Differences between forward and reverse logistics in ...

Introduction

Special feature – reverse logistics Differences between forward and reverse logistics in a retail environment Ronald S. Tibben-Lembke and Dale S. Rogers

The authors Ronald S. Tibben-Lembke is Associate Professor of Supply Chain Management and Dale S. Rogers is Professor of Supply Chain Management, both at the University of Nevada, Reno, Nevada, USA. Keywords Reverse logistics, Supply-chain management, Retailing Abstract This paper compares and contrasts forward and reverse logistics in a retail environment, with the focus on the reverse flow of product. Many differences between forward and reverse flows of logistics systems are presented. The impact of these factors depends to some extent on the supply chain position of a firm. Unlike much reverse logistics research, which is written from the perspective of the firm which will remanufacture or refurbish the product in the reverse flow, we consider the issues from the perspective of the firm generating the reverse flow. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/1359-8546.htm

Supply Chain Management: An International Journal Volume 7 . Number 5 . 2002 . pp. 271±282 # MCB UP Limited . ISSN 1359-8546 DOI 10.1108/13598540210447719

Recently, much has been written in the logistics press (e.g. Jedd, 1999, 2000; Ross, 1998) and in the research literature (e.g. Dowlatshahi, 2000; Fleishmann et al., 1997) about reverse logistics. A body of knowledge is beginning to develop around the reverse logistics field. It is clear that reverse logistics as a field of study is unique enough to undergo specialized research. While reverse logistics is different from forward logistics, to date there has been little discussion of the differences between forward and reverse logistics. In order to better frame future conversations about reverse logistics, this paper presents an overview of the ways in which forward and reverse logistics differ. Logistics has been defined as that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point-oforigin to the point-of-consumption in order to meet customers’ requirements (CLM, 1999). Reverse logistics has been defined as the movement of product or materials in the opposite direction for the purpose of creating or recapturing value, or for proper disposal (Rogers and Tibben-Lembke, 1999, 2001). The reverse flow may consist of both product and packaging, and both have been studied in the literature. Carter and Ellram (1998) give an overview of the literature on reverse logistics. Although it is a new and emerging field of research, much has been written. The following is a list meant to be representative of the wide variety of issues relevant to reverse logistics, but it is by no means exhaustive. The reverse logistics of recycling has been discussed in the literature for over a decade (Stock, 1992, 1998; Pohlen and Farris, 1992). Numerous case studies have been written in a variety of environments (e.g. Ritchie et al., 1999; Klausner and Hendrickson, 2000; and see Fleischmann et al. (1997) for a review of many). The special case of product recalls has been considered (Murphy, 1986; Murphy and Poist, 1989). Because much of the material in the reverse flow will ultimately be remanufactured, an extremely important area of research – the control and scheduling of remanufacturing – has been widely discussed (see Fleischmann et al. (1997) for an overview).

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Differences between forward and reverse logistics

Supply Chain Management: An International Journal Volume 7 . Number 5 . 2002 . 271±282

Ronald S. Tibben-Lembke and Dale S. Rogers

Although much has been written about many specific aspects of reverse logistics, or specific activities, the collection and disposition of reverse logistic product in the retail context have been largely ignored. This paper will focus on the logistics of collecting product returned by consumers, primarily in a retail context. Unlike many European countries, in the USA, producer take-back of product at the end of life is not required. Therefore, the major source of reverse-flow product is customers returning products shortly after purchase. After the product has been collected from the retail locations, decisions must be made about where the product should be sent: remanufacturing, back to the vendor, etc. This paper focuses on the process of collecting, sorting, and sending out this product again. Guide et al. (2000) and Flapper (1995) consider the differences in supply-chain management issues for manufacturing and remanufacturing, and raise several relevant points, which we will discuss below. Their perspective is from the point of view of the remanufacturer, whereas we consider retail reverse logistics from the point of view of the supplier of material for remanufacturing, the retailer. Because any supply chain may have product flowing in the reverse channel, the range of reverse logistics issues facing a particular supply chain will be as diverse as the number of supply chains. Although we cannot describe all reverse logistics networks, we will study many of the issues relevant to several broad classes of supply chains. Reverse logistics networks may be classified into several categories, depending on the source of the reverse flow: catalog/e-commerce customer returns; retail customer returns; retailer returns; and manufacturer returns to a supplier. Differences will exist based on the destination to which the returned items will be sent: return to vendor; resell via outlet, or to a broker, either as is, or reconditioned; donation to charity; or disposal via recycling or landfill. We will give an overview of reverse logistics activities, and consider how the source of the reverse flow affects the decisions to be made throughout the reverse supply chain. That

will be followed by a detailed discussion of the differences between forward and reverse logistics, across all supply chain positions and models, including consideration of how a company’s position in the supply chain affects the decisions it must make and the options available to it.

