Trigger 3: Improving the reverse logistics process

With our third trigger we are looking at a different aspect of logistics- reverse logistics. Cerasis defines reverse logistics as 'the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal'. So in other words, reverse logistics deals with what to do with a product after it has served its purpose for a customer. With the increasing problem of waste companies are more and more responsible for managing the final stage a product life cycle. Our PBL Team decided on the following learning objectives to study this topic:

• How to implement the 3 R's model in the reverse logistics process
• Pros and cons of e-commerce and regular stores from the logistics point of view
• Which legislative aspects you have to take into account when dealing with reverse logistics in Europe
• How can home decor companies reduce their returns

1. The implementation of the 3 R's model in the reverse logistics process

The R's model is generally considered as a basis for developing an effective reverse logistics strategy.  The 3 R's stand for Reduce, Reuse and Recycle. Paul Bush wrote on LinkedIn about the implementation of this model the following:

Reduce the costs of reverse logistics operations, which for some businesses can be as high as 5-6% of sales. This can be achieved by improving the quality (=usability) of the products, which should lead to lower return from customers. Also, companies should inform the customers about how to use the product to keep it at its best- instructions on paper, videos or give the customer an opportunity to solve a problem by themselves (with the help of a hotline or online support) rather than returning the product right away. 

Reuse products with a potential to be sold as refurbished (renovated, with a minor changes). Refurbishing takes a long time because not all products are suitable for this process and the company also has to figure out the most effective strategies for this. Once well established, it can save a lot costs and bring increased value for the company. Bush names outright liquidation as the most effective tool. This means selling the products to secondary markets (second hand stores). It is easy and generates a quick return.Companies should always make sure they are getting an adequate value in return. Outright liquidation is not the only way a certainly not suitable for all products. For example cars that wouldn't be possible to sell anymore can be reuse in parts salvage.

If a company has a thorough understanding of the materials that are used in their products, it can even make money on recycling. It is essential to compare, which materials are the most valuable and whether it makes sense to recycle the product as a whole or in parts. recycling can be outsourced, which would mean higher costs for the company but also time saved on doing this activity, which is not core to the business. To get the most value, company should make sure they are choosing the right recyceler, who offers them the highest bid.

According to our course book, Recycling is done in several steps:

• collection of waste material from recycling bins, stores (mainly aluminium, plastic, paper, cardboard, glass)
• sorting the waste collected into homogeneous groups
• processing recyclables into secondary raw material
• Using this material for manufacturing of new products
• These new products go back to the marketplace

Once the company decides, how each product will be used, it also has to make sure that the workers know what to do when they receive a returned product.This automates the whole process and makes it more efficient. This can be done through an ERP system, where workers will find information on what to do with a product received.

2. Pros an cons of e-commerce and regular stores from logistics point of view.

The globalization and constantly changing customer behavior makes the huge growth of e-commerce possible. There obviously must be more advantages than disadvantages to e-commerce, otherwise we wouldn't witness the growth mentioned. The question is, what are those advantages from the logistics point of view. 

The Balance lists the following advantages: 

• an e-commerce are not as physically limited (location of inventory and storage place)
• ability to scale up logistics using 3PL companies
• ability to track logistics
• can afford to sell low-volume goods, which retail stores couldn't afford to have constantly available

The disadvantages on the other include that despite the delivery is becoming faster all the time, customers don't receive their products immediately after making their purchase and they have to wait at least a couple of hours, usually couple of days, especially when ordering from abroad. Also, the shipment process is out of the business's hands. This means the shipment can arrive late to the customer due to the post or the goods may be damaged which will result in the customer returning the product and the e-commerce than has to deal with reverse logistics. Additionally, the convenience for the customer (having a product delivered literally to the front door) means costs and creation of complex processes of the delivery system.

Looking now at the traditional stores, the advantages can be summarized by looking at e-commerce's disadvantages, since traditional retail stores have all of these problems covered. Business Insider reminds that the company has a 'supervision' over how the product is delivered tot he customer since it goes directly from the shop assistant's hands to customers' hands. Also, the customer receives the product immediately after paying and the fact that he or she can see, feel or even try the product minimizes the possibility of return to a minimum. 

Also the return is usually much easier for a customer, as they might simply come to the shop with an item they wish to return (or exchange) and leave with a new item or money on a gift card- no packaging, sending, waiting for money, etc.

Now about the disadvantage:

• Some customers use traditional stores only as some kind of 'showrooms' where they come to try the product and then buy it for cheaper online- this means the company pays rent, salaries, etc. at a shop, where purchases are not actually made.

          - however this can actually turn out as an advantage for the stores, since some customers search

             for products online and then they prefer to come to the actual store and buy it from there

• Lower flexibility of products offered- there is a limited space in a shop, what kind of products a customer can buy, also it takes longer to get new 'trend' products to shops than it takes for e-commerce.

