Reverse Logistics: The Way Forward (Part I of II)Although reverse logistics is often overlooked, retailers that master this discipline can gain competitive differentiation and turn the tables on pure-play e-commerce goliaths.

Executive SummaryIn our experience with numerous retailers, reverse logistics remains an overlooked area. Reverse logistics is the process of receiving returned merchandise with the purpose of proper disposal or recapturing value. While many retail organizations run best-in-class transportation and logistics systems and processes, some have neglected reverse logistics as a primary focal area. However, they have started to realize that to create and maintain an edge over the com-petition, they must rethink and reorganize their reverse logistics strategies.

This is the first in a two-part white paper series that assesses major retail trends that will shape the reverse logistics landscape. This paper covers shopping’s transformation into a channel- agnostic experience and how this evolution impacts reverse logistics, including key regulatory compliance issues that have emerged along the way. The second installment delves into the importance of data analytics, highlighting how changing worker demographics can be leveraged to overhaul the reverse logistics process. Moreover, it explores how reverse logistics can be applied as a differentiator, particularly as product recalls become increasingly common.

Moving Back and ForthA focus on logistics and supply chain, as well as building flexibility in serving customers, is important to retailers as they seek to create leaner processes and increase cost savings. Tra-ditionally, retailers have placed greater attention on moving goods and materials forward in the supply chain, but a prevailing challenge is to move backwards. The backward flow of goods is referred to as “reverse logistics;” the concept is premised on moving goods and materials from the point at which they are purchased or consumed, or moving them back to a previous supply chain point to recapture value.1

Within the retail industry, reverse logistics plays a critical role in consumer returns and how retailers process returns efficiently. While this may appear to be a simple process of moving goods from customers to returns centers, retailers face numerous operational challenges. For instance, hazardous waste and related disposal methods place stringent restrictions on the management of reverse logistics.

Further, supply chain transformations are occur-ring as purchasing habits swiftly change. No longer are consumers constrained to shopping just at brick-and-mortar stores; they are instead

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shopping across multiple channels and expect-ing the same levels of service across each touch-point. This presents new challenges for how to accommodate and integrate returns across these channels. Retailers, therefore, are seeking

methods for processing mul-tichannel returns; however, fraud remains a growing chal-lenge. Methods must be found that enable hassle-free returns while mitigating the risk of fraud, which, if quantified, ranges from $9.1 billion to $16.3 billion annually.2

Changing Shopping StylesToday’s shoppers are gradually moving away from buying at brick-and-mortar stores. They are more price-conscious and increasingly prefer the convenience of shopping from anywhere at any time.3 As online shopping continues to grow, e-commerce revenues are expected to rise 20.1% in 2014, to $1.5 trillion.4 But with those online pur-chases come increased returns; industry insiders estimate that up to 40% of clothing and around 8% of electronics goods bought online or from a catalog during the last holiday season resulted in product returns.5 As the popularity of online shopping continues to increase, a similar return rate may occur year-round.

Even as online sales rise, many shoppers are reluc-tant to buy certain product categories online, pre-ferring instead to walk into a store and touch and feel the item before making a purchase. Industry gurus suggest that physically holding a product can create a sense of psychological ownership, driving must-have purchase decisions. This idea may underlie the push to move inventory from display cases into customers’ hands.6 To keep customers loyal, retailers offer free shipping and hassle-free returns. By allowing shoppers to expe-rience the product in the comfort of their homes at no additional cost, retailers have begun to tilt the buying process in their favor.

Of course, providing consumers with free shipping and returns comes at a price: a heavier emphasis on the effectiveness of the returns management process. In addition, consumers expect an equiva-lent level of service across all channels.

Multi-channel Retailing and Flexible ReturnsIt is not uncommon for shoppers to purchase a product from a retailer’s Web site and then return

it to the physical store for a refund. This presents numerous challenges for order management, order fulfillment and inventory management, which costs retailers $9.6 billion a year.7 Returns management, and specifically fraudulent returns prevention, presents its own challenges. By inte-grating returns with order management tools, retailers can achieve greater visibility of returns and decrease return fraud. This has been sub-stantiated in our experience with a leading home improvement client through the centralization of its returns process across channels.

