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Reverse Logistics Function – A Strategic Review

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It’s June, the end of the planting season of the corn crop (i.e., one of the crops contributing to most of the farm incomes in the United States and our client), and a farm equipment manufacturer is loaded with a lot of warranty cases for repairs of its farm equipment. The timeline to deal with these warranty repairs is a few weeks before the harvesting season in October — when the manufacturer’s customers are expecting the defective farm equipment (for which he raised a service request for repair) to be up and running.

If you closely look into the problem, there are a lot of things that should have been taken care of by the manufacturer before the planting season, even before planning the sales of its farm equipment for the year. The diagnostic areas for our client, the manufacturer, could be the development of a robust dealer network to deal with warranty repairs in locations near to the concentration of large farms, availability of technical expertise in dealerships to repair the high-tech farm equipment unserviceable by technicians without special training; logistics and technology capability for part returns to cater to the high seasonal demand; and above all, the customer service centers to ensure the process of a repair request to delivery of the farm equipment back to the customer location is smooth and hassle free, to prevent the farm owner from having second thoughts when he considers buying farm equipment from you next time.

These are just broader areas of concern in reverse logistics. If you delve deeper, there are other problems — unpredictable demands that may eat into profits of any big organizations if not handled well, like the geographical separation of the supplier network; transportation and labor costs; recalls; disposition strategies of the returned goods; and government regulations affecting the reverse logistic functions, to name a few.

The reverse logistics look more complex, and are more an area of concern as compared to the forward logistics, which are more organized and also a part of planned strategies of any organization in the business of manufacturing, selling, storing, distributing and servicing its goods. Historically, reverse logistics is one area that is often an overlooked and disorganized function of any manufacturing organization. But not anymore. For the organization that does not have a planned strategy for reverse logistics, the trends of its financial performance and market share may be a gloomy picture.

Statistics show how “Reverse logistics—the management of returned and recyclable goods” is, in fact, an important business activity. It is more expensive than expected, costing companies approximately US $100 billion per year in the United States alone. Costs associated with returned goods can be anywhere from 8 percent to 15 percent of a company’s top line. In fact, the cost of processing a return can be two to three times that of handling the original outbound shipment. Product returns exact a toll not only on a company’s financial performance but also on its image and sales. A major recall done by any automotive company can spread the negative sentiment about the company brand image like wildfire.

So, the way of the future is looking at reverse logistics as more of a strategic and diagnostic tool to differentiate from competitors. The strategic approach demands strong infrastructure backed with the technological capability to have data visibility throughout the reverse logistics cycle. Big data and predictive analytics can be used to make important strategic decisions in network planning and cost optimizations.

Many organizations have chosen to outsource their reverse logistics function completely to optimize cost. But choosing a third-party service provider is a big decision, before which a company needs to understand its current returns flows, identify the total cost of returns, profile the end-to-end returns, and quantify and categorize its return flows.

The diagnostic tool approach demands looking at the root cause analysis of failures in logistics and manufacturing, recalls, and repairs to come up with metrics of predictive analytics and performance management that can identify areas of risk, improvement, and performance in both the forward and reverse logistics.

The reverse logistics function should be viewed more as a profit center than a cost center. Companies should develop a financial framework to look at all financial transactions in the reverse supply chain and map them to the P & L and cash flow statements.

Last but not the least, performance management of the reverse logistics functions using key performance indicators (KPIs) and metrics to ensure that the function is performing consistently and is in line with the strategic planning of the organization is important. Financial KPIs can include return costs as a percentage of sales, return processing costs by category/channel/supplier, shipping costs, inventory levels and carrying costs, and write-offs.

Sources:

  1. http://www.supplychainquarterly.com/topics/Strategy/201201reverse/
  2. http://www.supplychain247.com/article/managing_reverse_logistics_to_improve_supply_chain_efficiency_reduce_costs/fedex_supply_chain
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