by Andrew O’Connell | Harvard Business Review
Competitive pressures have forced many retailers and manufacturers to liberalize their returns policies in recent years and gladly accept for a refund just about anything customers regret having bought.
Well, maybe not gladly. Most companies continue to view returns as a costly nuisance, and few have formal strategies for dealing with products that customers don’t want. But figuring out how to efficiently reuse returned items can increase profitability by reducing materials requirements: Every component reinserted in the forward supply chain is one unit fewer that must be procured or manufactured. And by reusing rather than disposing of units, a firm may be able to increase loyalty and attract new customers as it boosts its environmental image.
Managing the flow of finished products back into the company can be an important profit driver, write Vaidyanathan Jayaraman and Yadong Luo, of the University of Miami School of Business Administration, in a recent issue of the Academy of Management Perspectives. Jayaraman and Luo say the evidence shows that a “reverse logistics” value chain strategy can strengthen a company’s competitiveness.
The authors cite Estée Lauder’s strategic management of its returned goods flow. In the first year after investing $1.3 million to build a system of scanners and other technologies, the company was able to sharply reduce the percentage of such goods that it dumped into landfills and also to save half a million dollars in labor costs. It has built a $250 million product line from returned cosmetics, selling them to seconds stores or to retailers in developing countries.
Among the insights Jayaraman and Luo offer executives: First, in many industries, such as computers and peripherals, short product life cycles mean that returned items must be treated as perishable. Every delay in transporting, sorting, grading, and repackaging returned printers, for example, reduces the value remaining in the product. Second, value chain partnerships are crucial. Specialized third-party providers can often handle tasks such as credit issuance and transportation more efficiently than the manufacturer can.
Third, a well-managed reverse logistics system allows the company to retain contact with customers and derive valuable feedback from them. That information can be used to improve the company’s product mix and, if products are returned because of defects, correct any failings in the operational infrastructure.