Grant, Lambert, Stock and Ellram define logistics as “…the management of the flow of

goods or materials from one point of origin to point of consumption, and in some cases

even to the point of disposal”. The Council of Supply Chain Management Professionals

(CSCMP) include the activities in their definition and define logistics management as “…that

part of supply chain management that plans, implements, and controls the efficient,

effective forward and reverses flow and storage of goods, services and related information

between the point of origin and the point of consumption in order to meet customers'

requirements”.

Rogers and Tibben-Lembke identified that reverse logistics involves the same activities as

forward flow and they define reverse logistics 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 consumption to the point of origin

for the purpose of recapturing value or proper disposal”.

The forward logistics typically uses intermediaries such as wholesalers, distributors and

retailers to take the product from manufacturers to consumers.

Today, a large percentage of what is sold has the risk/chance of being returned. Norek’s

(2003) research shows that the results vary greatly between industries, but it can range

between 3 to 50 per cent in some sectors. Furthermore, the costs of reverse logistics vary,

Stock (1998) concluded that the cost of moving a product back from the consumer to the

producer could be as much as nine times compared to the forward flow

Tibben-Lembke and Rogers identify many differences between reverse and forward logistics, this involves

forecasting, transportation, product and packaging quality, pricing, marketing methods and visibility of

information in the supply chain:

Forecasting is more difficult in reverse logistics because of the greater uncertainty involved in reverse

logistics.

Transportation costs tend to be higher in reverse logistics; this is due to several factors. First of all, the higher

costs can be because of lack of planning in modes of transportation, routes and other strategic choices

involved in transportation. Furthermore, forward logistics is often movement from one-to-many destinations,

reverse logistics on the other hand is many-to-one movement.

Products in forward logistics are packaged by professionals, which protects it in transit from damage. The

packages are furthermore optimized to be handled easily. In contrast, the products in reverse flow may be

inadequately packaged and may be further damaged during transit and may be hard to stack neatly to

optimize the space during transport.

The pricing of the products going forward is often uniform because the quality is uniform, however some

variations can be due to market demand and other factors. When products are getting returned; they are

often not in a new condition and therefore the price for reselling it have to be different.

Marketing methods for returned products can be more difficult compared to new products. New products

are more profitable and therefore more marketing focus is given to them.

The visibility in reverse logistics is lacking compared to forward logistics because of the lacking information

system resources that is required to do this. Additionally, because, the lack of focus on reverse logistics; the

resources to fix this are often not available.

De Brito and Dekker list three main categories why a sender returns products;

manufacturing returns, customer returns, and distribution returns

Furthermore, Langley et al. mention eight categories of reverse flows reasons and sources:

• Products that are obsolete or near the end of their shelf life, but still have some value

for resale or salvage

• Products that have failed, but can be repaired or remanufactured and resold

• Overstocked products that are unsold at retail level and may have resale value

• Recalled products for quality or/and safety issues

• Products that are pulled back for repair and quickly returned to service

• Products that can be recycled, such as computer inkjet cartridges

• Products/parts that can be remanufactured and resold

• Scrap metal that can be used as raw material for additional manufacturing.

.

Depending on the source of the reverse flow, reverse logistics can be classified into several

categories

• Return from manufacturer to supplier

• Retail customer returns

• Catalogue/e-commerce customer returns

• Retailer returns

The reasons for product returns vary widely as shown in this exhibit. These reasons can be described as below:

Customer not satisfied

Most manufacturers and retailers allow customers to return products if they do not meet their demands within a predefined period. Money-back guarantees are standard practice for most direct sales channels. Consumers and retailers will sometimes abuse the return policies of manufacturers. Consumers wanting to try a new product will sometimes abuse the ‘not satisfied, money-back’ guarantee and simply return the product within allotted return period and receive their money back.

Installation or usage problems

Some customers experience problems with installation or usage of their recently acquired products. They perceive the product to be defective, while the reason for dissatisfaction is actually caused by difficult set-up or installation procedures or unclear instructions. This is a common problem in the computer industry where in some categories such as CD-ROM drives, return rates of 25 to 40 per cent are not uncommon. Complicated installation procedures and a lack of clear and simple instructions exacerbate the issue.

Warranty claims

Defective products or parts can be sent back to retailers or the manufacturer for repair. Products might either be dead on arrival, not working according to specifications or cosmetically damaged. This could happen either to the retailer or the end consumer. Alternatively, products might break down during the course of their life cycle. If the product is still within the warranty period extended by the manufacturer customers might return their product to the manufacturer or if that period has expired, customers could take up other options such as taking the product to a specialist repair center. Both end consumers and retailers can experience shipping problems.

Products need to be delivered in full and on time or customers can make claims against manufacturers and return (part of ) their shipment. Examples of delivery problems are incomplete shipments or missing parts, wrong quantities, wrong products, duplicate shipments and untimely delivery, which can cause the customer to miss out on the intended use of the product.

