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Management Research NewsVol. 29 No. 9, 2006pp. 532-551# Emerald Group Publishing Limited0140-9174DOI 10.1108/01409170610708989

Give me back my empties or else!A preliminary analysis of

customer compliance in reverselogistics practices (UK)

Liz BreenBradford University School of Management, Bradford,

West Yorkshire, UK

Abstract

Purpose – This research aims to conduct an exploratory analysis into current industrial reverselogistics practice in business-to-business (B2B) and business-to-customer relationships (B2C), anddetermine the financial and operational impact of customer non-compliance in returning distributionequipment back to their source.Design/methodology/approach – The analysis was conducted over multiple industry sectorsusing qualitative research techniques. The research sample included seven industry sectors,providing a response rate of 72 per cent (53 sources approached). The focus was on both B2B andB2C relationships to determine similarities and differences in financial and operational repercussions.Findings – The research findings indicate that the efficacy of the reverse logistics system can beundermined by lack of customer compliance, with losses of up to £140 million (B2B).Research limitations/implications – In both B2B and B2C relationships, there is evidence ofsuppliers suffering financial loss due to customer non-compliance. Due to the small scale of theanalysis and the breadth of the industry sectors investigated, these results are not generalisable, butdo indicate that this is an area, which could undermine supply chain effectiveness.Practical implications – Non-compliance of this nature carries a direct and highly applicable costfor manufacturers and distributors in the practitioner arena. Suppliers within industry need toacknowledge this issue and manage their reverse logistics more effectively.Originality/value – This paper adopts an innovative focus on an understated feature of the reverselogistics cycle, i.e. the recycling of distribution equipment used to transport outbound and returnedproducts. The paper identifies a range of options, which practitioners can use as guidance whenmanaging the returns system.

Keywords Distribution management, Waste minimization, Recycling, Distribution operations

Paper type Research paper

IntroductionReverse logistics has been defined as the movement of products or materials in theopposite direction for the purpose of creating or recapturing value, or for properdisposal. The reverse flow may consist of both product and packaging (Rogers andTibben-Lembke, 1999; 2001).

The reverse logistics system is enforced by returns policies in both business-to-business (B2B) and business-to-consumer (B2C) relationships. A B2B arrangement is aB2B trading relationship and B2C arrangement is when a business provides a productand or service directly to the downstream end-user as final customer. A returns policyis a commitment by partners in a supply chain (e.g. manufacturers, distributors,and retailers) to accept excess products from a downstream channel member(Padmanabhan and Png, 1995). Examples of which include the use of contracts, verbalagreements, deposit systems, and one-for-one exchange systems. All of which rely onthe compliance of customers, i.e. business and end-users, to facilitate returns in order to

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ensure an effective business cycle, where products can be re-introduced into inventoryand resold, and the logistics function can take place.

This study is driven by the recognition that there is some shrinkage of distributionequipment in supply chains. Industries and service providers have been having thisdifficulty for years. For example, Aberdeen Group (2004) found almost half therespondents to a study on this issue reported that assets within logistics operationsequate to 5 per cent of their corporate revenue and almost one-fifth said it was10 per cent. Theft, damage, and misplacement often eroded asset productivity and thata quarter of companies reported losing more than 10 per cent of their container fleetannually.

Distribution equipment or ‘‘kit’’ are essential in sustaining outbound logisticsactivity. While it is has traditionally been of little notice to suppliers, with decreasingmargins, it has become increasingly important to manage these assets. Examples ofthis type of equipment includes: trolleys, pallets, roll cages, tote boxes, beer crates,and beer kegs in B2B trading and wheeled bins, shopping, and baggage trolleys inB2C environments. The importance of this issue will vary depending on the companyinvolved, what it does (products/services offered) and how it does it (own distribution/equipment, equipment leased or distribution via 3rd party). The empirical researchundertaken centred on a number of industry sectors and a wide range of distributionequipment.

This paper reports on research investigating the impact of customer non-compliance in returning distribution equipment to their suppliers or distributors. Little,if any literature has focused on the issue of customer compliance in facilitating reverselogistics systems in the UK and the supplier financial and operational repercussionsof customer non-compliance in returning distribution equipment.

The next section briefly outlines the research background, followed by anexamination of the relevant reverse logistics literature. The methodological approachwill then be discussed and empirical data collected presented and discussed. The paperwill end with the research conclusions and suggested future research directions.

