The Importance of Reverse Logistics in Your Supply Chain

All News
by Stephen Gould
February 23, 2022
By Stephen Gould
February 23, 2022

At Stephen Gould, we manage all aspects of returns and exchanges, creating a turnkey process for companies of all sizes. This service often includes eCommerce Store Integration, Inventory Management, Quality & Inspection Services, Return Merchandise Authorization (RMA) and Freight Management.

The reverse logistics process has become a key component of many successful and streamlined supply chains. But what are reverse logistics? How do they affect your business’ supply chain? What can your company do to leverage reverse logistics and improve your bottom line?

Our comprehensive guide covers the importance of reverse logistics in your supply chain. Beyond covering the basics to reverse logistics, this guide explains the benefits of reverse logistics and provides ways to measure and assess your company’s reverse logistics system.

What Are Reverse Logistics?

Reverse logistics is all the operational processes involved in moving goods from end customers back to sellers and manufacturers. It is typically associated with merchandise returns and exchanges, but also can include product recycling, refurbishing, and resale.
As the name implies, reverse logistics is focused on moving goods and materials backwards through a supply chain.

The goal of reverse logistics is to recapture value and ensure repeat customers. It is estimated that thirty percent of ecommerce purchases are returned, as compared to less than ten percent of in-store purchases. Every year, returns account for almost a trillion dollars worldwide. Reverse logistics is essential to minimizing losses related to returns and earning repeat business from customers.

The Rise of Reverse Logistics

Reusing products and materials is not a brand new practice. However, reverse logistics is fairly new. Reverse logistics systems have only emerged within the last few decades with the growth of ecommerce.

The overwhelming volume returns and the cost of processing them is one of the biggest challenges in ecommerce freight logistics. In some industries, the volume of returns can be as high as fifty percent of total shipments. Some studies show the real costs of returns can eat up three to five percent of total revenue. For traditional brick-and-mortar retail, returns are three to four times more expensive than outbound shipments.

Many companies think of reverse logistics as a hassle, but investing in reverse logistics can lead to long-term benefits like improved customer experience, decreased resource investments, and reduced storage costs. Reverse logistics should be seen as an opportunity to create a competitive advantage and deepen customer loyalty.

The Benefits of Reverse Logistics

Implementing an effective reverse logistics system has many benefits, including the following.

  • Cost Reduction

    Planning ahead for returns and ensuring correct processing of return orders will help reduce a number of related costs, including administration, shipping, transportation, and more.

  • Fast Service

    Having the capability to provide quick refund and replacement of goods builds trust with customers and enhances your brand’s reputation.

  • Customer Retention

    Reverse logistics offer an opportunity to quickly respond to fulfillment errors and prevent negative customer experiences, which can be just as valuable as making a sale.

  • Loss Reduction

    Repurposing and restocking returned items on a secondary allows you convert a potential loss into an asset.

Common Types of Reverse Logistics

Reverse logistics can involve various plans and controls, which can vary across different industries. There are also different, industry-specific economic incentives for improving reverse logistics management. Some companies prefer to outsource reverse logistics to a third party with resources and capabilities to make it a turnkey process.

Some common types of reverse logistics include the following:

  • Returns Management

    Deals with returns processing as well as policies for rejecting and avoiding returns. The goal is to create a returns experience that is fast, visible, and straightforward for customers. It also expedites processes for sending reimbursements, item replacements, store credit, and more back to customers.

  • Return Policies and Procedures

    Designed to create clear, consistent guidelines for returns. It is important not just for customers to understand these but for employees to adhere to them as well.

  • Repair and Maintenance

    Sometimes built into product agreements, so that customers can have their equipment serviced if issues arise.

  • Remanufacturing or Refurbishment

    Involves any activities where a product is repaired, rebuilt, or reworked. Some companies will recover usable parts or materials or offer services to clean, repair, or reassemble products.

  • Packaging Management

    Focuses on reusing packing materials to reduce waste.

  • Unsold Goods

    Involves handling returns of low-selling items from retailers, manufacturers, or distributors.

  • End-of-Life

    Encompasses the handling of returns, recycling, and disposal of obsolete products.

  • Delivery Failure

    Occurs when there is an issue getting a product to its intended location. Drivers return products to sorting centers, who then must identify why a delivery failed, correct the problem, and resend.

  • Rentals and Leasing

    Often requires return shipping when a piece of equipment comes to the end of its lease or rental period, so that company that owns the product can redeploy it.

The Five R’s of Reverse Logistics

Optimizing your reverse logistics operations means setting KPIs that measure success in five crucial areas, sometimes referred to as the five R’s: returns, reselling, repairs, repackaging, and recycling. Taking a closer look at the five Rs can help your business find opportunities to streamline its reverse logistics and reduce losses.

