Reverse
Content
A Conceptual Framework for Exploring the Antecedents of Reverse Logistics Performance in E-tailing
Shu-Lu Hsu Department of Management Information Systems National Chiayi University, Taiwan [email protected] Abstract The philosophy of accepting product returns and offering post-sale services as a competitive weapon has resulted in the trend of liberal return policies and product-life-cycle services. This has brought on huge reverse logistics challenges, especially for virtual-only retailers lacking logistics experiences. While the importance of reverse logistics in e-commerce has been highlighted, there are few researches addressing distinctive capacities to achieve leading-edge reverse logistics performance for e-tailing. A framework of antecedents of reverse logistics performance is proposed to help identify the major factors that influence e-tailers’ reverse logistics performances. A series of propositions are presented which serve to direct future research in this area. Keywords: reverse logistics, e-tailing, capability, performance 1. Introduction As e-tailers have raced to set their web sites up for easily navigable and attractive to online customers, the processes for dealing with product returns have taken a backseat. The online world increases the likelihood of product return, as items might be damaged in transit or are simply different from customers’ expectation. In Asia, Dell is selling its personal computers online and is expecting about 10 percent of sale to be returned (Tang et al., 2002). The return process, or reverse logistics, has been especially underdeveloped by virtual-only retailers (Koloszyc, 1999). However, industry observers estimated that thirty percent of all online purchases will end up in the return pool (Modern materials handling, 2000). Return is generally considered to be essential to customer service and satisfaction. According to the survey of BizRate, full 94 percent of those surveyed are influenced by online merchant’s return policies (BizRate.com, 1999). With the fast growth of e-commerce, any company not paying attention to its reverse logistics process is simply siphoning profits from the bottom line. Part of the problem is that the high cost of processing returns for web merchandises (Richardson, 2001). In addition, that no one is in charge of the return process in many companies and that many companies do not have a plan at all can cause serious problems. Companies involved in e-tailing get more undifferentiated and reverse logistics may be one of those areas where they can get a competitive advantage. Although many studies have shown that various logistics capabilities are positively associated with logistics or economic performance (Bowersox et al., 1999; Narasimhan and Kim, 2001; Wisner, 2003), the capability and performance of reverse logistics of e-tailers is rarely addressed. This study applies the resource-based theory of firm to exploring the capabilities to sustain superior reverse logistics performance in e-tailing. In the following section, the existing literature is reviewed to provide a theoretical base for proposing the framework and propositions in section 3. The final section concludes the implications of this study and suggestions for future research. 1616
2. Literature Review 2.1 Reverse Logistics Stock (1998) defined reverse logistics as: the term refers to the role of logistics in production returns, source reduction, recycling, materials substitution, reuse of materials, waste disposal, and refurbishing, repair, and remanufacturing. Reverse logistics is a fundamental part of retailing. It is estimated that reverse logistics accounts for five-to-six percent of total logistics costs in retailing sectors (Raimer, 1997). Routine logistics in retailing sector includes handling recalls, exchanges, returns, re-distributions, trade-ins, as well as the disposal of shipping containers and the collection of products and packing materials for recycling. Considerable payoff is believed to be associated with effective reverse logistics program (Daugherty et al., 2001). 2.2 Performance of Reverse Logistics Effective reverse logistics can result in direct benefits, including improved customer satisfaction, decreased inventory levels, and reductions in storage and distribution costs (Guintini and Andel, 1995; Andel, 1997). Marien (1998) noted that a well-managed reverse logistics program can result in savings in inventory carrying, transportation, and waste disposal costs as well as improving customer satisfaction. Daugherty et al. (2001) measured the performance of reverse logistics in terms of “improved customer relations, environmental regulatory compliance, cost containment, improved profitability, recovery of products, reduced inventory”. Daugherty et al. (2002) investigated the impact of information support on operating/financial and satisfaction performances of reverse logistics. Recently, Daugherty et al. (2005) studied reverse logistics with both economic and service quality performances. 2.3 Capability of Reverse Logistics The resource-based view mainly emphasizes firms’ internal strengths and weaknesses, in contrast to industrial organization economics which focuses on firms” external opportunities and threats (Grant, 1991; Foss and Eriksen, 1995). The resource-based perspective contends that the distinctive assets or capabilities of firms are the critical resources of sustained competitive advantage (Oliver, 1997). Distinctive capabilities can be defined as “complex bundles of skills and accumulated knowledge exercised through organizational processes, which enable firms to coordinate activities and make use of their resources” (Day, 1994). Reverse logistics can offer an opportunity for companies to differentiate or distinguish themselves with customers (Daugherty et al., 2002; Tan et al., 2003). Stock et al. (2002) summarized the potential for gain: reverse logistics should not be viewed as “a costly side-show to normal operations… it should be seen as an opportunity to build competitive advantage”. Thus, the reverse logistics capability can be regarded as a distinctive capability for acquiring competitive advantages for an e-tailer when it is valuable and difficult to imitate. 