Hidden Costs of Reverse Logistics

Warehouse managers underestimate the importance and demand of reverse logistics

As e-commerce has increasingly shifted online, the traditional way of returning goods – taking them back to the store – isn’t always a consumer’s preferred method. So it’s important that distributors and retailers have clear reverse logistics procedures in place for returned goods.

Due to both human nature and training, logistics professionals tend to be forward focused. They are learning, however, that their companies can realise dramatic cost savings by applying forward-focused processes and automation to optimise reverse logistics operations.

Reverse logistics is no small matter in the supply chain. Industrial equipment return rates are approximately 4% to 8%, while computers and network equipment have return rates of 8% to 20%. The problem is, these costs are spread throughout the organisation, so no one is held responsible for them except, ultimately, the CFO.

Returns can be a headache if not managed properly. As a critical product life cycle phase, the need to support reverse logistics is not only important, it can be an opportunity to capture additional revenues that would have been lost without the proper supportive systems. Whether your company manages the distribution of its own products or outsources logistical services to a 3PL, the ability to provide return services is fully dependent upon the capabilities of your WMS.

Clear returns processes should be defined within your WMS. Returns processed within the WMS give distributors a real-time view of their inventory. They let them allocate stock instantly or permit picking straight from the returns zone. Damaged goods can be quarantined and dealt with promptly for repackaging or disposal, whilst reusable stock can quickly be identified and relocated for order picking. In this way, stock is not left under-utilised for long periods.

Additionally, by processing the returns within a WMS that is integrated to an ERP solution, it allows for automatic adjustments of stock and issuing of credits, all based on your defined processes, for example, maybe you want to run some quality checks first. Best practice dictates that the returned goods are linked to the original order and customer. Equally, the seller should know in advance that the return is coming and should check and inspect it on arrival. As a result, when returns are processed into a fully integrated ERP / WMS solution, it vastly reduces human error and speeds up the credit process – all of which increases customer satisfaction

In addition to WMS processes, to help manage returns costs, companies must be aware of the six following large, yet hidden costs associated with reverse logistics.

Hidden Cost #1: Labour.

To perform tasks ranging from customer relations to compliance, companies incur labour costs if their returns process is not automated. A returns operation is automated if it uses enterprise returns management software (accessed freely by channel partners) that offers rules-based, product-specific protocols for handling returned items.

Specific costs in this category are:

  • Customer relations labour costs: manually deciphering return policies on a one-off basis; excessive customer attrition rates due to poor returns experiences.
  • Customer service labour costs: determining applicable warranty policies and service contracts; identifying which credit rules are in place.
  • Financial reconciliation labour costs: issuing credits and determining inventory levels. Also, companies incur charges if a returned product is not covered by warranty.
  • Sales labour costs: revenue recognition, margin protection, account management, return rate forecasts.
  • Traffic and shipping labour costs: managing carriers, damage incurred in transit, one-off shipments, tracking—or attempting to track—returned items.
  • Receiving and warehousing labour costs: facility and labour planning with little or no information costs overtime pay or is manifested in poor returns processing service levels.

Hidden Cost #2: ‘Grey market’ items.

Companies face the risk of returned inventory ending up on the grey market, where goods are sold outside normal distribution channels. Assets designated as scrap may reappear for warranty service, and manual operations cannot quickly ascertain this. It is wasteful to refurbish a system that has little to no residual value.

Hidden Cost #3: Lack of visibility.

Customers want access to returns status. If they don’t have it, they’ll call or e-mail repeatedly. Guess who pays for the time personnel spend answering customer questions?

Internally, your merchandising staff needs inventory readings, while the design team wants information on what products are returned and why. Your third-party service providers also desire visibility of returns in transit.

Hidden Cost #4: Inability to forecast accurately.

With returns data trapped in Excel spreadsheets, your salespeople can’t “see” enough to make accurate predictions, and the operations team can’t prepare for a returns influx.

Hidden Cost #5: Credit reconciliation.

Large customers often calculate their own credits—and take a debit on the next payment, which is time consuming to reconcile.

Also, if return requests are approved, but not matched against receipts, it prevents accurate accruals, claims recouping, and effective vendor management.

Hidden Cost #6: Poor response time and brand toxicity.

Manual return request processing and validation cause delays in approving or rejecting return requests. This frustrates customers and communicates a lack of concern, which tarnishes your brand; so do delays in validation and discrepancies caught after receiving materials. Customers expect you to stand by your products during the entire lifecycle.

Automation to the Rescue

In every supply chain process today, product returns is an important area that needs to be effectively dealt with. In today’s competitive business environment, companies can no longer focus only on forward supply chain management and ignore reverse supply chains.

Organisations that implement an effective returns management solution, in conjunction with a WMS system, is more likely to be able to improve customer service and response times; reduce environmental impact by reducing waste and improve overall profitability.

WMS cloud software provides the ability to process all types of returns with high speed modules—some even with specialised functions for goods such as clothing, publishing, spirits, and more.

Top Key Benefits of WMS:

  • Damaged Goods can be quarantined and dealt with promptly for repackaging or disposal.
  • Essential for ECommerce businesses who need to manage high returns volumes.
  • Quickly identify re-usable stock so that it can be relocated for order picking.
  • Complete Traceability allows you to track and monitor the levels and types of returns.
  • Integrates with ERP systems to ensure credits, replacements are done promptly to maintain customer satisfaction levels.

About us:

Speak to one of our team to understand how Clarus’ WMS system can cost effectively support best practice warehouse management processes, better customer service and highly efficient working for a range of warehouse operations with pay per month options and no IT infrastructure needed.

Our platform can scale from a one user, small depot system to a 100’s of user distribution centre operation. The Clarus WMS platform will cost effectively scale with your business based on demand.

Clarus WMS is a UK based supplier of warehouse management solutions with a wealth of industry experience in third party logistics, wholesale / retail distribution, online fulfillment and manufacturing warehousing.

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