Chapter 6 Guide to Return in Supply Chain Management Abstract This chapter guides you through the return function of supply chain management. First, it helps you to understand the importance of reverse logistics, its drivers and key players. Second, the return process will be discussed in detail and different return business models will be depicted. Third, it will explore a strategic outlook of returns, along with examples from different industry sectors.
This will include trends in reverse logistics and the golden rules to improve returns perfor- mance will be highlighted. This chapter concludes with a case study of best practice on recycling operations within the company Wincanton. Having read this chapter you will be able to: l Explain what the return function is and how it fits into the supply chain l Describe the return process with its product discovery options, process stages and the business models of ownership l Recognise industry trends and their implication for return 6.1 Introduction to Return Return describes the process of returning logistics for goods, packaging material and transport equipment. This encompasses customers, retailers, manufacturers and suppliers.
In the SCOR model, return can be found at each interface between supply chain partners, all the way from the suppliers’ supplier to the customers’ customer. In the supply chain examples discussed in the previous chapters, the focus was on moving goods downstream to meet customer demand. Now, in the return supply chain, we are exploring product travelling the opposite way – essentially sending products back to where they came from! The term Reverse Logistics (RL) is often used in conjunction with returns management in supply chain literature. “Going the wrong way on a one-way street” (Lambert and Stock 1981: 19) was one of the first definitions of RL.
Although organisations use these terms differently, we will use return and reverse logistics interchangeably in this chapter. Reverse logistics can be further defined as: C. Scott et al., Guide to Supply Chain Management, 91 DOI 10.1007/978-3-642-17676-0_6, # Springer-Verlag Berlin Heidelberg 2011 92 6 Guide to Return in Supply Chain Management .The reverse process of logistics (Krumwiede and Sheu 2002: 326) .An organisation’s management of material resources obtained from customers (Jones 1998: 619–620) .The process of moving product from its point of consumption through channel members to the point of origin to recapture value or to ensure product disposal (Schatteman 2003: 267) The above stated definitions represent the traditional view on reverse logistics where the emphasis lies on the backward supply chain. A more holistic and modern definition would also include processes and activities to avoid returns, to reduce materials in the forward supply chain (so that fewer materials flow back) and to ensure the possible reuse and recycling of materials.
Drawing on the European Working Group for Reverse Logistics’ definition, we define reverse logistics as: The process of planning, implementing and controlling backward flows of raw materials, work-in-progress, finished goods and information, from the point of consumption to the point of recovery or proper disposal. The term “green logistics” is often mentioned in conjunction with reverse logistics (see Fig. Whilst those two terms overlap there are certain areas and activities that are more associated with reverse or green logistics respectively (Rogers and Tibben-Lembke 2001). Whereas RL is mostly commercially oriented, green logistics summarises logistics activities that are primarily motivated by environmental considerations.
These environmental considerations could result in designing products with waste- reduced packaging. Also practices and technologies that lead to lower levels of CO2 and noise emission form part of green logistics, as well as choosing transportation modes depending on their environmental impact (see also Chap. Reverse logistics • Product returns • Marketing returns • Secondary markets • Recycling • Remanufacturing • Reusable packaging • Packaging reduction • Air & noise emission • Environmental impact of mode selection Fig.1 Comparison of reverse logistics and green logistics adapted from Rogers Green logistics and Tibben-Lembke (2001) 6.1 Introduction to Return 93 6.1 Why Do Products Return? There are several reasons why products are returned in the supply chain. According to Schatteman (2003) the most common reasons for returning a product are: l Customer is not satisfied l Installation or usage problem l Warranty claim l Faulty order processing l Retail overstock l Manufacture recall program Most retailers and manufacturers allow the return of a product within a certain period after purchase if the customer is not satisfied.
Such money back guarantees have become standard practice for direct sales channels including catalogue sales and purchases online. There is, however, the risk that consumers abuse this money- back guarantee by ordering and then returning a new product they simply wanted to try with no real intentions of keeping it. When customers experience installation or usage problems of a recent purchase, they might perceive the product to be defective and therefore return it to the manufacturer. This difficulty in set-up or installation is common in the computer industry where some products, such as CD-ROM drives, have a very high return percentage.
In order to avoid the extra cost of falsely returned products, manufac- turers should keep installation procedures for end consumers as simple as possible and include clear first use instructions. In some product categories, it is common to send back defective products to retailers or manufacturers for repair. These warranty claims can occur immediately after purchase if the product received is faulty on arrival or cosmetically damaged. Alternatively, products might break down during the course of their life cycle.
Typical product categories with warranty are consumer electronics, as well as household appliances such as washing machines and vacuum cleaners. Another reason for product returns can be faulty order processing. An error in order entry or processing can cause shipping problems for consumers or retailers where the shipment does not arrive on time and in full. Common issues can include late delivery, incomplete shipments or wrong quantities.
