Common Reverse Logistics Costs

Reverse Logistics: What is it and How do you Manage it?

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 ecommerce 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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What is Reverse Logistics

When most people think of logistics they picture the process of moving a product from a seller to a customer—all the steps along the way to get goods to consumers. What isn’t obvious at first is what happens when those items need to be returned. This is reverse logistics (also known as returns management)—any time products are sent to a final destination but need to be returned for any number of reasons—and it is a huge aspect of logistics that is as intricate as it is important. A secondary aspect of reverse logistics process involves how products are dealt with once returned: reused, refurbished, disposed of, recycled, etc to extend their lifecycle. Because reverse logistics can be a very time consuming and costly aspect of doing business, many companies choose to partner with a third-party logistics provider (3PL) to handle both the supply chain process and help handle the returned products as well.

Benefits of Reverse Logistics

Because reverse logistics involves the same steps as traditional “forward” logistics (customer service, transportationinventory management, etc.), it requires similar efficiencies. By streamlining the way products move back through your supply chain, you will see benefits such as cost savings, happier customers, and improved sustainability.

Better Profit Margins

There are several ways to cut costs with reverse logistics, from reducing transportation spend, to reselling items that would have been a complete loss if disposed of upon return. If value is being regained from recycled and resold items, and the rest of the system is operating efficiently, your profit margins will improve.

Increased Customer Satisfaction

The way your business handles returns could directly affect how customers feel about your brand. A defective product can lead to a poor experience. Dealing with errors is just as important as making sales. If a customer had a bad experience with your product, you have to make it right. By offering options to your customers who wish to return items that make it easier for them, it can go a long way to boost customer satisfaction. These can include providing a full refund no matter the reason for the return, not requiring the original receipt if being returned to a brick and mortar store, not requiring the original packaging, among others.

Faster Turnaround

If you have a streamlined process in place for customers to return products and then receive replacement products quickly, you’ll have huge customer satisfaction. It can also help to speed up the process that products are repaired, refurbished, or reused which will cut down on the need to purchase new products.

Reduced Waste

Reverse logistics can help you identify ways to reuse, resell or recycle materials that would otherwise end up in a landfill. This not only helps profit margins, but it also helps improve your brand’s reputation for social and environmental responsibility. By remanufacturing or refurbishing your products you can extend their lifecycle.

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 management, 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

Benefits of Reverse Logistics

Because reverse logistics involves the same steps as traditional “forward” logistics (customer service, transportation, inventory management, etc.), it requires similar efficiencies. By streamlining the way products move back through your supply chain, you will see benefits such as cost savings, happier customers, and improved sustainability.

Better Profit Margins

There are several ways to cut costs with reverse logistics, from reducing transportation spend, to reselling items that would have been a complete loss if disposed of upon return. If value is being regained from recycled and resold items, and the rest of the system is operating efficiently, your profit margins will improve.

“With DCL’s advice and expert team, Canary has instituted a new system for processing returned items, including a device recertification process, and a more robust system of collecting inventory data. Thanks to DCL’s changes we have seen significant cost savings!” 

Robert DeHaven Supply Chain Manager, Canary

Increased Customer Satisfaction

The way your business handles returns could directly affect how customers feel about your brand. A defective product can lead to a poor experience. Dealing with errors is just as important as making sales. If a customer had a bad experience with your product, you have to make it right. By offering options to your customers who wish to return items that make it easier for them, it can go a long way to boost customer satisfaction. These can include providing a full refund no matter the reason for the return, not requiring the original receipt if being returned to a brick and mortar store, not requiring the original packaging, among others.

Reduce Waste

Reverse logistics can help you identify ways to reuse, resell or recycle materials that would otherwise end up in a landfill. This not only helps profit margins, but it also helps improve your brand’s reputation for social and environmental responsibility. By remanufacturing or refurbishing your products you can extend their lifecycle.

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 put the proper systems and processes in place it can improve customer service as well as help to boost your profits by repurposing products that are returned.

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

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