ADOPTION VALUE OPPORTUNITY LEADERS INNOVATIONS

Th e Hi dden Value in
LOGISTICS
Diane A. Mollenkopf and
DavidJ. Closs
r>iane A. MnWenknpj i.s an
asshianX projessor in the
Department <)/ Marketing
and Supply Chain
Wanu^L'ment ai Michigan
State University. David J.
C'foss is the }ohn H.
McConneW Chaired
Professor of Business
AdininisIradon in the
Depdrtnienl oJ Mcirhelinj;
and Supply Chain
Mtinuyetnent al Michigan
t'\X'rsc logistics has often be e n \i c\\fcl as
i h c u n wa n te d s te p-ch i l d ot supply ch a i n
management. It has been seen as n n e ce s -
sary cost of bu s i n e s s , a regukuory eornpli-
anee i ssue, or a "green" initiative, IJut more
e()ni[)anies are now seeing reverse logistics
a s a s tra te gi c a cti vi ty-on e th a t ca n
e n h a n ce supply ehain competi ti veness over
th e long term.
Reverse logistics is part of a broader supply ehain manage-
ment proe e s s called re tu rn s ma n a ge me n t,' Re tu rn s manage-
ment includes all activities related to returns flow, reverse logis-
ti cs , e ffe e ti ve ga te ke e pi n g, a n d e ve n re tu rn s a voi d a n ce ,-
Reverse logistics eneompasses th e traditional logistics aetivilies
of transportation and inventorv' management, but its tocus shifts
to ge tti n g prod u ct back from cu s tome rs ra th e r th a n moving
product to cu s tome rs .
Ma ki ng a s tron g Inisiness case for reverse logistics is not
easy. Although reverse logisties obviously bas some cost Implica-
ti on s , it cm be difficult to i l l u s tra te th e impact on re \e n u e .
Indeed, in (uir experienee, companies more olten tocus on the
cost side of returns management rather than on its revenue side.
To be successful. hov\ever, tbe revenue side needs to be man-
aged aggressively too.
I'o u n d e rs ta n d bow reverse logistics can cre a te value, it is
neeessar\' to u n d e rs ta n d botb th e marketing and logisties com-
pon e n ts of tbis proeess. !-rom a marketing perspective, an e l te c-
tive re tu rn s o[ieration can e n ba n e e cu s tome rs ' pe rce pti on s of
product quality, belp minimize th e pu rch a s e risks, and boost
goodwill by d e mon s tra ti n g good corporate 'eitizenship. Irom a
3 4 S L i M' i \ C M V I M M A N V G I - N U \ I R r \ i t . v \ J L i W A L ( . L s r i . s ( . m r , i o m
Many companies treat reverse logistics as an afterthought if they give it
any thought at all. That's a hig mistake. How well you manage the flow of
goods back through your supply chain can have a powerful itnpact on
costs, revenues, and customer goodwill. The seven companies profiled in
this article prove the point.
istics perspeeli\e. returned products that are handled
iHxIitiously and effieiently ean be reinserted into the for-
ward supply ebain in tbeir current form, as refurbisbed or
remanufaetured produets. or as repair parts. Tbis ean create
additional revenue, reduce operating eosts. and minimize the
opportunity costs of writing off defective or out-of-date pnid-
uets. (See Exhibit 1 on page .^6.)
Tbis article will outline four ways tbat reverse logistics can
bave a linaneial impact. It will give glimpses into tbe reverse
logistics aetivities of leading eompanies and deseribe the
()[ip()rtunitii's for others.
The Financial Impact of Reverse Logistics
Business leaders are siiov\ing much more interest in reverse
logistics for several reasons. Regulators both in the (European
Union and at the state level in the United States are tighten-
ing up on product disposal. Also, landfill costs are rising. In
tbe Linitetl St.ites, lancilill tipping fees havt' increased to an
RICHARD BORGE
average oi S,^,^,7() | XT ton, antl incinerator tifiping fees now
average S^^J.O" per ton,"' I'lirthermore, soeietv in general bas
bigber expectations for sustainable business practices.
