By Adam Robinson, Director of Marketing & Digital Marketing Consultant at Cerasis
Reuse of products and materials is not a new phenomenon, waste paper recycling, deposit systems for soft drink bottles, and metal scrap brokers are all examples that have been around for a long time. However, reverse logistics as a research field is relatively new. A body of knowledge is beginning to develop around the reverse logistics field which only emerged within the last two decades or so. Especially during the last decade, reverse logistics has obtained recognition both as a research field and as a practice. Although reverse logistics has been gaining more and more attention in recent years, many companies haven’t fully realized its importance and what is reverse logistics. As a matter of fact, reverse logistics is too often viewed as a headache, an expensive and recurring headache.
Reverse logistics presents one of the biggest operational challenges in the world of e-Commerce freight logistics due to the sheer volume and cost of processing returns. Effective reverse logistics is believed to result in direct benefits, including improved customer satisfaction, decreased resource investment levels, and reductions in storage and distribution costs. The amount of returned goods going backwards along the supply chain from the end point (customers) is usually much more than people normally think. As an example, the sheer volume of returns generated in many companies, ranged from three percent to as high as 50 percent of total shipments across all industries. Many other studies indicated the real costs of the returns take up roughly three-to-five percent of total revenue. Surprisingly, for the traditional bricks-and-mortar retail operations, returns are three to four times more expensive than forward (outbound) shipments. In some industries such as book publishing, catalog retailing, and greeting card, over 20 percent of all products sold are eventually returned to the vendor. What’s more surprising is that some industries are estimated to have return rates in the range of 30 percent to 50 percent with other estimates are as high as 60 percent. Given the status quo of the reverse logistics, the neglect of the importance to the reverse part of the logistics flow opens an opportunity to create and manage customer relationships and build customer loyalty to the retailer.
What is Reverse Logistics Flow vs. Traditional Logistics Flow?
For reference, the traditional logistics flow is defined by the Council of Supply Chain Management Professionals glossary, as:
“The process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements” or "recapturing value or proper disposal."
Sales forecast is used to project sale requirement, when certain amount product is required, they will be shipped to the DC (distribution center) and then shipped to the retail stores from DC. At every single level of the supply chain, ASNs (Advanced Shipping Notices) will be assisting the useful information as the products flow.
Reverse logistics flow, however, is a different story. Shippers generally do not initiate reverse logistics activity as a result of planning and decision making on the part of the firm, but in response to actions by consumers or downstream channel members.
Although the Council of Logistics Management has already given a definition to reverse logistics, reverse logistics has been evolving since the date it was recognized, as a result, its real definition varies largely on what company or industry segment intended to explain it. Shad Dowlatshahi in his paper titled “Developing a Theory of Reverse Logistics" described a holistic view of reverse logistics with 11 factors. Dowlatshahi further divided these factors into two main categories: strategic factors and operational factors. Strategic factors consist of strategic costs, overall quality, customer service, environmental concerns, and legislative concerns. The operational factors consist of cost-benefit analysis, transportation, warehousing, supply management, e-manufacturing and recycling, and packaging.
Reverse Logistics in E-Commerce is No Longer a HOPE to have but a NEED to Have
It’s no secret that a positive experience delivered to a customer determines whether that customer will come back. This is true in pretty much any industry, but especially true in manufacturing and distribution where collaborative relationships between suppliers and customers in a business to business setting are vital for long term success.Shippers who have set up online shopping carts must enhance the user experience prior to pressing the “buy” button but also focus on the post-purchase site experience to keep customer retention metrics at satisfactory levels.
This is where many who are now shipping products used to the traditional flow of logistics vs. the reverse logistics in e-commerce that occurs with introducing an online shopping experience for customers, drop the ball. Often, once a freight shipper starts doing e-commerce logistics, they have a need to consider reverse logistics for the first time. By incorporating new strategies to optimize this process, shippers can increase customer retention and add new revenue streams to the direct business beyond the traditional brick and mortar channel.
Here are some key metrics to support the reverse logistics in e-commerce business case:
- 85% of customers say they will stop buying from a business if the returns process is a hassle (Harris Interactive)
- 95% of customers say that they will likely shop with a catalog or business again if the online returns process is convenient (Harris Interactive)
- 40% of shoppers don’t buy online due to returns difficulty (Jupiter Research)
- Customers who have their complaint resolved quickly have a re-purchase intention rate of 82% (McKinsey)
Reverse logistics in e-commerce are an inevitable fact of online retail. As the depth of online product categories became apparent in the last three years, the importance of setting up a reverse logistics process as part of your e-commerce logistics strategy increases as well. Provide a bad returns experience and you undoubtedly reduce the chance of a customer coming back for a repeat purchase. Let’s continue the rest of the various elements you must explore when setting up the reverse logistics part of your e-commerce strategy. Yesterday we spoke about returns policy and preparation.
