With the growth of e-commerce, any manufacturer not paying attention to its reverse-logistics process -- that is, how it manages, processes, transports, and stores returned goods -- is simply siphoning profits from the bottom line. How much? Gartner Group Inc., Stamford, Conn., predicts that by 2002 companies that sell merchandise online will take back $11 billion in returns and as a result lose $1.8 billion to $2.5 billion. Part of the problem is that the cost of processing returns for Web merchandise last year was $2.5 billion -- or twice the value of the merchandise itself, says San Jose-based Geri Spieler, a Gartner Group research director. Also, in many companies no one is in charge of the returns process. "Everyone owns a piece of it -- customer service, logistics, operations, sales -- so it's difficult" for companies to see the "total cost," asserts Patrick Freeburger, project manager with the high-tech consortium Converge Inc., Cupertino, Calif. "Each segment sees it as a very small percentage of their cost." And having the wrong solution -- or not having a plan at all -- can create serious problems, says Dale Rogers, professor of supply-chain management at the University of North Florida in Jacksonville. Rogers cites two examples. When a manufacturer of sunglasses refused to accept returned products from a major retailer, the stock value of both companies plunged. Conversely, after a large retailer developed a formal asset-recovery program to wrest additional value out of returned goods, 25% of its annual profit started to come from asset recovery. "When it comes to returned product, there's a fair amount of money often left on the table," says Rogers. "Manufacturers need to be aggressive in managing what happens. They need to have a plan and make good decisions to get value out of returns," e-commerce or otherwise. Industry experts suggest the annual costs of reverse logistics, including those from e-commerce, total $40 billion annually. That represents a huge opportunity for cost savings and asset recovery. "Returns can have a significant effect on bottom-line performance," says Kevin Sheehan, president and CEO of reverse-logistics provider USF Processors Corp., Dallas, a subsidiary of U.S. Freightways Corp. Visibility Speeds The Process One critical area of return logistics that manufacturers need to address is asset recovery, where two of the most important elements -- speed and inventory visibility -- generally are lacking. "Very few companies appear to be giving the manufacturer inventory visibility on returns, especially in e-commerce," says Brian Hudock, senior principal, Tompkins Associates Inc., Atlanta. "The manufacturer learns of the return when it hits the dock." However, as more service providers enter the field and more companies use the power of technology to streamline the returns process, both speed and visibility will improve. And although the Internet is not yet a significant component of reverse logistics, applications are on the increase, says Frank Hazeltine, general manager, industry development, Penske Logistics, Reading, Pa. For example, software provider Return Central, Pittsburgh, offers solutions specific to reverse logistics. Business-to-consumer solution Virtual Returns Desk applies company-specific return policies, automatically issues return merchandise authorization, and prints shipping labels. ReturnMatrix accommodates high-volume B2B shipments, accounts for complex customer sales agreements, and addresses the nuances of supply-chain relationships. In addition, says David N. Hommrich, Return Central's CEO, ReturnMatrix allows the retail buyer to go to the manufacturer's Web site, search by SKU or order number to identify the product to be returned, and check the return parameters to see if it can be returned. Since the software also can capture the reason for return, says Hommrich, it can determine disposition of the product upfront, thus cutting costs and the cycle time for returns. That's critical in many industries, says the University of North Florida's Rogers. A case in point: The value computers lose in transit is 12% per month. "If you can save even 10%" of the $250 to $300 that Hommrich contends computer companies typically lose when transportation and labor costs are added, "you save a lot of money." That's why Converge's Freeburger suggests that "returned product is well on its way toward obsolescence. It has to turn quickly, so a big issue in the high-tech industry is reducing cycle time and cost associated with returns -- getting product returned quickly to the right place." In addition to the obsolescence issue, when a company can analyze data on returns it can determine cause. Since disposition changes depending on product, vendor, and retailer, USF Processors uses its proprietary internal software to allow disposition of product based on customer agreement on a product-by-product basis. "We provide analysis of the product and why it was returned," says Sheehan. "If there's damage, we determine the root cause so [the manufacturer] can fix the distribution system." Returns Via The Web Besides capturing vital information and disseminating it quickly, processing returns electronically can minimize time constraints and costs, says Tompkins' Hudock. Someone with Web access who wants to return a product could, theoretically, log on to the original purchasing site, enter pertinent information, and handle the return without calling customer service. For the manufacturer, capturing that information electronically allows the return to be processed quickly and at far less expense. Gartner Group's Spieler calculates the average cost of processing a return electronically at $4.75 compared with $25 when returns are processed through a call center. How manufacturers manage the disposition of returned goods also can impact costs, because the retail value of such returned goods approaches $60 billion annually. "Turning trash into cash is part of effective returns management," says Sheehan. Some manufacturers, he says, can get the buyer to absorb the cost of returns. Others -- usually more brand-sensitive companies -- will take back returns to keep them from being sold through alternate channels, and then sell them in their own highly profitable outlet stores. "In some cases it's more profitable to sell used than new," because it's not labor intensive and reduces inventory carrying costs, says Joan Starkowsky, president of Roadway Express Inc.'s reverse-logistics subsidiary Rexsis Inc., Hudson, Ohio. "Some companies are actually creating profit centers to deal with returns. The manufacturer refurbishes the product and puts it on an auction site or redeploys it, perhaps to an outlet store," she adds. Another solution: Turn the returns process into an online auction. For example, Honeywell International Inc.'s Bendix truck-brake division formerly had its customers in the truck-brake aftermarket return used brake cores to its manufacturing site. "With the help of Roadway we set up a Web site, CoreBin.com," says Steve Ahern, manager of logistics at Honeywell in Morristown, N.J. "Customer A can buy the cores from Customer B, negotiating on the Web site. Customer A [then] ships the cores directly to the Web site buyer." That's a tack manufacturers can take even if they don't have the resources to set up their own sites. They can use the services of companies that auction returned goods on the Internet, says Mike Nardella, vice president, logistics, ReturnBuy.com Inc., Ashburn, Va. ReturnBuy.com focuses on Internet auctioning of products that have been returned by consumers or retailers. It's less expensive for manufacturers to pay such Internet auctioneers a commission than to absorb the costs of shipping those products back and disposing of them. "We triage the product," says Nardella. "If it's in perfect condition, it's sold on a Web site auction. If it's scratched or dented, it's sold as is on a Web site or to a bulk liquidator. If it's trash, it's disposed of per the agreement with the client." Collaborative efforts in reverse logistics continue to make the supply chain more efficient. For example, Sears Roebuck & Co. uses third-party returns specialist Genco Distribution Systems, Pittsburgh, to process 240 million hangers that it once landfilled. "We pick them up along with returns, then drop them off at suppliers as we pick up orders, minimizing shipping costs," says Dwight W. Wyland, Genco's president of manufacturing services.