Reverse logistics in B2B relationshipsThe focus of this discussion whilst on the supply chain also acknowledges the need tounderstand the importance of broader returns systems. The nature of the productinvolved, and the parties involved, will dictate the policies and practice implementedwhen returning products. The return of any product that can be re-sold and reused hasto be timely, else many will have to be disposed of or sold at a lower price in othermarkets (De Brito and Dekker, 2001), or the operation may be ineffective or not functione.g. pallets are needed to transport stock.

The importance of having a structured approach to managing returns cannot beunderestimated, as information collated from returned products filters into sales,procurement, inventory management, storage, distribution, and finance (in the form ofpricing strategies, refund costs, distribution costs, and decisions regarding levels ofsafety stock amongst others) (See Mostard and Teunter, 2006; Yalabik et al., 2005;Minner, 2001; Inderfurth and van der Laan, 2001; Davis et al., 1998). Thus, there aredistinct economical considerations in managing returns in an effective and timelymanner. Protection against abuse of such systems by both end-user customers andbusiness customers can be through exchange periods being limited (the time withinwhich products can be returned) and contracts. In relation to distribution equipment,there is an innate value to the business in retaining such equipment as these products

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facilitate the operational function. To this end, there is a certain element of risk andtrust in the supplier–buyer relationship concerning this returns activity, and anincreased effort to reduce this risk through effectively designed systems (Minner, 2001),modeling (Fleischmann et al., 1997) and higher visibility through intralogistics(Lottner, 2005).

Reverse logistics in both practitioner and academic circles adopts a number ofguises. The term has been used to cover practice from individual customer productreturns (defective), en-masse product recalls, product warranties, product recycling/reclaiming, secondary sales, and equipment return for re-use. In supply chainliterature, the concept has been associated with the product life cycle (Tibben-Lembke,2002); warranty returns (Teng et al., 2005); container recycling (Kroon and Vrijens,1995); product recycling (Stock, 1992); and operational systems (Tibben-Lembkeand Rogers, 2002; Tibben-Lembke, 2002; Knemeyer et al., 2002). It has also beendiscussed in light of its strategic advantage (Tan et al., 2003; Stock et al., 2002), casestudy application (Ritchie et al., 2000; De Koster et al., 2002); information technology(Daugherty et al., 2004); e-cycling (Nagurney and Toyasaki, 2005) and green-supplychain strategies (Simpson and Power, 2005; Sheu et al., 2005).

Whilst the above literature demonstrates the variety of applications of reverselogistics in practice, the subject of the return of distribution equipment, i.e. thatequipment upon or within which products are transported to businesses and endcustomers, and the role of customers in facilitating this returns process has not beenaddressed.

Tibben-Lembke and Rogers (2002) in their examination of forward versus reverselogistics systems identify the various costs associated with reverse logistics andcompare them to forward logistics. The authors indicate that the costs associatedwith shrinkage in the form of theft are lower in reverse logistics when compared toforward logistics. The premise here is that the outbound route contains valuableproducts whereas the reverse route contains a reduced quantity of returned/defectiveproducts. There is no consideration in this equation of the loss/theft of equipment orcharges incurred by third parties due to loss of equipment. This issue would arguablylead to a potential increase in this reverse logistics cost category.

Reverse logistics systems and their development do present a challenge to theaverage company in determining how best to approach and sustain practice. Issuesthat have been raised by companies, which cause difficulties and limit success inthis development include: the importance of this issue in comparison to other issues;company policies; lack of systems; competitive issues; management inattention;financial resources; personnel resources, and legal issues (Rogers and Tibben-Lembke,1999). The issue of customer compliance in the facilitation of the reverse logistics cyclewas not listed as a problematic criterion, but is certainly an underlying economic andoperational issue that warrants investigation.

Customer compliance underpins the overall practice of returns and recycling ofproducts. Customers are required voluntarily or legally (e.g. the EU Directive on WasteElectrical and Electronic equipment (WEEE) (2005), focusing on the end-of-life return(http://europa.eu)) to return products for reuse, resale or disposal. In the case ofelectronics, customers can be more conscientious about environmental safety and thepotential for product recycling. For example, Hewlett Packard (HP) has recycledcomputer and printer hardware since 1987, collecting approximately 2.5 millionhardware products each year that are refurbished, resold or donated. To support thispractice further HP have introduced services such as asset recovery and destruction,

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leasing arrangements, the resale of remarketed and refurbished products and trade-insleading to upgraded products (www.hp.com). These services rely on business anddomestic customers returning products to HP before they can be initiated.

