Reverse logistics process: How it works, it’s role in retail returns and optimization strategies

And yet so many links in the supply chain remain unseen. Reverse logistics is a good example of one of those invisible processes — despite the fact that many of us interact with it on a regular basis and it’s vital to the success of many businesses (particularly those in the retail industry). Let’s take a closer look at reverse logistics, its value, its different forms, how it works, and how it can be optimized to deliver key business goals — as well as examining how process mining can take these business benefits to a whole new level.

Read more: What is causing Supply Chain Issues in 2023? And what can you do about them?

What is reverse logistics?

Reverse logistics management starts where traditional logistics ends — with the end user. Where the standard supply chain moves goods from manufacturer to consumer, the reverse supply chain deals with the journey of products going in the opposite direction. It manages returns, repairs, recycling, or disposal of items that customers send back because they're defective, unwanted, or no longer needed.

In simple terms, reverse logistics is about managing the flow of products upstream, from consumption back to a suitable destination, be it a warehouse, distribution hub, repair center, recycling facility, or even back to the manufacturer. Crucially, the end goal of reverse logistics is to recoup value from the product or minimize the cost of its disposal.

How does reverse logistics work and when is it used?

Reverse logistics processes are triggered when businesses are called on to handle returned products. In a process known as disposition management they determine how and to where that returned inventory will be directed — whether it can be reintegrated into the inventory pool for reorder, refurbished, sold on to a third-party seller, sent back to the manufacturer, recycled, or simply discarded.

While (hopefully) simple from the customer’s perspective, this process requires close coordination across multiple departments from the business’s side, for example:

• Warehouse / inventory management: where a returned product is inspected for resale, refurbishing, or disposal, and inventory records are updated.
• Quality control / refurbishing: damaged items can be sent for repair, then further quality assurance checks should be conducted.
• Customer returns teams: this team manages the logistics, communicates with customers, and ensures proper refunds.
• Supplier or manufacturer: suppliers handle warranty-related returns, offering replacements or repairs.
• Logistics and transportation: these teams coordinate product pickups and returns to the right destination.
• Environmental Compliance and Disposal Teams: for electronics or hazardous items, dedicated teams ensure environmentally compliant disposal or recycling as per regulations.

What are the different types of reverse logistics?

Reverse logistics can be subdivided into a range of categories, the most common of which is ‘Returns Management’. This is a key process for retailers and manufacturers, involving the handling of customer exchanges, refunds, and returned products — whether they’re defective, damaged, unwanted, or no longer needed. Other types of reverse logistics include:

• Remanufacturing and Refurbishing: Some products, especially electronic devices and automotive components, can be refurbished or remanufactured to extend their useful life. Reverse logistics can involve disassembling, repairing, and upgrading these items for resale.
• Recycling and Waste Management: Reverse logistics can also encompass the recycling and proper disposal of products and materials.
• Product Recall Management: Products found to be unsafe, defective, or requiring recall for regulatory compliance (in the food and pharmaceutical industries for example) often require reverse logistics to recall and return those products to the manufacturer or designated location for proper handling, repair, or disposal.
• Reuse and Resale: The reverse logistics process can be used to return products still in sufficiently good condition to be resold as refurbished or ‘open-box’ items — where goods’ packaging has been opened but the product has not been used or damaged. This involves inspecting, testing, and repackaging the products for resale.
• Packaging and Transportation: Managing the reverse flow of materials often requires specialized packaging and transportation solutions to ensure that products are returned efficiently and without damage.
• Warranty and Service Returns: When a customer wishes to return a product that has been sold under warranty, reverse logistics processes are used to manage the return and repair or replacement of faulty items.
• Asset Recovery: Typically more of a business-to-business use case, this is where companies may recover assets, such as equipment, machinery, or leased items, through reverse logistics after they are no longer needed, or at the end of their lease agreements.
• Product End-of-Life Management: When inventory reaches the end of its useful life and cannot be refurbished or resold, reverse logistics handles its disposal, ensuring that it is properly recycled or disposed of in an environmentally friendly manner.

What makes reverse logistics so important to businesses?

A reverse logistics operation is an increasingly important component of commercial success for retailers, manufacturers and e-commerce operators — essentially any business selling products rather than services. Optimized reverse logistics means an efficient flow of goods throughout their lifecycle, with maximum value being extracted at each stage.

It is particularly crucial to retail due to the sheer volume of product returns. According to the National Retail Federation, for example, U.S. consumers returned 16.5% of the goods they purchased in 2022 — costing retailers an estimated $816 billion in lost revenue.

