Krikke et al (2013) revealing an invisible giant

Resources, Conservation and Recycling 73 (2013) 239–250

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Resources, Conservation and Recycling journal homepage: www.elsevier.com/locate/resconrec

Revealing an invisible giant: A comprehensive survey into return practices within original (closed-loop) supply chains Harold Krikke a , Dianne Hofenk c , Yacan Wang b,∗ a b c

School of Management, Open University Netherlands, P.O. Box 2960, 6401 DL Heerlen, The Netherlands School of Economics and Management, Beijing Jiaotong University, No. 3 Shang Yuan Cun, Hai Dian District, 100044 Beijing, China Marketing and Consumer Behaviour Group, Wageningen University, P.O. Box 8130, 6700 EW Wageningen, The Netherlands

a r t i c l e

i n f o

Article history: Received 3 November 2011 Received in revised form 29 January 2013 Accepted 6 February 2013 Keywords: Returns management Life cycle Global Survey Multiple actors and industries Value creator

a b s t r a c t Forward supply chain actors are increasingly involved in the full life cycle of their products and the packaging used. Where in the past these were disposed of via (public) waste management systems or sold in cascade markets, now returns management becomes key to focal companies. Moreover, recent literature emphasizes that returns can be a value creator rather than a cost of business as it can save the environment, provide critical resources and customer value. But relevant, up-to-date data on returns and return practices is scarce, whereas such data is essential to show the potential value of returns and make a business case for returns management to practitioners. Based on a global survey among manufacturers/wholesalers/retailers and third party service providers, this paper presents comprehensive descriptive statistics on and analysis of current return practices. We develop and test propositions on the drivers, volumes and value of different returns along the life cycle; show the inefficiencies in current return practices leading to value destruction instead of the advocated value creation; and compare return practices in different regions and industries. We also provide recommendations for converting value destruction into value creation. Although progress is slow, there are hopeful signals that the potential of returns managements will be unlocked in the near future. © 2013 Elsevier B.V. All rights reserved.

1. Introduction Products and other items such as packaging are returned from the market several times along the life cycle. Research shows that the value of commercial returns (returns immediately after sales) averages about 6% of sales (Guide et al., 2006; Rogers and TibbenLembke, 2001). In addition, customer rights to return products cause warranty, trade-in, and recall returns. At the end of the life cycle, end-of-life returns occur due to increasing legislation on mandatory take-back. For a long time, returns were seen as a necessary evil, which is illustrated by Thierry et al. (1995) who described product recovery management as the management of all discarded, unsold, unwanted or defect items (products/packages/pallets) to which a (manufacturing) company is legally, contractually, or otherwise responsible.

Recent literature uses the term closed loop supply chain management, which is “the design, control, and operation of a system to maximize value creation over the entire life-cycle of a product

∗ Corresponding author at: School of Economics, Beijing Jiaotong University, China.

E-mail addresses: krikke@uvt.nl (H. Krikke), dianne.hofenk@wur.nl (D. Hofenk), ycwang@bjtu.edu.cn (Y. Wang).

0921-3449/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.resconrec.2013.02.009

with dynamic recovery of value from different types and volumes of returns over time” (Guide and Van Wassenhove, 2006, p. 349).

Seen from a supply chain angle, returns can reduce environmental impact, create customer value, and provide resources. Potential revenues often exceed the out-of-pocket costs for operating the return channel (Hauser and Lund, 2003). But relevant, up-to-date data on returns and return practices is scarce, whereas such data is essential to show the potential value of returns and make a business case for returns management to practitioners (Guide and Van Wassenhove, 2006).

This paper aims to contribute to the literature by presenting comprehensive descriptive statistics on and analysis of current returns practices. From an academic point of view, research on returns management has predominantly relied on normative quantitative research methods (see Fleischmann et al., 1997 for a review) and case studies (see De Brito et al., 2005 for a review). Purely conceptual papers are also common (Thierry et al., 1995; Toffel, 2003). Prahinski and Kocabasoglu (2006) state that survey-based empirical research on returns management is a valuable research opportunity and complementary to existing research in that it can be used to provide results that can be generalized to a broader group of companies, thereby addressing the needs of the business community. Due to restrictive access to data and respondents, a survey methodology was used in less than 5% of the recent

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returns management articles (Verstrepen et al., 2007). Some studies covered returns volumes and drivers as well as recovery options (Daugherty et al., 2001; Stock and Mulki, 2009; Rogers and TibbenLembke, 1999, 2001; Tan and Kumar, 2003; Verstrepen et al., 2007).

Fewer studies investigated collection and reverse logistics systems (Scharff and Vogel, 1994). An important shortcoming is that most studies focused on a particular or a few types of returns (Autry et al., 2001; Chen et al., 2009; Feitó Cespón et al., 2009; French ˇ and LaForge, 2006; Guide et al., 2006; Skapa and Klapalová, 2012; De Koster et al., 2002; Zoeteman et al., 2010). As managing the life cycle is often seen as key success factor for products, organizations, and supply chains (Krikke et al., 2004), all types of returns should be studied integrally. Furthermore, most if not all studies had a limited geographical scope, such as the United States (e.g., Rogers and Tibben-Lembke, 1999, 2001; Stock and Mulki, 2009), Singapore (Tan and Kumar, 2003), Flanders (Verstrepen et al., 2007), Hong Kong (Chan and Chan, 2008), Czech Republic (Klapalova, 2010), and Cuba (Feitó Cespón et al., 2009). Comparisons between regions may give additional insights into the drivers and effectiveness of solutions. Finally, research incorporating multiple perspectives including service providers is scarce (Blumberg, 1999). In conclusion, the literature is rather fragmented.

We contribute to the body of knowledge by developing and testing propositions on the drivers, volumes and value of different returns along the life cycle; showing the inefficiencies in current return practices leading to value destruction; and comparing return practices in different regions and industries. We complement and update empirical data as some references are over 10 years old and give handles in order to convert value destruction into value creation.