Even though the customer did not want keep the goods, these returned items need to be viewed as “assets”. An asset has value and can be sold. The challenge is to find or recover the highest value for each item.
In order to recover the highest value, these returned “assets” are often handled as follows:
- Restock – little loss of value if processed quickly and the product is still current
- Repackaging for sale – open box goods in “as new” condition can often be sold in a “clearance” area of your e-Commerce site or moved to a local “bricks and mortar” branch. These “B” goods are often sold for slightly less than retail, but often higher than original cost. This is often the best channel for these goods since handling is minimized, and turnaround time is quicker.
- Return to Vendor – defective goods, warranty issues or vendor agreements often allow for return of goods. This channel often means you will recover full cost of the items, but the cost of handling must be considered. For instance if the goods are not defective, it may be more prudent to sell the goods for cost plus a margin on your site.
- Disposition – Freight that you do not wish to resell on your site, often still hold considerable value. A number of great disposition sources and services now exist for just about any products in any condition.
- Scrap – almost nothing is scrap anymore. If you have a lot of it, someone is usually willing to buy it from you.
Careful attention to rapidly processing, sorting and resale of your returned “assets” is one of the best opportunities for profit in your reverse logistics in e-commerce operations.
“Returning” to Profitability
Reverse Logistics in e-commerce is a newly emerging area that is just starting to get the attention of senior management and shipper executives who are looking at or have already implemented an e-commerce channel. It is highly likely that your company has significant challenges in this area. Do not be afraid, you are not alone. (They do not even teach courses on Reverse Logistics in school yet). This is a “New Frontier” and should be viewed as an excellent opportunity to improve your corporate profitability.
The Rise of e-Commerce and the Aftermarket Increases the Formal Use of Reverse Logistics by Shippers
The rise in e-Commerce goes hand in hand with the rise of reverse logistics in the history of reverse logistics. As the use of the internet was more commonplace in American households and the rise of multi-channel retailing has increased since the last 2000s and in this current decade, reverse logistics is now a requirement when it comes to e-Commerce. The mid-nineties to 2000s saw major advancements in the commercial use of the internet. The largest online retailer in the world Amazon, launched in 1995 as an online bookstore. Brick-and-mortar bookstores were limited to about 200,000 titles and Amazon, being an online only store, without physical limitations was able to offer exponentially more products to the shopper. Currently, Amazon offers not only books but DVDs, CDs, MP3 downloads, computer software, video games, electronics, apparel, furniture, food, and toys. A unique characteristic of Amazon’s website is the user review feature that includes a rating scale to rate a product. Customer reviews are now considered the most effective social media tactic for driving sales. The company attracts approximately 65 million customers to its U.S. website per month and earned revenue of 34.204 billion in 2010. In 2001, Amazon.com launched its first mobile commerce site.
Another major success story of the dot com bubble was Ebay, an online auction site that debuted in 1995. Other retailers like Zappos and Victoria Secret followed suit with online shopping sites; Zappos being a web only operation.
When one thinks of e-Commerce, one often focuses on the cycle that culminates in delivering goods to a customer. But there is an entire leg of the e-Commerce supply chain that comes into action after goods are delivered. Enter the world of “reverse logistics” - there are several reasons that make reverse logistics inevitable. Some of the most common are Returns, Mis-delivered or Undelivered Goods, Damaged Goods, Malfunctioning Goods, and Exchange Programs.
Application of Reverse Logistics in the Growing Aftermarket Industry
The U.S. auto aftermarket industry should grow 3.4 percent annually through 2016 to $263.8 billion, adding $32.6 billion to the economy, according to a report produced jointly by the Automotive Aftermarket Industry Association and the Automotive Aftermarket Suppliers Association.
Ordinary logistics flows focuses on everything that happens prior to the sale and then between the sale and the point at which the customer has the product in hand. A product, whatever it is, must be manufactured and then warehoused in preparation for final shipment, or must be distributed throughout a variety of retail channels or other businesses for position in front of the consumer.
Conversely, reverse logistics focuses on the return of automotive aftermarket products for various reasons (usually the same as listed above for e-Commerce). Reverse Logistics is really a focus on core automotive aftermarket logistics activities. If a part doesn’t fit, it must be returned. If the part is damaged, it must be returned. Remember, the aftermarket industry is defined as the market for spare parts, accessories, and components, especially for motor vehicles. Just think of when you have a fixer up project on your own car and how often you’ve had to return to the auto parts store. That’s the same idea with automotive aftermarket reverse logistics!
So why then is automotive logistics seeing a boom in reverse logistics? Well, mainly for the fact the industry is growing, but also, it’s quite telling from this quote from AAIA CEO, President, Kathleen Schmatz: “The forecast model demonstrates that despite strong new vehicle sales, historically high gas prices and a flattening of miles driven, our industry is poised for steady growth. Why? The average age of vehicles is 11.3 years, the oldest ever, and the age mix of vehicles continues to favor older vehicles, creating a robust sweet spot for service and repair.