The key commercial lever retail businesses have at their disposal to mitigate the impact of such volumes is reverse logistics. Without well marshaled returns management processes in place, operational costs can quickly spiral across transportation, storage, and handling expenses for returned products. What’s more, if returned products are not efficiently reintegrated into inventory, businesses may struggle with overstocked or understocked items, affecting overall supply chain management and profitability.

Additionally, how the returns process is handled by retailers has a material impact on customer satisfaction and their buying behaviors. It has been estimated that as much as 60% of consumers will read through a return policy. More broadly, consumers have become used to omnichannel retail and expect consistent service excellence across all touchpoints — including returns. Sub-optimal service levels here can cede competitive advantage to rivals and damage customer retention.

Find out how Swiss luxury retailer Globus has used insights from the Celonis platform to drive this omnichannel customer service excellence. Introducing logistics dashboards that visualize throughput times and cancellation and return rates in real time has decreased throughput time significantly, and reduced the overall cancellation rate by 20%.

How reverse logistics can impact sustainability

Effective reverse logistics can have a significant impact on the environmental impact of returned inventory. Firstly, it promotes the reduction of waste by seeking to identify goods that can be refurbished, repaired, or resold — rather than ending up as landfill. Similarly, reverse logistics processes often include recycling efforts to extract and reuse both components and raw materials from returned inventory.

In addition to these reactive measures, reverse logistics enables a proactive approach to promoting sustainability. By analyzing returns data, companies can identify and address the likely causes of goods being sent back — such as design, build quality, promotional language, and even the returns policy itself — and take action to address these.

Reverse logistics is a key component of the circular economy — the economic model designed to minimize waste and resource consumption by maximizing the longevity and usability of products and materials through continuous recycling, refurbishment, and reuse.

Find out more about how Celonis is supporting the sustainability efforts of global retail giant ALDI SÜD by optimizing their transportation outbound processes from central warehouses — driving down carbon emissions and transportation costs.

How do you optimize reverse logistics?

There are several areas in which a business can look to optimize its reverse logistics service. Here are some of the biggest ticket items:

• Return policies and communication: ensure you’re offering clear and customer-friendly return policies — easy to access, understand, and query where necessary.
• Supplier collaboration: work to maintain close relationships with suppliers involved in the reverse logistics processes to ensure a seamless, intuitive customer experience.
• Centralize returns processing: where practical and affordable, operational efficiencies can be gained by organizing return processing through centralized returns centers (or dedicated areas in warehouse facilities).
• Logistics and transportation efficiencies: Look to optimize transportation efficiency, from equipment use, to routing and supplier partnerships. Fewer, faster trips with returned goods saves time and money but also truncates the end-to-end return process time which can improve the customer experience.
• Automate where appropriate: carefully selected automation of key processes can streamline operations. This might include, for example, automated systems for handling return authorizations and approvals or RMA (Return Merchandise Authorization) systems that track returned items from initiation to resolution.
• Continuous data analysis: use data analytics to identify trends in why returns occur most frequently, as well as to ensure processes are optimized to extract the maximum value from each returned item, at the minimum cost.

How can process mining can help with reverse logistics?

With its capacity to model, analyze, and optimize processes across multiple business functions, process mining can enable and accelerate reverse logistics optimization.

Process mining turns operational data from business systems into a hyper-accurate, 360-degree visualization of processes, how they impact each other and how that translates into overall business performance. Celonis has taken this a step further with its development of object-centric process mining (OCPM) which funnels multiple layers of cross-business process mining insight into a single three dimensional, end-to-end process perspective.

This is ideal for addressing a cross-functional business challenge such as reverse logistics as it enables organizations to:

• Analyze customer returns data to identify any causal trends and potential opportunities to overcome them.
• Identify opportunities to extract greater value when dealing with returned goods across systems, business functions, infrastructure, or personnel — more efficient transport routing or warehouse throughput for example.
• Highlight any execution gaps or deviations from the ideal process models.
• Use process simulation to model out the impact of any reverse logistics process enhancements before any action is taken.
• Monitor the impact of any change measures and team adherence to new process models.

Celonis has enjoyed considerable success tackling the supply chain management challenges at the heart of reverse logistics, for retail and beyond, for some time. The Celonis platform has been used to drive real-time data, process intelligence, and targeted action to provide retailers (and others) with optimized cross-docking, inventory management, and order management processes. Take, for example, DHL's EUR 14.2 billion supply chain division, which has leveraged the Celonis technology to improve throughput at its warehouses. Workload distribution was optimized for picking, packing, palletizing, and loading processes.

With a high definition view, real-time actionable insights and process modeled solutions, process mining can provide the ability to drive continuous improvement into efficient reverse logistics solutions.