Once regarded as a necessary evil and a drag on the bottom line, reverse logistics has emerged as a critical capability for third-party logistics providers trying to capture a share of booming secondary market sales. As online auctions, flea markets, value retailers and dollar stores capture a bigger share of consumer spending, reverse logistics and the technologies supporting it is becoming a hot commodity.
The U.S. secondary market is valued at approximately $329 billion. Liquidators such as GENCO Marketplace and Liquidity Services account for $127 billion, the biggest share of the market, followed by auctions such as eBay and Amazon, $99.4 billion; flea markets, $33 billion; value retailers such as Big Lots, Marshalls and TJ Maxx, $30 billion; and dollar stores such as Dollar General, Dollar Tree and Family Dollar, $17.6 billion.
The $127 billion liquidation market has two components: market returns, including excess inventory, closeouts and seasonal goods, $73 billion; and consumer returns, $54 billion.
Returns are costly. In 2011, returns as a percentage of total U.S. retail sales comprised 8.9 percent, equal to $217 billion, according to the National Retail Federation. Returns incur ongoing freight, storage, labor and processing costs. Many returned goods are time-sensitive and devalue quickly, as much as 10 percent a month for some consumer electronics, cell phones and fashion items. The returns process — including returns, testing, repairs, refurbishments, resale/remarketing, and disposal of goods — is long and complex, typically involving a three- to six-month liquidation cycle.
There are options for managing reverse logistics. Modules are included in major enterprise and software-as-a-service solutions for supply chain and product lifecycle management. Vendors large and small, including software giant SAP, offer reverse logistics software.
DEX Systems’ reverse logistics management suite includes five main modules: returns, repair and recycle, fulfillment, analytics and planning. Clients of the Camarillo, Calif.-based company, a provider to Oracle’s PartnerNetwork and E-Business Suite, include Cisco, DHL, ReCellular and Diebold.
ReCellular recycles more than 5 million cell phones annually, selling about 60 percent in the U.S. and the rest overseas. The Ann Arbor, Mich.-based company grew rapidly and needed to upgrade its systems for managing returns and recycling. ReCellular needed a configurable product capable of accommodating growth; company CEO Stephen Manning told the Wall Street Journal that within a few years, the used market could account for a fifth of all cell phone sales in the U.S.
“DEX Systems was able to demonstrate to ReCellular the total workflow process we need to manage every step of our process in one comprehensive management tool,” Manning said.
Reverse logistics, including product returns and disposition, is the last phase of what global supply chain management company GENCO ATC describes as product lifecycle logistics. By framing returns as a component of a total product lifecycle, 3PLs, retailers and manufacturers can manage products as single inventory streams rather than separate streams of raw materials, finished goods, returned products, repairable products and liquidation products.
A product lifecycle approach encourages companies to follow products through the forward and reverse supply chains. By tracking end-to-end costs and activities, companies have a much better idea of true costs and their impact on the bottom line.
“Product lifecycle logistics is everything from when a product is created to its disposition as secondary goods,” said Tim Konrad, senior vice president of reverse logistics for Pittsburgh-based GENCO ATC.
GENCO Marketplace, a subsidiary of GENCO ATC, is the nation’s largest volume wholesaler and liquidator of surplus inventories. GENCO Marketplace, or GMP, and other liquidators acquire goods through closeouts, overstocks and returns and remarket them to discount retailers, eBay power sellers, flea marketers, auctioneers, thrift shop operators and other sellers.
Some products are recycled, donated or harvested for parts and materials. Pallet quantities of goods are sold by Internet auction on GMP’s business-to-business Web site, and individual items are sold on e-commerce sites including eBay and GENCO ATC’s own consumer Web site. Goods include consumer electronics, apparel, jewelry, shoes, furniture, automotive parts and computers.
GMP was founded in 1992 to serve GENCO ATC’s reverse logistics customers who wanted to liquidate some or all of their product returns. The company operates returns centers and sells returned merchandise for some of the world’s largest retailers and manufacturers.
GMP’s arrangements with customers are flexible. It sometimes purchases goods directly from a retailer’s return center. The company also sells products for retailers or manufacturers on a consignment basis, keeping a portion of the sale as a commission, or purchases inventories outright.
GENCO ATC handles about $5 million a day in secondary market sales and processes more than 600 million returned products annually. The company operates four multiclient, standalone returns facilities and another eight or nine dedicated reverse logistics facilities for manufacturers and retailers. The facilities range from 120,000 to 300,000 square feet, Konrad said.