3. Conceptual Framework and Research Propositions Figure 1 outlines a framework for understanding the impact of reverse logistics related capabilities on the performance. The performance of reverse logistics is considered to be able to driven by both proactive and reactive capabilities. Proactive capabilities can facilitate e-tailers to reduce the possibility or occurrences of product returns from the e-customers. In contrast, reactive capabilities address the related competencies that e-tailers can efficiently and effectively execute the reverse logistics process. Regarding the performance, customers do not want to wait weeks before charges are removed from their credit card, and returned goods sitting in a stockroom invite higher carrying costs. Thus, reverse logistics is not just a logistics issue; it is also a customer service and a financial issue (Trebukcock 2002). Based on the work of Daugherty et al. (2002; 2005), two types of reverse logistics performances are 1617
considered: operating/financial performance and service quality. In addition, the examination of operating/financial performance should involve measuring the level of returns. Proactive Capabilities
Procurement Capability Avoidance and Gatekeeping Capability Information Presentation of Web
Reverse Logistics Performances
Operating/Financial Performance Return Level Cost Time Service Quality Customer Satisfaction
Merchandise
Reactive Capabilities
Formality of Reverse Logistics Program Information System Support Capability
Figure 1. Reverse logistics capabilities and performances of e-tailers 3.1 Proactive Capabilities Proactive capabilities mainly address the issue of how to prevent and avoid requests or occurrences of return for the e-tailer. This is a critical part of reverse logistics management to reduce the returns flow. Products designated to return may be due to customers’ remorse, finding the product unacceptable, overstock, for repairs, or refurbishing. 3.1.1 Procurement Capability The first factor, procurement capability, involves not only securing the merchandise quality and supply speed as that promised in web but also obtaining required support from suppliers, which rather affects the happening of customer returns. The policy and handling of returned products becomes part of the corporate image and is often an important criterion in online customers’ purchasing decision (Bayles, 2001; Daugherty et al., 2002). The restrictions imposed by an e-tailer for returning is relevant to the product/service agreement with the product supplier (Mukhopadhyay and Setoputro, 2004). In addition, reverse logistics is a boundary spanning process that requires interaction between members of the supply chain. E-tailers and suppliers must interact to accomplish the return or further handling of merchandise. The commitment from suppliers to support the reverse logistics program is a critical factor to the performance (Daugherty et al., 2002). Thus, a successful procurement system should be capable of ensuring the quality of acquired products as that proposed in web and gaining suppliers’ support to the reverse logistics policy and process. Based on the above arguments, the following proposition is suggested: P1. Procurement capabilities (product quality consistent with that promised in web, suppliers’ commitments to support reverse logistics program, attaining liberal return policy in suppliers’ product/service agreements) are positively linked to the e-tailer’s reverse logistics performance. 3.1.2 Avoidance and Gatekeeping Avoidance and gatekeeping are central elements to effective management of the return flow (Rogers et al., 2002). Avoidance involves finding ways to minimize the number of return requests. It can include ensuring that the quality of product delivered and user friendliness for consumer is at the highest attainable level before the product is sold and shipped, or changing the promotional programs that load the trade when there is no realistic chance that the product shipped to the customer will be sold. A survey by Daugherty et al. (2001) indicates that a significant proportion of product returns are due to defective merchandise (26.05%). Successful gatekeeping is to limit the number of items allowed into the reverse flow without damaging customer service (Rogers and Tibben-Lembke, 2001). It can eliminate unnecessary cost by preventing the product that should not be returned or 1618
returned to the inappropriate destination (Rogers et al., 2002). Thus, the following proposition is stated: P2. Avoidance and gatekeeping capabilities are positively linked to e-tailer’s reverse logistics performance. 3.1.3 Information Presentation of Web Products Having to evaluate a product without handing or seeing it is one construct associated with consumer’s perceived risks of using e-tail sites (Merrilees and Fry, 2003). According to de Figueiredo (2000), customers need to see and touch products such as produce and art despite recognizing the brand and knowing the product. Customers are likely to return products because their satisfaction after the purchase might not reach prior expectations generated from the web information. According to the studies of Jahng et al. (2002) and Cho (2003), the effectiveness of product information presentation varies with online consumers' psychological types and product categories. For example, a survey result indicates that companies are losing customers and sales as a result of having colors on e-commerce sites that do not accurately match the actual colors of the products being sold. Increased dissatisfaction of consumers leads to greater costs in both customer service and reverse logistics (Nitse et al., 2004). Thus, in an effort to fulfill the customer expectations, e-tailers must be capable of customized presentation of web merchandise for different products or customer categories. Based the above arguments, the following proposition is proposed addressing the impact of the nature of web merchandise information presentation capability on the reverse logistics performance. P3. The product information presentation capability is positively linked to the e-tailer’s reverse logistics performance. 