Why invest time and money into the reverse supply chain when the big money depends on your forward supply chain? Because returns happen.

"Returns are still cited as the third significant reason people don't buy online. Returns are a barrier to entry in online commerce," says Lee Waters, chief executive officer, Return.com, Atlanta, Ga.

Whether an item is different than the consumer expected or ordered, is broken or damaged, or there was simply a change of heart, returns are costly for any e-fulfillment operation. And with e-returns running as high as 30%, companies need a solid reverse logistics strategy.

According to Dave Hommrich, co-founder of ReturnCentral, Pittsburgh, Pa., one of the biggest challenges to building that strategy is a widely held myth: That if a company makes it easy for consumers to return product, they will send back more items.

Hommrich maintains that if a company wants a consumer back, it must keep the customer happy during the entire transaction. That includes the potential return of that product. If the process is difficult or non-existent, there is a higher chance the company will actually lose consumers. L.L. Bean, Freeport, Maine, which has a liberal returns policy, is often cited as living proof of Hommrich's claim.

Another major challenge to building an effective reverse logistics operation is not knowing the true costs involved. ReturnBuy, Ashburn, Va., an end-to-end returns processing center, offers a list of both the hard and soft costs of reverse logistics (see sidebar).

Other costs include the materials handling equipment and systems necessary to manage a good returns process. If a company invests in just the basics for the return process, it can use equipment such as mezzanines, conveyors, bins, shelving, racks, and data capture systems. But for companies with higher volumes and rates of return, more automated equipment such as high-speed sortation systems and carousels might be just the ticket.

So where should B2C e-tailers start when thinking about returns? One approach is to outsource. Another is to manage their own returns. Either can work. But the key to success in both is to treat returns with the same importance as sending out the order in the first place. Above all else, returns cannot become the forgotten child of the e-fulfillment (or any other) supply chain.

There are a number of multi-channel (online, catalog, and retail) retailers that have turned to third-party providers such as Genco Distribution, Pittsburgh, Pa., and USF Processors, Dallas, Texas, to manage their returns processes.

Lower cost is one major selling point of the 3PLs. Most mange returns for multiple companies in one facility, which allows clients to share operating costs proportionately.

"A good 3PL can provide significant value with a more comprehensive solution because they concentrate on returns as a logistics discipline," says Pete Rector, senior vice president, strategic initiatives of Genco Distri-bution's e-commerce division, e-genco.

Through Genco's ProductAssist program, a consumer who wants to return a product can go to the customer service section on the retailer's Web site. This will seamlessly link the consumer to Genco's software without the consumer ever knowing they left the retailer's page.

The consumer then selects the product to be returned, and the program assist feature asks what they would like to do. The software will ask why the consumer wants to return the product, offering seven reasons. If the product is defective, the software offers some troubleshooting tips that could solve the problem or perceived problem. Rector says 20-40% of the product returned for defects really isn't.

If the consumer still wants to return the item, the system allows the person to print out a mailing label for the return.

USF Processors, another 3PL, focuses entirely on returns. Kevin Sheehan, president, says there are big cost benefits to companies using a 3PL. USF Processors offers companies specialized systems that require minimal physical touch and produce maximum data. They can dispose of the items at attractive prices through auctions or traditional liquidation. As a consultant, they offer a company maximum return at each stage of the process because they have the market experience to create unique and efficient solutions.

In addition, USF Processors has partnered with Newgistics Inc., Austin, Texas, a business-to-business (B2B) supply chain management company. The alliance allows pure play dot coms as well as multi-channel retailers to offer consumers thousands of brick-and-mortar locations to return the product or use a shipping label for drop-off at any USPS location and get quick credit.

For all their advantages, 3PLs are not the answer for all.

Consider Ingram Micro Logistics, Santa Ana, Calif., the distribution arm of Ingram Micro, the largest global wholesale provider of technology products and supply chain management services. The company processes both e-orders and traditional orders for e-tailers and its own parent company. IM Logistics is also a pioneer at handling its own returns. Last month, the company opened what it says is the first automated returns facility in the U.S.

The Harrisburg, Pa., facility was previously a distribution center for the company. When IM Logistics vacated the facility and moved to a new state-of-the-art distribution center in Jonestown, Pa. (see MMH, September 2000), managers decided to use the operation to manage returns.

The company was able to use most of the existing materials handling equipment. It also added 27 carousels. The facility automatically handles returns in two ways, depending on whether the items are slow or fast movers.

The benefit of having an automated returns facility is that it takes away all time sensitive, manual processes. Instead of the employee manually putting away the product, the carousels allow the location to come to the employee. And as a result, more product can be handled with a fraction of the cost of labor.

However, this type of fully-automated, mechanized solution for reverse logistics only works for those companies that have a large volume of returns and can justify the cost.

Yet another approach to returns is taken by pure-play luxury goods e-tailer Ashford.com, Houston, Texas. The company does its best to avoid returns by ensuring the right product is sent out originally. "We have an enormously arduous verification order process to eliminate sending out the wrong order," says Bill Hensler, chief operating officer.

They succeed at prevention due to clear and accurate product presentation, checks built into the fulfillment process, a high percentage of gifts that means a low incidence of return, and consumer service contact. At the time the consumer selects the merchandise they know exactly what they are ordering, reducing the level of returns later on, Hensler says.

For some companies, the greatest challenge of returns is not reprocessing them. Instead, it's what to do with returns that are not likely to be bought again through the same channel for whatever reason.

One approach is to resell returns by auction channels, which are starting to become more popular. ReturnBuy is one company that offers this service to multi-channel retailers. ReturnBuy sells the retailer's merchandise that is resaleable but unable to be restocked on e-bay, Yahoo!, and similar companies. The profits are split between ReturnBuy and the company.

"The trick of the returns process is not to allow product to sit for months but to get it back out to the second market and sell it to get a profit," says Vincent Bianco, president, The Return Exchange, Inc., Irvine, Calif., another company that offers an online auction.

It's hard to say what the reverse logistics process will look like a year from now and especially 10 years from now.

Waters of Return.com, which offers both software and services to merchants, believes technology will be created that will allow consumers to drop off a return and a new package will be waiting for them with the exchanged merchandise in it.

Bryan Jensen, a principal with The St. Onge Company, York, Pa., believes that there will be more pre-shipping labels sent to the consumer with one centralized address to return product.

Whatever lies ahead, "the e-tailers that survive, will do so in large part because they have a disciplined reverse logisitcs program," says Rector of Genco.