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.
Contributing Editor Toby Gooley is a writer and editor specializing in supply chain, logistics, and material handling, and a lecturer at MIT's Center for Transportation & Logistics. 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.
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.
CENTRALIZATION: PROS AND CONS
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.
REGIONAL CENTERS: PROS AND CONS
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.
LOOK TO THE FUTURE
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."
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.