Don’t Overlook Reverse Logistics During Your Post-Crisis Supply Chain Recovery Efforts

Reverse logistics is managing the final stages of your product’s life cycle. 

Do it well and you can extend that cycle while extracting any remaining residual value in a timely fashion.

Product returns are a function of sales and are directly correlated to profitability. Companies that understand this have processes in place to streamline the returns process to save money and minimize the impact on profitability.

Seasoned supply chain professionals realize that, under normal conditions, this is sometimes easier said than done.  An underperforming, inefficient reverse supply chain can easily erode your bottom line by up to 3 %.  When we isolate certain product types, categories, retailers, etc., losses are often higher.

As we all know, these are far from normal times as the impact of the Covid-19 crisis on the consumer products supply chain will be far reaching and long lasting.  One of the biggest disruptions to the consumer products market is an imbalance in sales.

As consumers first reacted to the crisis, certain products began flying off shelves while others remained.  As a result, some categories are seeing explosive growth (i.e. cleaning and OTC’s) while others languish (i.e. seasonal and cosmetics). This volatility is resulting in inventory gaps and surpluses existing side by side in many supply-chain networks.  Where and how product is being purchased is also under extreme pressure. Concerned consumers are not venturing out into public spaces and are turning more to ecommerce platforms to place orders.  Return rates for ecommerce sales are historically 3-10 times higher than when purchased in stores.  At the same time, many retailers are not accepting in-store product returns until a later date when stay at home orders will be relaxed.

All of these imbalances are going to need to work their way through the reverse supply chain network at some point in the near future.

The imbalances, disruptions and volatility in the post Covid-19 crisis supply chain are unprecedented.
Photograph: Australian Maritime Safety Authority – AMSA/ Facebook

The risks associated with these imbalances include:

  • A spike in returns as a result of the disruptions in the returns process and broader reverse supply chain
  • Having the timing of this spike coincide with a pullback in sales as we see the unwinding of all the panic buying and pantry loading that occurred in March and April
  • A lengthening or even a breaking of the sales –> claim / deduction –> return –> recoup cycle
  • Increase in obsolescent inventory due to aging, missed seasonal windows, shifts in capacity, bull-whip effect
  • An increase in unproductive working capital

Therefore, my advice is that as you are dealing with and adapting to these disruptions to your forward supply chain, that you should not overlook reverse logistics as you are designing and implementing your recovery plans.

There might never be a better time to reinvent your reverse supply chain.  Forward thinking, agile companies will be rewarded in the future with the plans and decisions that are enacted today to better position their supply chain to adequately respond to these risks.

Understanding the Mindset of an Online Reseller

According to an article on Forbes online, entitled Inside The World Of Liquidated Amazon Merchandise Amazon often “sells a portion of its inventory to liquidation buyers by the truckload.” These are items that have been returned or marked as defective. Since Amazon accepts free returns of faulty items, many consumers declare this the reason for returning the item, even when it is in working condition. Much of this returned inventory can be resold, thus generating an opportunity for sellers to relist products on Amazon, but in the “used” category. The article goes further to state:

  • “Amazon doesn’t really want to be in the business of reselling inventory.”
  • People have used this opportunity to build successful businesses around the Amazon returns ecosystem.
  • Individuals have turned from producing products and selling them on Amazon to full-time liquidation businesses.
  • Brands don’t appreciate independent liquidators.
  • Some manufacturers have pursued action through Amazon by filing IP infringement claims.

Forbes goes on to say that buyers don’t often identify third-party sellers from the manufacturing brands and aren’t necessarily aware that a product may be used or returned. As a result, brand perception and price integrity is a concern. Liquidators typically offer goods at low prices, creating a conflict for brands.

As a reverse logistics expert, I find this article both fascinating and disturbing from the perspective that it gets into the “mindset” of a highly successful reseller who has “built their business around the Amazon returns ecosystem.”  Knowing that the number of these resellers is proliferating, it is more important than ever for manufacturers to secure their reverse supply chain by accounting for the return of their product.

Part of what is fueling this growth is just how lucrative this business can be.  The liquidation of returned product is a steady source of cheap product that these sellers can arbitrage when they acquire such inventory for 20% or less of list cost that they can then turn around and post online for sale well below the manufacturer’s suggested retail price.  The fact that most dot-com retailers now allow for free returns to compete with the fact that Amazon offers this perk adds to the volume of available inventory to be purchased for arbitrage.  Another aspect of this is the introduction of policies like “buy online, return in-store.”  With return rates 3x – 10x higher for dot-com purchases compared to traditional brick and mortar transactions, as online sales continue to comprise more and more of overall sales volume, the amount of “returned” products available for resale continues to grow substantially.

Unbeknownst to the manufacturer, they can be an enabler to the problem. If they are “just letting the returns happen” and not adapting their reverse logistics process to account for and retrieve these returns, passive and or uninformed manufacturers are literally “paying the price” with constant hits to their pricing integrity in the marketplace.

Another irony here is the symbiotic nature of the problem. The landing page on a site like Amazon that the brand has invested in to sell their item and carries their company’s reputation and goodwill is the same gateway to the possible harmful and destructive transaction waiting to be consummated by the reseller with the help of the same platform provider.  We know that the speed and ease at which these transactions occur lends itself to the consumer not even realizing that they didn’t just purchase an item sourced by the manufacturer to Amazon, in which Amazon ships it directly to them.  It could be an item that was never even in Amazon’s possession, thereby exposing the consumer to the risks associated with purchasing from someone who may or may not be handling this product properly or ensuring that quality and safety are being maintained throughout their portion of the supply chain.  We also see where this reseller in the article is branching out into teaching others how to get into reselling.  As this part of the supply chain continues to expand and splinter, this only adds more quality and safety risks through more and more handling, transporting, storage, etc.

Getting back to the mindset of this particular reseller and his position that, under the “first sale doctrine,” that he has the right to use these shared listing platforms/marketplaces to his advantage.  His logic being that once a manufacturer sells an item, they relinquish all intellectual property rights tied to any further selling of that product.  Accordingly, once an item is legally purchased, this doctrine gives the “owner” of such product the “right” to sell that product.  This only reinforces the need for the manufacturer to retrieve their products from the reverse supply chain to prevent the purchasing by the reseller in the first place.

Therefore, in response to this issue, manufacturers must be proactive in regaining control of their reverse supply chain to help them, in turn, regain control of their reverse supply chain and dot-com marketplaces. As the sheer volume of units being returned and made available for purchase by resellers eager to arbitrage their products in bulk for high-profit margins continues to multiply in today’s circular economy, manufacturers must match the aggressive and opportunistic mindset of these resellers.   They can do so by being disciplined in retrieving their returns to cut off the supply of arbitrage products and vigilant in protecting the integrity of their brands, pricing, goodwill, shareholder value, etc.

The Cone of Uncertainty