The set-up of the paper is as follows. In Section 2, we review existing knowledge on returns management practices, in particular survey-based studies and develop propositions. Section 3 describes the methodology underlying the survey, Section 4 the findings, Section 5 a discussion of the results, and Section 6 final conclusions.

2. Literature review 2.1. Types, volumes, and value of returns According to Rogers et al. (2002), the largest category of returns are commercial returns with values ranging from 5% to 15% of sales in catalogue retailing (Autry et al., 2001) to even 35% for e-commerce retailers (Gentry, 1999). Warranties and recalls are also an important concern, especially in the early period after sales (Stock and Mulki, 2009; Tan and Kumar, 2003).

We distinguish between returns early in the life cycle (commercial and warranty returns) and returns later in the life cycle (end-of-use (EOU) and end-of-life (EOL)). Early returns preferably go back to the original market. EOU returns involve all items returned which—after some period of operations—are of no longer use to the original owner, but for which new customers can be found in cascade markets, possibly at lower prices (Guide and Van Wassenhove, 2001). The original supply chain, in particular the brand owner, is responsible for returns at the end of the life cycle, effectuated by environmental regulations. In this paper, the EOL stage equals ‘waste’ which is always reached at some point in time.

As a consequence, EOL returns exceed commercial, recall, and warranty returns in volume. Yet they only represent material value as reuse is no longer possible or viable. Note that EOU products may also be subjected to producer responsibility and that in some EU countries reuse is applied in national WEEE schemes (O’Connell et al., 2012). The final type of return that we consider is packaging (including carriers like pallets), which might be one-way (destined to be recycled) or re-usable, e.g., reusable containers or refillable

Fig. 1. Product life cycle and return types.

cartridges. Returns volumes range from 10% to 60% of forward volumes (De Koster et al., 2002). This type of returns exists throughout the life cycle. Fig. 1 maps the timing and volume of different types of returns across the product life cycle and relative to new and cascade sales. Please note that we consider here the economic product life cycle from market entry to phase out (cf. marketing textbooks such as Brassington and Pettitt, 2003). The surfaces represent total volumes of products sold (new) and returned at different moments in time. The figure is conceptual and based on data found in the literature. For example, recalls do not occur exactly three times during any products’ life cycle. Actual volume and timing of returns may vary strongly per industry and geographical area. However, we argue that the size and shape of the areas under each curve do give a reasonable indication of the magnitude of actual forward and return flows. From Fig. 1, it follows: Proposition 1. The total volume of returns over the life cycle exceeds the volume of initial sales.

Early returns still have product value and for that reason their mere existence represents a major financial loss. Later returns can be recycled at the material level, which is often mandated by regulation, such as in the European Union. Industry is not always keen on regulation as the costs involved often exceed the (perceived) value of the recycled materials (Mayers, 2007).

Proposition 2.

Most value is lost by returns early in the life cycle.

Tan and Kumar (2003) state that returns management traditionally aims at minimizing losses. Little research has been conducted on how to value the economic attractiveness of returns management (Guide and Van Wassenhove, 2001). Despite its potential value, there appears to be no decision framework for how to gain this value (Tan and Kumar, 2003).

Proposition 3. Return channels focus on damage control and efficiency, value creation is not an issue.

2.2. Drivers of returns Obviously, the drivers of returns are strongly linked to the types of returns. Commercial returns are incurred by buyer dissatisfaction, perceived defects, a lower price elsewhere, and problems with installing and handling a product (Daugherty et al., 2001; Rogers et al., 2002). This category is often marked as broken but actually non-defective. Guide et al. (2006) report 80% of No Fault Found (NFF) for commercial returns of HP and 60% for Bosch Power tools.

A remarkably large proportion (40–60%) of commercial returns is inflicted by mistakes in the (forward) supply chain; i.e., damaged and/or incorrectly shipped merchandize (Daugherty et al., 2001; Verstrepen et al., 2007). Warranty returns and recalls are increasing

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Fig. 2. Different channels for returns handling.

due to shortening time to market, quality issues, and improved customer rights (Chen et al., 2009; Krikke et al., 2004; Tan and Kumar, 2003). Ending of lease contracts or trade-ins are the main drivers for EOU returns. Since the 1990s, European and Asian countries have introduced extended producer responsibility and set quota for collection and recovery of EOL returns up to 80% of initial sales (Zoeteman et al., 2010). Only a few states in North America have followed this example. Take back legislation boosts EOL returns, but is often implemented through collective public-private partnerships, out of sight for the original supply chain actors (Zoeteman et al., 2010).

Proposition 4. Early returns are market-driven, later returns are driven by mandatory take-back regulation.

2.3. Return channels and recovery options Collection and reverse logistics of returns can be organized through the original forward channel or through a separate reverse channel (Fleischmann et al., 1997). One may use customer drop off points, retail stores, producer’s outlets or pick-ups at customer locations, depending on customer remoteness, value of the return and the driving actor (end customer, industry or government), see e.g., Pohlen and Farris (1992). Public channels (communities) play a role in both collection and processing the returns, which is often not visible to the original supply chain, but a transfer to the private industry later in the channel is possible (Scharff and Vogel, 1994).

Dekker et al. (1998) state that reverse networks typically have a convergent structure from many sources to few demand points.

Multi-channel collection serves to lower the barriers for collection as customer convenience is essential to create a sufficient rate of return. For further transportation and processing economies of scale apply, hence fewer systems are operated in parallel (Murphy and Poist, 1989).

Proposition 5. Reverse channels are converging systems with multiple collection points.

Fig. 2 represents the three stages in the reverse chain and possible systems. A key issue is whether or not organizations should establish separate channels for forward and reverse logistics. Separate channels are used most often (Stock and Mulki, 2009). Rogers and Tibben-Lembke (2001, p. 141) state that “for returns to be processed effectively and efficiently, they should usually be separated from the forward channel.”

