The Hidden Value in Reverse Logistics (page 2)
-- Supply Chain Management Review, 7/1/2005
Page 2 of 6
As a first step, managers must grasp the impact of reverse logistics activities on their companies' costs, revenues, and assets. One way to do so is to apply the classic strategic profit model in which return-on-assets (ROA) analysis considers revenues, expenses relating to net profits, and assets in terms of asset turnover. Clearly, the reverse logistics process must be recognized as more than a cost of doing business or as a cost minimization exercise. In our experience, its impact can be demonstrated in four ways.- Increased revenues can be realized from "secondary" sales and from reducing discounting levels by offering fresh stock in place of unsold or slow-selling stock. Companies can avoid markdowns on older product by managing inventories to keep "fresh" product at the point of sale. New stock commands higher prices than old stock. A manufacturer can arrange to take back unsold stock from retailers and replace it with the new season's model to maintain retail prices and avoid markdowns, thus maintaining profit margins. Such a policy requires the manufacturer to actively manage any returned product in order to capture any remaining value in the product.
Reprocessed or remanufactured products can generate revenue—a factor that no marketing plan should overlook. The revenue levels range from relatively minimal (less than 1 percent) in cases involving fresh stock to increases of more than 5 percent when remanufactured returns could be sold in alternative channels or markets - The goodwill earned from acting in a socially or environmentally responsible manner can produce real value. Customers do respond to companies' behaviors, and the goodwill developed through reverse logistics and proper disposal of products can create substantial customer loyalty. For example, some researchers report that Nike takes back used running shoes and converts them into public basketball courts and running tracks as part of its community action efforts.5 Likewise, Kenneth Cole accepts used shoes from customers and donates them to those in need. Both of those returns programs are costly to manage, but the companies believe their actions enhance the value of their brands and create loyal customers.
- Cost reductions can come from the reduced cost of goods sold (COGS) and lower operating expenses. Many products and parts can be easily reclaimed. While the reclamation process may incur additional costs, every product or component that can be reinserted into the forward supply chain for sale is one less unit that must be procured or manufactured. For example, a major computer manufacturer has managed to reduce its procurement costs by recapturing usable parts from returned computers. This process has enabled the company to reduce the cost of its service parts as well as the expense of its "last-time buys"—the one-off purchases of parts to support after-sales. Better management of the flow of returns also improves returns processing and labor productivity, which can reduce variable expenses. Making sure that returns are received and dispositioned in a timely manner reduces costs associated with storage and congestion. Effective returns management and processing can also reduce the costs of environmental compliance or waste disposal. Customer service costs can be reduced when the return process is streamlined from the customer's perspective. And when properly captured and leveraged, data on customers' reasons for return can be used to further improve the product, thereby reducing future returns.
- Better management of returns inventory can improve asset turnover. In terms of inventory management, returned goods are no different from new goods. Returns inventory adds assets both in terms of the inventory itself and the facilities required to store it. Effective returns management can help lower inventory of revenue-generating items and reduce the need to store items that do not generate revenue. Effective management can also convert damaged products to salable products in a more timely manner. One consumer goods company managed to reduce returned inventory levels from 10 to three days. It did this simply by developing a returns management process that included better gatekeeping and returns processing. These activities stopped nonrevenue-generating items from being returned (while giving full credit to customers for the return) and helped transform returned inventory into salable inventory more quickly.
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