Reverse logistics: The relationship between resource commitment and program performance

Journal of Business Logistics, 2001 by Daugherty, Patricia J, Autry, Chad W, Ellinger, Alexander E

Reverse logistics is fast becoming a competitive necessity. More liberal returns policies, the increasing use of consignment inventory, shorter product lifecycles, and more demanding customers translate to more returned product.1 Firms are being forced to find more efficient ways to reclaim, redistribute, and/or dispose of returns. Firms that do not recognize the importance of an effective reverse logistics program risk damaging customer relations and may seriously harm the organization's reputation and brand image.2

The trend toward more direct-to-consumer marketing and retailing also impacts reverse logistics, as does the exponential surge in Internet retailing. Non-traditional retailing is typically subject to higher rates of returned merchandise than in-store shopping. For example, it is estimated that returns for direct sales catalog companies can run as high as 20% of sales.3 The necessity of dealing with such volumes of returned product has led catalog retailers to focus efforts at more efficient returns handling. Rogers and Tibben-Lembke4 suggest that some catalog retailers are at the forefront of best practice reverse logistics. Because of their history of dealing with returns and their purported expertise in reverse logistics, catalog retailers were selected as the focus for the current research project.

Reverse logistics programs are resource intensive in terms of implementation and maintenance. Significant time and resources must be committed. However, there is little empirical work examining the relationship between allocating resources to reverse logistics and reverse logistics program performance. Reluctance to devote managerial and financial resources is a barrier to the development of effective reverse logistics programs.5 Is there a payoff in terms of financial and/or service performance for firms that devote more resources to reverse logistics? The current research was undertaken to assess the effectiveness of reverse logistics programs and to gauge their impact on business operations. The research focused more on value reclamation aspects of reverse logistics (reclaiming unsold or damaged product, for example) rather than recycling or environmental issues.

Reverse Logistics Programs

Reverse logistics refers to:

The process of planning, implementing and controlling the efficient, costeffective flow of raw materials, in-process inventory, finished goods and related information from point of consumption to the point of origin for the purpose of recapturing value or for proper disposal.6

Reverse logistics has received more attention in recent years because of its strategic implications. A well managed reverse logistics program can result in savings in inventory carrying, transportation, and waste disposal costs7 as well as improving customer service.8 Environmental and "corporate citizenship" goals also have influenced program development.9 For example, stringent governmental legislation on disposal of products,10 public awareness of the social cost of excess waste,11 and growing support for recycling12 have all contributed to expand firms' involvement in reverse logistics.

Returns are, and always have been, a fundamental part of retailing. It is estimated that reverse logistics accounts for 5-6% of total logistics costs in the retail and manufacturing sectors.13 Routine reverse logistics activities in the retail sector include handling recalls (product defects), exchanges (customer dissatisfaction or indecision), returns (damage), re-distributions (seasonal and excess inventory), and trade-ins, as well as the disposal of shipping containers and the collection of product and materials for recycling. Considerable payoff in terms of performance-based outcomes is believed to be associated with effective reverse logistics programs.

Better customer service, improved customer satisfaction, increased control of inventory, reduced costs, higher profitability, and enhancement of corporate image have all been identified as potential benefits that may accrue to firms with effective reverse logistics programs.14 Reverse logistics programs also offer firms the opportunity to collect valuable information.15 Data may facilitate the identification of patterns of defects or problem areas, and thus, can be used to reduce the volume of returns. In addition, reverse logistics programs can improve overall customer service and customer relations by helping to ensure that returns are processed quickly.16

BMG, a catalog retailer that offers its customers a music membership service, provides an illustration of how a successful reverse logistics program can contribute to company performance. BMG exploits its reverse logistics capabilities to positively impact customer service and inventory control. Returns are standard business for BMG. On average, the firm receives approximately 80,000 returned packages on Mondays and about 40,000 on other weekdays. Reasons for returns include wrong product sent, wrong addresses, and customers simply changing their minds about the purchase. Because the nature of mail-order music business is such that returns are expected, BMG facilitates returns by planning for them at the time of original sale. Unique bar code labels are affixed to the customer's invoice as well as the product itself at the time of sale. The identifying label that is scanned when the product is shipped from the distribution center can also be scanned if the product comes back.