Due to the rise of e-commerce, efficient reverse logistics and returns management is now more important than ever. In fact, according to data reported by SaleCycle, 25% of items bought online are returned, compared to only 8% of items purchased at a physical store.
In this article, we will discuss:
- What is reverse logistics
- The process of reverse logistics
- Plus, how to handle returns to increase profitability, sustainability, and customer satisfaction
What is reverse logistics?
Reverse logistics is the process of moving items backward through the supply chain due to customer returns or exchanges. This process typically has two phases:
- Returns management: the customer-facing side of reverse logistics
- Remanufacturing, refurbishment, restocking, or disposal: the back-end side of reverse logistics
Implementing reverse logistics protocols and practices is essential for businesses to recoup lost revenue, maximize profitability, and maintain customer loyalty.
In addition, reverse logistics can ensure the proper disposal of certain end-of-life materials like rechargeable nickel–cadmium batteries, motor oil, or products containing mercury.
What is traditional logistics?
How does reverse logistics compare to traditional logistics?
Put simply, traditional logistics is the process of moving products through the supply chain from the point of origin to their destination. Sometimes this process is handled by third-party logistics providers but is most often handled in-house.
Forward logistics can include many steps and phases of shipping/distribution.
Here is an example of traditional logistics:
- Customer places online order for t-shirts.
- Cotton distributor ships raw materials to T-shirt manufacturer.
- T-shirt manufacturer assembles order and ships product to e-commerce T-shirt retailer.
- T-shirt retailer ships individual orders to end consumer.
- End consumer receives T-shirt order at their doorstep.
Logistics also encompasses additional aspects of the supply chain, such as tracking shipments for accurate arrival times, sending notifications to customers, and calculating truck storage capacity.
Traditional logistics plays a vital role in overall supply chain management by ensuring that your customers receive the products they want, when they want them, in a cost-effective manner.
Key differences between traditional and reverse logistics
There are several core distinctions between traditional and reverse logistics. First, forward logistics deals with moving materials and products forward through the supply chain, from their origin to the end consumer. Reverse logistics deals with moving products backwards through the supply chain.
Next, the goal of traditional logistics is typically the optimization of new revenue, while the goal of reverse logistics is to minimize or recoup lost revenue from returns, damages, delivery errors, and so on.
Finally, traditional logistics enjoys relatively straightforward demand and cost forecasting, while reverse logistics forecasting is more difficult and often situational. For example, the sale of one widget represents a straightforward dollar amount of revenue. However, a returned widget can represent wildly different values depending on if it was returned due to being in inoperable condition (which cannot be resold) or simply due to customer preferences (which can).
When should a business consider using reverse logistics?
Virtually every business can benefit from having set reverse logistics procedures in place. However, some industries and business models rely on reverse logistics more than others, including:
- Rental services constantly deal with the ebb and flow of products between the retailer and customers and need established practices for the two-way flow of goods.
- Pick-up and delivery services, similar to rental services, deal with a more circular supply chain as a core component of their business model.
- E-commerce companies inevitably deal with a larger volume of customer returns than brick-and-mortar businesses and rely on reverse logistics to maintain customer satisfaction.
- Pharmaceutical companies, due to the regulatory nature of transporting prescription medication, require extremely precise and defined traditional and reverse logistics protocols.
Types of reverse logistics
Reverse logistics encompasses more than just returns. The following procedures can all be described under the reverse logistics umbrella:
- Returns management deals with handling and processing customer returns as governed by your return policies.
- Refurbishment and resale deals with accepting returned goods for repair and resale, typically at a discount, to recoup lost revenue.
- Reverse waste logistics deals with the proper disposal of unsold or end-of-life goods to reduce environmental waste and potentially generate revenue by reusing raw materials or components.
5 benefits of reverse logistics
While many businesses ignore reverse logistics management or treat returns management as an afterthought, here are five ways you can take advantage of well-planned reverse logistics initiatives.
1. Enhanced data
Effective reverse logistics can help streamline your business operations by identifying key areas of concern within your sales data. These concerns can include a mismatch between customer expectations and product reality, defective goods, or product lifespan issues.
2. Increased profitability
Reverse logistics can have both primary and secondary positive impacts on your bottom line. First, the resale of returned goods can reduce losses and generate profits directly—while increased customer satisfaction can lead to additional sales in the future.
3. Sustainability
By incorporating a reverse logistics process, companies can help reduce the amount of waste sent to the landfill and increase the amount of goods sold using sustainable business practices.
4. Customer loyalty
The returns process is a make-or-break moment in the customer journey. Poor returns management practices can leave customers feeling cheated, while effective reverse logistics procedures can help customers feel heard and appreciated, improving customer retention.
5. Increased product lifespan
Finally, reverse logistics can add years of life to your products. Instead of the disposal of goods that have been returned or that the original buyer no longer needs, these items can be repaired, refurbished, and resold to a second customer for reuse.
The auto industry is the most obvious example showcasing how a robust secondary market can add years, or even decades, to a product’s lifecycle.