Other factors are pushing companies to focus on reverse
logistics, Ihc grov\th ot product leasing re(|Liires companies
to actively manage end-of-lease products. Additionally, there
has been significant growth in direct online selling, which
can produce return rates ol 40 |iercent for some catalog and
online retailers."^ Ihese direct vendors have no choice but to
develop etteetive returns management proeesses.
While direct marketers have long been experts at manag-
ing returns, many traditional bricks-and-mortar eompanies
tbat bave moved into Web-based eommerce are not fullv pre-
[xired tor biirulling the subsequent surges in [inxkict returns.
Ihus. it has become increasingK im[)ortant tbat logisties sys-
tems more elteetively aceommodate product returns, eitber
within the existing systems or through secondarv channels.
Management teams must identifv\ traek. and understand tbese
trends so they ean properly
develop their reverse logisties
eapti bi l i ti es and posi ti on
their companies to enhance
suppK chain competitive-
ness.
As a lirst step, managers
must grasp the impaet of
reverse logistics activities on
tbeir comjianies' eosts, rev-
enues, and assets. One way
to Jo so is to apply tbe elas-
sie strategie profit model in
v\ hi ch return-on-assets
(HOAl analysis eonsiders
re\enues, expenses relating
to net profits, and assets in
terms ot asset t urnover.
Ctearly. the reverse logistics
process must be reeogni/ed
as more than a eost of doing
business or as a eost mini-
mization exercise. In our
experience, ils impact can
be demonstrated in four
ways.
\ i \ M \ \ v f , r \ i
L I \ / Au < . L s r 2 0 ( 1 ^ 3 5
Hidden Value
EXHIBIT 1
Impact of Effective Returns Management
Secondary
Customers
Increased J
Revenues /
Supplier Manufacturer ^Re' t S' ' ^ Customers
^ ^ Increased ^
-. . \ ,--' ' Revenues ' InrrpacpH /
Reduced '. ,- - - -- increased
Cost of \ ;' ( Revenues
Goods \ ' , .". Returns - /
Sold ' Processor
1^ Reduced
Disposal Costs
Forward Product Flow
" - Returned Product Flow
1
Increased revenues can be realized from "secondary"
sales and from reducing discounting levels by offering
fresh stock in place of unsold or slow-selling stock.
Cuiii|Xinifs CLin Li\oid iiiarkdowns on older product b\ nianag-
injj in\cntorics to keep "fresh" iiroduct al the point of sale.
Neu stock commands higher prices than old stock. A manii-
i'acturer can arrange to take baek unsold stock From retailers
and rc-pkice it with the new season's model to maintain retail
prices .incl a\iiid markdowns, tluis niainlalning profit margins.
Such a policy recjuircs the manufacturer tu acti\'eiy manage
any returned product in order to capture any remaining value
in tlie product.
Reprocessed or reniantiiaL'tured products can generate
rc\enuca factor that no marketing |ilan shoLild overlook.
Ihe revenue levels range from relati\el\ minimal (less than I
percent) in cases iinoKing fresh stoek to increases ot more
than 5 percent when remanuFactured returns could be sold in
alternative channels or markets
2
The goodwill earned from acting in a socially or envi-
ronmentally responsible manner can produce real
value. C^ustomers do respond U) companies' behaviors, and
the goodvvill dc\elo|K"d through reverse l{)gistics and proper
disposal of products can create substantial customer lo\alty.
For example, some researchers report that Nike takes back
used running shoes and eonvcrts them into public basketball
courts and running tracks as part of its community action
efforts.^ Likewise. Kenneth Cole accepts used shoes from
customers and donates them to those in need. Roth ul those
returns programs i.irc costly to manage, but the companies
believe their actions enhance the value of their brands and
create loyal customers.
3
Cost reductions can come from the reduced cost of
goods sold (COGS) and lower operating expenses.
