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.

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Predator or Prey?

Best practices to get the most out of your Reverse Logistics program and avoid falling prey to current trends.

By Jim Schumacher

Introduction:

Times change, industries change (think Blockbuster Video), consumers at the end of supply chains are demanding more.  Driving much of this change is the effect e-commerce is having on the retail supply chain.  If factors like these are making you feel cornered when it comes to managing the cost and complexity of reverse logistics, then you are not alone.   Unfortunately, the axiom “survival of the fittest” also applies to reverse logistics.  As a person responsible for managing this for your company you are faced with choices like “adapt or perish”, “fight or flight” or becoming “predator or prey”.

 

No different than with other aspects of your business such as marketing and or operations, adaptation or evolution should also be present in your approach to reverse logistics.  With the fast pace of technology and impact of e-commerce almost everywhere today, companies must adapt if not embrace the changing forces present in reverse logistics to remain relevant and competitive.  Choosing to look the other way or ignoring these forces can become a costly mistake. Where prior to the impact of e-commerce on reverse logistics you could be dealing with a 1%-2% cost of goods sold, the multiplier effect we see today from e-commerce can easily double or triple this cost.

Fortunately, DRS is here to help you continue as king of the jungle in your industry. We have put together an assortment of best practices and actual business cases for you to reference.

Recommended best practices from the experts:

Here are some of our favorite best practices to illustrate the impact that a sound reverse logistics program can have in helping you make more profitable decisions in running your reverse supply chain:

  • When was the last time you updated your returns policy? Retailers have certainly been active updating their returns policies to reflect such changes as e-commerce and haz-mat. Policy best practices include:

    • Ensure policy is current and updated regularly
    • Accepted by your trading partners
    • Audited for accuracy
    • Comprehensive to cover all your product types and most likely scenarios
  • Are you in control of your product’s disposition? The ultimate disposition of your product should be your decision. 20 years ago, manufacturers were concerned with keeping their items out of 2 dozen flea markets.  Today, because of the proliferation of 3rd party resellers on sites like Amazon and eBay your product could be for resale out of thousands of garages and basements at any given time.  Best practices related to product disposition include:
    • Predetermine your items disposition beforehand by explicit direction in your policy, a prearranged return authorization or some other means
    • Avoid ambiguous dispositions like “destroy in field” or “donate”
  • Are you recovering as much residual value as possible? This is directly related to the best practice of controlling the disposition of your product. If there is residual value to be recovered most likely somebody is recovering that value.  Why not ensure through the control of your returned items that somebody is you and your company who benefits from any value recovery through liquidation, repurposing or recycling?  Best practices related to value recovery include:
    • Commit to a multifaceted disposition process that can positively impact your company’s bottom line
    • Don’t go at it alone – work with a trusted 3PL who can customize a program to meet all your needs and provide the expertise and experience you may be lacking
    • Understand that reverse logistics is a constant need to address and that you and your customers will both benefit from a disciplined, well-structured approach
  • Are you paying retailers claims with no questions asked? A longstanding paradox of reverse logistics has been that returns can be extremely transactional and these transactions can be highly inaccurate. Best practices related to claims processing include:
    • Validate quantities returned to quantities claimed
    • Audit claims to ensure correct item pricing and fees are included
    • Pay only on items returned and not just claimed
    • Get repaid for wrong items and fees claimed
  • Are you analyzing what is coming back, from where, and why? Analytics is your tool for adapting to survive in reverse logistics. What gets measured improves. If you are not learning from and adapting to this information you most likely don’t know your true cost of returns.  Often this blind spot can be a competitive disadvantage to your peer companies who have this information and understanding.  Best practices related to analyzing returns data include:
    • Limit the return of in-date, undamaged product that you are paying for
    • Identify and prevent the return of diverted product
    • Understand the root causes for the return (promotional, packaging, other) and preventing reoccurrence
    • Implement a continuous improvement mindset and philosophy and reinforce with cross functional teams
    • Collaborate both inside and outside of your organization with the information and knowledge gleaned from your program to reduce the incidence of returns
    • Use your improved understanding of the true costs related to your returns and the potential benefits directly tied to program improvements to secure senior management support for additional reverse logistics related projects

See our best practices in action:

Interested in learning more from specific examples?

If you are interested in looking to improve your returns management process, financial reconciliation, remarketing results, dealing with a recall or looking to assess your supply chain for areas of opportunities, take your pick from the links below.  DRS has been there assisting companies like yours for 25+ years and can customize a solution to meet your exact needs to help you save money and remove costs from your reverse supply chain.

Adaptation can keep your company’s supply chain from falling prey to these fast-moving developments in reverse logistics.   Now is not the time to be reducing and or even eliminating your focus on reverse logistics.  This is the best time to do just the opposite.  It’s not time to run, it’s time to attack this head on.  Don’t be prey, be the predator in this instance.  Trust me, you will like what your bottom line evolves into.