The return of products back to manufacturer, distribution or leasing agents may becompleted in a number of ways, facilitated by various tools and equipment. Operatorsmay recognize that it is operationally more efficient to utilize the resources of a thirdparty e.g. CHEP, a global pallet and container pooling agent (see Aghazadeh, 2003;Breen, 2004; Wilding and Juriado, 2004). Another development, which promotes moreefficient management of distribution equipment and other assets and stock at thecustomer end, is RFID technology (see Ranky, 2006; Sheffi, 2004; Karkkainen, 2003).Whilst this paper chooses not to focus on these two areas in depth, it acknowledgesthat these are potential solutions for more effective management of information andgreater supply chain efficiencies.

Loyalty and trust within a customer–supplier relationship are needed in order topromote a nurturing partnership, high-level communication, and visibility ofinformation. In certain circles, the option of incentives to encourage co-operation maybe considered, the assumption being that a supply chain works well it its companies’incentives are aligned – that is, if the risks, costs, and rewards of doing business aredistributed fairly across the network. There are three reasons why incentive-relatedissues arise in supply chains (Narayanan and Raman, 2004):

(1) When companies cannot observe other firms’ actions they find it hard topersuade these firms to do their best for the network.

(2) It is difficult to align interests when one company has information orknowledge that others in the supply chain do not.

(3) Incentive schemes are badly designed.

There are significant gaps between buyer and supplier expectations concerning howrelationships should evolve (Doran et al., 2005) and there is still a lack of definitionconcerning mutuality in such relationships (Cox, 2004). Thus, suppliers may be atfault in not effectively setting up and maintaining the relationship infrastructure i.e.communication channels, points of contact, progress review meetings, contractualresponsibilities, value gains, and feedback systems.

Reverse logistics in B2C relationshipsTibben-Lembke and Rogers (2002) state that the closer a company is to the endcustomer the greater the size and scope of reverse logistics issues. For example, aretailer will have to deal with more customer returns than their supplier. This situationalso means that the customer, due to their proximity has a more direct positive ornegative impact on the company. This issue is highlighted in the loss/shrinkage ofdistribution equipment due to customer negligence, which directly influencesoperational efficiencies and cost absorption. Because of the potential negativeimplications, significant effort should be made to encourage customer compliance inreturning distribution equipment (e.g. pallets, crates, and tote boxes) so that service ismaintained and deliveries made.

In the average B2C environment, manufacturers and retailers also have anobligation to accept returns from the customer as the end user and have individualpolicies for how this process is conducted. According to Davis et al. (1998) customerabuse and a harder line by manufacturers on returns were cited as the main reasons for

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tighter restrictions. In the retail environment today, certain items are not eligible forreturns e.g. electronic appliances, or retailers refuse to give cash refunds, optingfor credit instead. This behaviour is due to perceived opportunistic abuse of the systemby customers. A solution to such abuse or a preventative measure that can be taken bysuppliers is the introduction of supplier–consumer standard-form contracts. Suchcontracts are a rare crucial instrument in the establishment and maintenance ofcooperative relationships between firms and their customers ( Johnston, 2006, p. 857),as they explicitly state the contractual nature of the relationship and thereforedetermine the parameters of bargaining.

The popularity of varied modes of purchasing and the competition betweencompanies providing similar products means that there are more opportunities andease to buy remotely. This ultimately increases the number of returns as customers canbuy before they try and return if dissatisfied with their purchase. Research hasindicated that catalogue/internet mail order returns can be as high as 75 per cent(Mostard and Teunter, 2006; De Brito and Dekker, 2003). This creates a new level of riskin the transaction; getting the product back in the same condition and ensuring it is stillin demand.

MethodologyThe aim of this research was to examine current reverse logistics practice anddetermine the impact of customer non-compliance in returning distribution equipmentback to their source thus, making the reverse logistics cycle less effective. Table Iidentifies the companies who participated in this project.

The research originally focussed on B2B trading partners e.g. the pharmaceuticalsector and then was extended to include B2C to provide a wider appreciation of theissue under discussion. Examples of both B2B and B2C relationships are provided inTable II.

