While delivering quality products to customers is the quintessential mission of most manufacturers, distributors and retailers, the way these companies handle unwanted or defective products returned by customers can be just as important to their business viability. This is the objective of reverse logistics, which is fraught with challenges if companies don’t develop strong strategies for processing and tracking goods as they move backward through the supply chain.
What Are Reverse Logistics Challenges?
Reverse logistics involves moving goods from the customer back to the manufacturer or retailer, and the challenges include the disposal of customers’ unwanted, duplicated, defective or end-of-life products. For instance, businesses moving returned products through the reverse logistics supply chain often struggle with managing the costs of transporting and processing returns. And they’re typically working against the clock to validate refunds and arrange for exchanges to maintain customer satisfaction, while also refurbishing and repackaging returned products to maximize their resale value.
In addition to the complexities of managing costs, profitability of products and customer satisfaction, businesses are challenged to navigate environmental considerations in reverse logistics. These include the added carbon footprint of transporting returned goods on multiple round trips through the supply chain, as well as waste management and even hazardous materials handling issues from the disposal of end-of-life or unwanted merchandise.
Key Takeaways
- Reverse logistics has a huge influence on brand reputation, profitability and the environmental impact of companies processing product returns, trade-ins or disposals.
- Transportation challenges can add considerable costs to reverse logistics — up to 60% of reverse logistics costs are incurred from transport and shipping.
- Inventory management systems can play a significant role in elevating reverse logistics practices by providing the level of visibility and tracking necessary to keep tabs on returned products as they move backward through the supply chain.
Reverse Logistics Challenges Explained
A well-designed supply chain with reverse logistics proactively integrated with forward logistics can offer huge business advantages. When well-executed, reverse logistics can help a brand strengthen its reputation and maintain high customer service levels while minimizing costs and environmental impact. However, in order to achieve these goals, companies must be prepared to tackle obstacles at numerous levels. These include:
- Business process challenges: Reverse logistics poses a host of business process challenges. Companies need consistent processes and a heavy dose of automation to establish effective and speedy means of authorizing returns and making sure that they meet return policy criteria. They’ll need transportation and routing, as well as warehouse management processes to collect, receive and sort items as they are returned. They’ll also need strong inventory management processes in place to track returned items alongside new inventory.
- Customer satisfaction challenges: Establishing a hassle-free returns process, developing enticing trade-in programs and guaranteeing products free of defects can be a huge competitive differentiator. But if returns processes aren’t well designed and take too long or require too much effort on the customer’s part due to poorly run reverse logistics, that advantage could quickly become a detriment.
- Decision-making challenges: The variability of the condition in which items are returned can make it tough for companies to decide at scale how to maximize profits from these items. Decisions about whether to repackage and resell in traditional channels, refurbish for sale in discount channels, recycle or send items to a landfill must be made based on item type, profitability trends, inventory levels of new and returned items, condition of items and more. Effective decision-making requires real-time tracking and data analytics capabilities.
Overlaid on top of all of these various considerations is the number one issue of cost management. Failure to master each of the major issues laid out here can increase costs and ultimately erode business profitability. Companies need systems and processes in place to manage costs around transportation, labor, customer service and processing of goods and to wring out as much revenue from returns as they move backward through the supply chain and are either disposed of or reintegrated into forward logistics.
13 Key Challenges in Reverse Logistics
Navigating the complexities of reverse logistics poses significant challenges for businesses, from collecting and processing returns to complying with international and local regulations. The following list explores 13 key challenges in reverse logistics, addressing issues such as inventory management complexities, lack of standardization in returns processes and the need for advanced tracking systems.
