Reverse logistics is the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing or creating value or for proper disposal. Despite the growing recognition of the importance of reverse logistics, many companies are not ready to meet the challenges involved in handling returns. The rapid growth in the volume of returns far outpaces the abilities of firms to successfully manage the returns. Because of all the uncertainties involved, reverse logistics program development and implementation becomes very complex. The major challenges involve the considerable number of unknowns that have to be accounted for in developing reverse logistics programs.
The process of measuring and analyzing returns-related performance criteria is aimed at improving reverse logistics quality and identifying potential problem areas. The following metrics were identified by returns managers as the most important reverse logistics indicators: 1) volume of returns; 2) type/condition of returned product; 3) dollar value; 4) percent of sales; and 5) resources, including human resources, dedicated to returns. In-depth analysis of these measures can help to identify problem areas. Analyzing the volume, type/condition of returns, dollar value, and percentage of sales can provide a comprehensive list of reasons for returns and identify trends. For example, if a particular customer is constantly abusing the returns policy, this will be apparent when volume of returns and percent of sales data are analyzed. Type/condition of the returned product measures can uncover damage-related problems with specific carriers. R&D product designs and/or supplier selection procedures can be reconsidered if the number of defective products coming back exceeds a pre-determined level.
Measuring and analyzing reverse logistics programs can streamline resource allocation decisions as well. Targeting resources to potential efficiency gains should be a priority. Some firms start to apply reverse logistics-specific ROI ratios to identify the value-added to both the firm and the customers. Investments in employee training and new reverse logistics technological solutions, for example, are tied to pre-determined performance outcomes. Process formalization will enable the application of standardized analytical and measurement tools, like ROI, which can provide feedback useful in improving the service-quality and economic performance of the reverse logistics program.
The Effects and Implications of Reverse Logistics Process Formalization
Consistent with the Resource Based Value (RBV) of the firm, in its dynamic capabilities extension, (reverse logistics) processes/competences help to transform property-based and knowledge-based resources into enhanced (reverse logistics) capabilities and (reverse logistics program) performance. The formalization of these processes/competences becomes a necessary condition for building a state-of-art reverse logistics program. The formalization of the reverse logistics processes addresses the issue and provides several related benefits discussed bellow.
First, the formalization of the reverse logistics program can serve as a foundation for developing and implementing a solid monitoring system. Specific measurement items can be developed to help companies get control over their reverse logistics operations through increased visibility of the processes and activities involved. In addition to enhancing control, multiple monitoring/check points can help firms to modify certain processes and related activities. A constant feedback system can be established allowing for continuous process improvement.
Second, reverse logistics program formalization defines roles and responsibilities. A clear and shared understanding of what is involved in managing returns can increase employee motivation and contribute to increased operational efficiency. Clear delineation of required activities and associated responsibility can reduce returns processing time. The managers interviewed believe that reverse logistics process formalization allows employees to focus on ways to increase productivity. Measurable gains can be achieved, for example, by avoiding discussing potential options for every returned product. Instead, the prescribed policy/rule can be automatically applied. In addition to pure operational gains, providing structure to the reverse logistics program can contribute to enhanced performance by enabling reverse logistics personnel to build upon shared and in-depth, firm-specific knowledge and experience. Capturing standard policy through written formal procedures provides institutional memory and creates a firm-specific knowledge database.
Next, reverse logistics program formalization can help to identify necessary resources and indicate how resources should be utilized. A step-by-step schematic of what exactly is involved in handling returns can greatly contribute to securing senior management support. Problem areas can be readily identified as well as potential economic and strategic benefits. Tailored investments can be made, for example in returns inspectors training and wireless technologies. These investments should be related to clear-cut performance outcomes through developing distinct IT, innovation, and responsiveness capabilities. More importantly, gaining support for reverse logistics was cited as the necessary first step in changing the attitude toward returns, the culture from “let’s try to lose less money” to “let’s try to identify opportunities.”
The development of an effective, formalized reverse logistics program can also help companies to improve relationships with customers. When reverse logistics processes are formalized and documented at the detail level, preparing a customer-tailored offering can become less burdensome. Different activities can be adjusted as necessary and presented to the customer. The reverse logistics program can become an important element of the overall selling effort. Leading firms in reverse logistics management already include returns experts as part of their sales team. Formalization of reverse logistics processes can become a key, customer-oriented strategic tool.