Case study of reverse logistics of Amazon
It should not surprise anyone to discover that Amazon is the global leader in reverse logistics practices. So how did Amazon attain the returns management crown—and more importantly—what lessons can we learn from its success?
Customer experience
If a customer wants to return an item, Amazon’s website displays the “Returns & Orders” option in a highly visible location directly next to the cart icon. Amazon always asks why a customer wishes to return an item so it can keep track of available data for individual products and sellers.
Next, Amazon offers a variety of return options that typically include free shipping, such as dropping the item off at a Kohl’s drop-off center or UPS store or having the item picked up at your residential or commercial address.
While Amazon may not include free return labels with purchases, the company will immediately email a return label or scannable QR code to any customer seeking to make a return.
Using partnerships to cut expenses
By partnering with local businesses like Kohl’s, Amazon is able to dramatically cut its most expensive cost in the reverse logistics pipeline: delivery drivers. Kohl’s also pays part of the cost of returning items in exchange for the additional foot traffic generated by Amazon customer returns.
Leveraging robotics and AI
When returned products are received at the warehouse, Amazon uses robots to move, sort, and bring returned goods to human employees for manual processing. These robots help Amazon to cut storage costs and inventory risk by increasing the speed and efficiency of processing such a high volume of returns and exchanges.
Innovating to reduce waste
Amazon reduces its waste and environmental impact of returns in several ways. First, the e-commerce giant now offers refurbished and returned products on a discount website called Amazon Warehouse. Second, the company started offering a program called Fulfillment by Amazon (FBA) Donations in 2019.
The FBA Donations program reduces waste by allowing sellers to donate returned goods to charitable organizations such as the Salvation Army and Goodwill.
Key takeaways from Amazon’s reverse logistics program
- Always ask customers why they are returning products.
- Find innovative ways to reduce waste.
- Offer customers a simple, intuitive, and if possible, free returns process.
- Create strategic partnerships to reduce expenses.
How to incorporate reverse logistics into your existing supply chain management ecosystem
Now that we have an understanding of reverse logistics and its many advantages, let’s discuss five ways you can seamlessly incorporate reverse logistics into your business operations.
1. Review your current policies and user experience (UX).
Conduct a preliminary evaluation of your existing policies and the user experience on your company website to ensure customer satisfaction. Here are some questions to ask yourself:
- Is the language in my returns policy easy to read and transparent or vague and unclear?
- Is the returns policy easily visible on our company website or purchase agreements?
- Is the return or refund request option easily visible?
- Do my returns practices create unnecessary hassle for my customers?
2. Evaluate existing data to identify pain points.
Examine the data within your accounting software to determine if any statistical outliers exist that could explain return rates. These could include particular product SKUs, individual parts, or even certain material distributors or manufacturers.
To expand on your data collection in the future, always be sure to ask customers the reason for their return and catalogue this information.
3. Embrace automation.
Even if fully automated robotic warehouses are not currently in your budget, the power of automation can still make your reverse logistics system run more smoothly.
In QuickBooks Enterprise, you can set up custom workflows to automate key communications, such as sending email notifications to acknowledge you have received and are processing a customer’s return request.
4. Examine logistics practices.
Review your current logistics practices and protocols to identify areas that could be improved. Do you have dedicated workstations for handling and processing returns? Could your trucks be picking up returned inventory on their way back from deliveries?
5. Understand your accounting software.
Take the time to thoroughly understand the back-end process of handling returned items in your accounting software. For example, in QuickBooks Enterprise, you can track inventory, make purchase orders, record returns and refunds, rectify inventory discrepancies, and even track charitable donations.
Reverse logistics best practices to maintain customer satisfaction
If a customer returns an item, chances are that they were not satisfied with their order. Use these best practices to help improve customer satisfaction and retention.
1. Include free return labels with purchases.
One easy way to improve customer loyalty is to make every step in the purchasing process, including returns, as easy and painless as possible.
You can accomplish this by including free return labels with every online purchase or emailing them a printable label. This way, if a customer wants to return an item, they don’t have to pay for shipping or request a return label.
2. Establish clear returns policies.
No ones likes a bait-and-switch. Create clear return and warranty policies that are highly visible on your company website and/or purchase agreements.
In some states such as California, you may even be legally required to clearly display your returns policy.
These policies should establish rules governing the timing of returns (for example, if returns must be requested within 30 days of receiving an item), condition of returned items, refund policy (such as if items can be returned for full or partial refund or only store credit), and any other necessary conditions your customers must meet to qualify.
3. Organize workstations for reverse logistics.
Optimize the speed at which returns can be processed by organizing dedicated workstations for full-time employees to handle, audit the condition of returned products, and refurbish items.
These workstations may include items such as new boxes, packaging supplies (like bubble wrap), labels, and a computer to log progress.
Ideally, keep reverse logistics workstations separate from forward logistics workstations to avoid confusion and reduce human error.
The bottom line
Customer returns are an unavoidable reality of owning a business, but you have the power to handle them in a way that can turn unhappy customers into return customers. With a proper understanding of reverse logistics, your company can improve customer relationships, profitability, and sustainability.