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Collecting, Sorting and Processing Returns
The labor and other expenses involved in collecting, sorting and processing returns can quickly add up and pose a huge challenge that must be met through effective reverse logistics strategies. On the front end, for example, simply fielding customer service calls regarding return requests can cost $5 or more per contact from customers. Creating frictionless, self-service returns processes can help speed up those interactions and reduce costs. For example, Deloitte research suggests that retailers that participate in return bars — stores that pack and ship returns for retail partners — can save retailers as much as 20% in processing costs. Once returns are initiated and make their way backward in the supply chain, companies are also challenged to sort and process items in warehouse and manufacturing facilities. This includes receiving and inspecting returned products, as well as repairing and repackaging them — processes that require inventory management and warehouse management capabilities tuned to managing end-to-end logistics processing.
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Managing Long-Distance Returns
Distance traveled per returned item can impact reverse logistics profitability calculations as well as environmental impact. Long-distance returns can potentially degrade the value recovered from returned items, both in terms of transport costs and increased risks of damage during shipping and aging of seasonal or perishable products. As a result, reverse logistics personnel are challenged to carefully manage and track long-distance returns.
Often companies use distance traveled as a key performance indicator for the effectiveness of a reverse logistics network and the resilience of the broader supply chain. As the number creeps up, companies may have to consider designing their transportation infrastructure to account for reverse logistics challenges, including bolstering the drop-off collection site and distribution network, implementing more efficient routes that can handle reverse last-mile pickups efficiently and engaging third-party logistics providers that specialize in reverse logistics. Additionally, distance traveled could also factor into triggering policies, such as the “returnless” or “keep it” policies on items for which return costs — including expensive long-distance transport — could exceed the value of the returned item. Recent statistics show that nearly 60% of retailers today opt for these policies in some cases.
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Inventory Management Complexities for Returned Goods
Reverse logistics adds new layers of complexity to the inventory management process, as the disposition strategy for returned goods depends on a number of variables unique to returned inventory. Some of the inventory factors that companies need to consider in order to optimize inventory management for returned goods include the potential value of the items, the condition or quality of the items and their repair/refurbishment/repackaging status. Additionally, inventory management becomes more complex with the addition of reverse logistics because forecasting for returns can be a tricky proposition. Companies that meet this challenge through effective analytics can use return data to help move or dispose of returned goods more effectively, as well as to negotiate with suppliers for better terms on frequently returned items or even to ask for product improvements to avoid future returns.
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Lack of Returns Process or Policy Standardization
Clear and consistent returns policies and processes not only streamline processing and validation of returns, but they also can become a customer service differentiator. According to one recent study, nearly 70% of consumers read or at least skim through a returns policy before making a purchase. A lack of clear returns policies and processes can be a major reverse logistics stumbling block for retailers, distributors and manufacturers alike. Without policy and process standardization, returns are likely to be more complicated than they need to be, and logistics and supply chain personnel will be hard-pressed to institute strong accountability in their returns management practices. This can raise reverse logistics costs considerably, particularly in areas like returns fraud. According to the National Retail Federation, for every $100 in returned merchandise accepted, U.S. retailers lose $10.40 to return fraud. This translates into $84.9 billion in aggregate fraudulent returns each year.
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Need for Advanced Tracking and Inventory Systems
The complexities of reverse logistics demand a sophistication of inventory management that simply cannot be executed at scale through manual tracking or inventory systems. Companies won’t be able to manage costs and reap value from reverse logistics unless they implement advanced tracking and inventory systems that can offer real-time visibility, automation and data analysis to speed up processing and decision-making in the face of variable customer behaviors. In addition to implementing inventory management and warehouse management systems, many companies are getting on board with standardized labeling and coding to help in processing returned items. For instance, the Reverse Logistics Association is developing secure, quick, reliable login (SQRL) codes on product packaging that work hand-in-hand with advanced tracking and inventory systems to keep tabs on product status, location and so on.
