Reverse Logistics: Important or Irritant?

Estimated $100 billion industry in 2006

Survey shows considerable spending on Returns

“In an ideal world, reverse logistics would not exist.”

Jim Whalen, “In Through the Out Door,”Warehousing Management, March 2001

“Now, more than ever, reverse logistics is seen as being important.”

Dale Rogers, Going Backwards, 1999

Reverse Logistics - What is it?The Army’s Definition

The return of serviceable supplies that are surplus to the needs of the unit or are unserviceable and in need of rebuild or remanufacturing to return the item to a serviceable status

Reverse Logistics - What is it?The Commercial Perspective

• Reverse Logistics is the process of moving products from their typical final destination to another point, for the purpose of capturing value otherwise unavailable, or for the proper disposal of the products.

• Any activity that takes money from the company after the sale of the product

Typical Reverse Logistics Activities

• Processing returned merchandise - damaged, seasonal, restock, salvage, recall, or excess inventory

• Recycling packaging materials/containers• Reconditioning, refurbishing, remanufacturing• Disposition of obsolete stuff• Hazmat recovery

Why Reverse Logistics?

• Competitive advantage• Customer service

- Very Important: 57%- Important: 18%- Somewhat/unimportant:23%

• Bottom line profits

Reverse Logistics - New Problem?

• Sherman• Montgomery Ward’s - 1894• Recycling/remanufacturing in 1940s• World War II - 77,000,000 square feet of

storage across Europe with over $6.3 billion in excess stuff

• Salvage and reuse of clothing and shoes in the Pacific Theater World War II

Key Dates in Reverse Logistics

• World War II – the advent of refurbished automobile parts due to shortages

• 1984 - Tylenol Scare - Johnson and Johnson• 1991 - German ordinance that put teeth in

environmental reverse pipeline• Summer 1996 – UK Packaging and Packaging Waste

Legislation• 1998 - first real study of reverse logistics in the US -

University of Nevada, Reno• 2001 – EU goal of 50-65% recovering or recycling of

packaging waste

Reverse Logistics

A US Army Perspective

Operation Iraqi Freedom

The US Army moved the equivalent of 150 Wal-Mart Supercenters to Kuwait in a matter of a few months

Military Operations and Excess “In battle, troops get temperamental and

ask for things which they really do not need. However, where humanly possible, their requests, no matter how unreasonable, should be answered.” George S. Patton, Jr.

Jane’s Defence Weekly

“Recent report (Aug 2003): There is a 40 hectare (~100 acres) area in Kuwait with items waiting to be retrograded back to the US.”

From GAO Audit Report

Does this create a problem?

From GAO Audit Report

Reverse Logistics

The Commercial Perspective

Reverse Logistics

• Rate of returns?• Cost to process a return?• Time to get the item back on the shelf if

resaleable?

Costs - above the cost of the item

– Merchandise credits to the customers.

– The transportation costs of moving the items from the retail stores to the central returns distribution center.

– The repackaging of the serviceable items for resale.

– The cost of warehousing the items awaiting disposition.

– The cost of disposing of items that are unserviceable, damaged, or obsolete.

Costs

• Process inbound shipment at a major distribution center = 1.1 days

• Process inbound return shipment = 8.5 days• Cost of lost sales• Wal-Mart: Christmas 2003 - returns = 4

Days of Supply for all of Wal-Mart = 2000 Containers

• PalmOne - 25% return rate on PDAs

More Costs

• Hoover - $40 Million per year • Cost of processing $85 per item• Unnamed Distribution Company - $700K items

on reverse auction• 2001 - over $60 billion in returns; $52 billion

excess to systems; $40 billion to process

Is it a problem?• Estimate of 2004 holiday returns: $13.2 billion• % of estimated 2004/2005 holiday returns: 25%• Wal-Mart: $6 Billion in annual returns = 17,000 truck loads

(>46 trucks a day)• Electronics: $10 Billion annually in returns• Personal Computers: $1.5 Billion annually = approximately

$95 per PC sold• 79% of returned PCs have no defects• Home Depot ~ $10 million in returns in the stores alone• Local Wal-Mart ~ $1 million a month in returns

Is it a Problem?• European influence – spread to US - Green Laws• Estee Lauder - $60 million a year into land fills• FORTUNE 500 Company - $200 million over their $300

million budget for returns• Same Provider - 40,000 products returned per month;

55% no faults noted• K-Mart - $980 million in returns 1999• Warranty vice paid repairs• Recent survey of FORTUNE 500 Companies = 12% of

companies:

More consequences

• Increased Customer Wait Times• Loss of Confidence in the Supply System• Multiple orders for the same items• Excess supplies in the forward pipeline• Increase in “stuff” in the reverse pipeline• Constipated supply chain

Impact?

• Every resaleable item that is in the reverse supply chain results in a potential stock out or “zero balance” at the next level of supply.

• Creates a “stockout” do-loop

Results?

• This potential for a stock out results in additional parts on the shelves at each location to prevent a stock out from occurring.

• More stocks = “larger logistics footprint” = the need for larger distribution centers and returns centers.

Reverse Logistics

• According to the Reverse Logistics Executive Council, the percent increase in costs for processing a return, as compared to a forward sale, is an astounding 200-300%.

• Typically, as many as 8-12 more steps per item in the reverse pipeline than items in the forward pipeline

“The truth is, for one reason or another, materials do come back and it is up to those involved in the warehouse to effectively recover as much of the cost for these items as possible.”

- Whalen, “In Through the Out Door”

RFID and Returns

• Visibility Tracking• Component tracking• Data Warehouse on what, why, when• Altered products• Not for every product

Impacts of Reverse Logistics

• Forecasting• Carrying costs• Processing costs• Warehousing• Distribution• Transportation• Personnel• Marketing