8 reverse logistics KPIs that can help you measure success

What is reverse logistics?

Reverse logistics occurs after a customer buys a product and is the process of gaining any possible value from an item following its sale, as well as concluding the product's journey at the company. Reverse logistics can be costly, so companies must implement a reverse logistics strategy to ensure their costs aren't higher than needed.

Disposal logistics is related to reverse logistics and is the process of getting rid of waste at any point in the supply chain.

Here are some of the most helpful reverse logistics KPIs.

1. Returns rate

Supply chain leaders can calculate their company's return rate by dividing the number of returned items by the number of items shipped, then multiplying that figure by 100.

The returns rate provides insight into the number of customers returning items because they are displeased with their purchases. A return rate that is too high can indicate other issues, such as a problem with a product. For example, if the return rate on a certain type of paint becomes much higher than normal, supply chain leaders may look into the issue and realize a mistake was made with the mixing of the paint.

2. Cost per return

The cost per return measurement indicates the total amount of money the company will need to spend to deal with an unwanted item.

Calculating the cost per return involves adding up the following expenses:

• The cost of collecting the item from the customer.
• The cost of shipping the product back to the distribution center.
• The cost of handling the product.
• The cost of refurbishing, recycling or destroying the item.
• The cost of restocking the item.
• The cost of returning the item to the vendor.

Supply chain leaders can add up total costs across multiple returns, then average the cost across the number of returns to get more insight into this aspect of their operations.

The cost per return is an important metric to observe because it directly affects profit margins.

3. Customer satisfaction

Repeat customers are essential for a healthy business, so measuring how a customer feels about returning an item is an important step.

Keeping the process as simple as possible is best for measuring customer satisfaction. Employees can email a customer once they've completed a return and ask them for a satisfaction score, with the option to provide additional feedback.

4. Cycle time

Processing a returned item should happen quickly. The reverse logistics cycle time KPI measures the processing speed and is expressed in the hours or days needed to handle a return.

Measuring the cycle time begins once the customer decides to return an item. The cycle time is the time between the initial request and the time when the distribution center has fully processed the return, including restocking, recycling or destroying the product.

The cycle time should be as small a number as possible so usable items can return to stock quickly, which maximizes product availability.

5. Recovery rate

Supply chain leaders have various options for dealing with returned items. An unwanted but barely used product can be refurbished and resold, while a defective but repairable product can be fixed in-house and returned to inventory. Recycling or responsible disposal of an item is ideal for unusable products.

The recovery rate KPI measures the amount of value a company can claim from returned products. For resalable items, the recovery rate KPI is the cost of the item with expenses incurred from collecting, refurbishing and restocking the returned item subtracted from that cost. For end-of-life products, that value might be the amount of materials that the company can recover and recycle.

Maximizing the value of recovered items can significantly improve a company's profit margins.

6. Repair and refurbish costs

Like the recovery rate KPI, the repair and refurbishment costs measure only the expenses related to products that the company will resell. Reselling products typically involves cleaning, repairing and preparing the product for resale, which incurs labor and parts costs.

Lower repair and refurbishment costs increase the resale value of returned products, leading to overall higher profits.

7. Return-to-refund time

A large part of a customer's satisfaction with the returns process depends on how soon they receive their money. The return-to-refund time KPI measures the amount of time between a customer wanting to return a product and the time when they receive a refund or store credit.

Return-to-refund time should be as small as possible for optimum customer satisfaction.

8. Reasons for returns

One of the primary ways to achieve an effective reverse logistics process is by minimizing the likelihood of future product returns, which requires finding out why customers are returning products and taking action to prevent those issues in the future.

An automated returns system can ask customers the reason for their return, which can provide a good starting point.

Paul Maplesden creates comprehensive guides on business, finance and technology topics, with expertise in supply chain and SaaS platforms.