Reverse Logistics Systems: Definition & Challenges

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  • 0:03 What Is Reverse Logistics?
  • 1:09 How Reverse Logistics Works
  • 2:16 Why Bother With…
  • 3:18 Example
  • 4:04 Lesson Summary
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Lesson Transcript
Instructor: Alison Gu
Companies have largely designed their supply chains to move goods in only one direction. However, when there are returns or recalls, goods have to move both ways. In this lesson, we look at the reverse logistics that makes such movement possible.

What Is Reverse Logistics?

So you are standing in line with your faulty widget to get it repaired. After explaining to the person behind the counter that it just doesn't work, they take it, give you a refund, and put it in a cart. You probably go along with your day not thinking about the widget any further, but for the company that manufactured the widget, your return just presented a whole new set of challenges. In short, they have to use reverse logistics in order to retrieve the widget and see what the best course of action is to gain the highest level of profit. Reverse logistics is the flow of sold goods back to the company in the opposite direction of movement of the supply chain.

But wait, you're just sending a widget back - how is that a challenge for a company? Perhaps it would help to think about it like this. A supply chain is set up like a stream that continually shifts materials downstream. Something being returned is going upstream. Sure, you could just let it flow down and be a waste. But what if there is something that could be profited from that widget that just floated away? This is why companies have a real interest in reverse logistics.

How Reverse Logistics Works

As you might expect, reverse logistics works the same way as a typical supply chain but goes in reverse. Therefore, a product will go from the store to the customer distribution center, then back to the manufacturer's warehouse. However, here it is very likely for the item to change course. While the supply chain goes back to factories, a returned good must instead go to a quality assurance department. It is here that the decision on what to do will be made.

In many cases, a good can quickly be repaired. However, people don't like to buy a good that has been returned. As such, goods are often sold as refurbished. A refurbished good is one that has been returned to the manufacturer and been repaired or refinished. This can often come with a considerable savings to the consumer. However, if simple repairs can't fix a good, it will likely be scrapped and have its parts returned to the supply chain. Of course, there is a chance that a returned good could be indicative of a bigger problem. That could result in a recall in which all related goods are returned for inspection to ascertain that they meet quality expectations.

Why Bother with Reverse Logistics?

So why should a company bother with all of this? Not surprisingly, there are a number of reasons, and they all have to do with money. First of all, a company has spent a lot of money to buy the parts necessary to make a good. By refurbishing the good, it can regain some of that money. Likewise, by scrapping it and sending the parts back to manufacturing, it can regain some money, although not as much as it would if the widget could be refurbished. In any event, the end result is to maximize profits.

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