In those cases, customers can make a claim against the manufacturer and return the entire or part of the shipment. Error-free order processing is especially important before seasonal or special events such as Easter or Christmas where deliveries are often time critical. If companies do not have effective order processing they expose themselves to funding customer errors. Manufacturers can grant retailers the luxury of returning unsold stock after a certain period of unsuccessful sales.
This practice can be important to improve the retailer’s cash flow and to clear space for new stock in the shops. Sometimes, this practice is abused by the retailer to make accounting figures look good at the end of the quarter or month and then to reorder the same stock at the beginning of the next 94 6 Guide to Return in Supply Chain Management month. Sending back goods because of retail overstock is common practice in the book industry. Seasonal products such as sun lotions are also returned to the manufacturer at the end of the summer.
Once a product has reached the end of its life cycle, many manufacturers prefer to get the product off the shelves to prevent cannibalisation with the new version. There are two options with end of product life cycle or product replacements: Either the manufacturer takes back the stock based upon the agreed conditions with the retailer or the retailer disposes the old version himself and requests a credit note. A last reason why products are returned might be a serious flaw in the quality of the product, triggering a manufacturer recall program. Recalls appear more often in the automotive, pharmaceutical and toy industry where product safety is extremely important.
In order to limit damages in such situations, discredited products need to be moved quickly out of circulation and into designated storage centres. From there, the manufacturer decides whether to replace certain parts of the defective product, or whether to dispose it entirely. Alongside these reasons for product return, Krumwiede and Sheu (2002) outline a number of terms commonly used with returns management and operations (see Fig.2 Drivers of Reverse Logistics There are three main drivers that have led RL to become part of many senior managers’ strategic agendas: l Legislation l Economics l Corporate citizenship 6.1 Legislation In many countries, governments have introduced regulations on how to handle products in the supply chain in order to protect the environment. The European Union has been a leader in developing regulations such as the End-of-life Vehicle directive (ELV) and the Waste Electrical and Electronic Equipment Directive (WEEE) legislations.
These legislative reforms have led to an extended producer responsibility. In some industries, manufacturers are now obliged to take back and recover their products after use, in order to reduce volumes of waste disposal. This is especially true for certain product groups, such as household appliances, automobiles and electronics. In the US, the Environmental Protection Agency (EPA) emphasises the impor- tant and integral role of “re-manufacturing”, to reduce energy consumption and Term Definition 6.1 Introduction to Return Product Recalls Goods the manufacturer has recalled and must be picked up for return.
Inventory Returns Goods returned to reduce inventory at an outlet other than the manufacturer. Warranty Returns Goods a store/distributor/wholesaler knows are in need of warranty return. Core Returns Reusable goods; those items that can be remanufactured. Reusable Containers Shipping containers that product was shipped in and must be returned.
Damaged Goods Goods damaged in shipment or damaged on site. Seasonal Items Items returned due to the end of a season, which causes the item to have no retail value in the next season(s). Hazardous Materials Items considered hazardous and yet must be returned; also known as HAZMAT. Stock Adjustments Goods transported to correct a situation where there is an abundance of items at one location and lacking in other locations.2 Returns terminology Source: Krumwiede and Sheu (2002), Elsevier 95 96 6 Guide to Return in Supply Chain Management waste.
Therefore smart companies are not waiting passively to be forced into legislative compliance. Instead many manufacturers have developed “green” sup- ply chain practices. The five Green Supply Chain Management (GSCM) practices according to Klassen and Johnson (2004) include: l Environmental certification, e. product specific eco-labels or ISO 14001 l Pollution prevention l Life cycle assessment – to quantify the environmental burden and impact throughout a product’s life l Design for the environment – also termed green product design As can be seen from this list, reverse logistics is an integral part of green supply chain practices.
Some companies are already preparing for the next generation of environmental legislation, when the producer might be made fully responsible for the disposal of the end of its useful life. Thus, they are actively rethinking the producer’s role, responsibilities and opportunities in reverse logistics.2 Economics RL programmes may bring two types of economic benefits: 1. Indirect gains Direct gains from RL can mean significant financial benefits in terms of cost, revenues and Return On Capital Employed (ROCE) for the manufacturer. The recovery of materials is often cheaper than building or buying new materials.
Examples include product groups such as copying machines, computers, aviation equipment and tyres, where manufacturers such as Xerox have started to reuse old parts in new products for economic benefits (Jayaraman and Luo 2007). Metal scrap brokers have been able to build successful businesses by collecting metal scrap and offering it to steel works. Steel works are interested in metal scrap because they can mix it with virgin materials in their production process and thus reduce their production costs. Effective RL can also minimise the cost of environmental com- pliance and waste disposal.
In addition to reduced costs, increased revenues can be achieved. In consumer goods, the selling of fresh stock is more profitable than the selling of unsold or slow-selling stock at a discounted level. For example, millions of Easter chocolate eggs are sold in the UK in the weeks before the Easter holidays in spring. The time window for Easter eggs is quite short, and after the holidays, the chocolate eggs can only be sold at a discounted rate.