RLA News & Views

Combating the Hidden Cost of Reverse Logistics

By Dr. Sunnanda Panda, RevLog Resources

August 14, 2018

With a 400 million Internet user database, a government dedicated to “Digital India” and the emergence of retail as a dominant market segment, we have a potent cocktail for the unprecedented growth of ecommerce in India. As per a joint study by ASSOCHAM- Forrestor, India’s ecommerce revenue is expected to jump from USD 30 billion in 2016 to USD 120 billion in 2020, growing at a world beating annual rate of 51%.

While retail category penetration has increased to 65 million unique visitors a month, registering an annual growth of 55%, reverse logistics is struggling to keep pace. Like a ‘fat Indian wedding”, where the initial pomp is often followed by a ruinous trail of litter and waste, the self gratifying purchase made with a few clicks on a smartphone is often followed by the heartache of refunds and returns.

With consumer buying expectations driving constant change via e-commerce and mobile commerce - returns and the amount of capital spent on reverse logistics strategies are an unmistakable and a potentially growing friction point in the supply chain. When we talk aboout supply chain cost reduction, we usually talk about the apparent ones like transit time, route optimisation or preventaion of loss and damage of goods.

Similarly in terms of reverse logistics cost, we talk of handling returns in house or outsourcing it to a third party logistics provider, their trades off in terms warehousing & distribution, free or with a restocking fee, frequency and impact on valuable customer loyalty, etc.

But there are many “hidden” cost, as we don’t track it down to our day –to-day operations. It is sneaky because it sneaks up into our P&L when we tally or audit our supply chain during financial closings. Its like Guerrilla warfare i.e. fighting an army of guerrillas – it is hard to beat what you cannot see! Guerillas employ a hidden approach. They often disguise themselves and carry out series of small attacks, making them hard to directly confront without better information about their identities and movements. To combat this, armies employ a specialized strategy. It is done through the use of sustained surgical strikes. The mantra is “Watch,” “Calculate,” and “Combat.” Intelligence plays a vital role before a strike is calculated, calibrated, and launched.

• Watch and gather intelligence using real time visibility

Once there is visibility of products down to the SKU levels across the supply chain and it should be monitored over few weeks or months to see how they move, where they are lying at any point of time, etc. – thus helping to formulate the basis of estimating the hidden spend on them. 

As a research student, aware of reverse logistics once I walk into clothing store and picked up a garment to try in the fitting room. As I picked the dress I noticed a tiny hole in the fabric, disappointed I went back to pick another one when a store employee walked up to me and asked what the matter was. He immediately got me another dress, and throws this one into a store at the back of the shop. Out of curiosity I asked him, what’s the fate of that piece? He promptly responded that it would be send to their central returns warehouse. My last question to him was how will the warehouse identify the defect and why didn’t they mark it here before sending it back? Now he was speechless!

Labor cost is incurred at all levels. An attempt should be made to tap the problem where it occurs versus repeating a non-revenue generating activity at multiple points in the reverse supply chain. Similarly handling returns – related customer contacts are time-consuming. With an average customer calling up to four times to inquire about each return, with a quicker returns process an organization can eliminate 30% -50% of ones’ existing service cost or redirect the capacity to generating additional revenue.  

Speed also plays a part in reducing repair, replacement, liquidation, or recycling costs. If products are handled by undertrained workers, it beocmes a time-consuming and error-prone process. Also, assets and subcomponents devalue rapidly in some markets (2%-5% a month in some cases), and value is lost if disposition isn’t timely. Value recovery of a product means appraising its residual market value before it goes for costly repair. 

Financial reconciliation of the return is required, as is issuing credit to customers. The appraisal /write-down process and the charges incurred when a returned product is not covered by warranty but is returned anyway has to taken into account. On the sales side, there is complicated revenue recognition, margin protection, account management, and most important, return rate forecasts (perhaps to debit sales commissions that were not escrowed against returns and prepaid).

Because one is paying for the shipping of returned items, it will cost more in labor to individually assign a shipping method for each returned item. There are carrier-control rates to consider, as well as damage incurred in transit, one-off shipments, inability to track returned items, and cost-effective aggregation and routing. Without the application of rules, these decisions made incurr costs on a adhoc basis. 

