A lot of companies have opted to outsource the reverse logistics function than any other part of the supply chain. At this point, experts have even predicted this trend to continue growing globally over the next 20 years. Did you know that companies such as HP, Unilever, Dell, Walmart and Pfizer outsource reverse logistics? Many question why some of these effective, sharpest supply chain minds would choose outsourcing when they have such well-developed forward supply chain capabilities. The answer of course, is profit.
Compulsory product recalls, removal of overstock and seasonal goods, fixtures, outdated equipment and recycling help you understand why reverse logistics is such a crucial aspect of the supply chain. Unfortunately, it still happens that many executives never pay attention to the effect of returns on their companies until something goes wrong and they hit a financial snag. It takes numerous events before they look at the true cost of returns.
The only thing that reverse logistics and distribution processes have in common is the type of building used for storage and processing. There is no way for purchase orders to inform you of what you will be receiving and no standard packaging for the goods customers return. It is almost impossible to use your warehouse management system in reverse.
The potential bottom-line impact of process improvements can be much greater for reverse logistics than distribution. While distribution enhancements can reduce payroll and transportation costs, improving reverse logistics can significantly increase the recovery rate on the value of the inventory processed. This can have a much more significant impact on an organization than simply boosting productivity.
For example, if a retailer had 1,000 stores that averaged an 8.1-percent return on sales, and it could increase the recovery rate on customer returns by 10 percent, the impact on the bottom line would be the same as opening eight new stores.
Manufacturers have a similar opportunity. The average manufacturer spends between nine percent and 14 percent of total sales on returns, according to an Aberdeen Group study. Many manufacturers are driven by strong financial incentives to develop a quality reverse logistics process that could increase the bottom line by one or two percent of total sales.
Three Reasons To Outsource Reverse Logistics
- FocusQualified third-party logistics providers offer the focus and core competencies needed to run a state-of-the-art reverse logistics program and that is one of the main reasons why companies outsource. They gain the software, leadership and experience that is able to start and maintain a reverse logistics process that delivers bottom-line results.Outsourcing reverse logistics to an experienced 3PL means that there is an efficient process up and running in months compared to the years it might take when using in-house capabilities.
- Flexibility With 3PLs involved, retailers and manufacturers are awarded the flexibility that enables them to implement an efficient returns process quickly without impacting capital budgets. Most providers have existing facilities that can be controlled or can be opened in locations that minimize transportation costs. These third-party logistics providers provide all the infrastructure needed, and build all facility, software and equipment costs into their price.
- Financial3PLs provide liability protection—for example, capping worker compensation at a standard monthly cost, regardless of the accident rate in the facility. They also build into their contracts a shrinkage allowance over the inventory they process. Most 3PL reverse logistics contracts include some form of price-per-piece cap. All these factors make budgeting and planning easy for those who outsource.
Now that you know what the benefits of outsourcing reverse logistics functions are, see IT Outsourcing: Pros and Cons!