Overview of reverse logistics Reverse logistics flow is very different from the forward flow. Figure 1 shows the information flow for a typical retail forward logistics process. Forecasts of future sales are used to project future requirements. As product is needed, it is sent first to a distribution center (DC), and then to the retail stores. At each level in the network, forecasts can be used to help predict what will be needed, and shipments are sent in response to need at the DC or retail level. At each level, advanced shipping notices (ASNs) provide visibility of product coming in. By contrast, a reverse logistics flow is much more reactive, with much less visibility. Firms generally do not initiate reverse logistics activity as a result of planning and decision making on the part of the firm, but in response to actions by consumers or downstream channel members. Figure 2 depicts a typical reverse logistics information flow for the retail channel. When a consumer returns an item to a retail store, the store collects the items to be sent to a centralized sorting facility. At the time of the return, information about the item and its condition may be entered into the retailer’s information system, and forwarded to the returnsprocessing center. Unfortunately, this information capture rarely occurs, or is inaccurate. From the store, the retailer typically collects the product using trucks making ‘‘milk runs’’, that is, always stopping at the same stores in the same order. In previous research, Rogers and Tibben-Lembke (1999) found that many retail companies use centralized return centers (CRCs) to process returned product. Theoretically, the forward DC could be used to process returns but, as they describe, there is great temptation for reverse logistics personnel to be redirected to work on the ‘‘more important’’ forward logistics every time the forward distribution part of the facility experiences high demand.

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Figure 1 Forward logistics information flow for retail

Figure 2 Reverse logistics information flow for retail

When the product arrives at the CRC (or DC), a determination must be made about where the product should be sent. At the CRC, employees assess the condition of each incoming item, and determine the best place to disposition the item. With returned product, a wide range of disposition options is available, all with different revenue streams (Theirry et al. 1995). Possible destinations for product are: return to vendor; sell as new; repackage, sell as new; sell via outlet; remanufacture/refurbish; sell to broker; donate to charity; recycle; landfill. If possible, the retailer’s first preference generally is to sell the item as new. If this cannot be done, a full refund from the vendor is the next most profitable. When the retailer purchased the product from the vendor, an agreement was reached about whether the retailer would be able to return the product to the vendor, and under what conditions. If a return is not possible, the retailer may be able to sell the product again via an outlet store or Web site/auction, which generates reduced profits. Before being resold, the product may need to be repackaged or remanufactured,

which again reduces profits. Donating obsolescent but still usable product to charity may generate tax advantages for the company that exceed what the company would receive from selling the product. Short of recycling or landfilling the product, one of any company’s last resorts is to sell the product to a broker. Brokers operate in the ‘‘secondary market’’, buying and selling product that for one reason or another cannot be sold in the primary retail channel. Brokers can be found who are willing to buy almost any product in any condition. They, in turn, sell the product to companies who will sell the product in places such as ‘‘dollar’’ stores, fleamarkets, other low-priced outlets, and perhaps overseas. As a result, the prices which brokers will pay are typically very low.

Supply chain position The position within the supply chain often drives the size and scope of the reverse logistics problems that the firm faces. Generally, the closer the firm is to the end consumer, the greater the size and scope of the reverse logistics issues. Because retailers deal with customers directly, the retailer typically has a larger volume of returned merchandise to deal with than its suppliers. As described above, some of the returned product will be passed upstream to suppliers,

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Differences between forward and reverse logistics Ronald S. Tibben-Lembke and Dale S. Rogers


but much will not, and one of the key challenges for a retailer is managing this sortation process well. By collecting the returned material from the retail stores, the retailer provides the vendor with large, periodic shipments of returned merchandise. The vendor, whether a wholesaler or a manufacturer, has a different situation to deal with from the retailer. The retailer receives relatively small, unorganized shipments of a wide variety of products on a daily basis. The vendor receives large, organized shipments of a small number of products on a weekly or monthly basis. In addition to customer returns, the vendor may also receive product from the retailer that has been placed in a retail store, but not sold, or that never left the retailer’s DC because demand for the product was low. This product may not have sold for a variety of reasons. For example, the product may have been a seasonal item that reached the end of its sales life, or it may be a new product that did not achieve as much demand as expected. Although the arrival pattern of goods is different, like the retailer, the vendor must examine each item and decide the best disposition for each item. In this, the decisions the vendor must make are very much like the decisions the retailer must make with product it could not send back to the vendor. The disposition options available to the vendor are the same as those available to the retailer. However, the prices that the vendor may recover from each disposition may be different from those available to the retailer. Brokers prefer to deal in large quantities of product. Because vendors receive product from multiple retailers, they collect larger volumes of product than any one retailer could collect, and the prices at which they can sell product to brokers may be considerably higher. Vendors also have an advantage over retailers regarding remanufacturing. Because retailers generally have a broader product mix with lower volumes, and are not responsible for the design or manufacture, it is unlikely the retailer would consider remanufacturing any product in-house. A retailer would typically contract with a third party to remanufacture product. Because the vendor deals in much larger volumes, it may be economically feasible for the vendor to remanufacture in-house. If the vendor has produced the item itself, it will have an