Proposition 6. Because separate return channels prove more efficient, reverse and forward supply chains are often disconnected.

There are several options for recovery of returns. Most classifications in the literature describe five recovery options: repair, refurbishing, remanufacturing, cannibalization/harvesting, and

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recycling (Thierry et al., 1995). Tan and Kumar (2003) state that the quality of returns has a major impact on the feasibility of certain recovery options and hence value recovery. They emphasize the need for quick turnarounds in case of direct product reuse requiring agile and consequently costly return channels. This in turn lowers economic viability, and for products that quickly become obsolete (e.g., PCs lose 1% of their value per week), cascade or material recycling options come into play, especially as the life cycle progresses (Blackburn et al., 2004; Guide and Van Wassenhove, 2001).

Thus, early returns are mostly reused and later returns recycled.

Intermediate returns can be harvested for component reuse (Krikke and Van der Laan, 2011). According to Hauser and Lund (2003), total costs of remanufactured products typically range from 45% to 65% of comparable new ones, where energy amounts to roughly 20%, labour about 30%, and materials can be reclaimed up to only 5% of total value (Giuntini and Gaudette, 2003).

Proposition 7. The value of returns lowers when progressing through the life cycle, as the optimal recovery option drops in the hierarchy from product and component reuse, to material recycling and eventually disposal.

Reverse logistics activities may be outsourced to many different types of third party service providers (3PSPs), ranging from logistics companies, repair and refurbishing firms to recyclers (Krumwiede and Sheu, 2002; Meade and Sarkis, 2002). Compared to forward logistics, the type of process appears even more decisive for the choice of 3PSP as specialization is key (Tan and Kumar, 2003). There is a high number of 3PSPs jockeying for a position in the market, which can be captured in seven groups including reverse logistics specialists, LSPs with return channels-related capabilities, and allin-one service providers (Blumberg, 1999).

Proposition 8. Given the nature of the process and specialized skills needed, most return channel operations are outsourced to specialized 3PSPs. 2.4. Geographical and industry differences Because of differences in customer attitudes and retailers’ return policies, the proportion of returned product tends to be considerably higher in North America than in other parts of the world as return policies have been much more restrictive in Europe and Asia. However, return rates are rising rapidly in Europe because of new policies governing internet sales and the entry of powerful US-based resellers (Guide et al., 2006). There are also differences regarding packaging take-back. In many European countries, producers are obliged to take back packaging from customers, whereas in the US, recycling is often the responsibility of local and state governments rather than the industry. Developing country companies hardly manage their returns (Feitó Cespón et al., 2009; Klapalova, 2010). Tan and Kumar (2003) state that Asian companies are in the start-up of reverse logistics and focus on commercial and warranty returns as well as refillable units. A lack of legislation is seen as a major barrier for companies to be involved in EOL returns. Recently, a small number of Asian countries have introduced regulation for some industries, e.g., electronics (Zoeteman et al., 2010). Herold (2007) mentions infrastructural issues as a barrier.

Proposition 9. North American companies mostly deal with commercial and warranty returns, whereas European companies focus on EOL. Asian-Oceanian companies handle fewer returns than the other two and these are mostly returns early in the life cycle.

At the industry level, a key dimension appears to be the involvement of supply chain actors with the customer. The strength of the relationship depends on capital intensiveness, life cycle length, and regulations. In professional equipment, business models ensure

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intense customer relations and due to the capital value of products it is profitable to recover. At the other end of the spectrum, consumer goods enjoy short life cycles, fast value loss, and little customer contact after sales. Take for example car manufacturers (Ealey and Troyano-Bermúdez, 2000), whose involvement in the life cycle decreases as the car ages. This is countered by governments by legislation (producer responsibility). The responsibility for the disposal of EOL vehicles is put on the plate of the brand owner (Le Blanc, 2006). What goes for cars goes for many consumer products, e.g., electronics (Flapper et al., 2005). As producer responsibility mainly (though not only) applies to consumer goods, we expect higher volumes of EOL returns in B2C markets compared to B2B markets.

Blumberg (1999) states that the biggest service-repair markets are in high-tech and mostly B2B, namely computers, process control equipment, military, aerospace, and telecommunications.

Because of their capital value, technical complexity and mission critical nature, professional goods often have different business models including service level agreements with extended service programmes (Krikke and Van der Laan, 2011). As a consequence, warranty and field returns increase, but EOL volumes are lower.

EOU returns may be traded in early and more frequently for refurbishing. Long term contracts and extensive tendering reduce commercial returns. Kissling et al. (2012) discuss four operating models in closed loop supply chains; two of which aiming for profit maximization and two of which are non-profit. Although they do not provide details on return rates as % of sales nor the business relations model, it suggests that profit based models involve original supply chain actors (producer or retailer) and refurbishment of relatively early returns, non-profit models do not.

Proposition 10. Strong involvement of the supplier with the buyer over the life cycle reduces commercial and EOL returns, but increases warranty/field and EOU returns.

As buyer–supplier relationship involvement is generally higher in B2B than B2C markets, and for high-tech rather than lowtech products, we expect to see significant differences along these dimensions. According to Herold (2007), company size could play a role, however she did not find empirical evidence for this. As this study was conducted some time ago, we will also take company size into account.

3. Methodology Fig. 3 displays our overall methodological approach. Based on our literature review and ten in-depth interviews with returns experts (see Table 1), we identified a need for extensive, up-todate data on returns and return practices, which resulted in the following list of topics for our survey: return types, volumes and value, drivers of returns, return channels and recovery options. By collecting data on a global scale and for different industries, we were also able to compare regions and industries. After data collection and analysis, we again consulted seven experts (see Table 1) to discuss and interpret our findings.