Previously, reverse logistics was viewed as a cost centre that needed to be controlled and/or reduced. Furthermore, the reverse flow was viewed as not adding any value for the organization, Researchers documented several companies where reverse flow was viewed strictly as a cost centre and due to that; costs of reverse logistics became greater. Additionally, reverse logistics previously was not viewed as a strategic tool but rather as a necessary cost for the business, a “have to” or a regulatory agreement. However, as organizations started to believe that reverse logistics can be a strategic tool. they recognized that good reverse logistics practices can lower the customer’s risk when buying products and as a result; make an organization more competitive because the product can be returned more easily.

How efficient an organization handles their reverse flow in the supply chain will have a powerful impact not just on costs, but also on revenue and customer goodwill. Research shows that if the return management of products is convenient for customers, then they are more likely to shop, and if the return management is troublesome, they are not likely to shop there again. Organizations today cannot ignore the reverse flow of products and how they handle it because volumes of returns are increasing world-wide.

Reverse logistics is a part of returns management which in turn is a part of supply chain management. Activities involving reverse logistics are often reactive in nature instead of proactive which means it is often a result of a consumer or downstream channel member action and not a result of a planning decision of an organization. However, organizations can behave proactively to avoid/handle reverse flow. Proactive management of reverse flow can have positive impact on the financial position of an organization

Competitive Reasons

Most retailers and manufacturers have liberalized their return policies over the last few years due of competitive pressures.

While the trend toward liberalization of return policies has begun to shift a little, firms still believe that a satisfied

customer is their most important asset. Part of satisfying customers involves taking back their unwanted products or

products that the customers believe do not meet needs. Generally, customers who believe that an item does not meet their

needs, will return it, regardless of whether it functions properly or not.

These competitive pressures appear to be, in large part, cultural. North American consumers and businesses are much

quicker to return goods than those in most other countries. In fact, in many other countries, returns are never allowed.

Some of the international managers and academics interviewed in the course of this research believed that if liberal returns

were ever allowed in their country, both businesses and consumers would abuse them. However, it is clear that in some

countries, business return models are moving closer to North American models.

Good Corporate Citizenship

Another set of competitive reasons are those that distinguish a firm by doing well for other people. Some firms will use

their reverse logistics capabilities for altruistic reasons, such as philanthropy. For example, Hanna Andersson, a $50

million direct retailer of infants and toddlers clothes, developed a program called Hannadowns. In the Hannadowns

program, customers are asked to mail back their childrens’ gently worn Hanna Andersson clothes. The company then will

give those customers 20 percent off the purchase price of new Hanna Andersson clothes. For Hanna Andersson, this

program has been very successful. In 1996, 133,000 garments and accessories were returned. These returns were then

distributed to schools, homeless shelters, and other charities.

Clean Channel

Reverse logistics competencies are also used to clean out customer inventories, so that those same customers can purchase

more new goods.

Some firms use their reverse logistics capabilities to protect their margins. This strategic usage of reverse logistics is

closely related to cleaning out the channel. Firms cleanse their inventories and the inventories of their customers. These

firms have programs in place that maximizes inventory freshness. Fresher inventories can demand better prices, which in

turn, protects margin.

Recapture Value and Recover Assets

Many firms consider recapturing value and recovering assets as of strategic importance.

Firms that have recently begun asset recovery programs find that a surprisingly large

portion of their bottom-line profits is derived from asset recovery programs. These

programs add profit derived from materials that were previously discarded, which makes

them essentially free.

Legal Disposal Issues

Another set of reasons considered strategic deals with legal disposal issues. As landfill fees

increase, and options for disposal of hazardous material decrease, legally disposing of non-

salvageable materials becomes more difficult. Firms have to think carefully about these

issues. Careless disposal of hazardous waste can become a legal issue. Firms now want to

make sure that anything that comes out of their facilities is disposed of properly.

Reverse logistics helps achieve objectives of many functional areas. The financial function

benefits from recovered value. Improved image for quality and reliability, offering extended

Warranty (see Dell/Ford example later) are some of the example maximizing profitability/

Generous return policy increases customer satisfaction and help the sales grow.

Marketing function can control the products sold through unauthorized dealers or

channels. Without RL a very large proportion of products are not recovered and there is a

risk of leakage into the gray market with the potential of affecting company’s reputation

and brand image. Increasing asset recovery efforts diverts more products from the gray

market.

Proactive maintenance ( determining the causes of failure) of product returned during

warranty period helps in removing the causes of failure and improves quality and reliability

of the products.

Reduces waste to protect the environment and gives the company a reputation of

environment friendly.

Whenever a retailer wants to return an item, the retailer and the manufacturer may

disagree on any one of the following:

· Condition of the item

· Value of the item

· Timeliness of response

Often from the retailer’s perspective, every product was sent back in pristine condition,

and any damages must have occurred in transit or must be manufacturing defects.

Manufacturers can be slow to recognize returns as a subtraction from sales. They may want

to delay returns until a later accounting period, or, they may not want to credit the

returned items at their full price.

These manufacturer-retailer conflict need to be resolved. both parties need to realize that

they have to develop a working partnership to derive mutual benefit. Obviously, neither

can live without the other; they need to work together to reduce the number of returns

coming back

and speed up the processing of those that do come back. Inefficiencies that lengthen the

time for processing returns cause harm to both firms.