  • 1. Returns and Exchanges

    KPI: rate of return
    Returns are the first step in the flow of reverse logistics. Customers return products for a variety of reasons: product defects, damage during transit, sizing or fit issues, failure to meet expectations, and more. Regardless of the reason, all returns processing must involve authorizing, receiving, and inspecting products upon return. This step also includes scheduling return shipments, approving refunds, and replacing defective items.

  • 2. Reselling Returned Products

    KPI: amount of product resold
    95% of returns are due to customer dissatisfaction rather than the product being broken or defective. In the United States, the secondary market is worth over $15 billion annually. Many companies now leverage the secondary market to make additional profits off returns. Doing this requires reverse logistics systems to handle tagging returned products, then retesting, repackaging, and returning to inventory for resale.

  • 3. Repair

    KPI: total cost of repairs
    When a defect is not too severe, manufacturers can repair, refurbish, or remanufacture a product to like-new conditions and return them to stock. At the product’s end-of-life, manufacturers might harvest the pieces that can still be reused. These practices have become more common as manufacturers recognize the value in reusing materials from returned goods and contributing to broader sustainability goals.

  • 4. Recycling

    KPI: % of materials recycled
    In nearly every industry, the process of recycling returned parts, components, and products is key to achieving sustainability goals. Recycling is particularly important in tech and consumer electronics. Electronics manufacturers are increasingly finding safe ways to dispose of products when they reach the end of their life cycle. This might include partnering with third-party recycling companies to collect waste and dispose of assets for them. Companies are also finding ways to recover metals like silver, gold, titanium, copper, and palladium that are used in items like mobile phones and circuit boards. Salvaging, reclaiming, and reusing these parts can reduce costs and substantially minimize waste.

  • 5. Replacements

    KPI: % of parts or products replaced
    Some consumers just want the same product but in a different size, color, or version. Reverse logistics make it easy for customers to return and exchange items. Some sellers include return labels or make printing them simple. Warehouse management systems can automate much of this process, notifying customers automatically when their return is received and when their replacement is shipped.

Additional Metrics for Optimizing Your Reverse Logistics Supply Chain

Every company monitors their reverse logistics systems in order to improve and optimize. For some organizations, the main focus is on-time delivery. Others attempt to score every delivery and achieve a perfect score across a number of factors including place, time, condition, package, quantity, documentation, and more. By monitoring delivery data and developing metric targets, companies can improve their processes.
Here are five more KPIs for measuring the success of your reverse logistics supply chain.

  • 1. Volume and Value of Product Resold or Reused

    This is one of the most important metrics. It is a percentage created by dividing the volume of resold products by the volume of total products sold. By using this metric to create a financial value percentage, companies can see how reverse logistics are contributing to profitability. It also incentivizes organizations to implement sustainable supply chain practices.

  • 2. Percentage of Materials Recycled

    The performance of a reverse supply chain should be measured by its ability to reclaim and reuse materials. The percentage of materials recycled, which divides the volume of recycled materials by the total volume of materials received, is a key indicator of how sustainable a supply chain is. The higher the percentage, the more sustainable the supply chain.

  • 3. Waste Costs Associated With Disposal of Components or Items

    It is important to also track the costs of disposing of components or items, particularly for electronics and other items that fall under certain disposal guidelines, such as those involving precious metals or potentially hazardous waste. Added waste represents both a cost to the company for disposal and an environmental cost, so tracking waste costs is important to achieving goals for sustainability and corporate social responsibility.

  • 4. Percentage of Costs Recovered and Barriers to Recovery

    Tracking costs recovered through recycling, reuse, repair, and refurbishment allows organizations to identify potential barriers to recovery and build a more sustainable supply chain. The percentage of costs recovered carries an important metric for reducing losses associated with product recalls or expired/unsold products. With some products, like food, it won’t be possible to recover any costs. But in other industries, like electronics, companies may be able to recoup initial costs by recycling and reusing of component parts in future products.

  • 5. Total Energy Costs for Handling Returns

    Energy costs are usually one of the largest supply chain costs, so the total energy costs for handling returns must be tracked. This can be difficult to isolate for each product, but some insights can be achieved by setting benchmark rates of energy use and trying to keep the energy level within a desired range. Total energy costs should also include fuel surcharges, use of renewable energy resources, and additional factors.

Strengthen Your Reverse Logistics With Stephen Gould

No matter the size of your company, Stephen Gould’s team of supply chain and logistics experts can set up a custom, turnkey reverse logistics system that manages all aspects of returns and exchanges, enabling you to provide a superior customer experience. Our team can also help tune up individual components of your existing reverse supply chain, including Ecommerce Integration, Inventory Management, Quality & Inspection Services, Return Merchandise Authorization, and Freight Management.

Contact us today to learn more about our reverse logistics services.