3.1. Questionnaire development We developed two questionnaires to collect data from supply chain actors (manufacturers, wholesalers, and retailers) and 3PSPs, following the approach of Golicic (2007). Both questionnaires contained nearly the same questions (except for some small phrasing differences) to enable comparison between the groups, providing a test for the validity of our research results. However, some questions were not applicable to one group, or the required level of detail in answering was higher for one group than the other,

Fig. 3. Research steps.

Table 1 Experts in-depth interviews.

Informant #

Type of company

First round of interviews Reverse logistics provider 1 2 Express parcel company All-in-one provider 3 4 Recycler 5 Collective recycling system 6 Manufacturer of high-tech products Manufacturer of high-tech 7 products Electronics retailer 8 9 10

Consulting firm Consulting firm

Second round of interviews Reverse logistics provider 11 Reverse logistics provider 12 Refurbishing company 13 Manufacturer of printing 14 equipment Manufacturer of printing 15 equipment 16 Consulting firm 17 Governmental

Position of informant Account manager Product manager Commercial manager Manager public affairs Managing director Operations manager Supply chain management consultant Logistics and after sales manager Consultant Consultant CEO Account manager Managing director Manager asset recovery Operations manager Associate partner Enforcement officer

because based on the pre-test, one group was expected to have more detailed knowledge than the other.

The questionnaire consisted of five parts. In the first part we asked respondents to classify their company. Based on their answers, respondents were either directed to the supply chain actor or 3PSP questionnaire. Part two consisted of questions about return types and volumes, and drivers of returns. In part three we asked questions about collection channels, reverse logistics channels, and recovery options. Part four focused on 3PSP services for returns.

Part five concluded with general questions about company and respondent characteristics.

The questionnaire consisted of both closed and open questions. Closed questions were used to inventory current returns practices and to ensure comparability of the answers. Open

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questions were asked to allow the respondents to provide more detail (e.g., to provide an explanation). The answering options provided at each closed question were based on existing literature and the interviews. We submitted the cover letter, our directions for completing the questionnaire, and the questions to a pre-test with two academics, a manager working for a 3PSP specialized in returns services and a CEO of a branch association for returns. We modified the questionnaires according to their suggestions.

3.2. Data collection 3.2.1. Sampling procedure We collected data in a global web survey among managers involved in returns management at their companies. We invited managers of 2300 supply chain actors and 1222 3PSPs by e-mail to participate in the survey. We used the procedure recommended by Dillman (2000) to maximize response rates. A pre-announcement of the survey was made via web media, followed by a personal email invitation to participate in the survey in which a link to the survey was provided. A general reminder was sent, followed by a second personal e-mail (four weeks after the first personal e-mail).

3.2.2. Non-response bias The response to our survey showed two peaks: after the first personal e-mail and after the second personal e-mail. We consider these two peaks as the first and second response wave of our survey. We tested for non-response bias using the procedure recommended by Armstrong and Overton (1977) and compared responses of the first and second wave. Tests indicated no statistically significant mean differences between the first and second wave of both respondent groups (supply chain actors and 3PSPs), suggesting that the study does not suffer from a serious nonresponse bias.

3.2.3. Sample characteristics We received a total of 150 questionnaires from supply chain actors and 97 questionnaires from 3PSPs, resulting in response rates of 6.7% and 7.9% respectively. The response rates are somewhat low, which can be explained by the large effort we asked from respondents in answering the questionnaire: it took approximately 25 min to fill out and contained a large number of difficult questions aimed at retrieving detailed information. However, the in-depth questions and the resulting richness of the data fit our research aim. Table 2 shows the sample characteristics.

3.2.4. Respondent characteristics Approximately 95% of the respondents indicated that they have a management function, varying from general manager to all types of functional managers. Most supply chain actor respondents are operations manager (24.3%), reverse logistics manager (17.6%), or logistics manager (10.8%). The largest categories for 3PSP respondents are marketing or sales manager (25.4%), general manager (21.1%), and account manager (9.9%). On average, supply chain actor respondents have been working for the company for 9 years and they have been in their current position for 5 years. For 3PSP respondents these numbers are seven and 4 years respectively.

3.2.5. Data analysis We analyzed our data in Excel and SPSS 19. We mainly used descriptive statistics (frequencies and means). To analyze geographical and industry differences, we used cross-tabulations and chi-square tests or Fisher’s exact test, and the Mann–Whitney U test or Kruskal–Wallis one-way ANOVA.

Fig. 4. Volumes per type of returns.

4. Results 4.1. Types, volumes and value of returns In Proposition 1, we proposed that the total volume of returns over the life cycle exceeds the volume of initial sales. Fig. 4 shows how many returns supply chain actors receive as a percentage of sales (number of products sold): the average total volume of returns over the life cycle adds up to 90% of sales. Although this is less than 100% and thus does not support Proposition 1, Fig. 5 only shows the returns that are visible to the original forward supply chain actors. For example, every product once sold reaches the EOL stage sooner or later. However, not all EOL returns go back to the original forward supply chain actors. We found that supply chain actors receive on average only 25% of their products back as EOL returns.

Hence, visible returns already add up to 90% of sales, if we add to that the returns that stay invisible to the original forward supply chain actors, then the total volume of returns over the life cycle definitely exceeds the volume of initial sales. Thus, Proposition 1 is supported. It should be noted that the standard deviations of the percentages provided by supply chain actors were quite large (commercial: mean 8.39, SD 15.80; warranty: mean 9.65, SD 17.69; EOU: mean 9.88, SD 10.75; EOL: mean 25.33, SD 28.23; packaging: mean 31.35, SD 31.23; recalls: mean 4.28, SD 6.59; other: mean 33.2, SD 28.79) and that one third of the supply chain actors indicated that they did not know how many returns their company received.