To support these processes, retailers are placing a greater emphasis on master data contained within their supply chain systems. By maintaining a single source of information, one of our clients has successfully reduced fraudulent returns by introducing the following remedies:

• Issuing refunds in the original form of payment only.

• Introducing authorizations for canceled or rejected orders.

• Implementing locks prohibiting simultaneous returns from different stores.

• Instituting velocity checks for non-receipted returns.

To further improve the supply chain process, retailers need to automate the critical steps of reverse logistics and increase visibility throughout the supply chain. While enabling consumers to return products through the channel of their choice, retailers need to maintain visibility and control over their processes, while controlling costs. Often, returned merchandise does not need to go back to a claims center but can be returned to the online shelf. By routing it through an extended claims process, the retailer might lose an opportunity to sell the product when demand is highest.

Compliance ChallengesHazardous waste handling requires retailers to comply with a multitude of safety and envi-ronmental protection laws and regulations. Of particular significance is the management of hazardous goods as they flow through the reverse logistics channel.

Often, the product vendor requires the product to be returned to maintain the value of the product/brand in the market. Leading retailers are defining standard operating guidelines and pro-viding training for returns associates, particularly

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Retailers are seeking ways to

offer hassle-free multichannel returns,

while minimizing fraud and abuse.

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for individuals handling hazardous waste. Freight such as used batteries, chemicals and inflam-mable/combustible materials all contain harmful residual elements that need to be properly segre-gated and transported.

Another major push for reverse logistics partners and retailers to stay abreast of current laws and regulations for material handling are the penalties that can result from noncompliance. Retailers can face costly fines or consent decrees; an example is the CVS Caremark Corp. in the state of Con-necticut, where the retailer was fined for violating hazardous waste laws at seven of its stores there.9

Adequate controls and standards are needed to both remain in compliance and safeguard associates handling returned items. Existing processes might be sufficient, but there is a growing need for retailers to assess exception-handling capabilities and make necessary changes.

Changing DemographicsA key driver across all industry sectors is the changing demographic pattern of the workforce. This trend is expected to cause major changes in the workplace, and the key is to be prepared.

• Labor management systems of the future: With 20% of the experienced workforce 55 years or older10 and soon approaching retirement, retailers need more interactive and scalable labor management systems across the reverse logistics domain. These systems will track employee productivity and provide increased visibility into labor standards while providing real-time feedback for employees to improve performance.

• Training to engage and empower: As next-gen workers enter the workplace, retailers should invest in new training methods that aim to satisfy their varied needs. Gamification is one successful method that keeps next-gen workers engaged through interactive training. Deloitte, for instance, has already seen the benefits of gamification, with a 37% increase in the number of returning users to its training site, and these benefits will only grow as the

next-gen demographic within the workplace increases.11

• Automation to compete: As a fifth of today’s workforce approaches retirement in the next decade, a shortage of manpower within reverse logistics will emerge. To mitigate this, retailers will need to focus on specialized systems for decision-making to enable an effective and lean workforce.

Product Recalls Product recalls impact thousands of companies every year, affecting sales, testing customer rela-tionships and disrupting supply chains. According to data gathered by ExpertRecall, the quantity of recalled units increased by 292% in the fourth quarter of 2013, compared with the prior quarter.12 If retailers lack an adequate reverse logistics network, product recalls can cause irreparable damage to a company’s brand.

To better prepare themselves for recalls, retailers should build flexibility into their reverse logistics networks by increasing data capture throughout their networks. By capturing more data, coupled with analytics, retailers can identify areas of oppor-tunity and minimize risk, allowing them to react more quickly and efficiently to product recalls.

