The global supply chain management market was estimated at 15.85 billion US dollars in 2020 and is predicted to grow to over 31 billion US dollars by 2026.
In business, the term “reverse logistics” is used to describe the process of managing the return of goods. It’s a key part of the supply chain, but it can also be a major challenge for businesses.
Here are three important limitations of reverse logistics that you should know about.
1. Reverse Logistics can Lead to Delays
The bulk of the reverse logistics process follows through a series of carriers, stores, and warehouses before reaching the customer. In fact, there are several points in this process where the process becomes less efficient and more prone to delays.
First, the return shipment must be picked up at one facility and then transported to another site for processing. Then shipping methods also have an impact: shipment by ground is most time-consuming and requires storage space at both ends of the journey. For customers on tight delivery schedules, delays caused by these steps can be even more troublesome.
2. Reverse Logistics can be Expensive
The reverse logistics process requires a variety of resources and expertise, which can add up to significant costs. If you choose to outsource your reverse logistics needs, this can add even more expensive because you may have to pay for consultants who help you develop the processes.
The cost of excess inventory can also add up quickly. As a result, the supply chain needs to be planned carefully to avoid unnecessary expenses or loss of revenue on items that were intended for resale.
3. Reverse Logistics is a Challenge to Scale
The reverse logistics process tends to be more complex than the forward logistics process. Each step in the reverse logistics process has an associated step in the forward process, which makes it difficult to scale upward. To address this challenge, companies often partner with manufacturers or other retailers that have the capabilities to serve as a hub for reverse logistics services.
What Is Reverse Logistics
Reversed logistics is a part of the supply chain (of any company) where goods are returned to the company that sold them. Reverse logistics refers to the process of managing the return of goods. It is a key part of the supply chain since it involves many carriers, stores, and warehouses before reaching their final destination
Most companies have this process because it helps them to reduce costs and avoid inventory issues. The reverse logistics process happens in two steps: pick-up – where inventory is returned to the carrier(s) that sent them out; and return – where inventory is transported back to its origin(s). There can be several intervening stages between pick-up and return.
While some companies use the term reverse logistics interchangeably with the term “returns”, others differentiate the two, using reverse logistics to refer to the management of returns from customers and returns from retailers (to wholesalers or directly from retailers to manufacturers).
Reverse Logistics Strategy
An effective reverse logistics strategy is critical to maintaining high levels of customer satisfaction in today’s complex supply chains. By definition, reverse logistics is the process of managing the return of goods and materials back through the supply chain to their original point of manufacture or distribution.
This can be a challenge for supply chain managers, who must carefully track and manage the return of goods while ensuring that customer satisfaction remains a top priority.
Returns management is the process of managing the return of goods or materials from a customer or client. The reverse logistics process includes the returns management life cycle, which encompasses the return of goods or materials from a customer or client back to the production process. The importance of reverse logistics lies in its ability to optimize the production process and future sales.
The Three Main Types of Reverse Logistics
Even though the term reverse logistics sounds relatively simple, the actual process is more complicated than you might think. This is because the process involves moving a product that has already been sold back to its original vendor.
There are three main types of reverse logistics and they often involve activities that you can do in both the forward process and reverse processes:
1. Horizontal Logistics
Commonly used when shipping out defective products back to their vendor or another retailer for replacement or repair.
2. Vertical Logistics
Used when returning goods for warranty or product guarantees, or for items that were purchased directly from a manufacturer through a third party (i.e., an online retailer). This graph displays the global costs of returning shipments between 2015 and 2019, divided down by region. Return deliveries in the Asia-Pacific area totaled approximately 256.4 billion US dollars in 2019.
3. Open Loop Logistics
When a consumer returns a product that was previously owned and no longer exists in inventory.
Barriers & Solutions in Reverse Logistics
Internet sales have become increasingly important in retailing. E-commerce is expected to account for 19.6 percent of global retail sales in 2021. According to projections, the internet market will account for about a quarter of total worldwide retail sales by 2025.
