Backward progress. Turning the negative perception of reverse logistics into happy returns BY SARAH MASON

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1 Employees at one of Genco s returns centers sort products. Backward progress Turning the negative perception of reverse logistics into happy returns BY SARAH MASON 42 Traveling down a one-way street, you suddenly reach a dead end. With traffic behind you, there s nothing left to do but sit and wait. One wrong turn in an unfamiliar area landed you in this frustrating predicament. The same thing can happen with goods that are returned from consumers they flow back toward a company with no rationalized destination. Consumer returns have long been banished to the outskirts of a company s operations. The mere mention of returns can elicit groans from manufacturers and retailers. Viewed as a necessary evil, overstocked, broken, discontinued, and undesirable products often gather dust in dark corners. Little thought goes into the collection, transportation, and distribution of these items on the flip side of the supply chain a process commonly referred to as reverse logistics. One company that embraced these backward processes to find the promise of untapped benefits was Sears. Ten years ago, when the mention of returns was still taboo, Sears began outsourcing its reverse logistics processes. Central processing of all its subsidiaries resulted in increased efficiencies and cost savings. Before implementing the returns centers administered by Genco Distribution Systems, Sears disposed of its returned goods in landfills, paying for this privilege. Now, instead of consuming valuable landfill space, Sears uses Genco to ship merchandise back to vendors, sell it in secondary markets, donate it to charity, refurbish it, or recycle the material components. All these activities generate value for the company. Even the few items that must be destroyed earn credit for Sears from the vendors who don t want to be responsible for disposal. Now many companies are following in Sears footsteps and embracing reverse logistics. Why should companies tackle this historically undesirable area? What s changed that allows them to successfully implement new programs? And why won t the public ever hear about these undertakings? The means from the end Sometimes you have to move backward to go forward. In the broad-

2 est sense, reverse logistics refers to moving goods from the point of use to their final destination. This movement typically opposes the normal distribution channels employed by a company to deliver products to end users; hence its moniker. Returned goods affect multiple aspects of a business. From increasing inventory and tying up capital in stock to affecting financial statements, a poorly managed program has far-reaching implications. On the flip side, a streamlined process for collecting and processing returned material significantly contributes to business success. [Returns] do have value and they do incur inventory carrying costs and there are service implications for customers with them, said James Stock, professor of marketing and logistics in the college of business administration at the University of Florida and author of Development and Implementation of Reverse Logistics Programs. Faced with tight markets, an economic pitfall, and less brand loyalty among consumers, companies are moving from a focus on customer service to an emphasis on complete customer satisfaction. And that means prioritizing returns. The focus has always been on getting the product to the customer as fast as possible and ignoring the returns piece, said Dave Vehec, vice president of retail services at Genco. Businesses should focus on every interaction with the customer in order to encourage repeat business and develop relationships with consumers. It s the only way companies can service their customers correctly, said Greg Henninger of Schneider Logistics, another third-party logistics provider. A more intuitive place for reverse logistics to make a significant impact is online. Online retailers can reap the benefits of a strong focus on reverse logistics. Without the ability to handle merchandise before purchase, consumers return more goods. A handful of online retailers have seen reverse logistics emerge from the shadows of the back room into the bright light of the boardroom, explained Bruce Caldwell in an article that appeared on InformationWeek Online. Among the most common reasons for initiating a reverse logistics program is necessity. Returned merchandise chokes the supply chain and hinders financial gains. Regardless of the variations among returns, one aspect is constant: returned goods remain in limbo too long. There is value in product, noted Vehec. The longer it sits, the less value you re going to have in that product. Value is not only in the product itself. Information gleaned from returned products, another form of customer feedback, offers improvements for business processes and impacted profits. Reverse logistics is important because it tells you what consumers do and do not like, said Vehec. They ve got this wealth of information and data to be able to effect change on their product lines. Dale Rogers, a professor of supply chain management at the University of Nevada in Reno and co-author of Going Backwards: Reverse Logistics Trends and Practices, agrees. Leading-edge companies are recognizing the strategic value of having a reverse logistics management system in place to keep goods on the retail shelf and in the warehouse fresh and in demand. Uncertain returns One of the first hurdles a company faces is actually defining reverse logistics, according to David McLeod of Logistics Training International Ltd., a company that provides training in design, delivery, and implementation of logistics and supply chain. In my experience, it covers quite an extensive range of topics and there is a general lack of clarity being shown, explains McLeod. There s no clear consensus on the exact definition for the practice. Organizations interpret the term differently from the precise nature of the goods to the terms used to describe their final stop. In a threepart article in a 1995 issue of Transportation and Distribution magazine, Ron Giuntini and Tom Andel describe reverse logistics as an organization s management of material resources obtained from customers. Regardless of the exact definition, the intent of reverse logistics is to process goods to either recapture their value or dispose of them. Additionally, when it comes to customer returns, uncertainty prevails. It can be difficult or impossible to predict which products will be returned, where the items will originate, or where they might be sent. Once companies have a returned product in their possession, the item can spend days, weeks, even months on a shelf waiting to be evaluated because this process is often GLOSSARY Disposition: How a product is disposed; for example, sold at an outlet, sold to a broker, or sent to a landfill Green logistics: Attempts to measure and minimize the ecological impact of logistics activities Recondition: When a product is cleaned and repaired to return it to a like-new state Recovery: Physical movement of a resource from the customer Recycle: When a product is reduced to its basic elements, which are reused Refurbish: Similar to recondition, except more work is involved in repairing the product RMA: Return material allowance: authorization to return a product to a supplier Remanufacturing: Similar to refurbishing, but requiring more extensive work; often requires complete disassembly of the product Returns: Products for which a customer wants a refund because the products either fail to meet his needs or fail to perform Reuse: Using a redesigned product in a manner similar to its original purpose Reverse logistics: Moving goods from point of use to point of origin for disposal or to recapture value Reverse supply chain management: Another term for reverse logistics Zero returns: Manufacturer never takes possession of returns; retailer or third party is responsible for disposing of product The Reverse Logistics Glossary at done on a case-by-case basis. With limited software available, most inspection and work is completed manually, which further hampers the process. Although more and more firms have begun to view their ability to take back material through the supply chain as an important capability, the majority of these firms have not yet decided to emphasize 43

