management, 46(3), 293–315. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=113794749&site=ehost-live

Rubio, S., Chamorro, A., & Miranda, F. J. (2008). Characteristics of the research on reverse logistics (1995–2005). International Journal of Production Research, 46(4), 1099–1120. Retrieved October 23, 2016, from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=27541558&site=ehost-live

Reverse Logistics

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Subject Terms

Reverse Logistics

Abstract

Overview

Applications

Viewpoints

Terms & Concepts

Bibliography

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