What is Reverse Logistics? How Does It Impact Your Inventory?

Returns and replacements are an uncomfortable reality in today’s eCommerce space. Businesses that have warmed up to this have fared much better than their competitors who haven’t.

The following chart shows the factors that lead to people shopping online.

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What started out as a practice to protect the user from getting scammed online, has now turned into a buying pattern. A study shows that as many as 19% of shoppers buy multiple products just so they can inspect them physically before selecting one of them and returning the rest of them for free.

Now, getting the product out of the inventory and into the hands of the users is a time-tested, fairly simple process. But the same cannot be said for when the products travel backwards, from your customers back to your inventory.

This is where reverse logistics comes into play.

Reverse logistics is the flow of goods and products from your customers back to your warehouses. It’s called so because it is the exact opposite of the conventional supply chain, where the goods move from your inventory to your customers.

Reverse logistics is increasingly gaining traction, especially with the rise of eCommerce. Most products that you shop online today are either returnable or replaceable.This has resulted in an increase in customer trust and has led to a jump in the overall sales numbers around the world.

However, the concept of reverse logistics isn’t just limited to moving the products backwards. It also includes tasks like accounting all the products that have been returned, getting them checked, repaired and refurbished and adding them back to the inventory for resale.

A survey made by UPS Pulse of the online shopper in 2017 showed that a whopping 68% of shoppers take a look at the store’s return policy before buying their products. Since then, the number has only increased, owing to more and more companies offering lucrative return policies.

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If left unchecked, the costs of these returns can climb up to 3 times the cost of delivering them to the users. No company would want to find itself in such an unsustainable situation.

Inefficient returns management is a double whammy. It hurts the company in terms of elevated costs and also leaves a bad taste for the customers who are unlikely to shop from them again anytime soon. All of this makes it vital to have an effective reverse logistics mechanism in place.

Reverse Logistics and Inventory Management

Reverse logistics can help a company take out expenses from the returns by creating systems to infuse them back into the supply chain. Various companies have experimented with reverse logistics to ramp up their inventories, and the results have been extremely positive9.

It was observed that the increase in the number of returns led to inflation of inventories. To balance this, companies had to freeze production and procurements or at least slow it down.

However, it was soon that companies started to mine the returns data, trying to examine if there were any patterns to it. All of this led to a complete overhaul of the approach towards returns management. As a result, returns were now looked at as an inventory supplement, rather than a liability.

Retail giant Walmart is one of the largest companies to have followed this model for their inventory management.

Case Study: Walmart

As the world of eCommerce was warming up to exciting returns policies, Walmart was one of the first large corporations to react to the effect these liberalized policies had on the company’s inventories.

Walmart’s inventory is valued at around $32 million. It ships products from more than 70 countries and has upwards of 11,000 stores globally. Walmart also has one of the most competitive returns policies that allows customers to return goods for virtually no justification needed.

Walmart calculated the impact of having such a customer-friendly returns policy on their inventories. They noticed that their inventory levels were increasing disproportionately as compared to the growth in sales. They quickly realized that the returned goods were taking up a whole lot of real estate, but weren’t factored-in during the replenishment calculations.

The company sharply decreased their inventory growth to a meagre 0.9% in the fourth quarter of 2016. To give context to this, their inventory growth for the same quarter in the previous year was 25%.

Restraining the inventory allowed Walmart to focus on how to manage their returns and make them sellable again. This led to much leaner inventories around the world, and also helped the company make money out of the items that were returned.

(Source: Supply Chain Digest)

Here are some of the ways in which reverse logistics impacts your inventory and your company at large:

Reduced costs

When you plan for the reverse logistics in advance, you are able to predict the costs and reduce them considerably. Moreover, you can recover most of those costs by getting the product back to your warehouse safely and adding it to your inventory for resale.

Greater Customer Retention

Customers love to shop from stores that enable them to return or replace the product without much fuss. It is a great way for the company to show the customers that their happiness is paramount to them.

All of this leads to a rise in customer satisfaction and loyalty, ultimately resulting in greater customer retention. And as any wise marketer would tell you, it’s easier selling to 10 existing customers than making 5 new ones.

So while you may take a hit due to the cost of getting the product back to your warehouses, it pays off in the long run.

Reduced losses and unplanned profits 

When you’re selling products that can be repaired or refurbished, it’s a great idea to set up a mechanism in house that can help you fix any products that have been returned due to defects or damages.

This will help you minimize your losses due to the returns. Fix as many products as you can, out of those that have been sent back by the customers, and sell them off at discounted prices. This way, you’ll be able to extract the maximum possible value from your products, and turn liabilities into assets.