3.2 Reactive Capabilities Reactive capabilities are those significant for e-tailers to deal returns in an effective and cost-efficient manner. There are some challenges to reverse logistics. The survey of 311 logistics managers by Rogers and Tibben-Lembke (2001) showed that four in ten logistics managers consider reverse logistics relatively unimportant compared to other company issues. In addition, the survey revealed restrictive company policies (35%), lack of proper systems (including information systems, 34%), and lack of personnel/financial resources commitment (29%) could also inhibit actions on reverse logistics. In the following, it is focused on the two critical antecedents for e-tailers dealing with reverse logistics: formality of reverse logistics program and information system support capability. 3.2.1 Formality of Reverse Logistics Program As Rogers and Tibben-Lembke (2001) denoted that for many companies, it is difficult to successfully execute reverse logistics due to the lack of managerial support and organizational emphasis on reverse logistics in terms of lack of management system and designated resources. Stock (1998) and Daugherty et al. (2005) also indicate that even though reverse logistics is a critical component for success in many businesses, it is often overlooked or inadequately supported. The scope of reverse logistics has now expanded form service parts management to other areas, e.g., post-service, repair, remanufacturing, etc. However, as the reverse logistics process has not been mapped under the enlarged scope of reverse logistics, companies find it difficult to plan, implement and control the process properly (Stock, 1998). Also according to the study of Stock (1998), most companies developed reverse logistics programs by a non-logistics related group or department. Trebilcock (2002) suggested that reverse logistics is a fulltime job, and firms must decide whether handling returns with a dedicated team in-house or working with third-party logistics providers. The company’s planning approach sheds light on its organizational emphasis while determining how resources will be allocated. Since resource allocation directly determines the adequacy of the infrastructure and people skills of the firm, it plays a preeminent role in helping a firm 1619
to build superior reverse logistics processes and to allocate required resources. Thus, in this study the level of formality of reverse logistics program of an e-tailer is determined by the existence of sophisticated planning (including a statement of strategic objectives with corresponding policies and process planning of reverse logistics) and organization units charged with designated reverse logistics activities. Then, the following proposition is stated: P4. The level of formality of reverse logistics program is positively linked to the e-tailer’s reverse logistics performance. 3.2.2 Information System Support Capability Information support is recognized as a way to develop linkages to achieve efficient reverse logistics operations (Daugherty et al. 2002). Indeed, information is generally perceived to be a vital input to the design of a reverse logistics system as well as a key to achieving efficient and effective reverse logistics operations. By providing prompt and accurate information, logistics managers are equipped with enhanced visibility of products that will be returned and can, therefore, process products receipt and return more efficiently (Tan et al., 2003). For the e-tailer, capturing returns information electronically allows the return to be processed quickly and at far less expense. Gartner Group’s Spieler calculated the average cost of processing a return electronically at $4.75 compared to $25 when a return is processed through a call center (Richardson, 2001). Besides, firms need systems in place to address problems that lead to returns at the first point of contact. A successful reverse logistics program should include a system to clarify why returned goods are coming back (Trebilcock, 2002). It offers firms the opportunity to collect valuable information that may facilitate identifying the patterns of defects or problem areas, and that can be used to reduce the return rate (Daugherty et al., 2001). As Fontanell, a service director of supply chain execution for AMR Research, Boston, suggested the ultimate benefit of effectively managing reverse logistics is the information generated on product returns and related materials that can be shared within the company (Meyer, 1999). Moreover, reverse logistics involves multi-party coordination with intensive information exchange (Blumberg, 1999). A compatible system linking the e-tailer with suppliers and forwarders to facilitate this exchange will be positive for returns performance (Daugherty, 2002). Obviously, effective information and communication technology is needed to manage return flows, but, surprisingly, the information systems field has paid little attention to reverse logistics (Hillegersberg et al., 2001). Based on the previous argument, the following proposition is stated: P5. Capabilities of information system for supporting reverse logistics (supporting reverse logistics transaction, customer returns analysis, information exchange among supply-chain members, and reverse logistics performance evaluation) are positively linked to the e-tailer’s reverse logistics performance. 4. Future Research and Managerial Implications While e-tailers are busy setting up their sites and attracting customers with marketing campaigns, many of them have relegated merchandise returns to the back burner with no one in charge of the returns process or no plan at all. However, e-tailers have recently woken up to the returns challenge, which affects them particularly hard. As a “bricks and mortar” retailer may get returns of six to ten per cent, this shoots up to thirty per cent for sales made from a website (Nairn, 2003). In contrast to the significance of reverse logistics in e-tailing practice, there are few researches addressing the distinct capabilities that lead to superior reverse logistics performance. The framework developed in this paper is a basis toward an understanding of the antecedents of reverse logistics performance in e-tailing sector. This framework helps e-tailers begin to identify what factors, in both proactive and reactive dimensions, influence their reverse logistics performances. 1620
