Reverse Logistics: Definition, Components and Benefits

Updated 29 September 2022

In companies that produce commercial goods, logistics teams connect the different departments that create and distribute products for sale. They use strategic plans to increase efficiency and ensure that products reach their intended recipients, whether that means the customer or the business itself. If you're an inventory or logistics professional, learning about strategies to manage reverse logistics can help you develop a system that retains customers and grows revenue.

In this article, we define reverse logistics, explain how this process works, list some common elements of this process and share some benefits of these systems.

What is reverse logistics?

While traditional logistics traces the product's journey through the supply chain to the consumer, reverse logistics focuses on how customers might return products to the company that created them. These policies might concern completed products, raw materials and shipping materials. Many companies have different procedures for returns, exchanges, refurbishments and unsold goods.

How does this process work?

The goal of this process is to preserve as much value as possible from returned items and to retain customers. To that end, logistics professionals might create procedures that make the returns policy easy for customers, so they feel more comfortable buying additional products from the company. Along with easy return procedures, this process might include methods to reuse older products and extract value from obsolete ones.

Different reverse logistics methods

Here are some elements that companies might include in this strategy:

Self-serve return processes

Customers might receive a return shipping envelope or label in their original package, making it easy to return or exchange their product if they are unsatisfied. By giving customers the power to make an easy return, the company can build goodwill and ensure that it receives the products or materials quickly. Some companies might also automate the returns process for used products that the company can turn into raw materials.

For example, a company that sells aluminium coffee capsules to use in a proprietary coffee-maker might have its own recycling process for used capsules. Each order of new capsules might include a recycling bag with a shipping label already printed on it. When customers fill up the bag with their used capsules, they can mail the bag back to the company. Once the capsules arrive, the company's factory associates might extract the coffee grounds and melt the capsules down to make new ones from the metal.

Return and exchange centres

Many companies have return and exchange centres, either in standalone storefronts or inside larger department stores. These centres often have a wide range of stock, which allows associates to suggest an exchange in place of a refund. By promoting exchanges, companies can retain their revenue and encourage customers to give the product another chance.

For example, a clothing company might have a return and exchange department inside a large storefront. Sales associates in that department can help customers who need a different size or colour of the item they purchased or who simply want a refund. They might suggest the right size or ask customers if they're interested in a different style of product. After offering an exchange, they might provide cash or store credit refunds for customers who want them.

Trade-in policies

Some companies have trade-in policies, where customers can trade in their current model of a product and get credit for a newer model. When the customer trades their old item to the company, the logistics team can either refurbish the item or take it apart for its components. This method can be particularly effective for companies that sell products containing proprietary parts or expensive materials.

For example, a technology firm that creates laptops and tablets might have a trade-in policy where customers can trade in an older product and receive a certain amount of credit toward a new purchase. A customer might bring in their three-year-old laptop and receive enough credit to cover half the purchase of a brand-new laptop. The returns employees transport the old laptop to the company's manufacturing plant, where technicians use the parts and materials to create new products. The customer gets a new laptop at a lower cost and the company receives valuable raw materials.

Repairs and refurbishment

A repairs and refurbishment strategy is similar to the trade-in model, but also allows customers to keep their current product. Many companies have repair centres, where customers can bring in or ship their products to technicians to have them repaired at a lower cost than purchasing a new one. These centres might double as trade-in centres, where customers can give the company their old product in return for credit. If the product still functions, the technicians might refurbish it and sell it at a lower cost to a new customer.

The refurbishment method allows the company to reduce waste and access a segment of the consumer audience who cannot afford to purchase a new product. For example, the technology company that sells laptops might have a refurbishment strategy. When customers trade in laptops or tablets that still function, the company's refurbishment team might update the products' operating systems, repair minor damage and delete any user information. Then, the company can sell the refurbished items at a discounted rate.

Unsold goods policies

When a company produces items for sale by third-party vendors, the company might have a specific policy for products that don't sell. Third-party vendors might return unsold products at the end of the season or after an amount of time specified in the vendor contract. Once the vendor returns the unsold products to the producing company, the company's inventory team decides what to do with the products. They might sell the products to a discount retailer at a lower price or recycle the product's components to make new items.

For example, a luxury handbag and briefcase producer might sell its products through several third-party department store chains. If one of the department stores doesn't sell all of its products by the end of the season, the store's manager might send the unsold goods back to the producer. The logistics team might sort the unsold goods into product lines and decide what to do with each individual product. Some products might go to a discount retailer with a record of selling the company's products at a lower price, while others might go to the recycling department for deconstruction.

Benefits of this process

Having a system to handle returned goods and materials can have several key benefits for an organisation, including:

Reduced costs

The segment of work dedicated to sending products back through the logistics cycle is called return labour. When a company adopts a strategic system to handle returned items and supplies, the company's logistics employees can track the cost of labour in each stage of the return process. This analysis can allow them to find more efficient alternatives, saving the company money. These systems often feature logistics software programmes that track costs automatically, making it easy to identify places where the company can reduce costs.

Increased sustainability

By standardising how the company handles returns, the company's leadership team can reduce the amount of packaging and shipping materials and increase the amount of recyclable or post-consumer materials used in production. One way they can do this is through material harvesting, where the company uses materials from obsolete or returned products to create new products. They can also provide recycled or reused shipping materials for customers who want to return items. For example, an online retailer's product development team might create a new shipping bag that customers can turn inside out and reuse as a return bag.

Improved customer relations

These systems make it easy for customers to exchange and return items, which can improve their perception of the company. When a customer returns an item, it's often because they're dissatisfied with some aspect of the product. If the returns process is simple, it can rebuild their trust in the company and encourage them to buy a different product. An easy returns process is vital for cases when the customer purchases a product that's damaged or defective because it can allow the company to keep the customer's loyalty.

Improved products

A systematic method for returning items allows a company to collect information about customers' experience with products after purchase. By understanding why and when customers typically return certain items, a company's product development, sales and customer service teams can create strategic plans to improve products. For example, an appliance company might have a dedicated returns centre. Employees at the returns centre may ask customers to fill out a survey and select their reasons for returning their vacuum cleaner or steam mop. The product team can use this information to improve parts of the product that cause user dissatisfaction.