additional advantage in this regard, in that it will be even more likely to have the skills and equipment necessary to remanufacture the product itself. Although remanufacturing is a very important part of any reverse chain, this paper considers the logistics implications of decisions about whether to remanufacture or not, but will not focus on the details of these operations. When reselling product, either for the primary or for the secondary channel, the vendor has an additional advantage over the retailer. If a product has not sold well for one retailer, the vendor may be able to sell the product for the full price to a different retailer that is experiencing higher demand for the product. As described above, the decision about whether or not a retailer will be able to send product back to the vendor is typically determined at the time the retailer purchases the product from the vendor. The vendor may give the retailer a full or partial refund, and the vendor may or may not require the retailer to send the product back to the vendor. The vendor’s advantages over the retailer in dispositioning product in the reverse flow should allow the vendor to recapture a higher amount of value for a given product. However, the amount recovered by either the retailer or the vendor is typically not large. The increased revenue of the vendor, although large as a percent, may not be significant in terms of total economic value. This has caused some vendors to evaluate the cost-effectiveness of their returns-processing activities. The result of this is that some manufacturers in the USA have instituted a ‘‘zero returns’’ policy. Under such a policy, retailers are credited for customer returns, but the product is never physically returned to the vendor. Instead, the retailer dispositions the product at its facilities, according to the instructions of the vendor. Regardless of whether the vendor has instituted a zero returns policy, retailers are required to follow any conditions on disposition stipulated by the vendor at the time of purchase. Vendors have invested much money and effort building the ‘‘brand equity’’ of their products; giving their brand name a certain cachet that creates a particular image in the minds of consumers. Vendors do not want their products to appear in any sales locations which might damage this brand

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equity. The result is that, if the vendor sells the product to a broker, the broker must guarantee that the product will always be handled in accordance with the vendor’s wishes. Because they do not trust brokers to follow their dictates, brand equity concerns move some vendors to have all product sent back to them, so they can ensure that they maintain control over all secondary market product. The discussion thus far has focused on retailers, wholesalers, and vendors. This is true, because, in large part, the authors have found that producers of industrial products and suppliers to manufacturers have much lower incidences of returned product (Rogers and Tibben-Lembke, 1999). The most likely situation where a manufacturer would return a product to its supplier is when it discovers during manufacturing that a component or material supplied by the firm is defective. The supplier would typically replace the product, or credit the manufacturer for its cost. Depending on the vendor’s policies, the manufacturer may face a set of decisions rather like those faced by retailers and vendors: send the material back to the vendor; rework the material to be usable; sell the material on a secondary market; recycle the material, or dispose of it in a landfill. As this section demonstrates, the particular problems and possible solutions faced by a firm will also depend on how downstream and upstream firms handle reverse logistics. As is true of forward logistics, the best solution for the supply chain (whether forward or backwards) as a whole may not be feasible, because of decisions made in the self-interest of member firms.

Difficult to forecast As many authors have discussed, planning for reverse logistics is made more difficult than planning for forward distribution by the greater uncertainty involved in reverse logistics (e.g. Guide et al., 2000; Flapper, 1995). In remanufacturing, forecasts are needed not only of customer demand, which is always challenging, but also of the availability of product to be remanufactured. In the retail context, future planning and forecasting for reverse logistics are made difficult because individual customers ultimately initiate reverse logistics activities. However, some general trends can be observed. Reverse logistics flows tend to follow trends in forward flows, with some lag. The large forward flow of new product for holiday sales is followed by a post-holiday wave of returned product. On a smaller scale, sales and special promotions of individual products will increase sales, but also returns. When scheduling sales and promotions, marketing departments already work with forward logistics to ensure that the logistics function will be able to satisfy the demand created by marketing’s efforts. Like forward logistics, reverse logistics can benefit from information about such plans. When large sales of an item are expected to be followed by large return volumes, the CRC may begin contacting brokers in advance of the actual returns. Further complicating the forecasting in this context is the fact that different products will have very different returns rates. Customers’ decisions to return product will be influenced by factors such as the ease of operating the product, the clarity of the instructions, and buyers’ regret, factors which may vary significantly from one product to the next, within one manufacturer.

Overview of differences

Many to one transportation As Fleischmann et al. (1997) point out, one of the largest differences between forward and reverse logistics is the number of origin and destination points. Whereas forward logistics is generally the movement of product from one origin to many destinations, the reverse movement of a product is the opposite, from many origins to one destination. In the retail context in the USA, the reverse transportation of product is generally performed by the retailer’s logistics function. Trucks make milk runs to each store, picking

In this paper, we focus on the differences between the forward and reverse logistics associated with the retail channel. As Fleischmann et al. (1997, p. 7) point out, reverse logistics is ‘‘not necessarily a symmetric picture of forward distribution’’. We will look at a variety of differences between forward and reverse logistics. Table I shows a comparison of how various features of logistics systems differ for forward and reverse.