Obviously the first research opportunity is to empirically test the proposed propositions in the framework. Each of the major constructs needs to be examined to ascertain the strength and nature of the relationship with e-tilers’ reverse logistics performances. It is noted that several constructs and their effects on reverse logistics have not had the deserved attentions or obtained support empirically. For example, some studies (Jahng 2002; Cho et al., 2003; Nitse et al. 2004) indicated that the effective modes and contents of product information presentation may vary with customers’ attributes or product categories. However, the relationship between product information presentation and reverse logistics performance has not verified yet. Similarly, the variables are comprised in each capability construct need exploration and empirical study. With more detailed information on the contribution of reverse logistics performance, e-tailers can better focus on developing distinctive capabilities to sustain competitive advantages. The philosophy of accepting product returns and offering post-sale services as a competitive weapon has resulted in the trend of liberal return policies and product-life-cycle services. This has prompted huge reverse logistics challenges. Reverse logistics management can be extremely complicated. It involves both economic and customer service issues. It combines relevant policies, information technology, systems, and building up coordination and cooperation among supply-chain members. To make matters even more complicated is that each return may require different treatment, depending on the product problems, product categories, or suppliers. So far, the focus has only been on the reactive capabilities, about how to efficiently improve the reverse logistics process. The focus should, however, on the proactive capabilities, to reduce the rate of returns, and leverage of information system for tracking reasons and conditions of product returns. References 1. Andel, T., “Reverse logistics: a second chance to profit: whether through refurbishment or recycling, companies are finding profit in returned products,” Transportation & Distribution (38: 7) 1997, pp. 61-64. 2. Bayles, D.L., E-Commerce Logistics & Fulfillment, Prentice-Hall PTR, NJ, 2001. 3. BizRate, 1999, http://www.BizRate.com. 4. Blumberg, D.R., “Strategic examination of reverse logistics & repair service requirements, needs, market size, and opportunities,” Journal of Business Logistics (20: 2) 1999, pp. 141-159. 5. Bowersox, D.J., Closs, D.J., and Stank, T.P., 21st Century Logistics: Making Supply Chain Integration A Reality, Council of Logistics Management, Oak Book, IL, 1999. 6. Cho, Y., Im, Il, Fjermestad, J., and Hiltz, S.R., “The impact of product category on customer dissatisfaction in cyberspace,” Business Process Management Journal (9: 5) 2003, pp. 635-651. 7. Daugherty P.J., Autry, C.W., and Ellinger, A.E., “Reverse logistics: the relationship between resource commitment and program performance,” Journal of Business Logistics (22: 1) 2001, pp. 107-123. 8. Daugherty, P.J., Myers, M.B., Richey, R.G., “Information support for reverse logistics: the influence of relationship commitment,” Journal of Business Logistics (23: 1) 2002, pp. 85-106. 9. Daugherty, P.J., Richey, R.G., Genchev, S.E., and Chen, H., “Reverse logistics: superior performance through focused resource commitments to information technology,” Transportation Research Part E (41) 2005, pp. 77-92. 10. Day, G.S., “The capabilities of market-driven organizations,” Journal of Marketing (58) 1994 October, pp. 37-52. 11. de Figueiredo, J.M., “Finding sustainable profitability in electronic commerce,” Sloan 1621
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Management Review 2000 Summer, pp. 41-52. Foss, N.J. and Eriksen, B., Competitive advantage and industry capabilities, in Montgomery (ed.), Resource-Based and Evolutionary Theories of the Firm, Towards a Synthesis, Kluwer Academic Publishers, Boston, 1995. Giuntini, R. and Andel, T., "Reverse logistics role models Part 3'', Transportation & Distribution (36: 4) 1995, pp. 97-98. Grant, R.M., “The resource-based theory of competitive advantage: implications for strategy formulation,” California Management Review (33: 3) 1991, pp. 114-135. Hillegersberg, J.V., Zuidwijk, R., Nunen, J.V., and Eijk, D.V., “Supporting the return flows in the supply chain,” Communications of ACM (44: 6) 2001, pp. 74-79. Jahng, J.J., Jain, H., and Ramamurthy, K., “Personality traits and effectiveness of presentation of product information in e-business systems,” European Journal of Information Systems (11: 3) 2002 Sep., pp. 181-195. Koloszyc, G., “Internet-only retailers struggle to improve product return process,” Stores (81: 7) 1999, pp. 54. Marien, E.J., “Reverse logistics as competitive strategy,” Supply Chain Management Review (14: 1) 1998, pp. 43-52. Merrilees, B. and Fry, M.L., “E-trust: The influence of perceived interactivity on e-retailing users,” Marketing Intelligence & Planning (21: 2) 2003, pp. 123-128. Meyer H., “Many happy returns,” The Journal of Business Strategy (20: 4) 1999 Jul/Aug, pp. 27-31. Modern Materials Handling, “Return to sender,” (55: 6) Mid-may 2000, pp. 64-65. Mukhopadhyay, S.K. and Setoputro, R., “Reverse logistics in e-business: Optimal price and return policy,” International Journal of Physical Distribution & Logistics Management (34: 1/2) 2004, pp. 70-88. Nairn, G., “Not many happy returns: unwanted goods,” Financial