Reverse Logistics: What is it, and Why is it So Important?

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Reverse logistics is the process of goods returning to their point of origin – back from the purchaser to the manufacturer or supplier. Today, reverse logistics can no longer be an afterthought for manufacturers, but is instead an integral part of supply chain planning.

Rather than letting returns harm their business, manufacturers and retailers who are innovative and have efficient processes in place can benefit from reverse logistics.

For these businesses the question becomes how to optimise the reverse logistics process to improve the customer experience, reduce the cost of waste, add value to products by recycling and repurposing, and become more sustainable.

Here we look in detail at how and why reverse logistics is important for retailers and manufacturers, covering the questions:

  • What is reverse logistics?
  • What steps make up the reverse logistics process?
  • Why is reverse logistics important?
  • How are businesses putting reverse logistics into practice? (3 examples)
  • What are the challenges of reverse logistics?
  • How can smart software assist your reverse logistics programme?

Read more: Supply chain management explained: methods in modern business

A woman receives a parcel from a courier

Returns needn’t harm your business – instead, you can benefit from reverse logistics.

What is reverse logistics?

Reverse logistics is another name for a backwards supply chain – when goods flow backwards from the consumer towards the manufacturer. This usually happens when goods are retrieved for resale or recycling.

Many companies are already engaging in reverse logistics, but do not realise this because they call it something else.

For example, any agreement that includes a clause for the repair, maintenance, refurbishment, remanufacturing or recycling of goods and/or materials will involve a reverse supply chain.

Some examples of reverse logistics are:

  • Returns management: The process of dealing with or avoiding returns
  • Unsold goods: The handling of returns from retailers and distributors back to manufacturers
  • End of life: The handling of returns for products that are no longer able to be sold
  • Rentals and leasing: Refurbishing, repairing and redeploying rented equipment
  • Delivery failure: The return of a product back to a manufacturer via a postal sorting centre due to failed delivery
  • Packaging management: A process for reusing packaging materials to avoid waste

Reverse logistics vs circular supply chain – what’s the difference?

Reverse logistics and the circular supply chain involve the same processes – the reuse, recycling or reselling of goods and materials. But are they the same thing?

The short answer is: reverse logistics is one part of the circular supply chain.

In circular supply chains, the process of returning and repurposing goods is repeated over and over again. In other words, a circular supply chain needs reverse logistics as a core component.

The aim of a circular supply chain is to reduce landfill down to zero – or as close to it as possible. Many organisations are working out how to close the loop on their supply chain, but truly circular chains are still developing.

A man stands by his delivery truck

Reverse logistics is another name for a backwards supply chain

What steps make up the reverse logistics process?

Reverse logistics practices vary from business to business, but it generally includes some or all of these basic steps:

Process a return

This happens when a consumer signals they wish to make a return, a product hits its end of life, an amount of waste or salvage has accrued, or a container is ready to be re-used.

Smart software will assist with processing returns, a process which can be complicated and involve:

  • Identification and assessment of a product and its condition
  • Authorisation to move the product back into the supply chain
  • Shipment of the goods
  • Any approval of funding or product replacement for a customer

Determine next steps

When the product has been assessed and the reason for its return has been identified, the next step is to determine where it should go next: Can it be resold as is, or does it need work? If it can’t be resold, can it be broken down?

Repair/refurbish

In many cases a returned product can be repaired or refurbished. This can range from simple to complex – from cleaning up a scuffed piece of equipment to replacing damaged components. Either way, this step involves returning the product to an as-new state.

Sell as new

If the product is in as-new condition, it can be sold as such. Depending on the nature of the product, the state of the repairs, and whether it can be repackaged properly, the product will either be sold at full price or at a discount.

Reuse

Some returned goods and materials can be salvaged and reused in their current form. Salvaged materials are distinct from recycled materials in that they do not undergo further processing. It is becoming more common for food & beverage companies, for instance, to collect, clean and reuse boxes, bottles and barrels.

Recycle

Where goods cannot be refurbished or reused, they can sometimes be broken down, shredded or melted, then reformed and made into a new product.

Not every manufacturer will have the capacity to recycle returned goods, but businesses are innovating to find new ways of recycling.

Disposal

Disposal is still a part of the reverse logistics chain, but it has a much smaller role as businesses work out ways to resell, reuse and recycle their returned goods.

Disposal by consumers often used to be considered the end of the supply chain, but supply chains that include a reverse logistics component treat this as a last resort.

A person picking up a bottle for recycling

Goods can’t always be refurbished. Instead, they might be broken down, shredded or melted to be recycled

Why is reverse logistics important?

So why would a manufacturer or retailer set up a reverse logistics process? What do they have to gain from this?