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Table I Differences in forward and reverse logistics Forward

Reverse

Forecasting relatively straightforward One to many transportation Product quality uniform Product packaging uniform Destination/routing clear Standardized channel Disposition options clear Pricing relatively uniform Importance of speed recognized Forward distribution costs closely monitored by accounting systems Inventory management consistent Product lifecycle manageable Negotiation between parties straightforward Marketing methods well-known Real-time information readily available to track product

Forecasting more difficult Many to one transportation Product quality not uniform Product packaging often damaged Destination/routing unclear Exception driven Disposition not clear Pricing dependent on many factors Speed often not considered a priority

up the product to be returned, delivering it either back to the DC or to a CRC. In theory, it would appear that combining forward and reverse transportation might lead to significant transportation savings: why send a second truck to a location to pick up returned product, when one truck has already been sent there to deliver new product? Fleischmann et al. (1997) wrote that they knew of no models dealing with the combined routing for forward and reverse shipments. The authors of this paper still are unaware of any implementation of such a system. The reasons are likely twofold. In the first, maintaining the independence of forward and reverse systems allows the two to function independently, and avoids the difficulties present in trying to create schedules acceptable to both parties. If the DC and the CRC are located far apart, the savings from combining transportation may be limited. The second reason why forward and backward shipments are difficult to combine has to do with the physical difficulties in accomplishing this. Trucks from a forward DC may stop at multiple stores. Any returned merchandise loaded on the truck must be offloaded at subsequent stops to allow the new product to be offloaded. As the following section elaborates, returned product is much more difficult to handle than new product, making such double-handling undesirable.

complete packaging which protects it during transit. It also allows the product to be handled easily. New product can be palletized easily, stacked neatly for floor storage, and conveyed readily. Uniformly packaged new product stacked on a pallet or in a truck does not easily become dislodged. By contrast, most product in the reverse channel may not have complete packaging. If the product is unsold product coming back from a retailer, some of the packaging may have become damaged during handling or while on the shelf, and other packages may have been opened by customers curious to examine the product. It is likely that these customers have not properly put the product back into the packaging. Product returned by customers is even less likely to be properly packaged. If the packaging is present, it is very unlikely that the customers or the return desk personnel at the retailer will have put the product completely and properly into its packaging. Even when the product is properly in its packaging, shipping returned product is more difficult than shipping new product. New product is typically sent in large quantities. The large number of boxes going to a particular destination allows pallets to be stacked neatly. In contrast, most stores typically have smaller shipments (of the order of one pallet per week) of product going to a CRC. With these small volumes, it is harder to create a well-formed pallet. The result is that a majority of pallets arriving at returns

Product and packaging quality Aside from damage in transit, new, firstquality product from the vendor comes in

Reverse costs less directly visible Inventory management not consistent Product lifecycle issues more complex Negotiation complicated by additional considerations Marketing complicated by several factors Visibility of process less transparent

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centers consist of unorganized piles of merchandise, held together with shrink-wrap. Because the returned product is not properly packaged, it is more susceptible to damage in transit. The increased damage comes from two sources. First, if the product should fall off a stack or pallet, the lack of proper packaging renders the product more vulnerable to damage. Second, because the product is not in uniform packaging, it is harder to stack, and more likely to fall or be crushed. In the forward channel, the final advantage that packaging gives to new product is increasing the ease of identifying the product number of an item. In the reverse channel, if a product is not in packaging, the returnsprocessing personnel will have difficulty identifying exactly what the stockkeeping number (SKU) of the product is, or perhaps even who the manufacturer is. Destination/routing not clear Once a product reaches a CRC from a store, its further destination is unclear. The same can be said about forward distribution; once a product reaches the DC, it will sit until a decision is made about to which customer the item should be sent. There is, however, an important difference in how the next stop for the item is determined. When a new product arrives at a forward DC, it is known that the product will eventually be sent to one of the DC’s customers. Which customer, and when, will be determined based on customer needs. However, for make-to-order environments, cross-dock operations, and urgent shipments (in a make-to-stock environment), the name and location of the destination of the inbound shipment are known at the time the product arrives at the facility. Unlike a forward DC, then, a reverse logistics facility may need to spend a significant amount of time determining where a particular item will be shipped. Disposition options not clear As described above, a crucial decision for the success of reverse logistics is the disposition decision. However, before a disposition decision can be made, the CRC must first identify the possible destinations for the product. Different brokers specialize in different product types, and are willing to purchase different qualities of product.