Many products and parts can be easily reckijmcd. While the
reclamation process may incur additional costs, everv' product
or com[ioncnt that can be reinserted into tbe lorv\ard supply
cbain iur sale is one less unit thai must he prucLirei.1 or manu-
taettired. For example, a major computer manufacturer has
managed tu rednee its procurement costs b\ rccapttiring usable
parts from returneti computers. This process has enabled the
companv to retkiee the cost of its service parts as v\ell as the
expense of its "last-time buys"the one-off ptirchases of parts
to stipjiort altcr-Siiles. Better management ol the llovv of returns
also improves returns processing and labor productivitv. which
can reduce variable expenses. Making sure that returns are
received and dispusitioned in a timcK manner reduces costs
associated with storage and congestion. Effective returns man-
agement and processing can also reduce the costs of environ-
mental compliance or waste disposal. C'ustomer service costs
can be reduced when the return process is streamlined from
the customer's perspective. And when properly captured and
leveraged, data on customers' reasons for return can be used to
ftirther improve the product, therebv reducing futtire returns.
4
Better management of returns inventory can improve
asset turnover. In terms of inventory management,
returned goods are no different Irom new j^oods. Returns
inventory adds assets both in terms of the inventor)' itself and
the facilities required to store it. Fffective returns manage-
ment can help lower inventor}' of revenue-generating items
and reduce the need lo store items that do not generate rev-
enue. Effective management can also convert damaged prod-
ucts to salable products in a more timely manner. One con-
sumer goods company managed to reduce returned inventor}'
levels from 10 to three days. It did this simply by developing
a returns management proeess that included better gatekeep-
ing and returns processing. These activities stopped nonrev-
enuc-generaling items from being returned (v\hilc gi\ing full
credit to customers for the return! and helped transform
returned inventory' into salable inventory more quickly.
Best Practices in Practice
Researchers at Michigan State Universitv recently investigat-
ed the returns management practices ol seven noneompeting
organizations. The objective was to identify best practices
that eoultl be generalized across companies and indtistries.
Fhe researcbers conducted in-dcpth intenievvs and laeility
tours to explore the following five aspects of the companies'
reverse logistics activities: returns flow, remanufacturing,
rcmarketing, recycling, and landtllling.
/\t each of the organizations selected, senior management
pays significant attciition to improving reverse logistics activ-
ities. Executives emphasize the strategic and finaneial
importance of "getting reverse logistics right"although, in
some cases, their focus has been a relatively recent phenom-
enon. In many cases, tbe executive champions have had to
v\ork l{)ng and hard to demonstrate the importanee oi active
reverse logistics management.
Each of the organizations surveyed now actively pursues
36 SL vci vn \ 1 RI \
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. t s I 2005 \v\^\^ .scmr.ciim
Hidden Value
cind measures reverse logistics with tbe objecti\e ot enhanc-
ing eompany proHtiibility and en\ ironmental responsi\eness.
Highlights of tbeir Ltcti\ities follow, with the discussion link-
ing baek to the finjncial impact each L(impan\ has identified.
For confidentiLiiity pur|ioses, the compan\ names ha\e been
disguised.
The Computer Specialist. This companylet's call it
Computer Atlantic Corp.deals in otfice computer prod-
ucts, many of which are leased. With this foeu.s on end-ol-
lease asset reeoxeiy, Com[iiiter Atlantic has been inxoKed in
all fi\e of the re\erse logistics acti\ ities lor ycLirs, Because its
leased assets are returned, the eomp;iny highlights the impor-
tance of quickly assessing the \i.ikie ot tlie prinluct in its
entirety and deciding on the resale potential ol the whole
product as distinct from the potential \a!ue of indi\idual
modules, components, or materials.
Gi ven the short product lifeeyeles in its i ndust ry.
Computer Atlantic concentrates on reducing proeessing time
for the assessment and reconfiguration of returned produets.