The two distinct categories were examined in order to determine if the same issue ofnon-compliance existed, with like operational and financial repercussions despite therelationship difference and scale of activity. Within B2B trading, e.g. logistics, there is agreater geographic spread of activity, higher levels of stock being transferred hencemore equipment in the logistics cycle, multiple partners potentially involved (e.g. thirdparty logistics providers) and the potential for greater financial losses, but ideally

Table I.Details the sectorsinvolved in theresearch sample andresponse rates

SectorNumber of companies

approachedNumber ofrespondents

B2BPharmaceutical suppliers/wholesalers 9 8Pallet pooling agents/logistics distributors 10 7Breweries 11 7Logistics associations 5 4

B2CRetail supermarkets 3 2Local councils 5 2Airports 5 3Major railway stations 5 5

Total 53 38

Response rate 71.7%

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greater ability to control behaviour and activity. In B2C relationships, there is arestricted geographic spread concerning equipment use e.g. a retail supermarket orairport perimeter, limited range of stock, and quantity used (i.e. a trolley and generallycustomer only uses one), and overall there is a lower value of stock per location. Therelationship only involves the business and customer, but there is distinctly less abilityto control behaviour.

As this is an exploratory study, snowball sampling was used since it was difficult toidentify members of the research population and guidance was needed from contacts torecommend potential participants (Saunders et al., 2003). As the research was drivenby problems identified in the pharmaceutical supply chain, the initial intervieweeswere chosen initially through contacts within the pharmaceutical industry. This initialsample set led to further contacts. During the course of the research, some contactswere made purely by ‘‘cold-calling’’ after details were accessed from company websites.This process led to the most appropriate person to be contacted by either by telephoneor by e-mail.

Data was collected through questionnaires by e-mail or dictated over the telephone,and subsequent e-mail/telephone follow-up conversations. This phase of the researchwas pre-empted by initial e-mail introductions and requests. The questions addressedin the questionnaires are detailed in Table III.

A qualitative approach was adopted in approaching the data collection andanalysis. This approach was considered the most appropriate method for thisexploratory analysis, as it was essential that views and opinions were recorded in orderfor the scope and scale of the issue to be acknowledged and some valid conclusions tobe made. This feedback could then provide the basis for a wider and more detailedresearch agenda. The data collected was analysed via the identification of core themesfrom the interviewees’ responses.

FindingsThe issue of loss was questioned in all sectors and all parties interviewed. Loss isknown in the various industry sectors as shrinkage, leakage, attrition, damage, theft,and loss in general through non-return from customers. The consensus was that it wasan issue, that whilst not necessarily on the increase due to measures being taken toreduce it, was still something that was not being taken as seriously as it should and notaddressed properly. An overview of the findings is presented in Tables IV and Vfollowed by a more detailed discussion of results by sector.

B2B findingsThe findings of the B2B group will be discussed first. This section incorporates datafrom the pharmaceutical sector (suppliers and wholesalers), pallet pooling agents andlogistics distributors, logistics associations, and breweries.

Table II.Examples of B2B and

B2C relationships

B2B B2C

Third party logistics providers Amazon.comConstruction sub-contractors E-bayAsset management companies Retail supermarketsWarehousing specialists AirportsTelecommunication companies Estate agenciesTravel agencies Travel agencies

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Pharmaceutical sector. Within the pharmaceutical sector, manufacturer A statedlost pallets were causing organizational losses of approximately £100,000 per year.This loss resulted from customer non-compliance or potential theft for resale. Onehospital alone over the previous four years had not returned more than £20,000 worthof pallets. Wholesaler A in this sector responded that customers returned only 90 percent of their tote boxes. The tote boxes were desirable to the customer for internal use.They, therefore, operated on the basis of 10 per cent costs due to this loss per year.A similar issue was evident in another pharmaceutical company (Wholesaler B) whowere losing approximately £120,000 per year. Within this sector, the consensus was aproblem existed and was not being addressed, that customers were not aware of it, andwere not charged for it.

Logistics sector. Logistics distribution companies/pallet pooling agents recognizedthat loss of distribution equipment was evident and that costs were incurred as aresult. A pallet-pooling agent (agent A) stated that 15 per cent of pallets in circulationdisappear into a ‘‘black pool’’ and are never seen again. 80 per cent of pallets that gomissing are from major distribution centres. The company stated that they do notcharge customers for the loss of pallets but would not be prepared to absorb such costs

Table III.Questions posed toparticipants in thequestionnaire

What method of packaging/delivery material do you use?Pallets Y/NTote boxes Y/NOther Y/N