Times 2003 Feb.5, pp. 5. Narasimhan, R. and Kim, S.W., “Information system utilization strategy for supply chain integration,” Journal of Business Logistics (22: 2) 2001, pp.51-75. Nitse, P.S., Parker, K.R., Krumwiede, D., and Ottaway, T., “The impact of color in the e-commerce marketing of fashions: An exploratory study,” European Journal of Marketing (38: 7) 2004, pp. 898-915. Oliver, C., “Sustainable competitive advantage: combining institutional and resource-based view,” Strategic Management Journal (18: 9) 1997, pp. 697-713. Raimer, G., “In reverse,” Materials Management and Distribution (12: 3) 1997, pp. 12-13. Richardson, H.L., “Logistics in reverse,” Industry Week, (250: 6) 2001 Apr 16, pp. 37-39. Rogers, D.S. and Tibben-Lembke, R.S., “An examination of reverse logistics practice,” Journal of Business Logistics (22: 2) 2001, pp. 129-148. Rogers, D.S., Lambert, D.M., Croxton, K.L., and Garcίa-Dastugue, S.J., “The returns management process,” The International Journal of Logistics Management (13: 2) 2002, pp. 1-18. Stock, J.R., The development and implementation of reverse logistics programs, Oak Rrook, IL: Council of Logistics Management, 1998. Stock, J.R., Speh, T.W., and Shear, H.W., “Many happy returns,” Harvard Business Review (80: 7) 2002, pp. 16-17. Tan, A.W.K., Yu, W.S., and Arun, K., “Improving the performance of a computer company in supporting its reverse logistics operations in the Asia-Pacific region,” International Journal of Physical Distribution & Logistics Management (33: 1/2) 2003, 1622
pp. 59-74. 34. Trebilcock, B., “The seven deadly sins of reverse logistics,” Logistics Management (41: 6) 2002, pp. 31-34. 35. Wisner, J.D., “A structural equation model of supply chain management strategies and firm performance,” Journal of Business Logistics (24: 1) 2003, pp. 1-25.
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Shu-Lu Hsu Department of Management Information Systems National Chiayi University, Taiwan [email protected] Abstract The philosophy of accepting product returns and offering post-sale services as a competitive weapon has resulted in the trend of liberal return policies and product-life-cycle services. This has brought on huge reverse logistics challenges, especially for virtual-only retailers lacking logistics experiences. While the importance of reverse logistics in e-commerce has been highlighted, there are few researches addressing distinctive capacities to achieve leading-edge reverse logistics performance for e-tailing. A framework of antecedents of reverse logistics performance is proposed to help identify the major factors that influence e-tailers’ reverse logistics performances. A series of propositions are presented which serve to direct future research in this area. Keywords: reverse logistics, e-tailing, capability, performance 1. Introduction As e-tailers have raced to set their web sites up for easily navigable and attractive to online customers, the processes for dealing with product returns have taken a backseat. The online world increases the likelihood of product return, as items might be damaged in transit or are simply different from customers’ expectation. In Asia, Dell is selling its personal computers online and is expecting about 10 percent of sale to be returned (Tang et al., 2002). The return process, or reverse logistics, has been especially underdeveloped by virtual-only retailers (Koloszyc, 1999). However, industry observers estimated that thirty percent of all online purchases will end up in the return pool (Modern materials handling, 2000). Return is generally considered to be essential to customer service and satisfaction. According to the survey of BizRate, full 94 percent of those surveyed are influenced by online merchant’s return policies (BizRate.com, 1999). With the fast growth of e-commerce, any company not paying attention to its reverse logistics process is simply siphoning profits from the bottom line. Part of the problem is that the high cost of processing returns for web merchandises (Richardson, 2001). In addition, that no one is in charge of the return process in many companies and that many companies do not have a plan at all can cause serious problems. Companies involved in e-tailing get more undifferentiated and reverse logistics may be one of those areas where they can get a competitive advantage. Although many studies have shown that various logistics capabilities are positively associated with logistics or economic performance (Bowersox et al., 1999; Narasimhan and Kim, 2001; Wisner, 2003), the capability and performance of reverse logistics of e-tailers is rarely addressed. This study applies the resource-based theory of firm to exploring the capabilities to sustain superior reverse logistics performance in e-tailing. In the following section, the existing literature is reviewed to provide a theoretical base for proposing the framework and propositions in section 3. The final section concludes the implications of this study and suggestions for future research. 1616
2. Literature Review 2.1 Reverse Logistics Stock (1998) defined reverse logistics as: the term refers to the role of logistics in production returns, source reduction, recycling, materials substitution, reuse of materials, waste disposal, and refurbishing, repair, and remanufacturing. Reverse logistics is a fundamental part of retailing. It is estimated that reverse logistics accounts for five-to-six percent of total logistics costs in retailing sectors (Raimer, 1997). Routine logistics in retailing sector includes handling recalls, exchanges, returns, re-distributions, trade-ins, as well as the disposal of shipping containers and the collection of products and packing materials for recycling. Considerable payoff is believed to be associated with effective reverse logistics program (Daugherty et al., 2001). 