which aims to protect the environment and human health,
continues to gain acceptance worldwide.
Despite this and other evidence of the growing importance of reverse logistics—and, in a broader sense, the
reverse supply chain—most executives choose to focus more
of their attention on the forward supply chain because its
impact on a company’s bottom line is far more substantial.
By doing so, however, they are missing opportunities to
improve their companies’ profits and performance.
For one thing, returns management provides an opportunity to improve business efficiency at a time when the
marginal cost of improvement in forward supply chain
operations has been rising. For another, returns management offers various sources of revenue from auctions,
refurbishments, recycling, and more. The reverse supply
chain, moreover, offers a wealth of actionable intelligence
that can be employed to improve product design, process
design, and operations.
Although, as noted above, product returns can have negative consequences, with proper handling they can sometimes actually improve a company’s relationship with customers. For example, how a company manages its warranties, product recalls, and similar activities will have a
substantial impact on its brand image. Indeed, some companies are using reverse logistics as a strategic tool to differentiate themselves from their competition.
6
Clearly the reverse supply chain (which can include
everything from defective and end-of-life products, to shipment overages and refused goods, to reusable mobile assets
like pallets and containers) is rapidly growing in importance. And as we have seen, returns management and recycling can be very costly activities. How can companies manage this function without adding unsupportable costs? As
this article will explain, it is possible to at least mitigate
those costs, and even to make the reverse supply chain into
a revenue or profit center.
The key is to focus on disposition strategies for returned
products and materials, such as donating, auctioning,
reselling, refurbishing, incinerating, and recycling, among
others. Selection of one disposition strategy over another
should be a function of the financial benefits to be gained
as well as of nonfinancial implications, such as brand equi-
ty and regulatory compliance. Companies can develop a
framework for choosing the best disposition strategy by
examining financial transactions in the reverse supply chain
as a profit and loss (P&L) and cash-flow statement, and
complementing it with nonfinancial considerations. In
addition, this type of framework can help to monitor the
performance of the reverse supply chain and identify areas
for improvement.
KEY IMPACT AREAS
In order to improve the efficiency of a reverse supply chain
and address market and non-market drivers, a company has
to understand which areas of its business are affected by
returns and recycling, and where it should therefore be
focusing its efforts. These include:
Disposition strategies and gate keeping. Depending on the
type of product involved, there are several disposition
options, such as auctions, donations, redistribution, repair,
refurbishment, recycling, incineration, landfill disposal,
and energy generation. By making wise disposition choices
and routing the returns accordingly, the reverse supply
chain can be transformed from a cost center to a revenue
source. The gate-keeping choice (who handles returned
goods, and in what manner) is dictated by both financial
considerations and nonfinancial considerations like regulations and brand equity.
Company finances. The way in which returns are managed can have a significant impact on revenues and profits.
A long “return-to-credit” cycle, for instance, can harm a
company’s relations with its customers, retailers, and distributors. Returns-related taxation also deserves attention.
Value-added taxes (VAT) paid out in the course of managing returns often go unclaimed because the accounting
function does not receive timely information, and there
may be opportunities to minimize customs duties and
other trade-related taxes paid against returned goods.
Performance measurements. It is valuable to develop a set
of key performance indicators (KPIs) that are specifically
related to the reverse supply chain. Examples include
returned goods as a percentage of sales; the ratio of reverse
supply chain revenues (savings) to costs; the asset-utilization rate; year-over-year growth or decline of returns; and
the percentage of returns that are fraudulent.
Traceability. This typically is well managed in the forward
supply chain but often breaks down when returns are
involved. Proper tracking using bar codes, radio frequency
identification (RFID), and/or global positioning systems
(GPS) prevents mix-ups of returns with forward-flowing
