Turning Reverse Logistics into a Strategic Asset

Written by Supply Chain Insights Features Editor, Mel Stark

Once viewed as a cost business one had to sit back and bear, returning goods from consumers to retailers or manufacturers has the potential to drive customer loyalty and environmental sustainability. Supply Chain Insights investigates how organisations are leveraging advanced technologies to streamline processes, enhance visibility, and improve decision-making in reverse logistics.

In Australia, online consumers have the same refund rights as they do when buying from a physical shop. This means that, under the Australian Consumer Law, any item is covered by ‘consumer guarantees’, and has translated to online returns becoming a part of the everyday consumer’s shopping experience.

At first glance, reverse logistics may seem like a straightforward process - a customer returns an online purchase to the retailer, and the item moves back through the supply chain. But the rapid growth of e-commerce has magnified the challenges of managing product returns efficiently and profitably.

However, many retailers lack robust solutions for processing returns. Some simply send customers replacements rather than handling returns, while others discard returned items when reselling isn't cost-effective.

The rise of online shopping has increased return volumes, straining traditional retail reverse logistics processes. For high return rates product categories like apparel, efficiently reintegrating returns into the supply chain is crucial for profitability.

So, how is the supply chain industry grappling with returns in 2024? Raghav Sibal, Managing Director at Manhattan Associates, says that providing different options and flexibility to the consumer is an emerging trend this year. To understand and deal with which stage of the logistics process is causing problems with consumers, return authorisation notes and digital self-service provide retailers with a data foundation for predictive analytics and planning.

“In order to provide a better returns experience, retailers are digging deeper into why the returns are happening in the first place,” Raghav notes. “Organisations are looking at their overall omni-channel strategy to see what can be done in the sales process to overcome common issues for their customers.”

Kim Baudry, Global Market Development Director at Dematic says that retailers that manage their own returns are increasingly looking for ways to improve the efficiency of their returns process.

“Today, items must be inspected, repaired, priced, photographed and then put into available stock. Companies used to employ mostly manual processes for this, but automation is taking over and Warehouse Management Software (WMS) is being employed to help organisations manage inventory and processes used in returns,” she says.

James Sheerin, Associate Director in Supply Chain, TMX Transform explains that most customers now expect hassle-free returns.

“Businesses are increasingly investing in technology to efficiently track returns and optimise processes. There’s also an increasing focus on transparency, with customers wanting to know the status of their returns in real time,” James says.

“Retailers and 3PLs have accepted returns as a cost of doing business, but it is now one where they need to continually keep costs down, improve lead times, and enhance the customer experience. By doing this, businesses can encourage repeat purchase customers and positive shared experiences.”

Royston Phua, Vertical Strategy Leader APAC Supply Chain at Zebra Technologies, says the components of forward logistics and reverse logistics are generally the same.

“Reverse logistics is now subject to the commercial offerings of the operator because of the benefits of cost versus time. Similar to forward logistics, returns is about eco-sustainability and the four Rs – how to reduce, reuse, recycle and recover,” he says.

AI and Data-based Decision Making

Advanced data analytics plays a crucial role in the broader challenge thrown up by reverse logistics. Collating insights from large volumes of returns data enables retailers to forecast return patterns, identify root causes of returns and optimise their reverse logistics processes accordingly.

Manhattan’s Raghav Sibal says the greatest challenge for retailers is acquiring the right data to make informed predictions and strategies.

“The volume of returns goes up and down at certain times of the year depending on economic conditions and seasonal factors,” he says. “You have to plan ahead and have enough flexibility designed into the warehouse to process spikes in returns. Another major challenge is the re-commerce aspect – organisations will always want to maximise profitability, so it’s a major challenge to quickly identify which stock is in the right condition to be put back on the shelf and resold.”

Raghav predicts investments in generative AI will be especially useful in customer care centres because of large language models’ ability to interpret conversations.

“AI and machine learning will play an increasingly important role in understanding the seasonality of demand cycles,” he says. “In the future, inventory optimisation algorithms, especially for retailers with higher volumes, will start to factor in the amount of product coming back in. At the moment, we plan our inventory levels based on what we sell, but if 20 per cent of that is returning, it is important to recognise some kind of pattern or predictability to that.”