Proposition 2 posited that most value is lost by returns early in the life cycle. Fig. 5 displays that 63% of the supply chain actors receive commercial returns and even 76% receive warranty returns.

On average, these companies receive 8% of the products sold back as commercial returns and 10% as warranty returns (Fig. 4). Only 25% and 37% of the supply chain actors receive EOU and EOL returns, respectively (Fig. 5). Companies that do receive these returns indicate that on average they receive 10% of sales back as EOU returns

Fig. 5. Occurrences of returns as experienced by respondents.

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Table 2 Sample characteristics.

3PSPS (%) Company type Logistics service provider Repair company Remanufacturer/refurbisher Recycler Call centre (help desk) Field service All-in-one provider Other 3PSP Market Business to business Business to consumer Both B2B and B2C Annual sales (in US dollars) Less than 5 million 5–9 million 10–24 million 25– 49 million 50–99 million 100–499 million 500–999 million More than 1 billion Number of employees Less than 10 10–49 50–99 100–499 500–999 More than 1000 Company headquarters North America Europe Asia or Oceania Central or South America Middle East or Africa

Supply chain actors (%) Company type Manufacturer Wholesaler Retailer

78.0 8.7 13.3

Industry Consumer goods Professional equipment Other manufacture

28.8 47.9 23.3

77.5 7.0 15.5

Business to business Business to consumer Both B2B and B2C

64.9 25.7 9.5

21.4 7.1 20.0 11.4 2.9 12.9 5.7 18.6

Less than 50 million 50–99 million 100–249 million 250–499 million 500–999 million 1–10 billion More than 10 billion

31.5 6.8 11.0 6.8 8.2 21.9 13.7

9.9 21.1 9.9 21.1 4.2 33.8

Less than 100 100–499 500–999 1000–10,000 More than 10,000

23.0 17.6 4.1 25.7 29.7

40.8 33.8 14.1 9.9 1.4

North America Europe Asia or Oceania Central or South America Middle East or Africa

40.5 20.3 31.1 5.4 2.7

36.1 9.3 4.1 1.0 2.1 2.1 35.1 10.3

and 25% as EOL returns. Hence in these instances, the volumes of later returns equal or exceed the percentages for commercial and warranty returns (Fig. 4). 3PSPs generally show higher rates, which can be explained by a simple fact that it is their core business. Apart from closed loop returns they for example also accept returns from open markets and public institutions like schools.

Most importantly, a large part of commercial and warranty returns are No Fault Found returns: 83% of commercial returns and 41% of warranty returns (Fig. 6). As there is nothing wrong with these products, these returns represent a high value loss, especially when they are not correctly and quickly returned to the market.

So early returns are more often experienced and often unnecessary, later returns occur less but when they do in larger volumes

representing less value. Overall, we conclude that Proposition 2 is supported.

According to Proposition 3, return channels focus on damage control and efficiency and value creation is not an issue. We asked supply chain actors whether reverse logistics (defined as “the process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods, and related information from the point of consumption to the point of origin for the purpose of recapturing or creating value or proper disposal” (Rogers and Tibben-Lembke, 2001, p. 130)) adds value for their companies: 71% believe it does, while 29% say it does not. We also asked to what extent reverse logistics adds specific types of value, the results are displayed in Table 3. The findings lead us to reject Proposition 3, because respondents point out that

Table 3 Reverse logistics and value.

Fig. 6. No Fault Found as % of return flow.

The application of reverse logistics leads to. . .

Mean

SD

Increased customer satisfaction Increased customer loyalty Improved environmental performance Improved corporate social responsibility performance Savings on purchasing/sourcing by reuse Improved profitability Informational benefits through which the company can learn more about their products

3.66 3.42 3.50

1.25 1.29 1.37

3.45

1.37

3.40

1.45

3.35 3.34

1.43 1.41

Note: The items were measured on five point Likert scales, in which 1 = not at all, 2 = a little, 3 = some, 4 = moderate, 5 = very much.

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100 90 No apparent reason

80

(presumed) defective

70

Customer dissatisfied Better pricing else

60

Customer cannot handle product Wrong product shipped

50

Compliance Customer demand

40

Protective destruction Economically viable

30

Replenish/replace

20

Other reasons

10 0 Commercial

Warranty/SLA

End-of-use

End-of-life

Packaging

3PSP-all

Fig. 7. Drivers of returns experienced, per return type (% of respondents).

the application of reverse logistics adds value, such as increased customer satisfaction, to some or a moderate extent. Thus value creation is an issue in return channels.

4.2. Drivers of returns According to Proposition 4, early returns are market-driven and later returns are driven by mandatory take-back regulation. Fig. 7 presents the drivers of returns, per return type. We found that the major drivers of commercial and warranty returns are (presumed) defectiveness, customer dissatisfaction, wrong product shipped, and customer inability to handle the product. These returns are indeed largely market-driven. A remarkable finding is that 46% of the respondents indicate that commercial returns are returned for no apparent reason. For warranty returns, this percentage is 45%.

In line with Proposition 4, EOU and EOL returns are indeed partially driven by compliance but this is not the most reported driver; economic viability is. The need for protective destruction and customer demand are two other important drivers. These findings lead us to partially accept Proposition 4: the first part is supported, the last part is not.

4.3. Return channels and recovery options In terms of returns collection, we expected that reverse channels are converging systems with multiple collection points (Proposition 5), which is supported by the findings. Fig. 8 shows that collection channels used by 3PSPs are quite diverse

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100 90 80 70 60 50 40 30 20 10 0

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Fig. 8. Collection channels used by 3PSPs.

