November 19, 2014
strategic insight | Reverse Logistics

A complicated question

A complicated question

Which is better: one centralized reverse logistics processing center or several regional ones? Experts say the answer depends on a lot more than just cost and efficiency.

By Toby Gooley

One of the most important decisions a company can make concerns the configuration of its distribution network. How many warehouses or DCs should there be, where should they be located, and who will operate them? It's a complex matter, and the decision rests on a host of interlocking factors. When reverse logistics is involved, that decision becomes even more complicated. Although the typical site selection considerations for any warehouse or DC—land costs, labor availability, and taxes, for instance—still apply, there are other factors that are unique to reverse logistics.

A question that bedevils reverse logistics operations is whether to centralize or decentralize returns processing. In other words, which is better: a single processing center for the entire market, or multiple regional facilities? As is true in many business decisions, it depends—not just on cost and efficiency but also on the company's business model, on the service it promises to customers, and on regulatory requirements, among other factors. Here are suggestions from industry experts on how to go about answering this important question.

For some companies, a single centralized returns processing center is the right way to go. But, as is the case with any business decision, each option has its upsides and downsides. On the plus side, a central processing center offers the benefits of economies of scale, says Dr. Robert Lee Gordon, program director, reverse logistics management at American Public University. For example, having just one facility creates opportunities to consolidate returned goods from retailers into larger loads and thereby reduce freight costs.

That doesn't apply in business-to-consumer (B2C) e-commerce, where returned goods typically arrive via the postal service or parcel carriers, notes Steve Sensing, vice president and general manager, healthcare, technology, and retail for Ryder Supply Chain Solutions. A central facility does pay off in the next stage in the reverse logistics life cycle, though. "You can move products back out into different channels in a more efficient way," Sensing says. When planning facilities, he adds, it's important to optimize "not just the returns process but also your ability to resell the product and gain a benefit on the outbound side."

Concentrating activity in one location can boost productivity and efficiency. "It allows for a straightforward, simplified process," says Dave Vehec, senior vice president, retail for Genco. "You have everything in one place, and you're handling it all the same way." As a result, retailers, suppliers, and service providers don't have to deal with inconsistent practices or policies from one processing location to the next. Plus, they only need to provide specialized equipment, services, and personnel in one location, which helps keep costs down, he says.

Centralizing returns processing can be beneficial from a legal, tax, and regulatory standpoint, too. There can be significant differences from state to state when it comes to labor laws, payroll and inventory taxes, and regulations concerning the disposal of returned goods, particularly those deemed to be hazardous materials, Gordon says. Having only one set of state laws and taxes to deal with makes it easier and less costly to adhere to those requirements.

But a single returns processing center may become a liability for companies that serve customers across the United States, especially if it's located on one of the coasts, says Alan Amling, vice president, global logistics and distribution marketing for UPS. "Think about a West Coast returns center serving an East Coast customer," he says. "That returned good could be making at least two trips across the country. That's a lot of time, cost, and carbon."

For a company that promises a quick turnaround on inspections, repairs, and replacements, the time required to transport that product to a central point and then back to the customer may be too great. Furthermore, a single processing center may be located far from some of the manufacturing plants or retailers it serves, putting some customers at a cost and cycle-time disadvantage compared with those that are located nearby, Vehec says. Retailers might have to set up pool points in order to get returned merchandise from the store or customer to a single point, adding multiple touches and increasing transportation costs.

And then, as Sensing points out, there's the "eggs in one basket" issue. "You have to plan for disaster recovery," he says. "If there is a natural disaster or man-made interruption, then you will lose your ability to process returns"—itself a potential disaster for customer service and a company's reputation.

Establishing regional returns processing centers allows a company to optimize transportation time and cost based on where customers are located and the business strategy for serving them, Amling says. "If the returned item is in good condition and can be resold, then this optimization applies to the next sale as well," he notes. If, for example, a company has both an East Coast and a West Coast reverse logistics center, both the return and the next outbound shipment will likely stay within the same region.

A network of regional facilities can reduce the total cycle time from return authorization request to a cash-generating resale. When reverse logistics hubs are close to both the original sale and resale locations—for example, near population centers with large concentrations of retailers—they can make a disposition determination and get products to secondary markets faster, Vehec says.

Another important factor is the impact on customer service, says Sensing. "If returns centers are repairing and refurbishing items and sending the same units back to the customer, then there is value in having multiple repair nodes because it speeds up that cycle and improves customer service," he observes.

From a facility cost standpoint, regional centers have some advantages. They can be smaller and less costly to build and operate. Often, they are multiclient facilities managed by a third-party logistics company (3PL), which means that customers share the overhead. A network of sites allows companies to distribute work and labor across facilities if demand increases, Gordon says. Furthermore, he adds, in times of natural disaster, only a portion of capacity will be affected, and returns could be diverted to another location until the affected facility is up and running again.

One potential downside of regional processing centers is that the quantities of items being returned to each facility may be small, which raises the per-unit cost of processing and transporting them. Another is that it requires replicating processes, equipment, infrastructure, labor, information systems, and management structures to ensure consistent service. There's also the need to maintain inventory in multiple places, which further drives up costs. On top of that, it's necessary to ensure that items are returned to the right location—there are more inventory and customer service management issues to stay on top of, Sensing says.

In addition to those already discussed, there are many other factors to consider when deciding whether to centralize returns. Depending on the company, the industry, the product, and customer service standards, some of those factors will carry more weight than others. These might include the cost of opening standalone returns processing centers compared with dedicating sections of existing warehouses and DCs to that function, or the cost and service advantages of using a dedicated or multitenant facility operated by a 3PL. In the latter case, Amling says, "What matters is that your reverse logistics strategy is providing the right customer experience at the right cost."

The volume and complexity of the product will also drive some decisions from a network optimization and "total landed cost" perspective, Sensing says. For instance, for some products, it may be difficult to find the necessary specialty repair capabilities in all geographies; companies may have to work with different providers in different areas or find a way to develop the capabilities they need in underserved locations, he explains.It pays to consider a company's future plans when deciding whether to centralize or use multiple locations, Gordon says. For one thing, a single change in corporate policy could have a drastic impact on returns and leave you with too much or too little capacity. For another, you could overspend if you make decisions based solely on current conditions. "You should understand what the rate of returns is and do everything possible to reduce that before making a final decision," he says. "If you don't, then you'll be addressing the problem as it is today instead of solving problems and **ital{then} deciding what type of facility you need and where."

Changes in product lines and market strategies as well as consumer behavior can influence decisions about the number and location of returns processing centers. "Some of the change going on now in reverse logistics revolves around changing consumer expectations," Vehec says. E-commerce, with its high rates of product returns, raises questions about where and how to handle returned merchandise, he explains. "The way product is coming back from consumers is changing. I don't know if anyone knows what that will look like in five to 10 years." (For more on the differences between e-commerce and traditional industrial or retail returns, see "The difference is in the details".)

All of the experts we consulted for this article agree: You can't make an informed decision about centralized vs. regional returns processing without a comprehensive, holistic network analysis that looks at all relevant factors. That includes not just costs but also strategic considerations like customer service and your company's value proposition to customers. Says Amling, "Do you want to differentiate on customer service, lowest price, widest selection? Your returns strategy should be consistent with your business strategy."

About the Author

Toby Gooley
Contributing Editor
Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Senior Editor at DC VELOCITY and Editor of DCV's sister publication, CSCMP's Supply Chain Quarterly. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.

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