Products that can be readily refurbished or remanutaetured
are quickly identified and converted to resalabie goods. The
company has identified and estahlished a range of seeondary
markets so the remanufaetured machines do not compete
direetK ith the tactor\-new produets. I5y turning the reman-
ufaetured products aroimd and mo\ing them into the sec-
ondarv markets as tjiiiekK as possible. C'om|iuter Atlantic
keeps inventory low and maximizes re\enueatter already
realizing substantial re\enues from the lease of the produet in
its first life. In short. C'omputer Atlantic tully recognizes the
products' lull lilecyele value in terms of re\enues, costs, and
asset Litili/atii)n,
For produets that cannot be remanuiaetured. C'omputer
Atlantic removes usable components before disassembling
the rest of the produet to reco\er precious metals and sepa-
rate the plastic into appropriate recycling bins. By recaptur-
ing componentr\\ the compan}' has tound it ean significantly
reduce the xolumes of new eomponents it must purehase. (In
the electronics sector, many used parts are considered ot
ei|ua! \ ai ue to new [larts for rej i l acement purposes.)
Additionally, some eomponents are desigtujtecl tor future re-
use by the companys ser\ice division because Computer
Atlantic ser\ices its products for many years atter the last
produetion date. Having a ready supply of eomponents ior
older equipment has enabled the eompany to keep satisfying
eustomers with minimal investments in new jiarls imeiUory,
Finally, with less than tv\o percent of its returns volume
now sent to landfills. Computer Atlantic can promote its
einironniental responsiveness. Management believes that
effeeti\e returns management has inereased the eompany's
brand equity, aeeruing long-term benefits in terms of future
revenues. These days. Computer Atlantic's returns division
has become cirofitable in its own right.
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Tbe Engine Rebuilder. Ibis c{>mpany^we'll name it
Motormaster Ine, bas tle\elo[ied a strong cajiability to
rebuild engines and modules as re[ilacement parts on its
e<.|ui[iment, Beeause its hea\y-equipment product lifeeyeles
may be \ears or e\cn decades long, Motormaster must pro-
vide replacement-parts ser\'ice long after its initial unit sales.
l o do so, tbe company has formed a joint venture with a
remanulaetLirer to manage rettirns and rebuild its com|io-
nents and engines. Hemanufacturing components bas
enabled tbe company to cut its procurement and inventory-
costs to less than half of wbat it would take to aecjuire new
components. This approacb also belps build strong customer
lovaltv- by ensuring bigh levels of eustomer serviee over many
\ears, Motormaster manages tbe returns process profitably.
While engine and component rebuilding is not particularly
new in the aLitomoti\'e, agrieultLrral-macbinery, or bcavy-
To understand how returns management
can create value, it is necessary to
Linderstand both the marketing and lt)gistics
components of the process.
ei|nipment sectors, tbere are many lessons that can be
applied in consumer durables. For instance, as electronic
durables become increasingly modtilari/ed, tbere are more
opporttinities lor remantilacturing and resellingand greater
need lor effective logistics.
The Consumer-Goods Marketer. Household Supreme
C'orp. iHSC') operates in a \ery different environment. Its
consumer packaged goods are generally of nuicb lower value
iban C'ompiiter .Atlantic's antI Motcjrniaster's products, and
its approacb to re\erse logistics has been verv different.
atilhori/alion (R\fA} process in wbicb cus-
tomers must contact tbe comfnin\ to receive returns autbo-
ri/ation, Ibe customer benefit is receipt ol immediate credit
for the returns.
HSC's customers, who are maink independent husiness
people, have found tbat the practice greatly enhances tbeir
own easb flow, so they ha\e happily bougbt into tbe HMA
|>roeess. It may seem counterintuitive, but HSC bas positive-
ly affected its bottom line hy deeiding v\ hieh produets sbould
ix' returned and hy issuing faster credit to customers. That's
because processing labor has been greatly reduced, as have
return transportation expenses. Because fewer prodticts are
being returned, products that do come back can be proeessed
niucb more tjuiekly ijeeausc tbere's less volume and beeause
of the visibility created tlirougb the K,MAs, Sborter cvcle
times on returns processing bas enabled tbe companv to
return tbe products to the forward
supply chain more tjuicklv. thus
enhaneing revenues. Additionally,
the compan\ now experiences more
positive relationships with its cus-
tomers, thus enhancing the longevity
and value of each cLtstomer relati(jn-
ship.
