Product returns cost U.S. manufacturers and retailers $100 billion annually and can reduce a manufacturer’s profitability by 3.8 percent. That is why reverse logistics is fast emerging as a core driver of competitive advantage and financial performance among manufacturing leaders.

Reverse logistics vendors are generally involved in the gamut of processes involved in transporting previously purchased products from customers back to the manufacturer, according to the Reverse Logistics Association.

Product returns cost U.S. manufacturers and retailers $100 billion every year, and customer returns can reduce a manufacturer’s profitability by an average of 3.8 percent, says IndustryWeek.

As such, reverse logistics is rapidly emerging as a core driver of competitive advantage and financial performance among leading manufacturers, according to Aberdeen Group. Moreover, considering “the percent that net profits are reduced by improperly handled returns is 35 percent,” explains research firm Gartner (via Supply & Demand-Chain Executive), “it pays to get reverse logistics right.”

Company statistics vary, but the point is that optimized processes for capturing maximum value as soon as possible will help your company compete more aggressively. First, a company must realize that “the increase in costs for processing a return, as compared with a forward sale, is an astounding 200 percent to 300 percent,” says the Reverse Logistics Executive Council.

According to Aberdeen Group, best-in-class companies have improved their situation through the following strategy:

• Restructure the service organization with higher-level oversight and accountability, integrating the service organization closely with sales and marketing, as well as with design and manufacturing, i.e., disseminating service data throughout the product life cycle.

• Upgrade technology solutions to automate portions of the return process.

• Work with retailers, suppliers and channel partners to coordinate agreed-upon standards for returns processing, i.e., recover more costs from suppliers.

• Develop a dedicated reverse logistics operation separate from forward distribution activities with executive oversight.

Best-in-class service organizations reclaim 64 percent of initial value from returned products and parts, spend 9 percent of annual sales on overall logistics costs, and have nearly 5.7 percent of their products returned for repair within the initial warranty period, according to Aberdeen.

One reverse logistics example is toy manufacturer Mattel, which provides some insight into its return processing methods. The business-to-consumer company’s procedures are highlighted in an early article by Reverse Logistics Association’s Reverse Logistics Trends newsletter. In it, Reverse Logistics Professional Report editor Paul Rupnow emphasizes reliable data collection. In Mattel’s case, it has worked with retailers to either “provide them with a credit allowance to cover the cost of returned products” or “collect the returns for Mattel to validate, issue credit and perform further analysis.”

Mattel’s returns team at the time performed “a 100 percent audit for each of the returned items.” From that audit, team members would collect the following:

• Credit data to issue credit to the entity for the returned item. Team members also use the data collected to determine the appropriate return allowances for the others who they might not be able to audit.

• Statistics on defective versus non-defective products. These are gathered to ensure the entity is eligible for credit and to assess if there are product, packaging or instruction improvements that can be made to reduce the return rate.

• Statistics on the details of the defect with a code for each type and recommendations for improvement.

• The site where the product was made, to assist in troubleshooting.

“When a recurring problem is identified, the product showing it is often sent to the manufacturing and design groups for further research.”

Top managers at Mattel read monthly and quarterly reports “containing data about return rates and their related financial amounts, including comparisons and trends.” And, Rupnow adds, “data and trends are now used to help assess the performance of a brand or manufacturing facility.”

Mattel mines as much feedback from its customers’ actions to drive improvements within the company; and if shippers and packaging designs are inadequate, then the red flags demand attention. This makes supply chain “weak links” apparent, allowing for resolution of the problem based on its root cause.

The data further permits the prioritization of design and manufacturing problems, which enables managers to look at the rewards of — and costs of — processing improvements. So decisions can be based on the best available knowledge of which process enhancements will most dramatically reduce returns.

Naturally, every customer thinks his or her need is immediate, so the faster the refurbished item can be returned, the less the customer feels dissatisfied.

Resources

Supply Chains Also Work in Reverse
by David Blanchard
IndustryWeek, April 2007

Best-in-Class Reverse Logistics By the Numbers
by David Blanchard
IndustryWeek, April, 2007

Industry Best Practices in Reverse Logistics
by Rachel Gecker
Aberdeen Group, January 2007

Revisiting Reverse Logistics in the Customer-Centric Service Chain
by Rachel Gecker and Mark Vigoroso
Aberdeen Group, September 2006

Want to Be a Supply Chain Hero?
by Lee Norman and Warren Sumner
Supply & Demand-Chain Executive, April 7, 2007

Why Mattel’s Reverse Logistics Team Gets All the Resources They Need
by Paul Rupnow
Reverse Logistics Trends