Return to sender Reverse supply chain

Companies spend a great deal of time and money perfecting their forward supply chains, only to neglect backward flows that is, the return of goods that have been supplied. European retailers, in particular, are reportedly losing billions each year to poor management of their reverse supply chains. So, what can be done to manage these flows more effectively and how can treasury generate profit from waste?

An often neglected part of the working capital management process is the reverse supply chain. The reverse supply chain process, often referred to as reverse logistics, is the flow of goods from the point of consumption back to the point of origin. While this may sound like the domain of logistics managers, there are good reasons for treasury to get involved: particularly the opportunity to make significant savings.

According to industry estimations, almost 70% of the potential market value of these returned goods was lost due to poor management of the reverse supply chain. In fact, inefficient reverse flows can end up costing companies anywhere between two to four times the amount paid for the original item.

Why have companies neglected this area? One of the reasons that the reverse supply chain hasnt yet received as much attention as it may deserve is that most companies do not have a formal reverse logistics procedure in place. Therefore, there is no real means of monitoring the true costs or the potential for savings.

Reverse flows complete the supply chain!

How does the reverse supply chain work? At a basic level, products are either sent back directly by the distributor/retailer, or in many cases there are specialist collection departments and companies that will either send the goods back or recycle them on behalf of the distributor: (See diagram below)

Typical reasons for a backward flow of goodsinclude

Most manufacturers and retailers allow consumers to return items, for their money back, within a specified period if they are not satisfied with them for whatever reason.

Returns from the retailer/distributor if the packaging is too damaged for the goods to be saleable, for instance, or from the customer if the product does not work properly. This applies to items under warranty as well.

Some manufacturers allow retailers to return their unsold stock, a practice used frequently in the book industry, for example. As the retailer has to be credited for any returned stock, this can affect the predictability of the manufacturers cash flow.

Manufacturers often ask for products that have reached the end of their lifecycle (i.e. a newer version has been released) to be taken off retailers shelves. This means either shipping the goods back to the manufacturer or disposing of them and either of these options will incur expense.

Common in the pharmaceutical and automotive industries, product recalls may come either from the manufacturer itself or from a governmental body. For safety reasons, products have to be removed from retail outlets and recalled from consumers as swiftly as possible, which means an immediate cash outlay.
Faults then have to be fixed or products replaced and consumers compensated.

Reverse supply chain management involves extensive monitoring of the reverse channels illustrated in the diagram opposite. An efficient reverse logistics process can provide a company with opportunities to generate additional revenue and minimize wastage costs. This monitoring may range from basic processes (filling in forms when items are returned or picked up for return) to more sophisticated tracking of inbound items and monitoring of cash movements in relation to returned goods.

Reverse supply chain management aims to link up the value chain, making it a cycle rather than a one-way flow. Companies that are serious about reverse supply chain management will have dedicated reverse logistics teams and targeted systems that integrate into the companys ERP system.

With industry experts estimating that the return of goods takes anywhere between eight and 12 more steps than the forward distribution of goods, however, it is no surprise that reverse logistics is still viewed by most companies as more of a burden than a benefit. How then can the reverse supply chain be used to help a business to generate income rather than hemorrhage cash?

How to cut costs by up to 40% while scrapping or sending to landfill often seems like the simplest option for disposing of reclaimed goods, there are effective ways of driving value from returned products, such as:

Old products can be built on to improve their original specifications and then be sent back to market.

This involves returning the product to its original specification for instance replacing broken packaging and then selling the goods as per usual.

Faulty goods can often be repaired simply and cost effectively and can then be sold as used items or returned to the original consumer, without having to refund them their purchase price.

If the options above are not economically viable (i.e. it would cost more to refurbish, recondition or repair the item than simply to dispose of it), goods can be stripped back to the component parts. These components can then be reused in the manufacture of new goods.

Sell to a third-party/the secondary market:

This option applies to whole items as well as component parts. For instance, out-of-date mobile phones, while not desired by consumers in Europe, are an affordable option in developing countries, so manufacturers can sell old stock either directly into secondary markets or via third parties. There are also buyers in the secondary market for components and scrap metal, which are often auctioned off by manufacturers.

Recycling, sometimes referred to as waste management, is also an option for those looking to consider a greener route:

Although the recycling process has to be paid for, but for example, the biodiesel could then be used by the companys transport fleet as a cheaper and greener alternative to fossil fuels. The same goes for product packaging, such as cardboard, and many companies will pulp and reuse returned paper packaging. Soft drinks bottles are also commonly recycled and reused.

What does all of this mean in real terms

What does all of this mean in real terms? According to industry analysts, if the reverse supply chain, including the steps outlined above, were taken more seriously, companies could cut their total logistics costs by up to 40%. This alone is a good incentive for treasury to get more heavily involved with company logistics.

Aside from the obvious and immediate financial benefits of implementing a reverse logistics program, however, the enriched data that comes from monitoring reverse flows can also lead to significant savings. Feeding back the data surrounding returned excess stock into procurement for example, could ensure that less of that particular product is purchased next time round, or the product could be shipped to locations where it is proving more popular. CDs and DVDs are examples of products that are commonly redistributed according to demand in specific geographies.

Regulatory pressure for companies to act responsibly is another good reason for companies to start taking their reverse flows more seriously. European environmental directives set out at the beginning of the decade, such as the 2002 directive on Waste Electrical and Electronic Equipment (WEEE), are now being amended to encourage greater recovery, re-use and recycling of whole appliances or components. While the majority of the legislation applies to manufacturers of electrical goods and those using potentially hazardous substances, the theory is applicable to all manufacturing and retail industries. In many senses, having a reverse supply chain function is just like a service industry having a dedicated complaints department, particularly because well-managed reverse flows are proven to increase customer satisfaction and loyalty.

This is all well and good, but how easy is it to get the company motivated about reverse logistics? For as long as the potential value in the reverse supply chain remains hidden, those wishing to implement a full reverse supply chain strategy will inevitably come up against many challenges. Possible internal barriers to change may include lack of management interest and a lack of resources, both in terms of personnel and funding, as well as the inability of existing systems to cope with the data of reverse flows.

Having the correct infrastructure in place is also a common barrier to success. If reverse processes are not properly implemented, the potential for profit making will be reduced. A factor that is often overlooked in setting up a reverse supply chain program, for example, is the number of products that are either lost or stolen during the returns process. If the returns process is not properly monitored, in-house theft is likely to soar, particularly during a recession.

Although these barriers may seem significant, the first and biggest step is to stop reverse logistics from being sidelined. Everyone in the business knows that there are costs involved in reverse flows but few are prepared to formally acknowledge or quantify them. Firms should therefore be looking into how much the reverse supply chain is costing them to run directly e.g. shipping and labor costs and also indirectly e.g. how long goods are staying in the system. At a time when optimizing working capital has never been more important, the benefits of reverse supply chain management cannot be ignored.

If you have any questions, remarks and/or suggestions please do not hesitate to contact me.

Experts in Management, Sourcing and Procurement