Are these owned by your company or are these rented from a third party?If owned, approximately how much do they cost per item?How are the boxes retrieved from the customer after delivery?Returned by customer to supplier Y/NReturned by customer one-for-one at delivery Y/NCollected by supplier in bulk at appointed time Y/NCollected by third party on behalf of supplier Y/NOther Y/N

Are all pallets/tote boxes retrieved?What are the main causes of pallet/tote box loss?What does your company have to do to compensate for this loss?Has the company attributed any costs to this loss?Are customers aware of these costs?Have these costs been built into the supply chain (e.g. in prices, deliveries)?Do you track your pallets/tote boxes?If yes, is this tracking mechanism an in-house product developed and used by your systems only?Is this tracking mechanism linked into your customer’s computer system e.g. despatch to ensureoutward traceability (from suppliers’ customers to second customers)?Do you use RFID (radio frequency identification) in your company?Will you consider using this to track your pallets/tote boxes?Are your pallets/tote boxes tracked by a 3rd party?Why is this so?a) They have better resourcesb) They are more proficient in doing thisc) They will ensure the return of pallets/boxes in good conditiond) They are inexpensivee) This is not something we want to do or can do wellf) Pallets/boxes cost money and lose money but don’t make money and so we need to monitor

what they do but someone else can do it.Have you any immediate plans to resolve the issue of pallet/tote box loss?

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long-term. They estimated that approximately 14 million pallets are lost across Europe,worth £140 million.

Logistics company C saw shrinkage in the form of damage, as a particular problem.It was estimated that approximately 50 per cent of pallets were returned fromcustomers and of these only 30 per cent were fit for reuse, and a further 20 per cent had

Table IV.An overview of the

issues associated withinefficient returns

practices by company

SectorDamage toequipment Theft

Unexplainedloss

Retention bycustomer

Onward useby customer

PharmaceuticalManufacturer A X

p p p p

Manufacturer B Distribution via a 3rd partyManufacturer C Distribution via a 3rd partyManufacturer D Distribution via a 3rd partyManufacturer E Use non-returnable palletsWholesaler A X X

p p p

Wholesaler B X Xp p p

Wholesaler C X X X X XLogisticsPallet pooling agent A

p p p p p

Pallet pooling agent B No responseLogistics company A X X

p p p

Logistics company B X X X X XLogistics company C

pX

p pX

Logistics company D X Xp p p

Logistics company E X X X X XBreweryBrewery company A Distribution via a 3rd partyBrewery company B X X X X XBrewery company C No usable responseBrewery company D X

p p p p

Brewery company E Xp p

X XBrewery company F X X X X XBrewery company G

p p p p p

Brewery assetmanagement company X

p pX X

Retail supermarketsSupermarket A X X

pX X

Trolley retailer X Xp

X XLocal councilsCouncil A X X X X XCouncil B X X X X XAirportsAirport A X X

p p p

Airport B X X X X XAirport C X X X X XMajor railway stationsRailway station A X

p p pX

Railway station B Xp p p

XRailway station C Trolley management outsourcedRailway station D X

p p pX

Railway station E X X X X X

Note:p

Activity evident; X Activity not evident

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to be scrapped at a value ranging from £0.10-£1 each. The company admitted that theypreviously used a voucher exchange scheme with drivers and customers to regulateloss of equipment but this had not been maintained. The costs associated with the highdamage rate had led to the company discussing having a repair facility based in-houseto resolve this issue.

Table V.Steps taken to preventor resolve inefficientpractice by company

SectorDeposit system

in placeFocus on problem

customers Penalties

PharmaceuticalManufacturer A X X XManufacturer B No responseManufacturer C No responseManufacturer D No responseManufacturer E No responseWholesaler A X X XWholesaler B X X XWholesaler C X X XLogisticsPallet pooling agent A

pX

p

Pallet pooling agent Bp

No comment No commentLogistics company A X X XLogistics company B

p p p

Logistics company C X X XLogistics company D X

p p

Logistics company Ep

X XBreweryBrewery company A No responseBrewery company B

pX X

Brewery company C No responseBrewery company D X X XBrewery company E

pX X

Brewery company F X X XBrewery company G X

p p

Brewery asset management company X X XRetail supermarketsSupermarket A X X XTrolley retailer

pX X

Local councilsCouncil A Not applicableCouncil B Not applicableAirportsAirport A

pX X

Airport Bp

X XAirport C

pX X

Major railway stationsRailway station A

pX X

Railway station Bp

X XRailway station C

pX X

Railway station Dp

X XRailway station E

pX X

Note:p

Activity evident; X Activity not evident

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Logistics company B stated that they did not have such compliance issues withcustomers recycling their returnable transit packaging trays. Their deposit systemprevented problems with compliance. Penalties were also incurred if trays were notreturned. As a result, the level of non-compliance was low for this company with thisproduct and this was a very successful returns system.

