Reverse Logistics Management: Keeping a Lid on Costs

Without reverse logistics management, your supply chain can hide runaway costs and uncertainties that make it hard to execute well. The answer to rooting out these costs and uncertainties? A focus on the total cost of ownership (TCO).

True TCO must include costs from the entire supply chain. The hard part is that returns are far more complex and chaotic, so calculating their costs is much more complex.

Here’s what you need to consider to maximize product value through careful planning and investment in reverse logistics management.

1. Inventory

Inventory remains one of the biggest and most obvious costs to tackle when you’re talking about reverse logistics management. You can’t afford to have a service center within driving distance of every end user. Nor is it feasible to maintain one central stocking location that overnights critical repair parts everywhere in the world.

With such realities, figuring true costs requires your company to answer questions such as:

How much inventory do we need on hand?
How much inventory do we need to respond to a surge of failures?
How can we reduce downtime in the repair cycle?
What’s our time to customers?

As you figure TCO, it’s important to include all costs related to inventory, from inventory carrying costs to shipping to customer service expectations.

Obviously, quicker is better, but other issues factor into the overall inventory costs, too. For instance, increased repair parts inventory increases inventory carrying costs.

2. Transportation

Your next challenge in figuring TCO in reverse logistics management is transportation, i.e., freight costs.

Here’s a typical scenario: Do you maintain a robust inventory to minimize repair time and transportation costs, or wait for a certain number of defective parts before shipping repair components (or before returning repaired items) for restocking? Is significantly more expensive air freight necessary to keep customers happy? How do these freight costs weigh against your need to get a client’s equipment back in service in a timely manner?

Taking all these freight costs into account may mean that a domestic, higher-cost repair shop is actually more cost-effective for your business. That’s why you must have a complete picture of freight costs to figure TCO.

3. Government Regulations

When it comes to TCO and reverse logistics management in import-export compliance, details matter. Even minor paperwork or taxation errors can cause significant delays and major fines, tying up valuable inventory sometimes indefinitely.

Regulations vary between countries, and those details can be a real challenge for in-house compliance departments. A service supply chain partner who maintains a regional presence and an experienced compliance department skilled in leveraging compliance laws can help improve your TCO — especially in times of market and regulatory turmoil.

4. Repair Center Expenses & Logistics

It’s not usually feasible for a company to locate a fully functional repair center in every country or region where it operates because repair centers are so expensive.

It’s not unusual for construction costs of a top-tier OEM test and repair line to cost $1 million to $2 million for a facility fully stocked with testbeds, fixtures, environmental chambers, and servers that mirror the test environment. This expense is why so many companies operate just one repair center — even though that choice impacts costs of inventory, transportation, and customer satisfaction.

To reduce repair center costs, many manufacturers partner with a global service supply chain company to handle getting defective parts to their repair partner. You’ll also have to weigh the minimum acceptable distance between repair centers and end-users as part of your reverse logistics management.

5. Hidden Expenses of Reverse Logistics Management

The hidden expenses inherent in reverse logistics management may be the hardest to define and quantify but remain a critical element in getting your TCO equation right. This quandary is compounded when you’re talking about international operations. Some typical hidden costs related to cross-border repairs and returns include:

Additional inventory costs for “safety stock”
Travel and training costs
Currency volatility
Trademark and patent infringement risks
Additional internal administrative costs
Cultural differences

6. Opportunity Costs

Calculating opportunity costs can be more art than science since it requires you to place a value on an action not taken or an opportunity refused. It’s an important element in figuring the total cost of ownership.

When it comes to opportunity costs and reverse logistics management, consider the example of expanding your repair operations to another country. Many companies move overseas, attracted by the lower labor rates but fail to fully consider the time and effort involved in setting up a repair center or finding a repair partner.

What would the same amount of time and effort produce if expended for a different part of the company? What costs will be incurred if your repair cycle lengthens to weeks or months instead of days?

For many organizations, the returns management process has remained a cost center with low visibility. It tends to be an area full of products to be restocked, repaired, repackaged, or disposed of appropriately. However, robust reverse logistics management helps reduce administrative, transportation, and aftermarket support costs, and increases velocity and improves customer service.