2.2 Performance of Reverse Logistics Effective reverse logistics can result in direct benefits, including improved customer satisfaction, decreased inventory levels, and reductions in storage and distribution costs (Guintini and Andel, 1995; Andel, 1997). Marien (1998) noted that a well-managed reverse logistics program can result in savings in inventory carrying, transportation, and waste disposal costs as well as improving customer satisfaction. Daugherty et al. (2001) measured the performance of reverse logistics in terms of “improved customer relations, environmental regulatory compliance, cost containment, improved profitability, recovery of products, reduced inventory”. Daugherty et al. (2002) investigated the impact of information support on operating/financial and satisfaction performances of reverse logistics. Recently, Daugherty et al. (2005) studied reverse logistics with both economic and service quality performances. 2.3 Capability of Reverse Logistics The resource-based view mainly emphasizes firms’ internal strengths and weaknesses, in contrast to industrial organization economics which focuses on firms” external opportunities and threats (Grant, 1991; Foss and Eriksen, 1995). The resource-based perspective contends that the distinctive assets or capabilities of firms are the critical resources of sustained competitive advantage (Oliver, 1997). Distinctive capabilities can be defined as “complex bundles of skills and accumulated knowledge exercised through organizational processes, which enable firms to coordinate activities and make use of their resources” (Day, 1994). Reverse logistics can offer an opportunity for companies to differentiate or distinguish themselves with customers (Daugherty et al., 2002; Tan et al., 2003). Stock et al. (2002) summarized the potential for gain: reverse logistics should not be viewed as “a costly side-show to normal operations… it should be seen as an opportunity to build competitive advantage”. Thus, the reverse logistics capability can be regarded as a distinctive capability for acquiring competitive advantages for an e-tailer when it is valuable and difficult to imitate. 3. Conceptual Framework and Research Propositions Figure 1 outlines a framework for understanding the impact of reverse logistics related capabilities on the performance. The performance of reverse logistics is considered to be able to driven by both proactive and reactive capabilities. Proactive capabilities can facilitate e-tailers to reduce the possibility or occurrences of product returns from the e-customers. In contrast, reactive capabilities address the related competencies that e-tailers can efficiently and effectively execute the reverse logistics process. Regarding the performance, customers do not want to wait weeks before charges are removed from their credit card, and returned goods sitting in a stockroom invite higher carrying costs. Thus, reverse logistics is not just a logistics issue; it is also a customer service and a financial issue (Trebukcock 2002). Based on the work of Daugherty et al. (2002; 2005), two types of reverse logistics performances are 1617
considered: operating/financial performance and service quality. In addition, the examination of operating/financial performance should involve measuring the level of returns. Proactive Capabilities
Procurement Capability Avoidance and Gatekeeping Capability Information Presentation of Web
Reverse Logistics Performances
Operating/Financial Performance Return Level Cost Time Service Quality Customer Satisfaction
Merchandise
Reactive Capabilities
Formality of Reverse Logistics Program Information System Support Capability
Figure 1. Reverse logistics capabilities and performances of e-tailers 3.1 Proactive Capabilities Proactive capabilities mainly address the issue of how to prevent and avoid requests or occurrences of return for the e-tailer. This is a critical part of reverse logistics management to reduce the returns flow. Products designated to return may be due to customers’ remorse, finding the product unacceptable, overstock, for repairs, or refurbishing. 3.1.1 Procurement Capability The first factor, procurement capability, involves not only securing the merchandise quality and supply speed as that promised in web but also obtaining required support from suppliers, which rather affects the happening of customer returns. The policy and handling of returned products becomes part of the corporate image and is often an important criterion in online customers’ purchasing decision (Bayles, 2001; Daugherty et al., 2002). The restrictions imposed by an e-tailer for returning is relevant to the product/service agreement with the product supplier (Mukhopadhyay and Setoputro, 2004). In addition, reverse logistics is a boundary spanning process that requires interaction between members of the supply chain. E-tailers and suppliers must interact to accomplish the return or further handling of merchandise. The commitment from suppliers to support the reverse logistics program is a critical factor to the performance (Daugherty et al., 2002). Thus, a successful procurement system should be capable of ensuring the quality of acquired products as that proposed in web and gaining suppliers’ support to the reverse logistics policy and process. Based on the above arguments, the following proposition is suggested: P1. Procurement capabilities (product quality consistent with that promised in web, suppliers’ commitments to support reverse logistics program, attaining liberal return policy in suppliers’ product/service agreements) are positively linked to the e-tailer’s reverse logistics performance. 3.1.2 Avoidance and Gatekeeping Avoidance and gatekeeping are central elements to effective management of the return flow (Rogers et al., 2002). Avoidance involves finding ways to minimize the number of return requests. It can include ensuring that the quality of product delivered and user friendliness for consumer is at the highest attainable level before the product is sold and shipped, or changing the promotional programs that load the trade when there is no realistic chance that the product shipped to the customer will be sold. A survey by Daugherty et al. (2001) indicates that a significant proportion of product returns are due to defective merchandise (26.05%). Successful gatekeeping is to limit the number of items allowed into the reverse flow without damaging customer service (Rogers and Tibben-Lembke, 2001). It can eliminate unnecessary cost by preventing the product that should not be returned or 1618