The Role of Warehouse Automation

Warehouse automation has become synonymous with increased picking and packing throughput, helping organisations cope with more demand for online orders and consolidate orders into a single parcel out the door. The latest automation and robotics is just as important in reverse logistics, with systems such as multishuttle and automated storage solutions creating storage buffers that seamlessly integrate with various stages of the returns process.

Such solutions serve as temporary holding areas for returned inventory while necessary processes like inspection, repair, or awaiting outbound order demand are underway. Dematic’s Kim Baudry elaborates, "At receiving and after inspection, product can be placed in an automated storage system and then pulled back out when someone is ready to repair the item. The item can then return to the automated storage until there is demand for that product in another order."

Automated storage buffers act as interconnected hubs, enabling the smooth flow of returned goods through various stages while minimising handling, delays, and potential errors. Advanced robotics and autonomous material handling technologies also have the potential to revolutionise reverse logistics workflows to the same degree.

"The rapid advancements in robotics and vision systems will play a large role in streamlining the returns process and augmenting the human element. Robotics with artificial intelligence and advanced vision systems making 'decisions' on a product disposition at receipt has the potential to greatly reduce the cost of returns."

Moreover, warehouse automation software can empower companies to make data-driven decisions around reverse logistics processes. As Kim notes, "Software solutions can provide modules to enhance the returns process by providing customers with business rules and process steps for associates working in returns areas."

Building Customer Loyalty Through Visibility

Retailers and brands that can successfully leverage returns have a prime opportunity to bolster customer loyalty while concurrently optimising costs amid surges in return volumes. Amazon's remarkable success underscores that returns are an indispensable facet of the delivery experience, and consumer expectations in this realm will only continue to escalate.

Royston Phua explains that “easy returns” are a significant driver of conversion and customer loyalty – optimised returns process can keep customers coming back and get returned merchandise back into inventory or the store floor quickly.

“When you consider supply chain, it is an interconnected ecosystem involving multiple nodes from planning, sourcing, manufacturing assembly, transportation, storage and fulfilment. Returns is a part of this ecosystem, and digitisation of all these workflows is fundamental to giving the customer that valued experience.”

In order to encourage consumer loyalty – visibility of products, and returns, is paramount.

The Sustainability Factor

The surge in online shopping returns is having a significant environmental impact. The additional transportation and logistics required to handle returned items contribute to increased carbon emissions and energy consumption, while many returned items end up in landfills. In the US alone, 2.2 million tonnes of online returns end up in landfill every year.

In the Australian market, businesses are beginning to implement recycling and reuse programs through their reverse logistics.

“By refurbishing and reselling returned products, or recycling components from returned products, they can minimise waste,” James Sheerin explains. “Recyclable material dunnage in their packaging can also prevent waste and reduce the reliance on single-use plastics by moving to more paper-based biodegradable products. It’s crucial to recognise that businesses can reduce their impact on the environment and their carbon footprint.”

Optimising transportation routes for returns can also lower C02 emissions by seeking reduced lead times, improved vehicle optimisation, and reduced fuel burn, which can be achieved through fleet electrification.

“You’re now seeing some large transport companies beginning to experiment with this and industrial buildings being developed or retrofitted to think about future charging and battery swapping in cases,” James says.

Mapping Out Reverse Logistics Improvement

In order to get a hold on returns, TMX’s James Sheerin says there are clear KPIs to set out.

“Businesses must consider, at a minimum – the return rate percentage, return turnaround time, percentage of return goods that are resold, transportation costs per return, customer satisfaction with the return process,” he says.

A comprehensive review process into how an organisation’s reverse logistics is operating is the only real way to identify areas for improvement.

“This can help kick off a roadmap for short-term tactical change as well as long-term transformation. Changes may include investing in technology for tracking returns and optimising processes, focusing on transparency and communication with customers, and improving collaboration with partners and suppliers to streamline the entire reverse logistics chain,” James says.

All experts were unanimous in the importance of getting closer to the customer and listening to what they’re saying about your business, when it comes to returns user experience. “They will give you the best insight into where you need to improve,” Royston concludes.