The CRC must also include any restrictions by the manufacturer in its decision. Some vendors will require certain products to be ‘‘demarked’’, that is, all traces of the vendor’s identity must be removed from the product before it can be re-sold. Some vendors may allow this demarking to be performed by approved brokers. The vendor may allow sales to some brokers only if the retailer performs the demarking, and may forbid outright sales to other brokers. By contrast, in forward logistics, rarely, if ever, is any type of screening done regarding shipments to potential customers. Pricing not uniform Because new product is of uniform quality, the price that a consumer would be willing to pay for it might be expected to be uniform across retailers. The reality, however, is that the price that customers are willing to pay for new product is not the same at all retailers. Similarly, the vendor sells the same product to different customers at different prices, depending on the size of the customer’s purchase quantity and the total quantity of all products purchased by that customer, among many other factors. If new product of uniform quality is sold at different prices for different customers, the range of prices that an item in the reverse flow is sold for is even greater because of the fact that not all product in the reverse flow is first quality. When a firm’s returns-processing center has received and identified a product, it must determine to which companies to try to sell the product. The CRC knows what different brokers have been willing to pay for the product in different conditions, in the past. The price that the broker will be willing to pay may be different at the current time, however, for a number of factors. If the broker has a large volume of a particular product on hand, it may not be interested in buying more. As will be discussed in more detail below, lifecycle issues may also play a prominent role. Some brokers specialize in selling product domestically, while others specialize in shipping product to less technologically developed countries. It may be difficult to discern, ahead of time, when a product has reached the point where a product will or will not be attractive to a particular broker. Brokers typically will not want to come and bid on products one at a time, even in the case

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of high value items like computers. Companies selling to brokers must organize product into lots of similar product in similar condition for brokers to bid on. Because reverse flow product is often not in new condition, brokers often want to inspect the product before bidding on it. This restricts the number of brokers that a company can have bid on a particular lot of items. If a broker is often unsuccessful with its bids at a CRC, the broker may decline to bid on the CRC’s product in the future. The CRC must estimate which small subset of brokers are most likely to offer the highest price for a particular item, or lot of items, in a particular condition, and offer it to those vendors. Different importance of speed In the forward channel, it is important to fulfill customer orders quickly, to keep customers satisfied. If the customer is not promptly served, there may be some cost incurred, but it may not be directly observable. In the inventory literature, there has been much work done on the estimation of penalty costs for not satisfying customers in a timely basis (Silver et al., 1998). In forward logistics, the penalty to be paid for not satisfying a customer may not be felt until much later, when the customer reduces future orders or does not order at all. In some cases (particularly for e-retailers), the penalty has been immediate, as the e-retailer has given the delayed customer a gift certificate or other type of credit to be applied to the current or future purchase. By contrast, in reverse logistics, the ultimate destination for the product (from a retailer’s point of view) is the broker. However, the brokers have not placed orders for these products. If the returns processing happens slowly, these ‘‘customers’’ will not complain. The longer a product sits at a CRC, the more potential for damage, and the more its value is likely to decline. In addition to physical damage, obsolescence may or may not be a significant factor in reducing a product’s value if it sits in a CRC for a long time. For seasonal products, by the time a product gets sold, then returned, the season may have passed, so the product is worth considerably less than it would have been if it could have been resold during the season. In this case, there is not a lot of loss of value.

For technology products, however, the value loss is considerable. Given the relatively short lifecycle of technology products, reselling quickly is very important in recovering as much value as possible. Differences in nature and visibility of costs As the previous section indicates, the costs in reverse logistics are not necessarily the same as the costs in forward logistics, and the behaviors best suited to forward logistics are not necessarily best suited for reverse logistics. In forward logistics, costs are well defined and well-known. Accounting systems are built to handle the comprehensive cost development for a product as it moves through the forward channel. Firms specializing in forward logistics are usually not very effective at managing the amount of detail derived from a product’s nonstandardized journey backwards through the firm and the channel. The inventory costs of forward logistics can be broken into several broad categories: ordering, transportation, handling, and holding costs. Table II lists some of the ways in which reverse logistics costs differ from the costs of forward logistics. New product is not subject to refurbishment or repackaging. Returned product may require reworking as simple pressing and repackaging of clothes. Now the product to be resold has a much higher cost than new product. However, the reusable product’s incremental cost may still be lower than manufacturing a new item. In forward logistics, the cost of placing an order is an important factor in determining how often to order a product, and how large an order to place. In reverse logistics, the major cost associated with collecting returned product from a location is the transportation Table II Reverse logistics costs Cost

Comparison with forward logistics

Transportation Inventory holding cost Shrinkage (theft) Obsolescence Collection Sorting, quality diagnosis Handling Refurbishment/repackaging Change from book value

Greater Lower Much lower May be higher Much higher ± less standardized Much greater Much higher Significant for RL, non-existent for forward Significant for RL, non-existent for forward