Below we discuss five important factors in more detail:

  • Cost savings: More people are shopping online and return rates have increased, meaning an efficient returns process can save your business money.
  • Customer satisfaction: Having a quick and easy returns process increases customer satisfaction and retention.
  • Value of goods: Repurposing returned goods helps manufacturers increase the value of goods or the sustainability of the supply chain – or both.
  • Sustainability: Consumers are increasingly concerned with sustainability. Repurposing goods achieves greater sustainability and can enhance a business’ reputation.
  • Business insights: A well-organised reverse logistics process will give you valuable data to help you streamline your operations further.

Saving costs on returns in a digital world

As consumers shop online more and more, the rate of returns is increasing. In this environment, a well-planned and streamlined reverse logistics process can reduce losses.

In a 2018 survey of 1000 shoppers, 89% said they have bought an item online and returned it. A further 41% said they buy multiple versions of the same item with the intent of returning some of them.

Recent research shows the difference in return rates between in-store and online shopping. The return rate for items bought in a physical retail store (8-10%) was around half that of goods bought online (20%). The return rate for ‘expensive goods’ was more than double again (50%).

Without an efficient process for organising, processing, shipping and handling returns, managing this process can be costly.

Having a transparent and fair returns policy is an important first step. More people are likely to purchase goods from an online store if they know they can easily return products that don’t suit. This means the cost of returns must be factored into the pricing of your goods.

When the goods arrive back at the warehouse, an efficient process again saves money. Inventory control technology allows for tracking of returned goods and reduces the time it takes for a product to re-enter stock. This means that goods can be resold or repurposed more quickly, warehouse space optimised and inventory waste minimised.

A couple shops online

Consumers are shopping online more and more. As they do so, the rate of returns is also increasing

Handling returns to improve customer satisfaction

An efficient returns programme should be considered part of your customer retention programme.

Having a hassle-free returns process increases customer satisfaction and retention rates, and this can have an impact on the business’ bottom line in the long run.

According to a report by global shipping company UPS, 95% of surveyed customers say they will not buy again from a company if they have a bad returns experience. Companies that are considered best-in-class at reverse logistics enjoy 12% better customer satisfaction than their competitors.

Increasing the value of goods

Reverse logistics involves retrieving goods that have been sold so that they can be repurposed or recycled in some way. The manufacturer might recycle these goods by reusing their materials in new products, or they might repair damaged goods to sell at a discount.

The manufacturer is effectively selling or using the goods – or part of them – a second time. This increases the overall value of the goods to the business. The business doesn’t just make money from the initial sale of the goods, but also on the goods or materials produced from returned items.

Improving sustainability – and the business’ reputation

Reverse logistics allows goods to be brought back into the supply chain. Instead of goods being disposed of, they are repurposed and waste is reduced.

A 2019 research paper found that there was a direct positive effect of reverse logistics on environmental sustainability through waste reduction.

Research shows that consumers value brands that embrace sustainable principles, meaning that sustainability is good for the environment and for your business’ reputation.

A 2021 Deloitte survey of UK consumers showed that nearly a third of customers stopped shopping with a brand because of ethical or sustainability concerns in the previous 12 months. 34% had chosen brands with environmentally sustainable practices or values.

The same survey showed that the top three practices UK customers valued in a sustainable business were waste reduction, circular practices and reducing carbon footprint.

Gaining valuable business insights

One of the key benefits of having a well planned and executed reverse logistics process is that it provides data on returns.

This data is crucial so businesses can find out what the rate of returns is for different products and address the reasons goods are being returned. The business can understand, for instance, common faults and lifespans of different products.

This information can be used to plan a more efficient process and prevent losses from returned goods.

A woman carries two boxes of goods

One benefit of having a well-designed and well-managed reverse logistics process is that this provides data so you can continually improve your operations

How are businesses putting reverse logistics into practice? (3 examples)

1. Kua Coffee

Kua Coffee is a social enterprise in Sydney, Australia, that employs reverse logistics to make its practices more sustainable. Kua delivers ethically sourced Ugandan coffee in reusable benchtop canisters so that they can be returned and reused.

Kua has closed the loop on its coffee ground waste as well – any coffee grounds that aren’t used are used as compost in community gardens. The company is also experimenting with compostable packaging for direct-to-consumer coffee sales.

2. Eileen Fisher

Fashion brand Eileen Fisher is working hard to be more sustainable and close the loop on its supply chain with Eileen Fisher Renew and Waste No More programmes.

Eileen Fisher Renew is an excellent example of the reverse logistics process in action. Customers can return unwanted clothes to Eileen Fisher’s stores in the US or return them to one of the company’s recycling centres. In exchange, customers receive a small reward or a gift voucher.

