Apple Inc.

Managing Returns and

Reverse Logistics

SAMPLE ASSIGNMENT
IN OPERATIONS STRATEGY

/COVER PAGE/
Table of Contents

1. Introduction .......................................................................................................... 2
2. Managing the Reverse Flow of Products ............................................................. 3
2.1. Supply Chain Management ........................................................................... 3
2.2. Reverse Logistics and Returns Management ............................................... 4
3. Apple’s Returns Management; the impact on costs and customer service .......... 6
3.1. Securing Customer Loyalty ........................................................................... 7
3.2. Reducing Return Management Costs ........................................................... 7
3.3. The Impact of Returns Management on Apple’s Total Costs ........................ 8
4. Conclusion ........................................................................................................... 8
References ................................................................................................................. 9

Word Count: 1.677

Apple Inc.; Managing Returns and Reverse Logistics Page 1

 1. Introduction

Understanding global trends in operations management is crucial for winning

organizations. Technological advancement, shortening of product life-cycles, supply
chain management, green manufacturing and lean production are all evolving trends
that impact operations management. Mahadevan (2010) describes operations
management as a systematic approach to design, planning and control of activities
involved in the process of transforming inputs into revenue-generating outputs.
Successful operations management obtains the required efficiency and productivity
that eventually ensures delivery of value to customers and enables businesses to
achieve competitiveness.

Apple appears on the top of the list of “the world’s most admired companies” for
eight consecutive years (Fortune, 2015). Successfully supporting its “Think
Different” slogan, the company encounters the intense competition within the digital
industry by connecting creativity with technology and innovation with simplicity,
rendering itself prominent in the area of operations management (Segall, 2013).
Figure 1 illustrates Apple’s operations function.

Figure 1: Apple’s Operations Function (Source: Apple Inc., 2015; Lashinsky, 2012;
Statista, 2015)

Apple Inc.; Managing Returns and Reverse Logistics Page 2

After providing an overview of operations management, with specific reference to the
operations function of Apple, this report aims to outline the importance of returns
management and reverse logistics in supply chain management. It furthermore
assesses Apple’s degree of effectiveness in practicing returns management in
relation to cost reduction and better customer service. The report concludes with
recommendations as to how Apple could further improve its reverse logistics and
returns management practices.

2. Managing the Reverse Flow of Products

2.1. Supply Chain Management

Supply Chain Management (SCM) is a key term for operations management, as it

addresses management in the areas of customers, suppliers, demand,
manufacturing, resources, inventory, product development and returns (Autry,
Goldsby and Bell, 2012). Apple has become a supply chain “master” and has been
ranked Number 1 from 2008 to 2014 by the analyst firm Gartner (Blanchard, 2014).
Their efficient and streamlined processes, which perfectly balance supply and
demand, involve sourcing, manufacturing, warehousing, distribution, and finally
returns management and reverse logistics (Fig. 2).

Figure 2: Apple’s Supply Chain Model (Source: SupplyChainOpz, 2013)

Apple Inc.; Managing Returns and Reverse Logistics Page 3

2.2. Reverse Logistics and Returns Management

The importance of managing the forward flow of products to customers is equally

vital as managing the reverse flow. Reverse logistics is an extension of operations
management and an inseparable part of SCM. Bilodeau (2013) describes it as the
process of reintroducing the products back into the forward supply chain, after
delivery to the customer, by reusing or recycling them into new items for subsequent
lifecycles. Rogers and Tibben-Lembke (1998) define reverse logistics as the efficient
and cost-effective planning, implementing and controlling of the flow of goods from
the point of consumption to the point of origin, aiming to recapture value or proper
disposal. Figure 3 shows how reverse logistics is closely related with SCM.

Figure 3: Reverse flow in the supply chain (Source: Amer-Trans Logistics, 2015)

The essence of SCM is to provide products to the consumer at the right time and the
right cost. Returns management opts to meet these customer expectations and thus
improve customer relationships, while at the same time achieving product quality and
financial performance. Product returns impact physical flows (e.g. sales), information
flows (e.g. inventory levels) and financial flows (e.g. profitability). Therefore,
implementing effective returns management can add to supply chain efficiencies.
The role of returns management in the supply chain strategy is extended to
managing environmental, competition and legislative issues (Mollenkopf et al., 2007;
Hjort, 2010).

Apple Inc.; Managing Returns and Reverse Logistics Page 4

The process of returns management is illustrated in figure 4, based on Rogers et al.
(2002) definition of returns management, as being the part of SCM that includes
returns avoidance, gate-keeping, reverse logistics, and disposal.

Figure 4: Returns Management Process (Source: Hjort, 2010)

Apple Inc.; Managing Returns and Reverse Logistics Page 5

3. Apple’s Returns Management; the impact on costs and
customer service

The electronics industry in US spends $14 billion on returns every year, however
65% of returns are not defective (Greve and Davis, n.d.). While many companies
view returns as a cost driver, Apple considers reverse logistics and returns
management as a competitive edge that helps maximize value recovery for returned
products, through customer satisfaction and profit revenue.