3 Backward progress Green REASONING Cutting costs, increasing profits, and growing customer satisfaction aren t the only motivations behind reverse logistics projects. Increasing awareness of environmental issues and government regulations restrict businesses and require more responsibility for products and packaging. Even without direct government intervention, several companies feel the need to earn more profit from fewer resources. Reconditioning, refurbishing, and remanufacturing offer viable alternatives to acquiring raw materials. Thus began a new discipline known as green logistics. Green logistics encompasses any logistical activity that minimizes environmental impacts. Although green logistics is distinct from the reverse logistics trend, the two categories do overlap. Both green and reverse logistics can be key solutions for the shrinking availability and rising cost of landfills. In an effort to curb deposits into landfills, government regulations have restricted which items are eligible for landfill disposition. Companies are trying to restrict what they put in landfills and find another avenue for getting rid of the product, said Dave Vehec, vice president of retail services at Genco. In the United States, the government regulates hazardous material disposition. Companies must find alternate means of eliminating these items. According to James Stock, professor of marketing and logistics at the University of Southern Florida, If you look at the list of things that reverse logistics as a strategic variable, said Rogers. Because of the varied nature of returns, any software optimizing the process requires customization. The need for customization, combined with meager support from the management level, means that few are banned on airplanes, all those are hazardous materials. It really cuts across almost every spectrum. Several countries require companies to take back packaging as part of their environmental initiative. Other regulations require producers to accept products at the end of their life cycle. Prime examples in this category include car batteries and tires. Although charging customers for disposal at the time of purchase could offset the cost, reverse logistics still plays a part in collecting and disposing these items appropriately. In a move to standardize environmental regulations across countries, ISO certification requires documented procedures for environmental management systems, similar in nature to the quality certification of ISO The standards encourage continuous improvement and require documentation, auditing, and review of environmental programs. Common hazardous materials in the United States Battery acid Diesel fuel Fireworks Gasoline Insecticides Kerosene Motor oil Paint Propane Military Traffic Management Command information technology professionals are available to create solutions. Large time and staffing investments with low anticipated paybacks don t encourage innovation. Whether it s distribution or returns, the reverse logistics piece, or the sales and marketing of product, you have to focus on each equally, said Vehec. Although there is an obvious connection between sales, marketing, and distribution with the consumer, returns are not generally perceived as affecting the consumer. With more success stories trickling out, other companies realize the value of investment in reverse logistics. Although specific software is limited, other advances in technology make tracking and optimizing more manageable. Information was one of the crucial missing pieces in efficiently handling returned products. Tools such as e- mail and the Internet make sharing information simpler and faster. Developing a reputation After realizing it needed to develop a core competency in reverse logistics to provide a full range of logistics services, one thirdparty logistics provider considers reverse logistics to be the process of handling returns and shipping devices to ensure a complete loop in the supply chain. Its implementation for one customer mirrors the development of the returns industry itself. Because of emerging environmental concerns, reverse supply chain management originally focused on reclaiming and reusing product packages. Most of the stuff that was being done was primarily packaging related, notes Stock, who has been practicing reverse logistics since This third-party provider also focuses on packaging by implementing a program to optimize use of automobile part containers. The expensive packaging required to ship parts to dealers encouraged the development of the new process. The outsourcing company tracks and directs these costly assets. By maintaining an online database of container locations and advance notice of parts being returned, the company coordinates the transport of the containers directly from dealer to dealer. As a result, returned parts moving from dealers back to the distribution center are safely shipped for multi-million dollar savings. Focusing on packaging isn t the only way to reap benefits of the growing reverse logistics industry. With the advent of online purchasing and more demanding consumers, the amount of returned merchandise has increased substantially. J.C. Penney profits from both returned products and reusing materials. The company outsources its returns centers, but they also reuse plastic apparel hangers. The 44