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cost. Transportation costs for reverse logistics per item will generally be higher than for forward logistics. This is due, in part, to the fact that the reverse shipments tend to be much smaller. For example, a store may receive full truckloads of new product inbound each week, but return only one or two pallets of reverse material in that same amount of time. In addition to more stops per truck, reverse logistics generally cannot maximize cube utilization of trucks the way forward logistics can. The variability in product types inherent in shipments of returns makes creation of standardized pallets virtually impossible, and the result is that most retail locations send individual shrink-wrapped pallets to their returns centers. In addition to differences in package size and missing packages, many retailers do not put barcodes or other types of identifying labels on items in the reverse flow. Therefore, it is important to keep shipments from different retailers physically separated so each retailer is properly credited. Obviously, this precludes maximizing space utilization by efficiently filling the truck. Handling costs inside facilities are much higher for reverse logistics. Smaller volume shipments mean more material handling costs, but the most significant cost difference will be in the additional labor required to identify the disposition of each product. Inventory holding costs may be higher for product in the reverse flow in some ways, and lower in others. In inventory theory, holding costs are traditionally calculated as a percentage of the product’s value. Reverse logistics product is generally worth a small percentage of the value of new product. Therefore, theory would predict that holding costs as a percent of value would be much smaller for reverse logistics product. However, the simple holding cost calculation of forward logistics fails to include consideration of the fact that the value of the reverse logistics product may be declining steadily, due to damage during handling, and due to the fact that returned product may not have been repackaged properly, which could result in more damage. Also, obsolescence and seasonality can be very important in valuing product for the secondary market. By the time a product is purchased, returned, and arrives at a returns center, several weeks may have passed. For technology products, this may be enough time to make a product that was

cutting-edge much less desirable, significantly reducing its resale value. For slower-changing, but seasonal, products, obsolescence of a different sort is important. Once a seasonal product has reached the end of its selling season, the value drops significantly. If a returned product can be dispositioned quickly, it may be possible to sell the product off during its season. For these reasons, holding cost for returned product may be lower than the costs for new product. A final consideration in holding costs is shrinkage or theft. Because returned product is less desirable than new product, it is less desirable to steal. Also, because the product is worth less than new product, when it is stolen, the loss is less. However, this fact can lead to fewer preventive measures being in place, allowing for higher theft rates. Inventory management not consistent An extensive body of literature has been focused on proper inventory management methods for forward distribution (Silver et al., 1998). Unfortunately, many of the assumptions required for traditional inventory models do not apply for the reverse situation. Traditional economic order quantity and reorder point methods require certain supply and information about uncertain demand (i.e. the mean and standard deviation of demand per week). Unfortunately, neither of these situations is met in reverse logistics. Unlike the assumptions of forward logistics models, the arrival of product in the reverse channel tends to be random. In traditional inventory models, uncertainty usually arises in the amount of product that will be demanded; the price at which the product will be sold is assumed to be known. In reverse logistics, arrival of product tends to be very random, and the price at which the product will be sold is also unknown. The result is that traditional models of inventory management cannot be applied to these situations. Another difference is that the management of reverse logistics inventory tends to be more affected by seasonal accounting deadlines than new product shipments are. Reverse logistics managers are often told by upper management to quickly sell a large quantity of product before the end of a quarter, in order to reduce inventory values for reporting purposes, even though that may not be the most opportune time to sell the product.

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Product lifecycle issues more complex As Tibben-Lembke (2000) has indicated, the product lifecycle plays a very different role in reverse logistics than it does in forward. It is well documented that the role of marketing and logistics (Rink and Swan, 1979) changes over the life of a product. The changing stages of the product lifecycle offer some particular challenges in the reverse logistics setting. In the retail environment, the chief task of reverse logistics is to recapture as much possible value from the product. As a product passes through the stages of its lifecycle, the value of the secondary product will change significantly. This is especially true as demand falls and the product heads toward the end of its life. In this stage of life, it is very important to know whether the product is being phased out because that class of product will no longer be produced, or whether a particular model is being replaced by a similar one. In the former, the value of the product on the secondary markets will be very low. In the latter, the value will remain high, because interest in the product remains high overall, and value retailers will want to be able to offer a lower-priced version of a popular product. Negotiation less straightforward In forward logistics, when a supplier and buyer sit down to negotiate a sale, the negotiations are about the shipment of product some time in the future. In reverse logistics, negotiation is often about the sale of product currently at the CRC. The longer product sits, the more its value declines, so the CRC has an incentive to try to sell the product quickly to free up more space. Some brokers specialize in ‘‘forward buying’’, which is an agreement between a retailer and a broker that the broker will buy all of the retailer’s product at the end of its sales life. For example, a broker might contract with a retailer to buy all of the retailer’s women’s winter coats at the end of the selling season. Negotiating is more complicated than with new product because the quality of the product is not uniform, and the potential buyer may want to inspect the product before making an offer. Also, vendors may require that the product be demarked, or may restrict the set of brokers to which the product may be sold. Because vendor concerns are such an important factor in reverse logistics, sales to brokers tend to be very relationshipdependent. In forward logistics, a wholesaler

