February 29, 2024

Reverse Logistics KPIs: How to Optimize Your Supply Chain

The online retail sector has started to realize the increasing importance of returns and reverse logistics optimization. As customers get more and more freedom to accept only what they like, retailers have no choice but to design their return policies smartly. Since returns are also used as a way to improve customer loyalty, eCommerce retailers are now faced with a serious challenge.

Reverse logistics is the name given to the process of returning, disposing, or packaging products after they are delivered to customers. In the absence of the right tools and processes, reverse logistics is a complex and costly process. 

As the process becomes an essential part of supply chain management, retailers need to measure a set of reverse logistics KPIs in order to optimize their business processes. If you’re regularly dealing with warranty claims, sustainability concerns, or recalls, you have landed at the right page.

This article covers the most important KPIs for reverse logistics and how you can measure them to improve your supply chain efficiency.

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Common Reverse Logistics KPIs

Reverse logistics KPIs in retail can vary depending on the industry you choose, with some remaining consistent across the board. That said, it is equally important for eCommerce retailers operating in all industry verticals to monitor and analyze reverse logistics KPIs.

1. Return rate

Return rate is simply defined as the percentage of products that customers return compared to the number of products delivered. Return rate is one of the reverse logistics KPIs examples that allow retailers to develop an understanding of customer satisfaction as well as quality of products and services.

Naturally, a high return rate shows that your business is lagging behind in one or all of these areas. Customers may be returning orders due to unsatisfactory product quality, false perception of products in online shopping, or poor customer service. On the other hand, making efforts to lower your return rate can also enhance customer satisfaction, loyalty, and service delivery. 

Top most common reasons for returns in ecommerce

Return rate is also one of the reverse logistics KPIs that are dependent on product, industry, and customer segments. For instance, you can’t measure your return rate with retailers that sell different products and follow different industry standards. Upon implementing the right techniques to measure return rate, you need to carefully analyze the reasons why customers are returning their orders. 

2. Cycle time

Here is a tricky KPI that measures the time taken by retailers to process a return from the time a customer submits a return request to the moment when the product is up for sale again. In reverse logistics, cycle time can vary a great deal because of the various processes a product can go through after being returned. 

However, the reason behind measuring this KPI is to decrease the total time taken to move a product from receiving it to reselling it. This can only be achieved by streamlining your reverse logistics process and setting standard procedures for each type of returned item.

3. Recovery rate

Now that you have optimized your cycle time, the next reverse logistics KPI to measure is recovery rate. This KPI basically shows you how much value your business actually achieves from reselling a returned, repaired, or restocked item. Recovery rate is linked to cycle time in the sense that it covers how much time your business takes to repair or repackage a returned item and then putting it back on the shelf. 

Recovery rate is a key performance indicator because eCommerce retailers experience a high rate of depreciation in items that are returned to their inventory. The goal here is to improve your repackaging and repairing process and optimize the recovery rate in order to sell the item as quickly as possible.

4. Cost per return

When a customer returns their order, you need to handle the cost of transporting, disposing, and repackaging the item(s). A low cost per return is ideal for your business as it provides you a competitive advantage and improves your cash flow. Measuring such reverse logistics KPI is important to understand where your retail business stands as compared to its competitors. On average, the cost per return in the retail industry is around 66% of the price of the product.

If your cost per return is higher than other businesses in your industry vertical, it can have an adverse impact on profits, market share, and liquidity. For this reason, you need to measure and reduce your cost per return while ensuring that each item is ready to be sold again in due time. 

5. Customer satisfaction index

Considered one of the best KPI for logistics, customer satisfaction index tells you a lot about the overall quality of your services. Today’s customers are not easy to satisfy, as they look at product quality, delivery times, their personal liking or disliking, and various other factors that you may not be considering. It’s one thing to deliver a quality product, but its also equally important to display the product properly on your eCommerce website. 

In many cases, customers return their order because they receive something they were not expecting. To avoid this, you need to provide detailed and true descriptions of products, along with images on your website.

It is important to measure this KPI in reverse logistics because failing to satisfy your customers in such a situation may lead to a stained reputation, which is the last thing you would want as an eCommerce retailer. 

6. Timely delivery

One of the great things about online shopping is that customers do not have to travel to a shop and get their order delivered to their doorstep. However, this convenience quickly turns into a bad experience when the order is not delivered on time. 

In the case of normal logistics, it is easy for retailers to coordinate with delivery service providers and get the orders sent on time. However, reverse logistics makes the process quite difficult. You don’t know when, where, and how many returned orders will need to be delivered. 

Incorporating an AI-based system to measure this KPI allows you to meet customer expectations and avoid getting negative reviews.

7. Inventory accuracy

Similarly, inventory management is an important aspect of eCommerce supply chains. Without accurate oversight on your inventory, you can never ensure timely delivery of orders. In reverse logistics, you have to manage products coming from the other side of the lane along with those from your regular suppliers and manufacturers. 

This creates a hassle and you are left with a disorganized supply chain. To measure this reverse logistics KPI and get around the problem, you need to invest in an end-to-end order management system. XStak’s OMS automates multi location, real-time inventory management by synchronizing offline and online channels.

