Expert Insight: Supply Chain Technology Insights
  By Dwight Klappich  
  June 5, 2008  

Technology Support for Reverse Logistics is Minimal


New Group of Specialty Vendors is Offering Solutions for These Tough Problems

Klappich Says:
There is nothing wrong with outsourcing if it is done strategically, for the right reasons, but if it is simply done because the company doesn’t feel equipped to manage the process, that is a poor reason to outsource .

Bob Thaves, in a famous 1982 cartoon, penned the famous line: “Sure he (Fred Astaire) was great, but don't forget that Ginger Rogers did everything he did, backwards... and in high heels.”

To me this is the quintessential metaphor for reverse logistics – “outbound logistics is hard, but try running it backwards (even without heels)."

Managing reverse logistics (returns) is complicated and expensive. Returns are a significant problem for companies in both business-to-consumer (B2C) and business-to-business (B2B) environments. I have seen U.S. reverse logistics cost estimates from as low as $35 billion to as high as $100 billion per year. Some estimates peg returns at roughly 4 percent or more of total logistics costs, with other estimates pegging returns at around 6 percent of sales, although this varies by product and industry type.

Clearly, returns are an issue ripe with potential, but we find that, short of using rudimentary functions in their ERP, few companies have attacked the reverse logistics problem with technology. Although a significant problem for many companies, returns remain a secondary consideration because companies continue to prioritize supply chain related IT investments on outbound projects (e.g., order management and fulfillment). Consequently, most organizations live with labor intensive, manual, often undisciplined and inefficient returns management processes. Without question we believe reverse logistics must, and we predict it will, become a higher priority for companies with large and complex returns problems.

We find that many companies have thrown in the towel and simply elect to outsource returns. There is nothing wrong with outsourcing if it is done strategically, for the right reasons, but if it is simply done because the company doesn’t feel equipped to manage the process, that is a poor reason to outsource. A growing number of companies (especially in retail and high-tech) see competitive and strategic value in managing returns in house; however, they also recognize that they lack adequate systems to effectively do so.

Most ERP systems provide minimal returns capability (e.g., credit orders, limited RMA support), but these solutions lack customer return collaboration (e.g., customer self service) and robust authorization and dispositioning decision support. There is a nascent specialist return management/reverse logistics solutions market that is being driven by the need to make return processing more collaborative and to enhance the underlying returns functionality, particularly in decision support and process flow.

Automating the returns process provides several areas of opportunity.

  • Cost reduction – Returns cost savings can be found in people, processes and inventory. Better decision making at the point of authorization such as whether to accept a return and, if so, where best to route it, and having visibility to downstream functions will pull cost from the returns process
  • Customer Service – Customers will continue to buy from companies that are easy to do business. Companies with effective, and flexible returns programs, like an REI or Nordstrom, attract repeat buyers because their customers trust them, in part, because of their returns policies.
  • Efficiency – Returns are unpredictable and companies do not typically control a significant portion of the process, making manual returns processes highly inefficient and disruptive. Wasted freight and duplicate efforts kill efficiency
  • Control – Effectively controlling a manual returns process is near impossible. People make poor decisions if all they have is limited, if any, information and rudimentary tools to help guide the process and, without tools, the process degrades to near chaos. Tools that provide process discipline and guidance will go a long way to improving process control, which will drive the other benefits.

The specialized returns management market initially emerged around 2000/2001 with a bunch of start-up vendors offering a variety of different return management solutions. Buyers were focused on other priorities at the time, and when this was combined with the e-business bubble-burst, all but a handful of the returns specialists were effectively decimated. The reverse logistics challenge hasn’t gotten any better, so the need for tools remains. The climate for the new breed of returns vendors is much better than it was. Reverse logistics solutions are more specialized, robust, mature and proven, and demand, in certain industry sectors, like retail and high-tech, is hot. Given the growing awareness of the value of improving the returns process, there is good growth potential in the specialized returns management application market.

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