We can see here that neither of those two options offers only advantages, however in today's digital age, everything seems to be shifted rather on an online platform.

3. The legislative aspects of reverse logistics within Europe

According to Reverse Logistics Magazine, there is 1,4 billion tons of waste produced. Especially the expansion of the EU in the east has led the organization to impose directives that have to be implemented within the national law of member states. Those directives mainly concern manufacturers of the products and requires them to manufacture environmentally friendly products.

In this magazine, I found the following examples of directives:

• The ELV directive (End of Life Vehicles,2000): reusing or recycling (plastic parts, batteries) parts of cars. It is possible to do some with around 75% of the parts, the rest is considered as waste. The problem with this directive is that not all countries have the premises to recycle (for example Malta) and that the costs vary among states as well. The implementation of this plan is not satisfactory yet.
• The WEEE directive (2006), imposes responsibility of manufacturers for collection and disposal of electrical and electronic equipment. The customers (private households) should always have an opportunity to return used products to the producer at least free of charge. Currently this directive requires the states to collect at least 4kg of WEEE per capita. 
• The Battery directive (2006),  has to main purposes- firstly to reduce hazardous material in batteries and secondly to collect as much as possible used batteries. The target is currenty relatively low- the directive only expects to collect 45% of batteries.
• Packaging waste is one of the most significant waste produced. The EU introduced quotas for how much packaging waste has to be recycled.

On top of that each country introduces its own laws regarding reverse logistics. especially considering recycling. Generally the problem is that no matter what the company offers, it is mainly up to the customer to recycle. Consumers can be encouraged at the maximum and provided with as easy as possible 'infrastructure' for recycling. 

The EU also provides a guarantee for customers regarding the cancel and return of purchases. This is definitely something every company operating within the EU has to take into account. At this point the direct formulation of the EU is: 'In the EU you have the right to return these purchases within 14 days for a full refund. You can do so for any reason – even if you simply changed your mind.'

However, this is not valid for all purchases- the exceptions is everything regarding travelling: transport tickets, hotel bookings, car rentals, etc, foods and drinks, clearly personalized goods, online contents or goods bought from an individual. Every company has the right to adjust these regulations on top of those criteria- some stores allow longer period (usually a month the longest).

4. Reducing returns in case of home decor companies

Reducing the amount of customer returns can significantly lower the logistics costs for any company, especially an e-commerce. Shopify states that the key is to determine 'the motive' of returns. According to Shopify, there are three types of customers who tend to return products: those who don't intend to keep the product in the first place and only want the product for a certain time and then return it (eg. because they cannot afford to own the item) and then there are those, who only order products to try, if they fit their home- so they might order multiple styles, colors, etc. of the same product and send back those that do not fit. Another important cause is the disappointment from the quality of a product (23% of returns are done for this reason). Thus, making sure the company produces in accordance with customer expectations, they can eliminate returns based on this reason.

Companies do not want to avoid returns completely, because in customers' eyes, buying online still bares a risk for them to not like the products. By return policies companies provide customers with 'derisking' of their decisions. So generally it is- the more you derisk, the more will the customers be willing to buy. 

Sources

Business Insider. Bricks-And-Mortar Retailers Have One Big Advantage Over E-Commerce Companies. Available from: http://www.businessinsider.com/bricks-and-mortar-retailers-have-one-big-advantage-over-e-commerce-companies-2014-7?r=US&IR=T&IR=T. Accessed: 8.4.2018.

Bush, P. Reverse Logistics: The Triage Process Starts With 3 R's. LinkedIn. Available from: https://www.linkedin.com/pulse/reverse-logistics-triage-process-starts-3-rs-paul-busch. Accessed: 6.4.2018.

Cerasis. What is Reverse Logistics and How Is It Different than traditional Logistics. Available from: http://cerasis.com/2014/02/19/what-is-reverse-logistics/. Accessed: 6.4.2018.

Reverse Logistics Magazine. European Legislation and the Implementation of Take Back Schemes. Available from: http://www.reverselogisticstrends.com/rlmagazine/edition15p16.php. Accessed: 9.4.2018.

Shopify plus. How to Reduce Ecommerce Return Rates & Predict What Customers Want. Available from: https://www.shopify.com/enterprise/ecommerce-return-rates. Accessed: 9.4.2018.

The Balance. Advantages and Disadvantages of Ecommerce. Available from: https://www.thebalance.com/ecommerce-pros-and-cons-1141609. Accessed: 8.4.2018.

Your Europe. Guarantees and Returns. Available from: https://europa.eu/youreurope/citizens/consumers/shopping/guarantees-returns/index_en.htm. Accessed: 8.4.2018.