Common Reverse Logistics Costs

Common Reverse Logistics Costs

While logistics typically refers to getting items to end users, an important piece of successful logistics includes the process of returning products, getting them from end-users back to the manufacturer or warehouse. The reverse logistics process is how companies recoup value from products that were in bad condition or were shipped incorrectly.  Reverse logistics (also known as returns management) is actually a broad aspect of fulfillment, and just as important for effective supply chain management as traditional “forward” logistics.

It can be costly and cumbersome to enact reverse logistics efficiently. Additionally  complex costs of reverse logistics often go unchecked, because each step of the reverse supply chain might incur its own small cost; but adding them all up can mean diminishing margins. Despite being more difficult to understand, reverse logistics play an important role in controlling overall logistics costs. In addition to providing a better understanding of direct costs, successful reverse logistics management also increases customer satisfaction, reduces waste, and promotes sustainability.

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Common Types of Reverse Logistics Costs Include:

Transportation

Logistics is most often concerned with how long it takes to get products to retail stores or into consumers’ hands. An analysis might weigh out cost of air freight and if it’s worth paying for it   to increase customer satisfaction. However, reverse logistics examines less obvious angles like the cost of bringing back unsold merchandise from retail stores or recycling packaging components. In some industries, these reverse transportation costs can be just as high as their forward transportation counterparts. Packaging, pallets, crates, and displays are all sizable packaging elements that need to be accounted for when transporting products because these items are recycled for use with subsequent product sales.

Returns

Product returns have one of the highest costs of any type of reverse logistics, especially for retail companies. These costs begin before products are even sold and increase proportionally as they are returned. Developing legally binding warranties, return policies, and service contracts all factor into the cost of returned products. As returns increase, customer service expenses increase as well because more labor is required to handle return requests, check the status of returns, and process claims. Transportation costs result when products are taken back and sent elsewhere even if they are only moved over a short distance. Receiving and warehousing costs are then incurred when returned products are logged into facilities and stored. When documentation errors occur during receiving, additional costs can result because finance teams must do additional work to reconcile the accounting issues that follow. Furthermore, returns that are not covered under warranty come at an additional cost to the business, resulting in an even higher reverse logistics cost.

Repairs

It is typically more cost effective to have fewer repair locations and transport products to be repaired to them than it is to open additional centers. Regardless of the industry, repair centers of all kinds carry hefty price tags that outweigh the ongoing costs of inventory transportation. Within each repair center there are different reverse logistics costs to account for as well. For instance, stocking inventory comes with a carrying cost that must be analyzed to determine where appropriate thresholds exist. Storing excess inventory comes at the opportunity cost of occupying valuable space and running the risk that inventory will become obsolete before it can be utilized. However, not stocking enough inventory can result in downtime when required parts are unavailable to complete repair work.

Service

Like repair centers, the location of service centers is an important decision because it affects overall profitability. However, service centers have unique considerations as well, such as service level guarantees. For products that include specified service levels, the logistics throughout the supply chain need to work together flawlessly to meet customers’ expectations every time a product is serviced. Inventory, transportation, staffing, training, and customer communications all come together to deliver expected service outputs. At each step inbound logistics can determine where service gains may be made if individual components are changed. In the case of training, for instance, a cost-benefit analysis can be conducted to determine if the downtime needed for additional training and the cost of that education itself can result in more efficient operations or measurably higher service quality.

Reselling

Refurbishing products is a reverse logistics approach that many companies use to extract residual value from existing inventory that otherwise would have reached the end of its lifecycle. By remanufacturing can give otherwise obsolete products an upgrade, so that they can be resold. . While common, refurbishing is not the only method of reselling products. Returned products can also be resold if they are in good condition. However, inspecting products, repairing damage or replacing defective parts, and repackaging them takes time and materials. These costs are all included in the reverse logistics calculation of reselling products.

Click Here for a Glossary of Common Reverse Logistics Terms

Bottom Line

The costs associated with reverse logistics are often overlooked when factoring in the total cost of a product. If you are able to determine what some of these variable, often hidden costs are, it can go a long way to help your bottom line and ensure you don’t have unexpected costs. With careful analyzing and planning you can make reverse logistics a successful part of your business.

If you are looking for help managing your reverse logistics we would love to hear from you. Send us a note to connect about how DCL Logistics can help your company. You can read DCL’s list of services to learn more, or check out the many companies we work with