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Send it Back! The Role of Reverse Logistics

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The first e-commerce book that tells you how to get product orders from the Buy button to the doorstep-quickly, cost effectively, and hassle free!

The first complete e-commerce guide to e-logistics and fulfillment!

Almost 40% of the cost of selling online takes place after the customer presses the Buy button. At that moment-when the visitor becomes a customer-the most crucial part of the relationship begins. Payment processing, order fulfillment, product delivery, and product returns handling are the largest gaps in electronic commerce today. These essential but unglamorous, messy, and often expensive functions are not optional in true e-business. They can make or break your customer relationships, profitability, and future business.

Identifying and managing these functions, termed e-commerce logistics and e-fulfillment, are the subjects of this book.

Inside, find helpful advice on how to:

  • Assure your customers receive the products that they order from your Internet site in a timely, efficient, traceable way
  • Set up a rock-solid e-commerce infrastructure and calculate the return on investment
  • Evaluate shippers and online shipping tools
  • Tackle payment processing, online fraud, and U.S. and global taxation issues
  • Provide superior customer service
  • Evaluate third-party logistics providers and select outsource fulfillment partners
  • Handle the inevitable product returns (reverse logistics)

Useful tools such as planning templates, checklists, and spreadsheets are included throughout the book and at www.bayles.com. Whether you're an electronic commerce or logistics practitioner or provider, this book will be an extremely useful addition to the "How To" books of your library.

The way a manufacturer or retailer handles customer returns can ruin or enhance the customer relationship. In this chapter from Deborah Bayles’ E-commerce Logistics and Fulfillment, (2000, Prentice Hall PTR) the author discusses the process of pushing returns back through the pipeline in an effective and cost-efficient manner.

For most people, the idea of returning a product they have purchased brings to mind images of waiting in long lines at a department store or post office, hours on the phone arguing with customer services reps, or worse yet, being stuck with something that doesn't work. The way a manufacturer or retailer handles product returns can be either a nightmare or an opportunity to increase customer satisfaction, achieve greater cost reductions, and preserve the environment. Enter reverse logistics-the process of pushing returns back through the pipeline in an effective and cost-efficient manner and, when possible, recovering some of the products' value.

What Is Reverse Logistics?

We've seen that logistics is defined by the Council of Logistics Management as:

The process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods, and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.

Reverse logistics is essentially all of the activities that are mentioned in the definition above, except operating in reverse. Therefore, reverse logistics, as defined by the Reverse Logistics Executive Council, is:

The process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods, and related information from the point of consumption to the point of origin for the purpose of recapturing value or of proper disposal.

More precisely, reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Reverse logistics also includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, and excess inventory. It also includes recycling programs, hazardous material programs, obsolete equipment disposition, and asset recovery.

Reverse Logistics as a Competitive Weapon

Returns started spinning out of control back in the late 1980s, when many retailers began using returns as a competitive weapon in the battle to win market share. Consumers quickly took advantage of liberal, no-hassle return policies and retailers perpetuated them, often taking back items they knew were older than their return policy allowed. In some cases, retailers took back products that they didn't even sell-all in the name of keeping customers happy. In fact, there's an urban legend about Nordstrom's return policy being so gracious that someone actually returned an automobile tire to the clothing retailer and Nordstrom accepted it.

There can be a fine line between a fraudulent return and the return of a defective product. Customers who believe that an item does not meet their needs will return it, regardless of whether it functions properly or not. A humorous example is one retailer's report of the return of two Ouija boards. Ouija boards are children's toys that supposedly allow contact with the spirit world. On one Ouija board, there was a note describing that it did not work because "no matter how hard we tried, we could not get any good answers from the `other side'." The other Ouija board returner said that the reason for return was, "too many spirits responded to the Ouija board session, and things became too scary." In both cases, the consumers were allowed to return these "defective" products (Rogers and Tibben-Lembke, 1998).

This philosophy of accepting product returns as a competitive weapon has resulted in huge reverse logistics challenges. Examples of the scale of the problem include

  • At Federated Department Stores, 25 million units amounting to $820 million in merchandise goes back to the vendors.

  • At Estee Lauder, which does $4 billion in sales worldwide, returns, excess, obsolescence, and destruction amounts to $190 million on an annual basis.

  • In the consumer electronics industry, product returns cost more than $15 billion a year.

Table 10-1 shows that while the trend of liberal return policies has started to level off, U.S. firms still believe that a satisfied customer is the most important strategy for maintaining a competitive advantage.

This same attitude has fueled an increasing ramp-up in the sheer volume of total retail product returns. Figure 10-1 shows the rise of returns from around $40 billion per year in 1992 to well over $65 billion per year currently.

Table 10-1 Strategic Role of Returns

Source: Rogers and Tibben-Lembke

Role

Percentage

Competitive Reasons

65.2%

Clean Channel

33.4%

Legal Disposal Issues

28.9%

Recapture Value

27.5%

Recover Assets

26.5%

Protect Margin

18.4%

The story is different outside the U.S., however. In many other countries, returns are never allowed. Some international managers believe that if liberal returns were ever allowed in their countries, both businesses and consumers would abuse them. In other countries, return models are moving closer to North American models, indicating that they too will be pressured to improve their reverse logistics capabilities.

Table 10-2 shows the return percentages for several categories of products in the offline world. The online world is often faced with much higher return percentages, particularly for "high-touch" items such as clothing.

FIGURE 10-1 Total Retail Product Returns

Source: BizRate

TABLE 10-2 Sample Return Percentages

Source: Rogers and Tibben-Lembke

Industry

Percent

Magazine Publishing

50%

Book Publishers

20-30%

Book Distributors

10-20%

Greeting Cards

20-30%

Catalog Retailers

18-35%

Electronic Distributors

10-12%

Computer Manufacturers

10-20%

CD-ROMs

18-25%

Printers

4-8%

Mail Order Computer Manufacturers

2-5%

Mass Merchandisers

4-15%

Auto Industry (Parts)

4-6%

Consumer Electronics

4-5%

Household Chemicals

2-3%

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