returned to the inappropriate destination (Rogers et al., 2002). Thus, the following proposition is stated: P2. Avoidance and gatekeeping capabilities are positively linked to e-tailer’s reverse logistics performance. 3.1.3 Information Presentation of Web Products Having to evaluate a product without handing or seeing it is one construct associated with consumer’s perceived risks of using e-tail sites (Merrilees and Fry, 2003). According to de Figueiredo (2000), customers need to see and touch products such as produce and art despite recognizing the brand and knowing the product. Customers are likely to return products because their satisfaction after the purchase might not reach prior expectations generated from the web information. According to the studies of Jahng et al. (2002) and Cho (2003), the effectiveness of product information presentation varies with online consumers' psychological types and product categories. For example, a survey result indicates that companies are losing customers and sales as a result of having colors on e-commerce sites that do not accurately match the actual colors of the products being sold. Increased dissatisfaction of consumers leads to greater costs in both customer service and reverse logistics (Nitse et al., 2004). Thus, in an effort to fulfill the customer expectations, e-tailers must be capable of customized presentation of web merchandise for different products or customer categories. Based the above arguments, the following proposition is proposed addressing the impact of the nature of web merchandise information presentation capability on the reverse logistics performance. P3. The product information presentation capability is positively linked to the e-tailer’s reverse logistics performance. 3.2 Reactive Capabilities Reactive capabilities are those significant for e-tailers to deal returns in an effective and cost-efficient manner. There are some challenges to reverse logistics. The survey of 311 logistics managers by Rogers and Tibben-Lembke (2001) showed that four in ten logistics managers consider reverse logistics relatively unimportant compared to other company issues. In addition, the survey revealed restrictive company policies (35%), lack of proper systems (including information systems, 34%), and lack of personnel/financial resources commitment (29%) could also inhibit actions on reverse logistics. In the following, it is focused on the two critical antecedents for e-tailers dealing with reverse logistics: formality of reverse logistics program and information system support capability. 3.2.1 Formality of Reverse Logistics Program As Rogers and Tibben-Lembke (2001) denoted that for many companies, it is difficult to successfully execute reverse logistics due to the lack of managerial support and organizational emphasis on reverse logistics in terms of lack of management system and designated resources. Stock (1998) and Daugherty et al. (2005) also indicate that even though reverse logistics is a critical component for success in many businesses, it is often overlooked or inadequately supported. The scope of reverse logistics has now expanded form service parts management to other areas, e.g., post-service, repair, remanufacturing, etc. However, as the reverse logistics process has not been mapped under the enlarged scope of reverse logistics, companies find it difficult to plan, implement and control the process properly (Stock, 1998). Also according to the study of Stock (1998), most companies developed reverse logistics programs by a non-logistics related group or department. Trebilcock (2002) suggested that reverse logistics is a fulltime job, and firms must decide whether handling returns with a dedicated team in-house or working with third-party logistics providers. The company’s planning approach sheds light on its organizational emphasis while determining how resources will be allocated. Since resource allocation directly determines the adequacy of the infrastructure and people skills of the firm, it plays a preeminent role in helping a firm 1619
to build superior reverse logistics processes and to allocate required resources. Thus, in this study the level of formality of reverse logistics program of an e-tailer is determined by the existence of sophisticated planning (including a statement of strategic objectives with corresponding policies and process planning of reverse logistics) and organization units charged with designated reverse logistics activities. Then, the following proposition is stated: P4. The level of formality of reverse logistics program is positively linked to the e-tailer’s reverse logistics performance. 3.2.2 Information System Support Capability Information support is recognized as a way to develop linkages to achieve efficient reverse logistics operations (Daugherty et al. 2002). Indeed, information is generally perceived to be a vital input to the design of a reverse logistics system as well as a key to achieving efficient and effective reverse logistics operations. By providing prompt and accurate information, logistics managers are equipped with enhanced visibility of products that will be returned and can, therefore, process products receipt and return more efficiently (Tan et al., 2003). For the e-tailer, capturing returns information electronically allows the return to be processed quickly and at far less expense. Gartner Group’s Spieler calculated the average cost of processing a return electronically at $4.75 compared to $25 when a return is processed through a call center (Richardson, 2001). Besides, firms need systems in place to address problems that lead to returns at the first point of contact. A successful reverse logistics program should include a system to clarify why returned goods are coming back (Trebilcock, 2002). It offers firms the opportunity to collect valuable