GMP has exclusive contracts with major retailers, ensuring a steady flow of merchandise year-round. The company this year signed an exclusive contract to liquidate returns for The Home Depot. The goods are mostly sold in bulk lots to customers who harvest parts or clean them up for resale in secondary markets.
“It has been a very successful partnership,” said Tom McElroy, vice president of marketing and e-commerce for GENCO ATC.
Successful reverse logistics and channel management is heavily reliant on technology. Brand protection, for example, is a critical issue for many retailers and manufacturers. Fearful of devaluing their brands, they are reluctant to allow their products to be sold in certain secondary channels unless protections are in place. Steps could include removal of labels, restrictions on channels or requirements that goods be destroyed or exported. Approximately 10 to 20 percent of the goods GMP handles are exported, McElroy said.
Advances in reverse logistics software allow goods to be tracked by serial number, reducing the risk they’ll wind up in prohibited channels and preventing unauthorized customer service and returns.
GMP employs what Konrad describes as smart returns management, or managing the returns process with maximum accuracy, velocity and visibility. Given the variety of optional and specialized features in products such as personal computers, such as hard drives or Web cams, tracking by serial number often isn’t good enough. To maximize recovery rates, PCs must be tracked on an individual basis.
“Even though products might share the same SKU, they could have different bills of materials, which means different values and possibly different secondary market channels,” Konrad said.
Steps in the smart-returns management process include analyzing product details such as size, weight, lifecycle and seasonality, and modeling different disposition strategies. Return costs, ROI and recovery values are analyzed relative to alternate strategies. Products are scanned and analyzed using processes and technologies developed for GENCO ATC’s proprietary R-Log reverse logistics software.
The processes employed by GENCO ATC, a reverse logistics pioneer, are underpinned by business rules embedded in the R-Log system. The rules are defined by retailers and their vendors and help the company identify optimal product disposition methods, such as liquidation, disposal, return-to-vendor or return-to-stock.
GENCO ATC also uses warehouse management software developed by RedPrairie, a Waukesha, Wis.-based provider of productivity software. The RedPrairie WMS is used for order and inventory management, to support product postponement and warehouse kitting services and to operate distribution centers in conjunction with GENCO ATC’s own proprietary WMS.
The secondary market, which once relied on auctions for moving liquidated inventories, has diversified and become more efficient. In a survey of approximately 600 small to midsize liquidators, GMP found the vast majority of them are embracing multichannel strategies that include online sales through eBay and other Internet marketers and secondary channels such as flea markets and dollar stores.
Much has been written about the “hourglass” economy in which even in an economic downturn, retail thrives at the high and low ends. First quarter 2012 results from the major dollar stores and online auctions indicate the sector is enjoying robust growth and showing strong potential for future growth.
“We have seen tremendous growth in the number of value-conscious consumers,” McElroy said. “The bottom line is that this market is growing, and we are glad to be part of it from a supply chain perspective.”
Dollar General reported record sales, operating profit and net income for its fiscal 2012 first quarter. The company plans to open approximately 625 new stores this year. With 10,052 stores in 40 states, Dollar General has more retail locations than any retailer in America.
Dollar Tree reported a 11.5 percent increase in year-over-year consolidated net sales for the first quarter of 2012 and a 7.1 percent increase in comparable store sales. Family Dollar Stores’ fiscal first quarter net sales were up 7.6 percent and net income was up 8.1 percent. The company opened 101 new stores in 2011, 20 percent more than in the first quarter of 2010.
Reverse logistics is also a key part of industrial and energy supply chains. Logistics Management Services, a non-asset-based 3PL with headquarters in St. Louis, started 16 years ago as a service provider for chemical giant Monsanto. The company primarily serves the chemical industry and recently branched out into retail and pharmaceuticals.
Many companies see reverse logistics as a necessary evil; a lot of money can be lost if equipment and materials are written off or scrapped, said Tracy Meetre, vice president of supply chain solutions for Logistics Management Services. For the chemical industry, reverse logistics is a natural extension of the outbound shipping process. It’s a kind of reverse pooling, requiring more visibility and different processes and capabilities.
Logistics Management Services manages the return of containers for shippers of chemicals and hazardous liquids. The containers are expensive — cylinders with dispensing units cost $5,000 to $12,000 each, and totes, with 293-gallon and 549-gallon capacities, each cost more than $3,000. The containers must be tracked, picked up and returned for cleaning or reuse. LMS returns approximately 75 cylinders and 150 totes a month.
To optimize returns from multiple sites, LMS uses proprietary software the company developed in 1999 for outbound logistics. It added reverse logistics capabilities about six years ago.
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