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April 12, 1999

Reverse Logistics

Untapped opportunities exist in returned products, a side of logistics few businesses have thought about--until now

By Bruce Caldwell

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sidebar story: The Web Can Reduce Returns

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stèe Lauder Companies Inc. used to dump about $60 million worth of its products into landfills each year, destroying more than a third of the name-brand cosmetics returned by retailers. Such waste is common in nearly every industry, but Estèe Lauder decided to do something about it by developing processes and an IT system that cuts the volume of destroyed products in half.

Reverse logistics, the handling and disposition of returned goods, "used to be something that happened in the back room and wasn't considered strategic," says John Corrigan, VP and CIO at Estèe Lauder. "It's now being brought to senior management's attention and viewed as an addressable and important part of the business."

Estèe Lauder made a relatively low investment of $1.3 million a year and a half ago to build its own reverse-logistics system of scanners, business-intelligence tools, and an Oracle data warehouse--and recovered more than that in the first year through reduced staffing and costs. It's now considering making its system commercially available and is negotiating with a consulting firm that could serve as a reseller of the software.

For a number of reasons, companies including General Motors; Sears, Roebuck; 3M; and a handful of online retailers have seen reverse logistics emerge from the shadows of the back room to the bright light of the boardroom. At the simplest level, the disposition of returned goods consists of junking them or giving them away. But with more sophisticated systems and processes, returned goods can be put back into inventory, sold at liquidation centers, or broken down to component parts--steps that can cut costs, increase profits, and improve customer service. Says Gus Pagonis, executive VP of logistics at Sears, "Logistics is the last frontier for cost reductions."

John Corrigan

How companies handle product returns can also be a competitive differentiator, says James Stock, a professor at the University of South Florida and author of Development and Implementation of Reverse Logistics Programs (1998, Council of Logistics Management). "It's a new area to exploit for increased efficiencies," he says.

But getting a handle on reverse logistics isn't necessarily easy. Software specifically designed for supporting the process doesn't exist, leaving businesses with the choice of developing proprietary systems, building reverse-logistics capabilities into existing systems, or using third-party service providers such as Federal Express Worldwide Logistics, Genco Distribution System, and UPS Worldwide Logistics. These companies use customized systems to usher customers' returned products to a central recovery center, where they're sorted for parts, reconditioned, or junked.

"No one plans to develop commercial reverse-logistics software," says John Fontanella, a senior analyst at AMR Research who just completed a research report on reverse logistics. The reasons: The software requires too much customization, and reverse logistics has never been an IT priority. But there appear to be opportunities. A recent study by the Reverse Logistics Executive Council indicates that reverse-logistics costs may exceed $35 billion a year for U.S. companies.

Some vendors are taking note. The maintenance, repair, and overhaul functions in enterprise resource planning suites from vendors such as Baan, Great Plains Software, and Oracle provide some support for reverse-logistics processes, Fontanella says. Advanced planning and scheduling vendors such as LPA Software Inc. and Numetrix Ltd. are also beginning to address the need for manufacturers to be able to forecast returned goods.

The dearth of software products for reverse logistics is what led Estèe Lauder to custom-build its own software to manage the process of handling returned goods. "It literally used to take us months to sort through shipments that came to our warehouse," says CIO Corrigan. Today, with the proprietary system in place, boxes of returned merchandise are scanned as they come into the warehouse. The scanned data provides expiration dates for products, and the receiving system calculates whether items can be sold in other markets or at Estèe Lauder's employee stores, or given away to charities instead of being discarded. Inventory levels of the returned items are kept according to their eventual disposition until sufficient goods have been returned to make it economically worthwhile to ship them out.

During the system's first year, Estèe Lauder was able to evaluate 24% more returned products, redistribute 150% more of its returns, and save $475,000 a year in labor costs, Corrigan says. The company destroyed 27% of returned products because they were beyond their shelf life. That's down from 37% in 1998, and Corrigan expects to reduce that percentage over the next 18 months to just 15% as the new systems allow Estèe Lauder to move through returns in a more timely manner.

In the process, Estèe Lauder will reduce its production and inventory levels because of the increased ability to put returned goods back on the market and better data on why goods are returned, Corrigan says. Estèe Lauder's retailers indicate reasons for returns on printed labels included with returned merchandise. If an item was returned because it was overstocked or damaged, that could lead to a new marketing, packaging, or production strategy.

The Online Angle
Reverse logistics can be particularly crucial for online sales. The rate of returns can be staggeringly high--up to 50%--calling out for more efficient means to manage returned products, says Buzzy Wyland, executive VP of customer development at Genco Distribution System, a major logistics services provider. But the rate of returns for online purchases has the potential to decline as custom manufacturing such as that offered by Dell Computer becomes more widely available on the Web (see sidebar story, "The Web Can Reduce Returns").

WorldSpy Corp., a shopping portal launched in December, recognized the need for online reverse logistics. The company helps manufacturers that want to sell products online but aren't equipped to handle the logistics of online sales, in which products are shipped individually to customers rather than in bulk to retailers or distributors, says George Coulter, WorldSpy's chief technology officer. WorldSpy's returns rates, he says, are in the single digits.

Here's how WorldSpy's system works: When customers choose to return goods, they fill out a return notice on WorldSpy's Web site. WorldSpy then advises them where to send the items--either to a central warehouse managed by UPS Worldwide Logistics or directly back to the manufacturer--and credits customers' accounts when the items are received. "What we're doing, you can't buy off the shelf," Coulter says.