Tbe Carpet Maker. In ihe carpet industry, remanufae-
tLired car|i(.'t is becoming an accepted product lor man\ com-
mercial markets. In fact, "WeaveCo lnc.'"viev\s its eni|ibasis
on returned car[iet as a basis for comjietitive advantage: tbe
companv s sales stalf offers customers end-of-life manage-
ment for tbeir existing carpet, C'ustomers are pleased not to
have to worr\' about used-carpet disposal, and tbe cost differ-
ential can be built into tbe value offering. In turn, VVeaveCo
biis invested in tecbnology to remanulacture tbe useti carpet-
ing it actjuires from its customers: tbe company successfulfy
IISCs products are generally consumables, so tbere is limit- remarkets tbe remanufactured carpet in noncompetitive see-
ed need to return tbe |>rodLict at tbe end of its life. I lowevcr.
as a catalog and mail-order company, I4SC is faced with a pp g
substantial number of returns when products are not accept- lator\' processnot to manipulate tbe regulations into being
ond.HA markets
VVeaveC'o actively participates in the environmental regu-
able to consumers,
I ISC' has come to realj/e tbat not ali products sbould be
returned. W'ben customers call witb a complaint about a par-
tieuiar protluct. tbe etistomer ser\ ice representatives use
tietailed gtiitielincs to determine wbieh products sbould be
rclurned and wbich sbould not, Tbe deeision to accept a
return is basetl on an explicit cost analysis, comparing the
cost ol jirodtict return anti reproeessing w itb the cost of mak-
ing tbat item again, A product tbat meets predefined cost cri-
teria is not taken baek; consumers are told to keep tbe [irod-
uet, and they recci\e immediate credit for it. Tbis proactive
policy has already sa\'ed the company a significant amotmt in
processing labor and transportation, "Fbe trade-off is often the
$2-3 contribution on the product \s. the $4-5 to return, sort.
"soft" on difficult issues but to ensure a level playing field for
all industry participants and to maintain consistency in legis-
lation across tbe United States. A eompany tbat's belping to
create more laws for its industryr Tbe rationale is this:
VVeaveCo's management team is convinced that operational
eosts will get out of hand if tbe regulatory en\ ironment
e\ol\es into a patcbwork of different laws nationw i(.lc. Long
term, VVeaveCo expects its invoK-ement in reverse logistics
acti\'ities and its work with legislators and nongovernmental
organizations to bave a significant positive impact on its prof-
itability. In tbe meantime, tbe company is capitalizing on the
marketing value it gains with customers by activcK- participat-
ing on tbe environmental scene.
The Office Furniture Distributor. "I be Deskmax
and refurbish it. To sueceed witb this plan, tbe company bas Companies" has taken an unusual approacb to returns, ft bas
bad to create higher visibility for returns. It has built a return long been involved with removing old office furniture when it
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S L I'l'l"! Ci M i N M \ \ \(,t- \ i t N ! R( \
jL l.WAUGUM 200=. 39
Hidden Value
installs nt'w furniture. But Dcskmax has gone lurther iliiin
that by being alert to customers' broader needs. When a cu^-
tcMTitT is rc-outfittinfj an olTict'. it olten upgrades flooring and
electronic equipment as well. So the company has expanded
its seniee offering to include managing the rem()\ii! ol elec-
tronic t'L|uipnienta sen ice that many ol its customers ha\'e
been willing to pay for. Additionally, Deskmax provides verili-
caLion that hard disks ha\c been cleaned and olfers cus-
tomers the option oi either donating used eqLii[iinent to non-
profit organizations or ha\ing them de-manufactured, in
essenee, the company views returns management as an
enabler of new business opportunities. Its expertise in the
area and its e.\panded offerings have beeome strong selling
points. The extended sen ices have inereased Deskmax's rev-
enues and ha\'e created a profitable business through remar-
keting, recyeling. or disposing ot dcctronie
equipment.