The returned clothing is then sorted and any items that can be revamped are cleaned and resold. Sustainable cleaning partners are used to reduce water and electricity usage and capture microfibres.

Items that can’t be cleaned for resale are converted into art pieces like wall hangings through Eileen Fisher’s Waste No More programme.

3. Dell

Dell is a major electronics corporation investing in reverse logistics to close its supply chain loops and become a more sustainable business.

When electronics are returned to Dell, the company checks to see if they can be reused – either resold or donated to someone in need. If the whole unit can’t be reused, Dell may use some of its parts for repairs or remanufacturing.

The units that are left are sent on to recycling partners, where plastic can be shredded, melted, and mixed with virgin plastics to be reused again in the manufacturing process.

A woman repairing a computer

Electronics maker Dell checks returned products to see if they can be reused or used for parts

What are the challenges of reverse logistics?

Manufacturers and retailers face several challenges when setting up a reverse logistics process that is efficient and cost-effective for the business and its customers.

The complexity of planning for reverse logistics

Creating and managing a streamlined returns process in a world where consumers shop both in-store and online can be difficult.

To deal with this, businesses must be able to predict which items are more likely to be returned, and where and when these are likely to arrive.

Shipping must be cost-effective to ensure this doesn’t outweigh the value of the item, and items should be tracked.

Once it has arrived at the warehouse, the return should be processed quickly. Crucially, there must be a process to determine what to do with each item when it has been returned.

The efficiency of reverse logistics can be improved by using appropriate software and technology. By using barcode scanning technology, for instance, customer returns can be tracked in real time and re-entered into the inventory management system.

Optimisation of reverse logistics

When planning reverse logistics, a balance must be struck between three key factors:

  • Achieving sustainability goals
  • Delivering a best-in-class returns process
  • Maintaining the bottom line

If a reverse logistics process focuses on one of these too much, it can mean the others are neglected.

This is where creating an optimal reverse logistics system becomes a challenge. Keeping accurate data on historic returns helps with this. Using this data, companies can work out:

  • Return rates
  • The cost of shipping, recycling and refurbishing returned items
  • The value that can be recovered from returned goods

Consideration of these factors – and customer experience – will help a business design an optimal reverse logistics programme. This might mean working with distributors to manage the returns process or recycling returned goods in a different way.

Collection of goods

Should retailers and manufacturers ask customers to return goods themselves? Or should they organise it for them?

The first of these is easier and cheaper but could lead to a poorer customer experience. This could also mean fewer products are returned, meaning fewer goods coming back into the supply chain.

The second puts more onus on the business and increases costs.

When establishing a backwards supply chain, this can be one of the biggest challenges – especially for SMEs, who may need to rely on third-party shipping providers.

A delivery woman with her bike

Streamlining your reverse logistics is better for your business and your customers

How can smart software assist your reverse logistics programme?

Today’s supply chain is as digital as it is physical, which means smart software is a must for reverse logistics – especially where a business wants to access data analytics and automate its processes.

Many companies – especially SMEs – will have limited in-house software resources. They will need to look to service providers that offer software and technology to manage orders and inventory.

Managing orders and fulfilling shipments

To give customers a stress-free experience, look for a system that can automate much of the fulfilment process and provide shipping support both forwards and backwards. This will:

  • Process shipment requests
  • Generate documentation, including returns documentation
  • Provide shipping costs to the customer
  • Manage shipping, both outbound and inbound
  • Integrate with the e-commerce platform of your choice

Inventory management software and scanning technology

To improve the performance of your reverse logistics, you can integrate this shipment system with inventory management software. An effective inventory management system can track every detail of your warehouse, including incoming and outgoing goods, shelf life, location and costs.

This can be enhanced by using scannable codes that provide data on products, such as serial numbers, product descriptions and the product’s history. This gives you real-time visibility of customer returns and means these can be sorted quickly and accurately.

Refining your reverse logistics process

By using smart software, you can have a complete handle on your warehouse. This will provide you with useful data to refine your returns process. For instance, you can analyse the reasons products are returned, address the issues causing this, and improve your purchasing decisions with this information.

Smart software will also give you metrics to help you streamline your reverse logistics programme and make it easier for your business and your customers. You’ll be able to compare return rates to waste, cost versus product popularity, inventory turnover and more.

More about the author:

Alecia Bland - Unleashed Software
Alecia Bland

Article by Alecia Bland in collaboration with our team of inventory management and business specialists. Alecia's background is in ancient languages. When she's not reading a book with her cat for company, you can usually find her cooking, eating or trying to make her garden productive.

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