Looking AheadReverse logistics should no longer be viewed simply as a cost center for retailers. Rather, a well-planned reverse logistics strategy can be a crucial factor for improving a company’s com-petitive advantage and creating both tangible and intangible market opportunities. With clearly defined processes and metrics, retailers can drive efficiencies and gather valuable analytics that will turn reverse logistics into a profitable investment.

Part two of our series will provide additional guidance on how to get there from here, offering actionable recommendations and areas to prioritize to transform reverse logistics from a necessary evil into a competitive differentiator.

Footnotes1 “What Is Reverse Logistics?” Reverse Logistics Magazine, Winter/Spring 2006.

2 “2013 Consumer Returns in the Retail Industry,” The Retail Equation, 2013, http://www.theretailequation.com/retailers/IndustryReports.

3 “2013 UPS Pulse of the Online Shopper,” comScore, February 2013, http://pressroom.ups.com/pressroom/staticfiles/pdf/fact_sheets/2013_PulseShopper_FINAL.pdf.

About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 178,600 employees as of March 31, 2014, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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About the AuthorsJoydip Lahiri is a Senior Consultant within Cognizant Business Consulting’s Retail Practice. He is respon-sible for projects in supply chain and logistics and has worked with multiple Fortune 500 clients on defining supply chain and logistics strategy. Joydip holds an M.B.A. from Indian Institute of Management, Kozhikode. He can be reached at Joydip.lahiri@cognizant.com.

Subhash Anuguthala is a Functional Consultant within Cognizant Business Consulting’s Retail Practice. His primary areas of work are supply chain and operations. Subhash has worked on multiple warehouse management systems implementations. He holds a master’s degree in management information systems from Texas A&M University, as well as an undergraduate degree from Jawaharlal Nehru Technological University in Hyderabad, India. Subhash can be reached at Subhash.Anuguthala@cognizant.com.

Brian Martin is a Business Analyst within Cognizant Business Consulting’s Retail Practice. Brian is respon-sible for providing strategic governance for a leading retailer’s international operations and has success-fully helped implement a direct-to-customer fulfillment supply chain transformation program for a large retailer. Brian received his undergraduate degree in information systems with a minor in transportation and logistics from the University of Arkansas. He can be reached at Brian.Martin@cognizant.com.

4 “Global B2C Ecommerce Sales to Hit $1.5 Trillion this Year Driven by Growth in Emerging Markets,” eMarketer, Feb. 3, 2014, http://www.emarketer.com/Article/Global-B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575.

5 Sarah Butler, “Gift Returns Take Shine Off Christmas Retail Figures,” The Guardian, Jan. 3, 2013.

6 Lawrence Williams and Joshua Ackerman, “Please Touch the Merchandise,” Harvard Business Review, Dec. 15, 2011, http://blogs.hbr.org/2011/12/please-touch-the-merchandise/.

7 Kristin M. Finklea, “Organized Retail Crime,” Congressional Research Service, Dec. 11, 2012, http://fas.org/sgp/crs/misc/R41118.pdf.

8 “Reverse Logistics,” Council on Safe Transportation of Hazardous Articles, http://www.costha.com/page/reverse-logistics-30.html.

9 Allan Gerlat, “CVS Agrees to Pay Fine for Connecticut Hazardous Waste, Recycling Violations,” Waste360, Jan. 30, 2013, http://waste360.com/waste-generators/cvs-agrees-pay-fine-connecticut-haz-ardous-waste-recycling-violations.

10 “Household Data Annual Averages 2013,” U.S. Department of Labor, Bureau of Labor Statistics, http://www.bls.gov/cps/cpsaat39.pdf.

11 Jeanne Meister, “How Deloitte Made Learning a Game,” Harvard Business Review, Jan. 2, 2013, http://blogs.hbr.org/2013/01/how-deloitte-made-learning-a-g/.

12 “The Recall Sprawl,” ExpertRecall, Q4 2013, http://recall.stericycleexpertsolutions.com/wp-content/uploads/sites/2/2014/02/Recall-Index_Q4_2014_v8.pdf.