T h e M i l i t a r y A g e n c y . A U . S . m i l i t a r y
agency is employing inlormation technology to
manage its returns processes effieientK' and
cost-effeeti\ely. The agency uses a sophisticat-
ed Web-based listing to identify all items (and
tbeir loeations) that are available lor reuse.
When one government agency no longer needs a [iroduct. it
offers it for use in other agencies around the world.
Because distances between buyer and seller are typieally
large, the ageney has developed a produet classification s\s-
tem that enables Web-based remarketing efforts and a
receivf-in-placc capability for managing and tracking invento-
r\. Rather than moving inventory over long distances to a
central location tor refurbishing and remarketing, the agency
takes the product "in place." adds it to its database of avail-
able items, and doesn't move il until a "buyer" claims it.
(There is no actual charge for the "purchase" of an item as it
moves from one government agency to another.) The buyer is
solely responsible for the cost of transporting the item to its
new place of use. By not moving product until its next desti-
nation is knovvn and by taking advantage ol Web-based mar-
keting and eommunications, the agency has significantly
reduced lhe costs ot managing returns while )iroviding
imiirovcd levels of sen ice lor the other agencies it serves.
The A ppl i a n c e M a n ufa c t ur e r . A maker of household
applianceslet's call it Henderson .Appliance Corp.has
recentk begun a reverse logistics system to actively manage
returns from its major dealer customers. Products are
returned primarily beeausc of in-transit damage, although
some damage ap[)ears to be occurring at the customers loea-
tions. As a rclati\ei\ nev\ entrant to the reverse logistics
arena, tbe companv bas bad the luxuiy of designing a high-
performance inforTiiation system Irom the ground up. The
system enables I lenderson to link everv' return to a customer
and tn tbe original purchase order as v\ell as to the lactory ot
origin and the date of manutactLire. lhe company's produet
and quality engineers use this data to assess manufacturing
detects, proeess improvements, and even packaging redesign
in order to prevent tuture damage. The company s ultimate
goal bere is to eliminate returns due to in-transit damage
because such returns can be extremely costly. For example,
v\hen a particular type of damage was seen repeatedly, the
engineers redesigned the product package to prevent sLicb
damage from occurring while in transit. This change bas
resulted in significant savings and inereased revenues over
the past two years.
The niost interesting aspect of the new system is that it
allov\s Henderson to make distinctions among customers
according to their long-term value to the appliance maker.
Management has realized that some customers are more eost-
ly to sene than others. The dealer customers can be profiled
according to their returns historv. which Iccds into an assess-
ment of the profitability ot each to Henderson.
Dealers that abuse Henderson's return polieics
may find themselves looking for another appli-
ance maker. By more effectivelv managing the
cost-to-serve each dealerparticularly how
much it costs the manufacturer in terms of
returns managementHenderson has already
seen improvements to its bottom line.
Henderson has built another eiement (jf sophistication intti
its reverse logistics system: an ability to maximize the margins
on returned products. Immediately upon receipt oi damaged
goods, product engineers assess the damage, calculating the
cost of the parts and labor required to bring the pn)duet back
to prime condition. I'or example, when a refrigerator is
returned dented and inoperable, an engineer evaluates what it
would cost to make it operational and to replace the dented
panels. Based on the cost of repair, Henderson has established
guidelines for v\hether the appliance should be repaired to a
new level, repaired and sold in a "seconds" channel, or broken
down to components for spares. In this way. Henderson can
minimize its costs to restore products and ensure that it gener-
ates maximum revenues for the refurbished product.
Overall. Henderson ampK' demonstrates the positive
impact tbat a focus on revenue and cost management can
have un a company's bottom line, Not long ago. the appliance
maker's returned products used to be written oft. Today,
repairables proeessing and remarketing is a prolitable endeav-
or for the company.