4 hangers conform to industry standards, and they can last up to five cycles before quality concerns prevent reuse. With more than 55 million reclaimed per year and a savings of at least four cents per hanger compared to purchasing new replacements, J.C. Penney sees a significant reduction in costs. One of the changes in the industry that has allowed firms such as J.C. Penney to profit from both returned product and reusing packaging materials has been the increasing number of outsourcing options. The rise of reverse logistics spawned an epidemic of consultant services in this previously untouched area. More alternatives appear in other aspects of reverse logistics as well. After a product is returned, more established channels exist for divesting the company of the product in order to realize value. Landfills are no longer the only option for disposal. Once reclaimed by the company, products can be reused, reconditioned, refurbished, remanufactured, resold in secondary markets and auctions, or recycled. Destruction and disposal are last resorts instead of the first line of defense. Historically there were very few things that people would do with these returns, explains Stock. Now there are a variety of options which increase the potential revenue stream for companies. Kmart takes advantage of the new options available to realize cost savings. Originally limited to centralizing reverse logistics at a distribution center on their own, they turned to Genco to create four returns centers. The centers act as a hub for merchandise from Kmart stores, consolidating returns and moving items out via established channels. Products leaving the returns centers may go back to manufacturers, be resold elsewhere, or be repaired both on and off site. In addition, quality concerns not visible at the store level surface at the central locations, alerting the retailer to potential problems. With this notification, Kmart can spot possibilities for service and quality improvements. Kmart retains decision-making capabilities in the centers even though Genco manages operations and transportation. Progressive publicizing The most common approach to reducing returns is eliminating mistakes before they Scanning is one option to track items returning from consumers. reach the customer. But in order to reduce the number of returns and increase the value of used goods, reverse logistics must become a priority. Priorities demand resources - labor and capital investment - but few organizations have been willing to reallocate scarce resources. Reverse logistics programs require fulltime management. It s not something you can do occasionally or when you have the time, explains Stock. It s not forward logis- 45

5 Backward progress tics in reverse. But when return goods account for only a small percentage of overall inventory, allocating dedicated resources is undesirable. Low volumes haven t changed. Part of the problem with returns is smaller quantities tend to cost more to get back into the system because you re moving smaller items, said Stock. With a good program installed, the number of returns can be further reduced. Other innovations can also help address these difficulties. For instance, to create volume, some companies also accept competitors products. 3M, a company that manufactures products in health care, safety, electronics, telecommunications, and other markets, undertook a reclamation project for their overhead projectors. Because the final product is essentially the same regardless of the manufacturer, 3M encouraged customers to return all projectors they owned at the end of their life span. By accepting competitors machines, 3M received enough volume to justify the project. While authors like Stock and Rogers have contributed to the subject of reverse logistics in recent years, few educational programs publicize reverse logistics or address returns management. Even with the establishment of the Reverse Logistics Executive Council in 1996, no central source of readily available topical information exists. People didn t realize they needed it, said Henninger. They didn t understand it. They thought it was a burden to actually handle returns and administer that. There is little demand for knowledge in this area because reverse logistics inherently deals with the least favored aspect of a company s business: its mistakes in the form of returns. Returns are an inevitable part of the business, said Vehec. Yet most executives still view returns as little more than a necessary evil. Even the most innovative companies addressing the problems of reverse logistics don t go out of their way to advertise their efforts. Amazon.com, one of the best-known online retailers, found a solution to returning merchandise. To combat the difficulties of accepting product via Internet transactions, Amazon.com partnered with Borders bookstores. The partnership benefits both parties, but few people outside the company will ever hear about it. That s in part because returns are a low priority. The larger reason may be that in an era of fierce competition and rapid improvements in other areas, there s little difference between companies and their products. Since firms are becoming more equal in terms of quality, service, delivery, and price, other factors become important. One of them is reverse logistics, says Stock. A lot of companies do good reverse logistics but keep it to themselves because this is a point of differentiation. Despite the negative perception of reverse logistics, the lost value associated with long processing time has made more companies turn to reverse logistics to solve these and other issues. Although the discipline may never make front-page news, it s quietly and steadily making an impact. It s never going to be as important as forward logistics because the volumes are just not the same, said Stock. Obviously money is to be made on the forward side but that doesn t mean you can t make more money by doing the reverse better. 46