Therefore, a well-run returns operation can derive more efficient use of capital by capturing, synthesizing, and publishing intelligence about your returns population to the relevant functional areas in your organization.


• Calculate your savings

Once you have visibility, you will be able to identify and estimate the impact of various inefficiencies in the reverse movement across your supply chain. 
Many a times returns end up in the greymarket, effecting the sales of the original product and hitting the companies margins. Even if a warranty program is controlled by serial numbers or SKUs, manual look-ups are costly, and gray-market contamination is a risk. Controlling both asset history and required disposition systematically at the SKU or product-category level helps to minimize this risk. For example, assets designated as scrap may reappear for warranty service. Manual operations are not able to quickly ascertain this, and costly work is performed against an asset that has been deemed to have no residual value. The key to avoiding this cost is to establish a rigorously enforced returns authorization process that grants you the power to deny any unacceptable return and offers you advanced knowledge of what’s coming at you.

Detailed historical information about returns may be trapped in local Excel spreadsheets and static databases. Sales staff is often asked to provide forecasts for reserves, but they can see across the various stations and links in the supply chain to make those predictions accurate. Operations is unable to accurately predict whether additional (temporary) resources are needed to process a large influx of returns. They may be paying overtime to ensure internal cycle times are met, or upstaff too far in advance and have to send employees home early, if they have no returns to process.

From a customer perspective, most customers often calculate their own credits – and take a debit on next payment, which is a very labor-intensive problem to resolve in the accounting office. And that’s not the only reconciliation problem. Here’s another in a list that goes on and on: Return requests are approved, but not valued or matched against receipts. This prevents accurate accruals, claims recoupment and effective vendor management.. It can be automated and integrated; thus making a saving.

Manual return request processing and validation cause delays in approving or rejecting return requests. This frustrates customers and communicates a lack of concern, which tarnishes the brand and drives up call and email volume. It also ties up customer funds and prevents more sales. So delays in validation, discrepancies caught in receiving, and many other “simple” problems, may make customers unhappy. Customers expect brands to stand by their products during the entire lifecycle. They demand that the companies reverse logistics processes should work equally well as the forward logistics.

• Combat by building a Process

Many insightful companies have been highly disciplined about returns authorization. This isn’t a new practice, especially in the after-market service and warranty sectors. A product can’t be returned until it has a returns management authorization label generated by the person returning the product. But excellence in the returns management process seems limited just with companies that do nothing but reverse logistics. That’s because the logistics team is already “thinking in reverse,” and it is rare – though less and less rare – to have the process automated at the industrial level for the return of a new sizeable quantity of otherwise saleable products.

The sure way forward is automation process of the reverse flow. An excellent Warehouse Management System (WMS) can help reduce costs by automating cycle counting, and maintaining location control. The layout of your warehouse can save money. Product slotting, or having top demand SKUs near shipping, will reduce the cost of picking and put away. When demand changes or returns of a product increases, it can be re-slotted. Using Warehouse Execution System (WES) in combination with Warehouse Control System (WCS), regulates, automates, and optimizes the processes.

Return Merchandise Authorizations (RMAs), Return to Vendor (RTV) or Reverse Logistics systems can aid in logistics cost reduction. A cross-functional Material Review Board (MRB) will reduce the need for additional space by reviewing obsolete, non-moving and slow moving inventory monthly, and sending disposition recommendations to top management. 

A Transportation Management System (TMS) optimizes freight to utilize the most effective lanes and routes. With an automated, cost-effective transportation and logistics system, a company can implement major strategic changes to provide visibility, reduce costs and increase customer service levels not only in forward logistics but also for reverse logistics. 

Therefore, we can conclude that there are different strategies to tackle the reverse logistics challenge and cost. As soon as it boils down to implementing the strategy, our experienced team is able to assist in establishing a balance between required governance, finance, operations, marketing and legal aspects. Important to note is that it is not only about achieving cost efficiencies! More and more businesses are starting to reveal the profit potential inherent to the reverse supply chain. But this requires embedding flexibility into the reverse supply chain in order to be able to respond to internal (e.g. strategic choices) and external changes (e.g. emerging markets, changes in legislation, etc.) in an agile way.

Dr. Sunnanda Panda
Dr. Sunnanda Panda, logistics professional with a PhD in reverse Logistics. Founder and CEO of RevLog Resources, India