3.1. Securing Customer Loyalty

According to a survey, 91% of customers will not buy from a company if they have a
bad service experience (CSM, 2015). Adding to this, Murphy and Murphy (2002)
suggest that a 2% increase in customer retention has the same effect as decreasing
costs by 10%. To this end, in an innovative attempt to manage returns effectively
and deliver quality customer service, Apple created the Genius Bar, also referred to
as the "heart and soul of Apple's stores". Here, trained and empowered employees
are assigned with the role of helping customers with product information and free
support (Heisler, 2015). Eventually, fast and simple returns practices lead to
reduced response time and increased convenience, which leverage customer
experience, enhance customer retention and loyalty, and upturn repeat purchases.

3.2. Reducing Returns Management Costs

Apple develops plans to find the most cost-effective ways to manage and reduce
returns. The manufacturing and distribution quality controls, the on-the-spot
educating of the customers before and after the sale, and the in-store handling of
problems by Apple’s Geniuses eliminate unnecessary handling costs and reduce the
likelihood of return (Mollenkopf, 2010; Gantenberg, n.d.; PRLog, 2011). As a result,
the “returns avoidance” section of the return management process as outlined by
Hjort (2010) is effectively and efficiently handled (see figure 4).

Furthermore, a well-managed and efficient gate-keeping process is applied by Apple,

so that the costs of accepting the return will not exceed benefits. Return policies and
product warranties with clear guidelines protect the company from excessive and
unauthorized returns. Return-preventing policies involve a 10% restocking fee,
shipping costs, a 10% unboxing fee and a short time limit of 14 days from date of
purchase, all of which discourage light-hearted returns and help recover processing
costs (Apple, 2015).

Apple Inc.; Managing Returns and Reverse Logistics Page 6

Once the product enters the reverse flow, the company uses tracking methods, like
shipping and packing labels to ensure correct and quick management and shipment
of the return. The customer even receives the package, with the necessary
identification on it, in order to return the product. The company is therefore
burdened with extra costs like manpower, assessing, repairing, packaging, reselling
and refunds. However, the profits gained from keeping customers satisfied through
the ease of processes, outweigh the costs involved in the return process
(SupplyChainDigest, 2009).

3.3. The Impact of Returns Management on Apple’s Total Costs

According to PwCs (2008), returns management incurs both clear costs (e.g.
recovery processing) and hidden costs (e.g. inventory depreciation). The question is
whether the opportunities presented with reverse logistics are effectively exploited,
so as to minimize costs, while adding value to both the business and the consumers.

Apple has realized that planning, collaboration and communication in returns

management reduces expenses and develops new markets. Starting with effective
data management, Apple collects information about the reasons for return, which is
then used to improve processes and products, leading to higher quality and
customer satisfaction. At the same time, data management helps to manage
inventory levels, a very important factor for high-tech companies because of the
relatively short life-cycle nature of products. In addition, by implementing technology
and automation in its reverse logistics processes, the company achieves speed at
lower cost and manages profitable asset recovery from products that fall out of the
supply chain (Bilodeau, 2013).

Electronic toxic waste has been a rapidly growing problem as it can harm the
environment. Electronics’ manufacturers use 320 tons of gold and 7500 tons of silver
every year to meet consumer demands (Burger, 2012). These precious metals from
e-waste that were once dumped in the sea or landfills now bring in high profits
through proper return management practices. For example, Apple’s trade-in
programs help in circular economy or reselling in the secondary market, where e-
waste from one organization can become a resource for another (Clancy, 2015).
Eventually, the company’s sustainable reverse logistics practices leverage its
corporate image and raise its profits, while helping the environment.

Apple opts to reduce return management costs by outsourcing much of its reverse
logistics to third party logistics providers (3PLs). In doing so, reverse logistics
expertise and network is achieved quickly, eventually leading to greater flexibility and
faster speed to market. With 3PL providers dealing with the reverse flow, the
company can use its capital resources, technology and staff to focus on the forward

Apple Inc.; Managing Returns and Reverse Logistics Page 7

running of the business, thus positively impacting its profitability (Genco Insights,
2014).

4. Conclusion

The consumer electronics industry is rapidly changing; demanding consumers,

shortened product life-cycles, increased globalisation and companies straggling to
find new sources of revenue. In an increasing returns-world many challenges and
opportunities are offered. Reverse Logistics, having become a critical component of
successful supply chains, is one of the main unexplored areas for potential revenue
and profit growth.

Apple Inc. has realized that reverse logistics is an ongoing process with long-term
financial benefits, and has therefore incorporated returns management strategies
that differentiate the company in terms of efficiency, innovation and value creation.
Nevertheless, the company was not included in the top ten list of Fortune 500 in
terms of Management Quality (Fortune Editors, 2015). To this end, Apple should
develop a Lean and Six Sigma program, in order to manage quality and achieve
error-free performance within its reverse logistics processes. The goal would be
improved customer experience, higher efficiency and productivity, and increased
profitability by eliminating defects and waste like inventory, over-production, over-
processing, time, transportation and waiting (Sherman, 2014).

Deploying a Lean and Six Sigma program to optimize the reverse chain will require
Apple to: strengthen collaboration within the company and between partners; to
automate processes in order to reduce errors; to apply information technology so as
to control end-to-end processes; to use advanced forecasting and planning
principles that will eliminate uncertainties; to implement efficient gate-keeping in
order to prevent excessive returns; to promote a sustainable culture that will impact
on its corporate image; and to remain focused on satisfying customer needs and
expectations so as to encourage loyalty. Appropriate implementation of all the
aforementioned practices would translate into the company’s further global
competitiveness and financial soundness.

Apple Inc.; Managing Returns and Reverse Logistics Page 8

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