energy offsets can be considered as revenues.
Lastly, reclaimed VAT payouts represent another source of
revenue or savings. In countries where a VAT is paid as part
of a service fee to providers of reverse logistics services, the
tax refund generally goes unclaimed. Accurately tracking
and accounting for the VAT paid in relation to reverse logistics activities, and then passing timely information to the
accounting department helps to reclaim the VAT and generate savings.
Cost drivers
The most obvious reverse logistics costs include warehousing for temporary storage at collection centers and
transporting returned items to their final disposal location.
In addition, there are traceability costs related to the use of
bar codes, RFID, GPS, and similar technologies.
But the cost drivers associated with the reverse supply
chain go beyond physical distribution
and handling activities. There are customs duties when goods cross national
boundaries, and the excise and VAT taxes
paid to third-party remanufacturers,
logistics companies, and other service
providers. There might also be other
taxes and/or penalties, such as landfill
disposal fees.
Returns authorizations are a distinctive
aspect of reverse supply chain costs. This
includes order management costs, which
are indirect costs related to the generation of RMAs, move orders, and so forth. In addition, there
are transaction costs incurred in issuing credit advices or
chargebacks to dealers, retailers, and vendors.
Gate-keeping costs include both labor and equipment
costs. These can be broken down into two categories. The
first is direct costs incurred during handling, disassembly,
sorting, cleaning of returns, and changing product attributes for redistributing products to new geographies. The
second is indirect costs, typically incurred in the examination of returns to determine whether or not they are defective as well as in the examination of disassembled parts.
Customer service linked to reverse supply chain activities
will also have its associated costs. Consider, for example, the
cost of maintaining a call center to guide retailers and customers with returns and recalled products. Some retailers
bear the costs of maintaining factory outlet stores to sell
returns at discount prices. Finally, there are warranty-pro-cessing costs, which can be considerable.
For a company following a “zero returns” policy, the
major cost would be for return allowances, which can range
from 3. 5–4 percent of sales to retailers.
13
Last but not least are costs incurred in maintaining in-house facilities for refurbishing, repairing, and remanufacturing. For instance, in the automotive industry, several manufacturers have their own remanufacturing facilities,
14 while some outsource it to third-party providers.
For companies that are operating in-house facilities for
energy generation from waste, the cost incurred for operating such a facility should, of course, be counted in the
reverse supply chain.
Figure 1 summarizes this financial framework, along
with illustrative nonfinancial considerations.
PERFORMANCE MEASUREMENTS
In addition to the factors affecting a P&L statement discussed above, the following measurements can help companies monitor the performance of the reverse supply chain.
Customer recovery cycle time. When customers return a
product, they expect a recovery in the
form of a repair, refund, or exchange. The
length of the cycle time from “a customer
applies for return authorization” to “the
recovery reaches the hands of the customer” has a critical impact on customer
satisfaction. This cycle time is a measure
of after-sales service and a source of competitive advantage.
Dealer/retailer credit cycle time. When
dealers and retailers return a product, the
manufacturer sends a credit advice to
them. This credit cycle time is important
to both parties, and in conflicting ways. For the manufacturer, a long credit cycle time means more money in
accounts payable and hence lower working capital. But for
a dealer/retailer, a long cycle time increases its working capital. However, in the interest of long-term relationships
with dealers and retailers, manufacturers are expected to
keep the credit cycle time short.
Return-to-reuse cycle time. This is the time from when a
return authorization is created to the point when
repaired/refurbished/remanufactured parts are put on
shelves in the secondary, or “B,” channel. Because of short
product lifecycles, it is imperative that returned goods that
have been repaired/refurbished/remanufactured be sold as
soon as possible in the “B” channel. Long cycle times will
risk items becoming obsolete before reaching that channel.
Returned goods as a percentage of sales. This measurement
can be benchmarked using industry standards. For food and
grocery companies, for example, the industry standard would
be 1. 2 to 1. 8 percent.
15 However, if returns are a part of a company’s business strategy (consider the case of Xerox, mentioned earlier), then the comparison would be misleading.
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.