may be willing to sell to any company that places an order. With reverse flow product, the wholesaler will only sell to brokers that they and the vendor trust, generally based on a long history of past transactions. If a broker violates the trust of the CRC and the vendor by dispositioning a product by a method not allowed by the agreement, the vendor may never allow that broker to buy its product again. In addition to determining a price and the acceptable disposition methods, another point for negotiation would be any possible warranty to be provided by the manufacturer, which is generally not something to be negotiated with new product. Product which will be sold as-is will carry a lower price at the retail level, so it sells to brokers more cheaply, while product with even a limited warranty will sell to brokers for a higher price. Brokers typically do not like to buy small quantities of product from a variety of sources, but prefer to buy large quantities in a small number of shipments. Having larger quantities available increases the value of the product. However, this is only true to an extent. If a very large quantity of a product is available, it may be because the product did not sell well in the retail channel, in which case the value on the secondary market will be very low. Marketing difficulties Marketing reverse logistics product can be much more complicated than marketing new product. Vendor concerns about brand equity can constrain a broker or secondary market retailer’s ability to market product. There are several chains of stores in the USA that specialize in purchasing from manufacturers large quantities of new product that has reached the end of its sales life. A condition on these purchases is often that the retailer cannot advertise the identity of the product in advertisements outside of the store. The result is that customers will often see advertisements in newspapers that relate that, for example, a 19-inch TV set from a ‘‘major manufacturer’’ is for sale at a certain price. The customer only learns the identity of the manufacturer at the retail store. Unfortunately, such restrictions make identifying and communicating with customers interested in purchasing remanufactured product more difficult.

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Such restrictions are also motivated by vendors concerned about market cannibalization. Many vendors believe customers are only likely to buy a given number of their products, and sales of reconditioned, remanufactured and returned product can only increase at the expense of sales of new product. Because new product is more profitable, vendors are more interested in increasing the sales of new product. To increase customer interest in the items, the price must be significantly lower than the price of new product. For some consumers, remanufactured/refurbished product may have additional appeal for environmental reasons. For some products, remanufacturing may be the accepted norm, as is the case with some automotive products. For items like starters and alternators, a very high percentage of aftermarket sales are remanufactured items. Marketing reverse flow product is also difficult because of the uncertainty of supply. Retailers want to maintain a consistent supply of a set of products, so that, once customers learn what products the retailer carries, customers will know that they can rely on that retailer to supply them with that product. The sporadic nature of the arrival of reverse flow product makes this difficult, because the retailer selling this product cannot depend on a consistent supply. Some apparel manufacturers in the USA opened outlet stores to sell returned and seasonal overstock product. However, they quickly discovered that these sources did not provide the consistency of supply needed to supply a network of outlet stores. The result has been that the apparel manufacturers have been forced to begin manufacturing product specifically for sale at these outlet stores (Consumer Reports, 1998). Visibility of entire process lower Unlike forward logistics, incoming reverse logistics product is not tracked extensively, because of the lack of the information system (IS) resources necessary to do this. Because reverse logistics is generally a lower priority for firms, the IS resources necessary to increase its efficiency and effectiveness generally are not available. Rogers and Tibben-Lembke (2001) found that lack of IS resources and a general lack of recognition of the importance of reverse logistics were two of the largest barriers reverse logistics executives face.

This lack of visibility of product coming into a returns center makes short-term operational planning more difficult. At a centralized returns center, an ideal IS would allow the CRC visibility of all returned items, including those items still at the store waiting to be sent to the CRC, and those items in transit to the CRC. This would allow planners to see how many units of a particular type are expected to arrive, which would allow them to schedule processing and sortation planning more efficiently.

Conclusions In this paper, we have considered many ways in which reverse logistics processes differ from forward logistics processes in the retail environment. In talking with practitioners, many have reported that they at one time held the mistaken belief that reverse logistics was just like forward logistics, just driving the trucks the opposite way. As we have demonstrated in this paper, the differences are considerable and cover a wide variety of aspects of logistics. The lack of uniformity in the physical condition of products has many consequences for reverse logistics. It means sorting and evaluation of product must be done, which is not necessary for new product in the forward channel. It also complicates the negotiations to sell the product, and vendor concerns reduce the number of possible buyers of the product in a way not typically seen with new product. The result is that the reverse logistics of products offers many challenges and opportunities not present with forward logistics. Many techniques have been discovered to maximize the effectiveness and efficiency of forward logistics. As this paper illustrates, reverse logistics has many significant differences from forward logistics. Companies and researchers are just beginning to appreciate these important differences, and much future research is needed to discover how to best structure reverse logistics operations to deal with these special challenges.