Oppor t un i t i e s Abound
The Michigan State benchmarking research revealed oppor-
tunities that can be pursued by supply chain managers at
many companies and across many industry sectors. (See
Kxhibit 2.) We toimd that companies can use tbe returns
proeess to enhance marketing etiorts by analyzing reasons tor
returns and conducting ongoing defect analysis. Companies
can then use v\biit they learn to guide product design and
engineering to present tuture product defeets and returns. Or
if returns are happening because customers don't understand
4 0 S L F T I . I C H A I N M W A C hVI h\ E R K \ I L \ \ J U L Y / A U C L S T 2 0 0 5 www.scmr.coni
Hidden Vtilue
liov\ to use ibe protliict, companies can use tbe analvsis to
rel ine tbei r eommuni cati ons to customer s. For thi>se
instances when returns cannot be avoitied, prodtict-grading
initiatives can belp maximi/,e tbe margin on remarketing tbe
produet-
I he researcb also revealed abundant opportunities for
cost contr ol , Apr i me oppor tuni t\ : i mpr ovements in
returns iorecasting. Impl ementi ng a return merciiandise
autbor i / ati on system cr eates visibility in tbe r etur ns
pipeline, b\ providing advance notification
of i ncomi ng products, Lven a lev\ days of
a dva nc e noti c e can ena bl e i mpr oved
i nbound control / scbedul i ng and workforce
| i l anni ng, RMA [irograms also provide an
opportuni ty to work more proactively witb
customer s duri ng tbe r etur ns pr ocess; an
effective program can overcome customers'
r el uctance or lack ol i ncenti ve to provide
better visibility of returns.
Further opportunity lies in bov\ tbe returns process is
vievvedand acted iqntn. Unless all de| iartments understand
tbe role {>f tbe returns proeess and its ultimate goals, eonflict-
ing goals and priorities will be set across departments. It is
also crucial to prepare tbe vvorklorce lor tbe volume of
ineoming receipts. By afigning employees abead of time,
compani es can expeet i mpro\ ed tbrougbput processing,
ensure that customers receive credit more t|uickK. and make
sure tbat products are returneil to saleable stock as (.|tiiekly as
possible.
Tbe Micbigan State researcbers also lound tbat compa-
nies can benelit greatlv by leveraging their relationships v\itb
third parties. For example, alliances with carriers can belp
provide visibility when customers cannot. And bv publicizing
reverse logistics efforts, companies can hefp get their suppli-
ers and customers on board witb tlieir initiatives vvbile creat-
ing significant goodwill both witb their customers and witb
the public in general.
Counting the Lessons Learned
We draw five valuable lessons ior supply cbain managers
from the experiences of the organizations descrilied.
First: Bacb of the organizations involved in tbe bench-
marking study is no\^ at a point v\here its managers recognize
and measure the financial impact of reverse
liigistles nil company perlormance. In several
cases, companies have also heen able to mea-
sure tbe impact on customer service and rela-
tii>nsbip management. These per for mance
measurements have further substantiated the
i mportance of effectively managing reverse
logisties.
Second: Each company nov\' uses its reverse
logistics capability to enbance its eompeti ti \ c ad\ antagc.
Wbile re\erse logisties may never be tbe focal point of a com-
jianv's overall strategy, managers are increasinlgy recognizing
tbat reverse logistics can fit into a company's strategy to be a
cost leader or to better serve customers, f^everse logisties sys-
tems still represent uncbarted territory for many companies,
i'liose managers who recogni/e the importance of the process
to enhance pn)iitability or de\elop stronger eiislomer relation-
sbips stanti to strengtben tbeir companies' com|ietitive pos'\-
tions.
Third: l or reverse logistics systems to he successful, top
management must guide and support ibe im|ilementati{)n.
Only then will tbe strategic importance of tbe process be
widely recogni zed, Eacb ot the compani es i ntervi ewed
acknowledges that its systems work onlv because it enjoys tbe
lull sLip|)ort oi its executive team.
EXHIBIT 2
Revenue
Expenses
Assets
The Financial Impact
1 Returns Flow 1
Environmentally
responsible activities
enhance brand equity.
