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Critical Issues in Establishing a Viable Supply Chain/Reverse Logistics Management Program

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In this paper, we intend to analyze the complex issues that OEM’s face in managing their worse nightmare – Reverse Logistics. Viable solutions will be proposed to solve the problems, streamline the operation and ultimately enhance the bottom line.Since our com-pany, Supply-Chain Services Inc. (SSI) is a 3rd party reverse logistic service  provider for major corpora-tions from a variety of industries, the numbers used and scenario described are based on our own experi-ence and data. However, a number of published re-search papers are also used as references and ap-propriately noted.


In today’s competitive business environment, it is critical for OEMs to focus all their energies and core competence into the execution of an efficient and effective forward supply chain. However, after the OEMs sell the products to their distributors, major retail chain stores, or consumers directly, their supply chain process does not stop there. There is an entire part of the business they cannot ignore. OEM’s eventually are forced to face the enormous amount of problems at the back end of their business which can create the biggest headaches.

• Problem # 1: Field and Customer Returns

As dealers and retailers compete for the attention of consumers, lenient return policies have left stores and OEMs’ warehouses flooded with returned goods in-ventories. On average, the typical return rate for all products in the U.S. Market is about 6%. However, the average return rate for some national brand consumer electronics is around 8.46%[1].

There are a wide variety of reasons for end-users’ re-turns. According to SSI and its clients’ experience, predominately, the reasons could include:

  • True Product Defects (major or minor)
  • Wrong size or model
  • Recalls or Warranties
  • ...

In business-to-business (B2B) situation, returns from wholesalers, distributors, retail stores, etc. can also be the results of the following scenarios:

  • Errors in ordering, picking or shipping
  • Damages due to transportation and handling
  • Overstock items due to seasonal business cycle
  • ...

The myriads of reasons make the Reverse Logistic no less a complicated issue than Forward Logistic in the complete Supply Chain Process. It would be simpler if only “defective products” need to be dealt with. How-ever, based on SSI and its clients’ data, the “non-defective returns” can actually account for 55% or more of the total returns. An ill-managed Reverse Lo-gistic operation can have substantial adverse affect on the profit margin that a company works so hard to achieve during the Forward Supply Chain process. Therefore, it is critical for the OEMs to institute an ef-fective and efficient Reverse Logistic Program.

In other words, Reverse Logistics should be considered as a set of Supply Chain processes that adds value to the OEMs. However, unfortunately, not many OEMs realize the impact that the Reverse Logistic may play and do not view Reverse Logistics as a value-added business process because it is not their core compe-tence.


• Problem #2: Excess and Obsolete Inventories

SSI’s clients often tell us that the financial loss in this area has been statistically significant due to rapid prod-uct obsolescence rate and inaccurate sales forecast both at the OEM’s and their business customers’ side. For example, a major retail chain may place a substan-tial order for Christmas related items. However, they fail to move the products and would negotiate with the OEM to return the overstock inventory. If this retail chain is an important client, in an effort to keep the client and assure future sales, the OEM may have no choice but to accept returns on certain items and terms.

Other reason for excess inventory may have resulted from OEM’s own promotional program, such as spe-cial volume discount. The OEM’s sales team may push the business customers to purchase more than what they can sell. In the end, costs on returning excess in-ventories would have to be absorbed by the OEM.

• Problem #3: Costs Associated with Managing Reverse Logistics

The costs associated with reverse logistics could be quite intricate due to the enormous amount of details involved. It is clear that whether an OEM possesses the ability to control the costs could have a positive or negative impact on the company’s bottom line.
The tangible and intangible costs borne by OEMs could include the followings:

  • Return Merchandize Authorization (RMA) process
  • Transportation: This is a major cost of the reverse logistic process.
  • Receiving and inventory control management
  • ...

• Problem #4: Managing the Disposal of Prod-ucts and Production Scrap Material

In order to avoid risks in product and environmental liabilities, OEMs realize the need to institute strict policies in handling scrap material. Non-functional and non-remarketable items need to be sent to reliable re-cyclers for product destruction and material reclama-tion. If the OEM’s products are composed of valuable material such as precious metal, aluminum and copper, it is likely that the OEM is able to receive payments from recyclers even after transportation costs are de-ducted. However, if their material was mostly steel or contaminated plastic, disposal of scrap material would become a cost issue and should be calculated into the product cost.

Download full white paper below.

Last modified on Tuesday, 28 August 2012 14:24

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