Fig. 9a and b deserve some explanation. 3PSPs (Fig. 9a) are diverse in nature (logistics service providers, repair firms, recycling firms, etc.). Some 3PSPs make use of their customers’ logistics system, while owning for example the recovery system. Customers can be manufacturers, retailers, and wholesalers. Other 3PSPs have their own logistics system and some even own a specialized channel for returns only. In case 3PSPs do not have their own logistics channels, and also do not use customer logistics, it is outsourced to other service providers. Supply chain actors (Fig. 9b) may use the forward or a specialized return channel where both can be insourced or outsourced. In case there is no control or responsibility taken for returns it is left to the free market or the community.

We posited that because separate return channels prove more efficient, reverse and forward supply chains are often disconnected (Proposition 6). The findings in Fig. 9b show that most supply chain actors use separate reverse channels (under their responsibility) rather than the forward channel to handle returns, except for commercial returns. Fig. 9a shows that 3PSPs often use their customers’ distribution systems to handle returns (in which the reverse and forward channel can either be integrated or separated), but they equally often use their own distribution system in which they combine reverse and forward logistics. Thus, supply chain actors tend to disconnect forward and reverse channels whereas 3PSPs tend to integrate them, which provides partial support for Proposition 6.

Proposition 7 posited that as the value of returns lowers when progressing through the life cycle, the optimal recovery option drops in the hierarchy from product to component reuse, and eventually material recycling. Our findings do not support this proposition: Fig. 10a and b show a wide variety of disposition strategies for each type of return, whereas based on theory we expected commercial returns to be reused as is, warranty returns and recalls to be repaired, EOU returns to be refurbished/remanufactured, harvested or recycled, and EOL returns to be harvested or recycled.

We expected that given the nature of the process and specialized skills needed, most return channel operations are outsourced to specialized 3PSPs (Proposition 8). We found that 71% of the manufacturers, wholesalers, and retailers indeed use services for returns from 3PSPs. Most of them use multiple types of service providers: logistics service provider (LSP) 75%, waste management company 54%, repair company 48%, remanufacturer/refurbishing company 38%, recycler 36%, call centre (help desk) 21%, field service 25%, all-in-one provider 13%. These findings indicate that 3PSPs that provide services for returns are indeed highly specialized, providing support for the proposition. Only a small part of the companies uses an all-in-one provider. Interestingly, quite a large part (35%) of the 3PSP respondents classify themselves as all-in-one providers.

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Fig. 9. (a) Reverse logistics organized by 3PSPs. (b) Reverse logistics organized by supply chain actors.

Fig. 10. (a) Disposition strategy by supply chain actors. (b) Disposition strategy by 3PSPs.

4.4. Geographical and industry differences Proposition 9 held that North American companies mostly deal with commercial and warranty returns, whereas European

companies focus on EOL. Asian-Oceanian companies handle fewer returns than the other two and these are mostly returns early in the life cycle. We analyzed return types and volumes received by supply chain actors and 3PSPs, and tested for geographical

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differences. We did not find the proposed geographical differences, so Proposition 9 is not supported. However, we did find a few other geographical differences: The percentage of supply chain actors that receive packaging returns is significantly higher in Europe than in Asia-Oceania ( 2 (2) = 7.746, p < .05; Cramer’s V = .338, p < .05). Furthermore, the percentage of supply chain actors that receive recall returns is significantly higher in North America and Europe than in Asia-Oceania ( 2 (2) = 9.700, p < .01; Cramer’s V = .378, p < .01). We also found geographical differences for the reverse logistics channels that supply chain actors use to handle returns: The percentage of companies that use a separate reverse channel (under their responsibility) for commercial returns is significantly higher in North America than in Europe and Asia Oceania ( 2 (2) = 11.151, p < .01; Cramer’s V = .522, p < .01). The percentage of companies that use the forward channel for warranty returns is significantly higher in Asia-Oceania than in North-America (Fisher’s exact test, p < .05). Finally, regarding recovery options used by 3PSPs: The percentage of 3PSPs that recycle commercial returns is significantly higher in North America than in Europe ( 2 (1) = 9.073, p < .01; Cramer’s V = .569, p < .01). According to Proposition 10, involvement of supply chain actors with the buyer over the life cycle reduces the amount of commercial and EOL returns but increases field/warranty and EOU returns. This proposition covers two aspects: B2B versus B2C and high-tech versus low-tech products. Our findings provide partial support: The percentage of supply chain actors that receive commercial returns is significantly higher for companies that operate in a B2C market than for companies in a B2B market ( 2 (1) = 5.253, p < .05; Cramer’s V = .280, p < .05).

However, we do not find evidence for fewer EOL returns and more field/warranty and EOU returns in B2B markets.

Supply chain actors selling high-tech products do not receive fewer commercial and EOL returns than supply chain actors selling low-tech products. But the percentage of companies that receive warranty returns is significantly higher for companies that sell high-tech products than for companies that sell low-tech products ( 2 (1) = 6.936, p < .01; Cramer’s V = .340, p < .01), which could be explained by the increased sensitivity and complexity of hightech products (Blumberg, 1999). Another interesting difference is that the percentage of companies that repair EOL returns is significantly higher for high-tech products than for low-tech products (Fisher’s exact test, p < .01). Finally, we found that the percentages of companies that receive warranty returns and recalls is significantly higher for large companies than for small companies ( 2 (1) = 5.768, p < .05; Cramer’s V = .281, p < .05 and 2 (1) = 5.807, p < .05; Cramer’s V = .282, p < .05 respectively). The results are summarized in Table 4.

5. Discussion In this section we compare our results with previous studies.

In particular we pay attention to counter-intuitive results and we discuss areas for improvement.

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their European counterparts, American studies hardly mention EOU and EOL returns. Yet they are becoming an issue in North America too (12), as some states have introduced regulation and because commodity prices have risen. Experts (11, 16) emphasize that end customers, both in B2C and B2B, become more articulate towards original supply chain actors about their right to return at all stages of the life cycle. This increases early and later return volumes in Europe and North America respectively. Although one might argue that these returns have always existed, visible returns totalized over the full life cycle may exceed initial sales soon.