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8. Supplier performance

Here’s the thing with suppliers in eCommerce. While it’s easy to find suppliers and establish initial contracts, it becomes difficult to evaluate their performance in the long run. This reverse logistics KPI can be broken down into sub-categories like supplier availability, defect rate, compliance rate, and more. But the main goal is to measure supplier performance and gain data-driven insights that can be used to make improvements. 

Calculating the number of disputed orders against the total number of orders allows you to measure supplier compliance rate. Similarly, measuring defect rate allows your business to identify and eliminate errors associated with suppliers and their services.

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Importance of Measuring Reverse Logistics KPIs

Regardless of how optimized your logistics process is, there are always going to be certain orders that are returned. While you cannot completely eliminate the possibility of returned orders, you can speed up the process that follows. Measuring reverse logistics KPIs in retail allows you to reduce the time and resources required to process returned orders, hence reducing the negative impact on your business.

Common Challenges in Reverse Logistics

Enhanced visibility into the reverse logistics process

Without a mechanism for measuring reverse logistics KPIs, you can never know the status of returned orders. Consequently, you cannot recycle or re-sell them, and your customers remain unsatisfied. On the contrary, having better visibility allows you to determine the aspects of reverse logistics that slow down your business processes. 

Identification of areas for improvement and cost-saving opportunities

Measuring and improving reverse logistics KPIs helps cut down business costs as fewer returned orders go to waste. As there are various steps involved in reverse logistics, you need to identify and work on each one in order to streamline the whole process. However, constantly going over each process is a painstaking task and cannot be done every now and then. Instead, measuring individual KPIs allows you to identify the exact areas to be improved. 

Optimization of inventory management and resource allocation

When you have all the right metrics in front of you, resource allocation and inventory tracking become easier. In order to avoid overstocking due to an uncalculated number of returned orders, you need to incorporate a distributed order management system. Using XStak’s OMS, you can improve order fulfillment with the ability to book orders with multiple couriers at the same time. 

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Compliance with regulatory requirements and sustainability goals

There are multiple risks associated with reverse logistics, some of which can have serious consequences. For instance, the possibility of wasting returned orders due to a lack of reverse logistics KPIs does not allow your business to meet sustainability goals. Similarly, regulatory requirements need to be considered while transporting returned orders that may be important for customers. 

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Why Invest in Reverse Logistics Solutions?

Looking at the challenges of reverse logistics mentioned so far, its not so difficult to guess that you need to invest in a modern solution. Modern order management systems can make or break your supply chain. Without such a system, you are risking wastage of returned orders and missing out on possible returns from reselling. 

Instead, you should play it safe by adopting a modern, future-proof approach. Investing in a distributed order management system like XStak’s OMS allows you to streamline your supply chain and fulfillment operations. 

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Strategies for Improving Reverse Logistics KPIs

By incorporating a system for real-time inventory synchronization and order management, you can effectively deal with returning, recalling, repairing, and repackaging returned orders. You are able to reduce wastage, efficiently utilize warehouse space, and extract benefits from your reverse logistics process. 

Implementing effective data tracking and analysis systems

The distributed omnichannel retail management system constantly monitors your reverse logistics flow to identify anomalies and helps your business book orders with multiple couriers. You get end to end supply chain visibility and can work on improving your reverse logistics KPIs. Tracking and analyzing returned orders also allows you to identify the reasons why customers are not satisfied with your service and make improvements accordingly.

Enhancing communication and collaboration across the supply chain

Keeping an eye on reverse logistics in real time means that all parts of your supply chain are in sync. As a result, you can communicate effectively with courier partners and packaging service providers to improve the overall efficiency of your supply chain.

Investing in technology and automation   

Modern technological solutions allow you to tag and trace returned orders. This helps improve your visibility and ease the process of getting products back on the market. Tagging and tracing improves reverse logistics KPIs as it simplifies the process to be followed in case of returned orders. Thanks to automated solutions like XStak’s OMS, your business does not have to carry out any manual process and also generate higher profits.

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Partnering with reliable reverse logistics service providers

Returned orders are obstacles that are unexpected and unpredictable. This means you need to monitor and measure reverse logistics KPIs to stay prepared for any and all types of scenarios. One of the most important aspects of a well-designed reverse logistics solution is to partner with trusted logistics partners. 

You need to have partners that can guarantee timely transportation, delivery, and reverse logistics. Having such partnerships not only gives customers the confidence to shop with your brand but also helps improve order fulfillment.

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How Reverse Logistics can be Optimized with XStak OMS  

XStak is an industry leader in next-gen omnichannel retail management systems. The XStak OMS is designed specifically for eCommerce businesses to automate their logistics processes from start to finish. 

The XStak OMS boasts a comprehensive process to return orders and provide returns to customers. Using the RMA (Returns and Refunds Flow) process, you can simply select the order you want to return and follow the steps to process complete or partial returns. 

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Key Takeaways

Reverse logistics is a costly endeavor for any eCommerce business. But when done right, it can bring favorable returns. You need to be prepared for any kind of returned order through any channel at all times. Considering the fast pace of eCommerce business operations, your best bet is to implement a technologically advanced solution to measure and improve your reverse logistics KPIs.

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