Poor data collection leads to uncertainty about return causes. Improving the return process

and efficiently handling the returned products decreases costs. However, being able to see

defective products and to track return issues by reason codes can be more useful than

simply improving return handling efficiencies. In forward distribution, it is more important

to be able to manage information effectively than

to mange inventory. Generally, those firms that manage information well also manage their

inventories effectively.

Those that do not manage well the data surrounding their logistics processes, do not

generally manage their inventories effectively. This same rule applies to reverse logistics as

well.

Reactive Response

Over the past years, many companies have practiced reverse logistics primarily because of

government regulation. or pressure from environmental agencies; not for economic gain.

For most of these companies, reverse logistics has not been as strongly emphasized as

other business activities.

For many firms, it has not been possible to justify a large investment in improving reverse

logistics systems and capabilities because generally, not enough analysis is completed.

executives usually disregard reverse logistics issues.

The result of a survey on barriers to RL is shown in the slide. The answers were grouped

around the following categories: importance of reverse logistics relative to other issues,

company policies, lack of systems, competitive issues, management inattention, financial

resources, personnel

resources, and legal issues.

Very few of the firms surveyed manage their reverse logistics costs at the operational level.

Since successfully completing the reverse logistics mission is clearly a problem for many

firms, it is obvious that numerous barriers to good reverse logistics exist.

Advisory Group for the Reliability of Electronic Equipment (AGREE) found that electrical and electronic

product reliability, when plotted against time follows what is referred to as a ‘bathtub curve’. The significance

of this failure rate characteristic is that it gives a model that describes the returns distribution profile of any

product. This model characterises the profile into three distinct periods identified as infant mortality,

constant failure rate, and wear out

A product typically has a high failure rate shortly after manufacture. These failures are called infant mortality

failures. Infant mortality failures are caused by latent manufacturing or material defects. Items that fail during

the infant mortality phase are described as having a quality problem. This is often covered by the

manufacturers under dead on arrival warranty.

From a few weeks after start of use, the failure rate drops and remains low and constant until after the

‘useful life’ of the product at which time the failure rate again increases. During the useful life phase of the

product life cycle there are also fewer returns

In the end of life phase, due to wear and environmental attack, the failure rate starts to increase again as the

product ages. This end of life phase is normally well after the warranty period and not covered.

One advantage of warranty cover is that returns from customers are used to find the reason for failure

(proactive maintenance). Removal of the causes of these failures results in improved quality and reliability of

next generation of product.

Proper application of reverse logistics can thus be used to improve the quality and reliability of the product

reducing infant mortality, long useful life and improved customer satisfaction.

DOA Warranty

In most countries there is a legal requirement to offer an exchange or credit for goods

which were sold as defective. Defectives of this type are often referred to as Dead on

Arrival (DOA). For example, Philips Consumer Electronics offer an automatic exchange for

any defective product returned within 28 days of sale. Philips refers to returns of this

nature as 28 day returns. Returns like this fit into the infant mortality classification

discussed above. Technically, extending DOA Warranty to 28 days is not a legal requirement

but is frequently done for marketing reasons

Legal Warranty

Repair, exchange or credit can be offered at the warrantor’s discretion, if the defect

appears after a period of initial use but before the expiry of the legal warranty period. In

some cases a customer may receive credit or an exchange item without the need to return

the original item when the return freight costs exceed the recoverable value of the item

after return.

Free Extended Warranty

Warrantors often extend product warranties beyond the legal requirement for marketing

reasons. From the Bathtub curve, we know that during the useful life of a product the

returns defective rate is very low. Therefore, extended warranty may not cost the warrantor

a lot versus the market goodwill gained. Often it is necessary for the consumer to register

to get extended warranty. This can be a valuable source of marketing information. For

example, Whirlpool offer a ten year warranty on kitchen appliances provided the consumer

registers for the extended warranty.

Chargeable Extended Warranty

There is a growing market for extended warranty products. For example, the Australian

based electrical franchise retail operator, Harvey Norman, sells extended warranty to its

customers. An insurance company, IC Frith manages the process. IC Frith takes

Frequently, reverse logistics involves the processing of goods using disposition rules

designed to maximise the net asset recovery (NAR) from the disposition of goods being

processed.

Possible dispositions include; resale as new, resale as ‘B’ stock, use as exchange,

recycling and disposal. The cost, management and handling of hazardous or

polluting materials may be a factor in recycling and disposal. Therefore it is

possible that NAR may be negative.

Repair, remanufacturing, and refurbishment are sometimes stages in the reverse supply

chain. These stages add value to the returned product to maximise NAR or to satisfy a

customer need for an exchange item or to enable the re-return of the actual item to its

owner after service.

The Net asset recovery depends upon the ability to recover/refurbish the product. If the

returned product can be refurbished to as good as new condition as much as 70-90% of the

original value can be recovered. On the lower end if only the scrap value can be recovered

then the NAR is rather poor (see the NAR spectrum in the slide.

New environmental regulations are restricting use of toxic chemicals and also mandating

companies to accept life cycle responsibilities for pollutants and ensure their disposal

through RL