It is interesting to see that many companies consider the return channel as a potential value creator. The trend visible in the academic literature from “returns as something mandatory” (Thierry et al., 1995) into “a value creator” (Guide and Van Wassenhove, 2006) now becomes visible in practice. A subset of supply chain actors experience high return volumes in packaging and EOL returns. One might argue that EOU and EOL returns as well as packaging can be considered “unavoidable returns” as these have served their purpose whilst early returns often point at customer dissatisfaction and/or product failure (14). Following this logic, percentage of sales is not a good indicator for assessing the value of later returns as we merely count numbers.

Few recalls are experienced. Experts (12, 13) state that recalls are infrequent and not monitored by many companies. The more frequent a return is experienced, the more visible to the supply chain actors. They add to this that although logistics costs and product value loss of a recall can be high, not necessarily all is lost. In fact, it is suggested that well carried out recall and repair programmes can create customer loyalty.

5.2. Drivers of returns Drivers that we find are not very different from the ones found in the literature, but a few new trends can be observed. First, extended producer responsibility is gaining territory because also governments outside Europe are adopting mandatory recycling schemes and many global companies implement take-back schemes worldwide, even in areas where legislation is absent. However, we do see that economic motives are stronger than before, also for later returns with lower value due to upcoming resource scarcity and overrule regulation as a driver (experts 14, 16). Although we suspect an increased awareness in North America for EOL returns and in Europe for commercial and warranty returns, we cannot compare our data with previous findings as they do not cover the full life cycle.

We found a relatively high percentage of NFF warranty/SLA and commercial returns, but literature already reported NFFs of 60–80% for commercial and warranty returns (Guide et al., 2005). Literature also reports that 40% of returns are caused by supply chain errors (Daugherty et al., 2001) and 50% by customer inability to handle returns (Rogers and Tibben-Lembke, 2001), our results show a somewhat lower percentage.

5.1. Types, volumes, and value of returns

5.3. Return channels and recovery options

The types of returns most frequently experienced are commercial and warranty, which can be explained by the fact that these are relatively close to the selling process and are generally returned to the original supply chain actors, i.e., retailers, producers, and wholesalers. Literature reports average return rates from 5% to 10% with peaks up to 50% in commercial/warranty returns. Our survey does not produce such extremes, not even in North America. A new development is that American retailers offer a discount if the customer renounces the right for a warranty claim. Furthermore, these retailers are trying to reduce their commercial returns by becoming more restrictive in their return policies (experts 11, 12). Unlike

Contrary to the literature (Fleischmann et al., 2000), there is no typical return channel or recovery option per return type. Remarkably, a significant percentage of warranty/SLA, EOU, EOL returns, and recalls only need a dust-off or cleaning operation. For the warranty returns, this can be explained by the high NFF score.

Having a variety of recovery options available makes sense as return flows are heterogeneous in quantity and quality and markets vary too. It appears that supply chain actors and 3PSPs have a diversified strategy, i.e., they have multiple recovery options for each return type available for application. The classical way of thinking that recovery follows a strict hierarchical sequence from higher

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Table 4 Overview of propositions and results.

1 2 3 4 5 6 7

8 9

10

Proposition

Result

The total volume of returns over the life cycle exceeds the volume of initial sales Most value is lost by returns early in the life cycle Return channels focus on damage control and efficiency, value creation is not an issue Early returns are market-driven, later returns are driven by mandatory take-back regulation Reverse channels are converging systems with multiple collection points Because separate return channels prove more efficient, reverse and forward supply chains are often disconnected The value of returns lowers when progressing through the life cycle, as the optimal recovery option drops in the hierarchy from product and component reuse, to material recycling and eventually disposal Given the nature of the process and specialized skills needed, most return channel operations are outsourced to specialized 3PSPs North American companies mostly deal with commercial and warranty returns, whereas European companies focus on EOL. Asian-Oceanian companies handle fewer returns than the other two and these are mostly returns early in the life cycle Strong involvement of the supplier with the buyer over the life cycle reduces commercial and EOL returns, but increases warranty/field and EOU returns

Supported Supported Not supported Partially supported Supported Partially supported

levels of reuse to materials recycling along the timeline of the life cycle (Krikke et al., 2004) proves false. As expert (11) points out, for some products like cell phones the material value is often higher than the product value itself because the distance to market for reuse is too large and hence logistics is expensive.

3PSPs seem to handle different types of returns more frequently than supply chain actors, which can be explained by the fact that returns are their core business and they have customers outside the private industry (schools and cities, for example). Experts (14, 16) suggest that returns are too heterogeneous to be handled by a single company. Although 3PSPs do offer a range of collection and recovery options to their customers, they tend to specialize in a limited set of options and work with partners to offer the other ones (12). All-in-one providers are doing this best, in particular because they have access to more markets than e.g., LSPs (16).

It appears that 3PSPs attempt to expand their portfolio of services (becoming all-in-one providers), but their customers are reluctant to follow this trend. At the moment still many types of 3PSPs specialize in different return activities leading to different layers of outsourcing. The need for specialization is potentially in conflict with being flexible and economies of scale. Returns are relatively often handled in separate return channels, but still under the directorship of forward supply chain actors (hence visible). Return flows that require mostly transport and little processing can be dealt with by the forward chain. For early returns, the need for fast turnaround makes the use of the regular distribution system feasible. Outsourcing does not immediately imply separate channels, since both combined and separate forward and reverse logistics systems can be used in outsourcing.

Forward supply chains are often not geared for handling more complicated return flows (13, 14). For example, recalls must be dealt with swiftly in high volumes but at infrequent occasions.

However, a high number of (separate) return channels lead to lower volumes per channel, hence little economies of scale. At the same time multi-channel collection may be needed for customers’ convenience and increased rates of returns (15).