1. Returned Goods Must be Picked Up
At a store or an online retailer, customers who no longer want an item can return it for free. But in reverse logistics, this process can often be delayed by several weeks. In fact, even when a company offers free returns, delays like these can still occur.
The company might require that the product be returned to a specific location and often only at certain times of the day. If a store wants to do this, it can make more money by selling more new products instead.
Solution: Make services available in your local area and throughout the day. For example, if someone lives in an area where there are no direct return locations for their store’s products, you could offer convenient drop-off locations instead.
2. Shipping Costs Can Build Up
When you outsource your returns, you might have to pay a regular fee for shipping. You also might have to pay for an extra shipping box or your vendor might not be able to send items back at all.
In these cases, you may choose to offer customers store credit instead of free returns. If this happens, be sure that the store credit is worth more than the amount the customer paid for their original item.
Solution: Make sure that when you outsource returns, your vendor offers convenient and seamless service and does not charge extra fees for shipping or returning goods. If it does, look for alternatives (like drop-off locations) that keep costs low.
3. Returned Goods Must be Segregated
To make up for the financial loss from items that are not sold, the retail company that does their returns might request that you have your products labeled with a barcode for easy product tracking.
Some companies also like to use UPC barcodes. Returned goods also need to be stored separately so they can be easily identified and returned as well. If there is no specific storage area, then one of the shipping boxes would have to be removed from the shipment when it arrives at its destination and may not be able to fit in with other shipments.
Or the shipping box may not even fit back into the original shipment because they are usually made with different dimensions than the original box.
Solution: Make sure that you have a well-marked return area so your vendor can easily identify returns as they come in. Consider creating a specific barcode to use for your returns to make it easier on your vendors as well.
4. Reverse Logistics Is Hard to Codify and Scale
Because the reverse logistics process is more complex than the forward process, it can be challenging to set up the proper processes in order to scale your supply chain efficiently. You may need to partner with other retailers or manufacturers who are able to serve as collection points for return goods. The more complicated the logistics of reverse logistics, the less likely manufacturers and retailers will be able to scale their operations in a cost-effective way.
Solution: Partner with other businesses to set up a reverse logistics process that makes sense for your operations. Then, train your employees and partners on the process so that they can internalize it and make it scalable.
5. You Cannot Determine Returned Goods’ Value Until You Receive Them
If you are returning goods back to the same store or online retailer where you purchased them, then you cannot determine how much money you will get for them until they arrive at their destination. In fact, many vendors will only give you a dollar amount and not a percentage of the original sale.
Solution: Figure out how much you will receive for each returned item before it is shipped. This way you can make an informed decision about whether or not you should accept it. Some companies even offer customers an upfront payment on items that they bring in that they can use to purchase new items so they can return their unwanted goods at another time.
If you are returning goods to another store or online retailer, then be sure to find out ahead of time from your vendor if the company typically takes quality control measures or has other limitations when handling returned items if this is something that you worry about.
Why is Reverse Logistics Complicated
Reverse supply chain logistics is a process where traditional outbound logistics flow is reversed. This is important for businesses to handle because it allows them to keep track of their products and ensure that they are being used properly.
With the reverse flow of logistics, businesses can save money and time while also ensuring that their products are being handled in the best way possible.
1. The Process is More Complex Than the Forward Logistics Process
The more complicated a process is, the higher the likelihood that errors will happen during the process. Some companies that use reverse logistics have very aggressive return policies on items that they have to outsource to third parties.
But others do not place as much importance on returns and may not publicly share the number of returns they receive or how much money those returned items generate for their company.
Because of this, you may find it hard to get statistics on how many products are returned, how much money they generate (or lose), and what types of errors occur during their reverse logistics processes.
2. Reverse Logistics Happens After a Product Has Been Sold
When you make a sale, your goal is to transfer ownership of a product to someone else. And for end consumers, it’s not uncommon for people to buy something because they have an emotional attachment to it or because they want it for sentimental reasons.
It’s not unusual either if another part of the supply chain experiences some issue with how the items are handled before they reach their final destination. This can cause problems during the reverse logistics process and make you lose money on your original sale.