information that may facilitate identifying the patterns of defects or problem areas, and that can be used to reduce the return rate (Daugherty et al., 2001). As Fontanell, a service director of supply chain execution for AMR Research, Boston, suggested the ultimate benefit of effectively managing reverse logistics is the information generated on product returns and related materials that can be shared within the company (Meyer, 1999). Moreover, reverse logistics involves multi-party coordination with intensive information exchange (Blumberg, 1999). A compatible system linking the e-tailer with suppliers and forwarders to facilitate this exchange will be positive for returns performance (Daugherty, 2002). Obviously, effective information and communication technology is needed to manage return flows, but, surprisingly, the information systems field has paid little attention to reverse logistics (Hillegersberg et al., 2001). Based on the previous argument, the following proposition is stated: P5. Capabilities of information system for supporting reverse logistics (supporting reverse logistics transaction, customer returns analysis, information exchange among supply-chain members, and reverse logistics performance evaluation) are positively linked to the e-tailer’s reverse logistics performance. 4. Future Research and Managerial Implications While e-tailers are busy setting up their sites and attracting customers with marketing campaigns, many of them have relegated merchandise returns to the back burner with no one in charge of the returns process or no plan at all. However, e-tailers have recently woken up to the returns challenge, which affects them particularly hard. As a “bricks and mortar” retailer may get returns of six to ten per cent, this shoots up to thirty per cent for sales made from a website (Nairn, 2003). In contrast to the significance of reverse logistics in e-tailing practice, there are few researches addressing the distinct capabilities that lead to superior reverse logistics performance. The framework developed in this paper is a basis toward an understanding of the antecedents of reverse logistics performance in e-tailing sector. This framework helps e-tailers begin to identify what factors, in both proactive and reactive dimensions, influence their reverse logistics performances. 1620
Obviously the first research opportunity is to empirically test the proposed propositions in the framework. Each of the major constructs needs to be examined to ascertain the strength and nature of the relationship with e-tilers’ reverse logistics performances. It is noted that several constructs and their effects on reverse logistics have not had the deserved attentions or obtained support empirically. For example, some studies (Jahng 2002; Cho et al., 2003; Nitse et al. 2004) indicated that the effective modes and contents of product information presentation may vary with customers’ attributes or product categories. However, the relationship between product information presentation and reverse logistics performance has not verified yet. Similarly, the variables are comprised in each capability construct need exploration and empirical study. With more detailed information on the contribution of reverse logistics performance, e-tailers can better focus on developing distinctive capabilities to sustain competitive advantages. The philosophy of accepting product returns and offering post-sale services as a competitive weapon has resulted in the trend of liberal return policies and product-life-cycle services. This has prompted huge reverse logistics challenges. Reverse logistics management can be extremely complicated. It involves both economic and customer service issues. It combines relevant policies, information technology, systems, and building up coordination and cooperation among supply-chain members. To make matters even more complicated is that each return may require different treatment, depending on the product problems, product categories, or suppliers. So far, the focus has only been on the reactive capabilities, about how to efficiently improve the reverse logistics process. The focus should, however, on the proactive capabilities, to reduce the rate of returns, and leverage of information system for tracking reasons and conditions of product returns. References 1. Andel, T., “Reverse logistics: a second chance to profit: whether through refurbishment or recycling, companies are finding profit in returned products,” Transportation & Distribution (38: 7) 1997, pp. 61-64. 2. Bayles, D.L., E-Commerce Logistics & Fulfillment, Prentice-Hall PTR, NJ, 2001. 3. BizRate, 1999, http://www.BizRate.com. 4. Blumberg, D.R., “Strategic examination of reverse logistics & repair service requirements, needs, market size, and opportunities,” Journal of Business Logistics (20: 2) 1999, pp. 141-159. 5. Bowersox, D.J., Closs, D.J., and Stank, T.P., 21st Century Logistics: Making Supply Chain Integration A Reality, Council of Logistics Management, Oak Book, IL, 1999. 6. Cho, Y., Im, Il, Fjermestad, J., and Hiltz, S.R., “The impact of product category on customer dissatisfaction in cyberspace,” Business Process Management Journal (9: 5) 2003, pp. 635-651. 7. Daugherty P.J., Autry, C.W., and Ellinger, A.E., “Reverse logistics: the relationship between resource commitment and program performance,” Journal of Business Logistics (22: 1) 2001, pp. 107-123. 8. Daugherty, P.J., Myers, M.B., Richey, R.G., “Information support for reverse logistics: the influence of relationship commitment,” Journal of Business Logistics (23: 1) 2002, pp. 85-106. 9. Daugherty, P.J., Richey, R.G., Genchev, S.E., and Chen, H., “Reverse logistics: superior performance through focused resource commitments to information technology,” Transportation Research Part E (41) 2005, pp. 77-92. 10. Day, G.S., “The capabilities of market-driven organizations,” Journal of Marketing (58) 1994 October, pp. 37-52. 11. de Figueiredo, J.M., “Finding sustainable profitability in electronic commerce,” Sloan 1621
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