5.4. Geographical and industry differences Europe is closing in on North America regarding commercial and warranty/field returns. American firms are dealing increasingly with EOL returns mostly for economical reasons. Asia-Oceania has less visible recall returns in general and less packaging than Europe which might be explained by a lack of maturity of the business such as lacking infrastructure (14; Herold, 2007) or due to regulation. Compliance issues become more important, also outside the European Union (17). North America has more separate,

Not supported

Supported Not supported

Partially supported

specialized returns channels because the market is less fragmented and it has a strong trading tradition in cascade markets and perhaps less fear for market cannibalization effects. Larger companies (supply chain actors) have higher recall and warranty returns which might be explained by them being more liberal and pro-active in taking back (11, 12). Multi-national companies tend to offer global solutions for take-back and recycling, also in regions where it is not mandatory (14, 17).

Several experts (11, 13, 16) put forward that the fragmented and strongly regulated European market has higher compliance risks, hence more outsourcing takes place here. Yet our study did not yield significant results in this respect. Furthermore, experts (11, 12) expect volumes for drop-off and customer pick-up to increase because of the growth of internet sales, combined with postal networks for reverse logistics. Customer pick-up is feasible in professional equipment due to customer relations and high capital value, drop off for consumer goods. Again, no significant differences were obtained by us.

Involvement with the customer for sure varies across industries and is primarily determined by the business model. As service logic is expected to gain territory, we expect supply chain actors to become increasingly involved in the life cycle. However, this concept is most feasible for high-tech capital intensive products in B2B markets.

5.5. From value destruction to value creation Table 5 synthesizes results from our survey, the literature and additional observations of experts (14, 16). First, we see that reuse options regain most embedded resources, material recycling does the same but to a lesser extent and disposal only regains some energy. Second we indicate which type of return has the highest unused potential. Early returns incur most value loss and regaining their value must be seen as “damage control”, meaning this value is gone completely in case no recovery takes place. Looking at the numbers we see that warranty returns are dealt with relatively well, handling of commercial returns and in particular recalls needs to be improved. This implies foremost prevention of these returns and when this is not possible they should be reused. Later returns have served their purpose in the market and have often been replaced by new(er) products and hence can be seen as free resources returned to the supply chain; their recovery is a bonus.

Despite the fact that recovery is not always hierarchical, as a general rule a multi-loop approach makes it possible to create value multiple times. This requires good vertical coordination throughout the reverse channel(s). Note that an increasing value regain for EOU and EOL returns depends more on collection than on recovery.

31% of sales 10–15% 50% 40% 10% Medium Reuse/recycle 10% of sales 2–3% of sales 50% 40% 10% High Collect and reuse

6. Conclusions and outlook

c

a

b

Hauser and Lund (2003) and Giuntini and Gaudette (2003).

Our survey.

Experts (14, 16).

30% of cost price ++ − − 20% of cost price ++ + +/− 5% of cost price ++ ++ − Unused potential 3> Prime strategy>

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In other words, original supply chain actors should make a stronger effort to bring back returns in a closed loop, provided that revenues exceed costs.

Our findings also show that much inefficiency exists in collection, reverse logistics, and recovery operations. Horizontal collaboration across reverse chains should aim to leverage volumes by sharing facilities and equipment and process improvements. An example of the latter is to improve product design or customer education in case failures lead to massive warranty claims.

3PSPs integrate systems more than supply chain actors. As both vertical and horizontal coordination is their natural habitat, it is not unlikely that all-in-one providers will increasingly act as 4PL companies; taking ownership of the chain but making use of other actors’ systems, in particular their customers (Mukhopadhyay and Setaputra, 2006). Once the endogenous reverse chain variables are optimized, exogenous variables can further enhance value creation and cost effectiveness through eco-design, service logic, customer education, and infrastructural improvements both in physical systems and information systems (Herold, 2007; Krikke et al., 2004).

Although 3PSPs are needed for their skills and scale, many of these variables are controlled by brand-owners.

25% of sales 2–3% of sales 30% 60% 10% High Collect/reuse/recycle

End-of-use

4% of sales <1% of sales 60% 30% 10% High Reduce/reuse 10% of sales 7–8% of sales 80% 15% 5% Low Reduce/reuse 9% of sales 3–4% of sales 70% 10% 10% Medium Reduce/reuse

Recall Warranty/field Commercial Labour Energy Materials

Embedded resourcesa

Table 5 Value potential of returns.

Volume Value (regain) Reuse 3 Recycle 3 Disposal 3

Returns and recoveryb , c

End-of-life

Packaging

H. Krikke et al. / Resources, Conservation and Recycling 73 (2013) 239–250

Our results indeed suggest that an invisible giant is slowly getting on the radar of business companies. Based on a literature review, we formulated ten propositions on how returns practices are organized. Much of this knowledge proves outdated or incomplete in existent literature. By disclosing return practices, we show that return volumes towards original supply chains actors and/or their visibility are increasing. We also see more resemblance across industries and regions. Fortunately, business is slowly adapting its approach from “a cost of doing business” to “value creation” as underlying drivers related to customer, resource, environmental, and learning value of returns are gaining momentum.

The heterogeneous and uncertain nature of returns requires a set of collection, reverse logistics, and recovery systems that can be used flexibly—sometimes combined with the forward supply chain, sometimes not. We put forward the need for vertical and horizontal coordination to be flexible on the one hand and create critical mass on the other hand. A full life cycle approach is necessary as success factors are cross-functional. Given the requirements and skills needed, we suspect that there are good market opportunities for 3PSPs but it may take time to develop this market.

According to academic tradition, this paper raises more questions than it gave answers. First, there is a constant need for updating and detailing data; for instance on geographical differences. The mentioned improvement areas all represent opportunities for further research. Particular attention should be given to scarce natural resources (materials, energy, water). Moreover, value creation in closed loop supply chains can benefit from integrating forward and reverse supply chains.

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