3. There is a Difference in The Person’s Motivation for Returning the Product
Because you can no longer own the product when a sale has been made, many people will return their items for different reasons than you would expect. Some consumers may buy items on impulse because they like them and want to own them.
Other consumers may buy something because it was on sale but then decide later that they don’t want it after all. And still, other shoppers may buy something and then find out that their purchase won’t work in their home or office space after all. This can cause complications when trying to return merchandise back to its original vendor.
4. The Cost of Returning the Product may Outweigh any Potential Gain
Even if you want to return a product, the cost of shipping it back may put you in a position where you are losing money on the transaction. It’s important to determine whether or not you can make a profit from accepting the product before sending it to its destination.
Plus, if you have a strict time frame for when your vendor needs to receive returned items, then your costs will go up as well. These are some of the reasons why so many companies who are engaged in reverse logistics have strict policies on when they will accept returns and what they will do with returned items in order to prevent loss and delays.
5. Reverse Logistics is Hard to Codify and Scale
Because the reverse logistics process is more complex than the forward process, it can be challenging to set up the proper processes in order to scale your supply chain efficiently. You may need to partner with other businesses to set up a reverse logistics process that makes sense for your operations. Then, train your employees and partners on the process so that they can internalize it and make it scalable.
Why is Reverse Logistics Important
Reverse logistics management is an important factor for success in eCommerce. According to a USPS research, internet purchases are three times more likely to be returned than in-store sales. And for the first year ever, National Returns Day, which is observed annually by UPS, occurred prior to Christmas in 2018, reflecting just how deeply e-commerce is transforming the retail supply chain.
1. Increase Product Sales
When you have an efficient reverse logistics process in place, you can treat an inbound shipment of returned items as another source of revenue. By doing this, you can use the returned items as a way to move your inventory and increase your sales.
It’s important to note that when goods are returned after they have been sold, the person returning those goods is usually looking for a refund on their original purchase so they can replace the item with something else. This means that if you return the item back to your vendor, then you could lose any profit associated with reselling it for a discount or at full price.
2. Reduce Your Holding Costs
When you accept packages that have been returned by consumers, then you can reduce the amount of time and resources that you have to spend on maintaining inventory in your warehouse.
It’s also likely that you will find it easier to keep track of these items because they are stored in separate locations than products bought on the sales floor. Reverse logistics processes that are streamlined offer for cost savings in a variety of areas.
3. Reduce Shipping Costs
On average, business owners spend a lot of time preparing and sending out new inventory. When there is an abundance of returned products to ship out, then this process gets simplified because you do not need to send new inventory out as often.
This means that you will spend less time on the manufacturing process, which reduces your costs. It also means that your product is much more likely to be placed on the shelves of your vendors and retail stores.
4. Increase Retrieval Rates
When you have a reverse logistics process in place, then it’s not a bad idea to check with customers about what products they might want to purchase for future orders. By getting these requests from your customers, you can increase the retrieval rate for returned items and make shopping easier for them from the comfort of their homes or offices.
5. Reduce the Chance of Fraud
When you have a reverse logistics process in place, it’s also likely that you will develop better relationships with your customers by giving them the option to return their merchandise.
In some cases, a customer may decide against returning an item and simply want you to donate it to a cause that they care about, so everyone can benefit from the transaction instead of just suffering from a loss.
On the other hand, if you don’t have a reverse logistics process in place, then it’s possible that customers could abuse this system by posting high-value items on their social media accounts and requesting refunds so they can resell them for profit.
The Future of Reverse Logistics
The global reverse logistics industry was valued at 635.6 billion US dollars in 2020. The reverse logistics market is anticipated to be worth more than $958 billion USD by 2028.
While reverse logistics is still a young industry, it’s certainly gaining momentum. As the use of 3D printing becomes more widespread, we can expect to see a rise in the number of products returned because they were not up-to-standard. With this in mind, reverse logistics and its process will become more important as companies find ways to take care of the goods that are being returned.