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Integrating Reverse Logistics Into Existing Supply Chain Software
Ideally, reverse logistics processes shouldn’t operate in isolation. Companies can improve the efficiency and effectiveness of their entire supply chain if they integrate the reverse flow of products into their forward logistics supply chain. While it can be challenging, the integration of reverse logistics into broader supply chain management can make it easier for an organization to track and manage the impact that returns, recalls, refurbishment and recycling have on a company’s overall profitability. This integration becomes especially important as businesses transition to the circular economy, an economic model designed to maximize the use of resources and minimize waste by keeping products, materials and resources in a continuous cycle of use, reuse and recycling. Establishing this kind of tight integration often requires detailed and well-automated inventory management processes powered by meticulous data collection and tracking.
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Lack of Warehouse Storage Space
Real-estate experts anticipate a warehouse storage crunch to impact both forward and reverse logistics operations in 2024. Worldwide warehouse construction has slowed to its lowest point in seven years in 2023 — with some reports in the U.S. and Europe showing a 25% decline. As a result, companies will be challenged to closely manage returns inventory storage across the reverse logistics supply chain. This could pose headwinds for retailers, distributors and manufacturers seeking to maximize profitability. Not only does a lack of warehouse storage space disrupt reverse logistics, but it also can challenge companies as they balance storage needs with warehouse and inventory management requirements on the forward logistics side of the business.
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Cost Implications of Transportation, Processing and Storage
Research analysts estimate that transportation costs can account for up to 60% of the total cost of reverse logistics. Add processing and storage cost implications to the equation and many companies find it difficult to affordably manage their supply chain in reverse. Cost challenges are ever-present for reverse logistics, but best-in-class companies find a way to minimize the risks and gain value from the overhead in the process. This takes careful orchestration of transportation management to increase efficiency of pickup and collection; warehouse management to minimize processing costs and plan storage effectively; and inventory management to streamline swift refurbishment, repackaging and resale of items to get the most out of returned inventory.
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Impact on Resource Allocation and Operational Efficiency
Just as forward logistics requires workers in the warehouse picking products, managing the flow of inbound and outbound products and tracking stock levels, reverse logistics requires appropriate resource allocation to keep operations running smoothly. Some of the biggest resource challenges for reverse logistics include fielding customer service inquiries about returns; receiving, processing and categorizing items in the warehouse; refurbishing and organizing inventory and quickly returning products back into the supply chain as finished inventory or raw materials for future manufacturing. As with forward logistics, companies typically meet these challenges by implementing data-fueled automation to improve the operational efficiency of their reverse logistics processes and manage the labor costs associated with them.
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Ensuring Quality in the Refurbishment Process
Companies need to carefully track refurbishment and repair data and establish quality control measures in order to get the most value out of their reverse logistics supply chains. Keeping track of quality in reverse logistics poses unique challenges, however, as returned items require careful inspection, repair and validation before being resold. Without these checks, a brand risks reputation damage and further costly customer service interactions. Companies need to develop processes and tracking mechanisms to keep tabs on the inspection process, the status of items as they move through the refurbishment process and the condition of items once they’re ready for resale, which could determine where and how an item is resold. Depending on their condition, products may be sold in normal channels marked as “like new,” in secondary markets or as salvage. Orchestrating these actions can prove difficult at scale without automated inventory management and tracking systems to keep this part of the supply chain operating smoothly.
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Determining the End of Life for Products
In some industries, companies may want to manage the return, refurbishment and recycling of products at the end of their life cycle to bolster environmental, cost savings or even customer service strategies. For example, pharmaceutical companies consider end-of-life waste management of medication as a reverse logistics challenge for their industry. Meanwhile, manufacturers may encourage trade-in policies for computer hardware or other equipment that let customers exchange end-of-life equipment for discounts on new models. This allows manufacturers to spur new sales while decreasing their products’ impact on landfills by stripping old products for reusable parts, saving money in the process. However, managing the end-of-life reverse logistics workflow isn’t without its challenges, which include determining the end-of-life status of products, establishing policies around how customers will be incentivized to return them and developing processes for how products are returned and processed.