References Carter, C.R. and Ellram, L.M. (1998), ``Reverse logistics: a review of the literature and framework for future

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investigation’’, Journal of Business Logistics, Vol. 19 No. 1, pp. 85-102. Consumer Reports (1998), `Òutlet malls: do they deliver the goods?’’, Consumer Reports, August, pp. 20-5. Council of Logistics Management (CLM) (1999), 1999 Membership Roster, Bylaws, Article I, Council of Logistics Management, Oak Brook, IL, p. 506. Dowlatshahi, S. (2000), ``Developing a theory of reverse logistics’’, Interfaces, Vol. 30 No. 3, pp. 143-55. Flapper, S.D.P. (1995), `Òn the operational logistic aspects of reuse’’, Proceedings, 2nd International Symposium on Logistics, July. Fleischmann, M., Bloemhof-Ruwaard, J., Dekker, R., van der Laan, E., van Nunen J.A.E.E. and van Wassenhove, L.N. (1997), ``Quantitative models for reverse logistics: a review’’, European Journal of Operational Research, Vol. 103 No. 1, pp. 1-17. Guide, V.D.R. Jr, Jayaraman, V., Srivastava, R. and Benton, W.C. (2000), ``Supply-chain management for recoverable manufacturing systems’’, Interfaces, Vol. 30 No. 3, pp. 125-42. Jedd, M. (1999), ``Going forward with reverse logistics’’, Inbound Logistics, August, pp. 46-52. Jedd, M. (2000), ``Returns happen: reverse logistics online’’, Inbound Logistics, February, pp. 22-8. Klausner, M. and Hendrickson, C.T. (2000), ``Reverselogistics strategy for product take-back’’, Interfaces, Vol. 30 No. 3, pp. 156-65. Murphy, P.R. (1986), `À preliminary study of transportation and warehousing aspects of reverse distribution’’, Transportation Journal, Vol. 35 No. 4, Summer, pp. 12-21. Murphy, P.R. and Poist, R.P. (1989), ``Management of logistical retromovements: an empirical analysis of literature suggestions’’, Transportation Research Forum, pp. 177-84. Pohlen, T.L. and Farris, M.T. II (1992), ``Reverse logistics in plastics recycling’’, International Journal of Physical Distribution & Logistics Management, Vol. 22 No. 7, pp. 5-47. Rink, D.R. and Swan, J.E. (1979), ``Product lifecycle research: a literature review’’, Journal of Business Research, Vol. 7 No. 3, pp. 219-42. Ritchie, L., Burnes, B., Whittle, P. and Hey, R. (1999), ``The benefits of reverse logistics: the case of the Manchester Royal Infirmary Pharmacy’’, Supply

Chain Management: An International Journal, Vol. 5 No. 5, pp. 226-331. Rogers, D.S. and Tibben-Lembke, R.S. (1999), Going Backwards: Reverse Logistics Trends and Practices, RLEC Press, Pittsburgh, PA. Rogers, D.S. and Tibben-Lembke, R.S. (2001), `Àn overview of reverse logistics practices’’, Journal of Business Logistics, Vol. 22 No. 1. Ross, J.R. (1998), ``Returns gatekeeping seen as key to efficient reverse logistics’’, Stores, February, pp. 49-50. Silver, E., Pyke, D. and Peterson, R. (1998), Inventory Management and Production Planning and Scheduling, 3rd ed., John Wiley & Sons, New York, NY. Stock, J.R. (1992), Reverse Logistics (white paper), Council of Logistics Management, Oak Brook, IL. Stock, J.R. (1998), Development and Implementation of Reverse Logistics Programs, Council of Logistics Management, Oak Brook, IL. Theirry, M., Salomon, M., van Nunen, J. and van Wassenhove, L. (1995), ``Strategic issues in product recovery management’’, California Management Review, Vol. 37 No. 6, pp. 114-35. Tibben-Lembke, R. (2000), ``Life after death: reverse logistics and the product lifecycle’’, working paper, University of Nevada, Reno, NV.

Further reading Chain Store Age, ``Simple solutions for reverse logistics’’, Chain Store Age, October 1, p. 126. Fleischmann, M., Krikke, H.R., Dekker, R. and Flapper, S.D.P. (2000), `À characterization of logistics networks for product recovery’’, Omega, Vol. 28 No. 6, pp. 653-66. Kopicki, R., Berg, M.J., Legg, L., Dasappa, V. and Maggioni, C. (1993), Reuse and Recycling ± Reverse Logistics Opportunities, Council of Logistics Management, Oak Brook, IL. Teunter, R.H., van der Laan, E. and Inderfurth, K. (2000), ``How to set the holding cost rates in average cost inventory models with reverse logistics?’’, Omega, August, Vol. 28 No. 4, pp. 409-15.

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