15 March 2022

Reverse logistics: costly afterthought or strategic advantage?

Reverse logistics can cost up to 10% of a company’s total freight spend. We look at how companies can better manage their returns to improve profitability and carve out competitive advantage.

An increasing customer expectation

For every nine items received by a consumer, one will be returned[i]- even more during peak shopping periods such as Christmas and Boxing Day sales. A generous returns policy is a standard customer expectation these days. But although it can improve the customer experience, it comes at a high price for businesses, with the global reverse logistics market valued at more than $630 billion USD and expected to reach more than $950 billion by 2028[ii].

This raises the question for the astute business: How to approach reverse logistics more strategically to improve profitability and create advantage over the competition?

The answer is that partnering with a true 4PL like efm can help.

The backwards flow of goods

Reverse logistics – when goods flow backwards from the customer to the manufacturer – is an important part of the supply chain for businesses across industries, not just e-commerce.

Returns management is one key example but the scope of reverse logistics extends well beyond this. Other scenarios include handling returns from retailers and distributors back to manufacturers; the handling of returns for products that are no longer able to be sold; the refurbishment of rented equipment; the return of a product back to a manufacturer due to a failed delivery; or a process for reusing packaging materials to avoid waste.

An expensive afterthought

Typically, the emphasis of logistics management is on optimising forward-facing processes. Reverse logistics is treated as an afterthought, which can be a very costly mistake. Consider these numbers from Gartner [iii]: the average return costs 30 percent of the purchase price; meanwhile the average profit for an online order is only 10 per cent. This means that for each return a business is making a loss which needs to be recovered by making at least three more sales.

E-commerce businesses have a high frequency of returns and an obvious need for a clear process. However, there are many industries with a requirement for high-value returns on a less frequent ­­– but still consistent – basis. For example, lessees of vending machines will need to send them back for servicing, a mechanic may order a generic car engine but then realise they require a specialist one instead, or a hospital returns their surgical equipment to the supplier for sterilising. These instances of reverse logistics may be infrequent, but they are large and costly to manage on an ad hoc basis.

In fact, in our experience at efm, we have seen that the accumulated spend on returns can be up to 10 per cent of a company’s freight budget. On an annual freight budget of $1 million this is $100,000 – not insignificant by any means. Through our experience we also know it’s possible to bring down the expenditure to around 2 per cent by taking a strategic approach to reverse logistics, in much the same way as we tackle forward-facing logistics.

Where the costs come from

Labour, shipping and manual processes are three of the major contributing factors to the costs. Let’s take these in turn.

  • First: labour. Returns must be collected, shipped to a returns centre, opened, inspected, classified, repaired if necessary, repackaged, and then distributed to the next location and restocked. This all takes time and wages – two weeks, in fact, to add a returned item to inventory, according to Shopify research[iv].
  • Secondly: shipping. Shipping costs tend to be markedly higher for reverse logistics because they are managed ad hoc. A company will pre-negotiate carrier rates for outbound logistics but typically do not give the same consideration to returns rates. This is usually because the returns are not top of mind and tend to be overlooked until it is too late.
  • Third: manual processes. A lot of businesses would experience an ‘off-system’ process for managing returns, along the lines of filling in a carbon copy con-note with a black marker. With manual processes there is no end-to-end visibility of the return parcel until it eventually lands in the depot. The lack of timely data means that the business may not be able to track the success rate of their returns process or the actual cost to the business.

How a 4PL can help

Data and proprietary technology

Key to a reverse logistics strategy – as with forward logistics – is data. To optimise the efficiency of reverse logistics it is critical to capture data across transportation providers, through warehouse and fulfilment and integrate it with financial data.

A hallmark characteristic of a fourth-party logistics provider (4PL) is sophisticated proprietary technology. At efm, our platform, OneFlo collects real-time data and provides us with visibility deep into the supply chain. With this information we can understand what is happening, including the number of returns, frequency, locations to and from and so on, and identify opportunities to improve efficiency.

Operational improvements

Armed with the valuable insights from the data, we can recommend streamlined returns processes that benefit a variety of operational scenarios. The goal is to optimise freight space and routing, reduce handling costs, minimise wastage and maximise customer satisfaction.

For example, consider a retail network of 100 stores, each receiving multiple consumer returns each week. It is unlikely that they need to be shipped back to the warehouse as soon as they are received in store. So, rather than consigning the reverse shipment of singular items from multiple locations, multiple times per day or week, they can be consolidated to one pick-up periodically to make for a much more efficient and cost-effective process.

Over a longer timeframe such as a year, the data can reveal interesting insights about the contribution of reverse logistics on total freight spend. The company might have thought returns cost only $5 per customer, but in fact it turns out to be $10 per customer. That information enables better business decisions. Perhaps the company will pass on the cost to the customer, or they might absorb the cost to improve the customer experience and differentiate themselves from the competition.

Competitive carrier rates

We provide value right from the outside. While reverse logistics is typically an afterthought for many companies and logistics providers, when a company partners with efm we dedicate time during the initial solution design to focus on the returns. We ensure that the carrier rates for returns are fair and reasonable so that the cost will not have a material commercial impact on the customer’s business.

Transparent, timely accounting

With OneFlo, the paperwork is automated, meaning timely invoices. In an ‘off-system’ manual process, the company fills in paperwork by hand, and later inputs into a computer system. The risk with this approach is that the lag can cause considerable accounting and financial headaches.

Consider for example a company that closes off for the financial year believing they have made a profit, only then to receive a stack of return invoices incurred in that period, which have not been accounted for. The automated OneFlo will normalise accounting to avoid any nasty surprises.

Environmental sustainability

In addition to the commercial benefits, reverse logistics is intrinsically aligned with environmental sustainability. By increasing the efficiency of transportation, a business can reduce energy usage and greenhouse gas emissions.

Further, activities in reverse logistics outside of transportation – repair, refurbishment, repackaging and recycling - can reduce a company’s environmental impact. Given this, reverse logistics is an important consideration for companies that have made a commitment to sustainability.

Profitability and competitiveness

With reverse logistics estimated to cost up to 10% of a company’s total freight spend, and with the global spend set to reach nearly $1 trillion USD before the end of the decade, to overlook reverse logistics is to throw money away.

A true 4PL like efm will provide the visibility and the dedicated team needed to identify and implement efficiency improvements across the supply chain. We will help customers to improve their profitability, carve out competitive advantage and operate more sustainably.


[i] https://knowledge.wharton.upen...

[ii] https://www.alliedmarketresear...

[iii] https://www.cnbc.com/2016/12/1...

[iv] https://www.cnbc.com/2016/12/1...

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