1) Reduce COGS by
reclaiming usable parts.
2) Reduce inventory-
carrying costs through
improved channel-
clearing activities.
Reduce obsolete
inventories by
improving channel-
clearing activities.
1 Remanufacturing 1
Increase sates of
remaiuifactured
product, which is
produced at lower
cost of goods sold
(COGS).
Reduce COGS by
refurbishing or
remaniifacttiring
products and parts
salable.
of Reverse Logistics Strategies
1 Remarketing 1
DSel l recovered
and remanufactured
products/parts,channels.
2)Env]ronmentally
responsible activities
enhance brand equity.
Keep inventories of
old stock from
accumulating by
actively remarketing
to secondary markets.
1 Recycling 1
DRecycl e parts/
materi al s that can no
longer be used in
products.
t ) Lnvirofimentally
responsive activities
enhance brand equity.
Reduce operating
expenses through
disposal compliance.
1 Landfill ^^M
Environmentally
responsible activities
enhance brand equity
Reduce operating
expenses through
disposal compliance.
4 2 S L I ' I ' I . \ C H V I \ M A N V I : L M I N I R l V J L s r 2 1)OS
w \\ \\ . s u m r, t; < un
Fourth: It is cruciiil to integrate all the functional areas
[hat allcct. or can be alfectcd by, returned prodtacts. At sev-
eral ot the organizations surveyed, integration chiefly means
creating tighter linkages between the marketing and logistics
functions to ensure a smooth return [irocess with prompt
and correct credits for customers. Regardless of the scope of
the necessary integration, each company recognized that
reverse logistics spans several kiiictional areas and cannot he
managed in isolation.
Firth: Ihe most sticcesslul companies systeniaticallv
developed decision rtiles that consider the cost of return
transportation, the cost ol reprocessing or remanufacturing,
ami the resale price, Stich giiiLlclines allow companies to
tocus their return and processing elforts on items that ean
achieve a return on investment while minimizing the eosts
incurred hv other prodticts thai v\ ill not generate any rettirn.
Potential Waiting to Be Captured
[Reverse logistics is a valid stipply chain management disci-
pline, hut one whose full potential has yet to he realized hy
man\- managers, B\' sharing the rcsirlts of the Michigan State
survey, we hope to have prov iilcd some valuahle glimpses of
the gains that comfianies can make from wel l -pl anned
reltirns management eapahilitles and systems.
Some of the organizations stirveyed have heen [iractieing
returns management lor a long time, while others are relative-
Iv' new to it. In manv ol the cases, tlie rettirns management
process had been ad hoc, meaning that the strategies, opera-
tions, and gtiidelines were not well-defined or thought out.
I iowever, all the organizations survevcd have i,|Liickly seen
compelling henefits, to the point where thev, have all opted to
build reverse logistics eapahilities into their overall logistics
and sup|ilv chain strategies and processes. Each ol the com-
[lanies profiled above can attest to the value of doing so.
Authors' Note: The researchers ivisli lotluiiik IHM htlegnitcd
Stippiv Chain for its support oj ''''' rc^^earch iuid llw conipuiiies
and agencies that agreed to be inten'ieived. (3SD
Footnotes
^M.C. Cooper, D.M. Lambert, and J.D, Pagh, "Supply Chain
Management: More Than a New Name for Logistics," The
International Journal of Logistics Management, vol. 8, no. 1 (1997):
pp. 1-14,
S. Rogers, Douglas M, Lambert, Keely L. Croxton, and
Sebastian J. Garcia-Dastugue, "The Returns Management Process,"
The International Journal of Logistics Management, vol. 13, no. 2
(2002): pp, 1-18.
^ D. S. Rogers and R.S. Tibben-Lembke, Going Backwards: Reverse
Logistics Trends and Practices, Reno: Reverse Logistics Executive
Council, 1999. Also, Edward W. Repa "SWMA's 2002 Tipping Fee
Survey/' NSWMA Research Builetin, September 2002.
''Rogers, 2002.
^Rogers, 1999.
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