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Navigating Varying International and Local Regulations
Every country and local geography has a complex set of rules and regulations regarding how reverse logistics is controlled. Not only must companies carefully track processes for taxes and tariffs, which can get particularly tricky as returns cross borders, but they also must follow rules for safe and legal handling of hazardous materials and specially classified product categories. For example, some countries have stringent rules about the transport and handling of non-working electronics. Additionally, companies must be prepared to establish and enforce return and recall policies that are in line with relevant geographical consumer protection laws.
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Compliance With Environmental Standards
An important component of the regulatory picture for reverse logistics is environmental standards for handling returns and product end of life. This becomes increasingly important as public companies are pressed by investors and government regulators to establish transparent reporting on environmental, social and corporate governance issues as part of their regular financial reporting. The environmental policies and practices that a company establishes with regard to reverse logistics can have a huge impact not only on its bottom line, but also on the environment — and sometimes those decisions can be at cross-purposes. For example, the cost of recycling or refurbishing an item may outweigh its profitability, but choosing to do so could reduce the strain on landfills. Tracking environmental metrics alongside cost analysis will be a growing challenge for companies looking to master reverse logistics in the years to come.
How Does an Inventory Management System Help?
An inventory management system can play a huge role in elevating reverse logistics practices. Inventory management systems provide the level of visibility and tracking necessary to keep tabs on returned products as they move backward through the supply chain. These systems track the quantity and condition of returned products in tandem with new product inventory. This real-time data can help product and inventory teams make informed decisions that will help their companies extract maximum value (or at least minimize costs) from returned items — whether through refurbishment and resale or recycling and disposal.
Inventory management systems also provide the analytics and automated logistics support to cost-effectively coordinate transport, storage and staffing resources. Ultimately, the data consolidation and automation capabilities of an inventory management system provide faster processing and routing of returns to create a responsive reverse logistics supply chain that satisfies customers and maintains profitability.
Streamline Your Reverse Logistics Process With NetSuite
NetSuite Inventory Management provides a single, real-time view of all inventory types that can help companies streamline their reverse logistics processes and integrate them with broader supply chain operations. Together with NetSuite Order Management and NetSuite Warehouse Management System, NetSuite Inventory Management gives companies the power to quickly facilitate return material authorizations, supplier returns and refurbishment and recycling activities. The systems also provide advanced tracking and automation to speed processing and decisions about disposition of returned items. This data supports decision-making that is responsive not only to the condition and quantity of returns, but also to existing and projected inventory levels of new products. In addition, the data analytics provided by NetSuite can help leaders pinpoint and resolve recurring issues within certain product types and categories to help reduce the rate of returns in the first place.
Addressing the key challenges in reverse logistics requires companies to plan a coordinated strategy that’s well integrated into their broader supply chain operations. To accomplish this, businesses need to invest in technology and thoughtfully designed processes. Effective reverse logistics necessitates real-time visibility, strong analytics and a solid automation infrastructure to ensure that inventory management and warehouse management functions can quickly and cost-effectively process returned products through the supply chain.
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Reverse Logistics Challenges FAQs
What are the factors affecting reverse logistics?
Some of the factors impacting reverse logistics include external considerations, such as the volume and condition of items returned by customers, as well as internal issues, such as how well an organization tracks and processes these items across the supply chain.
How do you overcome challenges in reverse logistics?
Companies overcome challenges in reverse logistics through advanced tracking of returned items and inventory levels, as well as automation of inventory management and warehouse management activities powered by this data.
How can reverse logistics be improved?
Reverse logistics can be improved through careful planning of supply chain flows, better visibility and appropriate allocation of resources to staff the receiving, processing, sorting and refurbishment of returned items.
What challenges does reverse logistics present?
Reverse logistics poses numerous challenges, including cost management, environmental and regulatory considerations, as well as customer expectations.
What are the barriers to reverse logistics?
Some of the major barriers to reverse logistics include problems in tracking and tracing items, expensive shipping and storage and a lack of policies and procedures for handling returns.
What are the main logistics challenges?
The main logistics challenges for companies include effective inventory management, warehouse management and transportation management.