One company, Logistics company D, indicated that they had managed to reducetheir loss from 25 per cent to approximately 20 per cent through the introduction oftargeting and contacting offending customers and third parties. This effort was due to20 per cent of all packaging/equipment being lost due to customers retaining them forown use or third parties removing them for their use e.g. in laundries. Customers weremade aware of the costs incurred and these were built into the overall operating costs.

Brewery sector. The brewery sector had similar problems related to the non-recycling of beer kegs and pallets. Brewery company D stated that they were chargeda deposit of £10 by pallet leasing providers per tray allocated for onward use to theircustomers. This charge was removed when they could prove that they had a process inplace to monitor the pallet activity. The same company stated that they believed mostcustomers were aware of the one-for-one system used for returns, especially in relationto CHEP leased pallets. They stated that there was no incentive for their owncustomers to return the same leased pallets to them, as they were not allowed to chargea deposit for pallets that they did not own. Thus, there was a high reliance on customercompliance and if this deteriorated then they would have to consider introducing adeposit system.

The issues surrounding kegs lost due to theft and secondary sales is such that anassociation (Kegwatch) has been set up to co-ordinate relevant information regardingthefts, sightings of smelting activity and other helpful guidance. An asset managementcompany within this sector stated that industry loss is in the millions of Britishpounds. The company asserted that the average large brewer in the UK market maylose 3 per cent of the fleet due to theft/no-returns and may have to scrap 1.5 per cent ofthe fleet (disrepair). This loss, in their opinion, might equate to £5-7 million per year.The company also stated that the theft rate may be linked to steel and aluminium priceincrease in the market. The situation is such that three of the large national breweries,Scottish Courage, Molson Coors, and Carlsberg UK sold their kegs to a third party,Trenstar, and now lease from them on a need only basis.

The nature of the arrangement, according to Brewery company E, is that paymentmust be made for any kegs lost or not returned. No deposit system existed for them.They stated that such a system is used in Europe but the associated administration ofthis activity for that company would be problematic. The system was based on a papertransfer of notes, which were tallied over a certain period of time and was relianton customer cooperation and could not be effectively completed. It was estimated bythis company that as of 2002 there was a loss of approximately 4 per cent of kegsper year due to theft. This appeared to be of an organised activity as opposed toopportunistic theft.

One problem that does not appear to be prevalent, mentioned only once, is thepotential for small brewers to use other brewers’ pallets and crates without priorpermission. A large national brewer, Brewery company G, highlighted this problem.They stated that not all pallets are retrieved. The main causes of loss were damage,theft, and unauthorised usage. The company tries to compensate for this throughdamage awareness videos, building good relationships with suppliers, and buildingcosts into budgets (attrition rate of 20 per cent annually). Some customers are aware of

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these costs but most are indifferent. These costs have been built into the supply chainthrough prices and deliveries.

Only one brewery (Brewery F) did not have an issue with the equipment recycling.They felt a good relationship existed with their customers and thus had a high level ofcompliance. This was not enforced via a deposit system but they did monitor theplacement of pallets through a manual system.

B2C findingsFindings from the B2C category incorporate data sourced from the retail supermarketsector, airports, major railway stations, and local councils within the UK. These arediscussed below.

Retail sector. Within the retail supermarket sector supermarket trolleys wereexamined to ascertain the compliance of customers using them and then removingthem from site premises. One large supermarket retailer had 89 per cent of their trolleystock taken off-site by customers. After a new RFID system was introduced into storesthis amount was reduced to 23 per cent. A trolley manufacturer, which producedtrolleys for large supermarkets, stated that trolley loss is a significant issue in the UK,with an estimated 16-18 per cent loss per annum for UK retailers. For major retailersthis could translate into approximately £1.5-2 million per year.

Airport transport sector. Baggage trolleys also suffer at the hands of customers butto a lesser extent. When questioned some airports stated that they do have complianceissues not with external customers but mainly internal customers e.g. stafftransporting materials and equipment. One large airport (Airport A) stated that out ofthe 4,500 trolleys owned, it was estimated 500 were out of service. This figure did notinclude those being maintained, but those on site not in their expected location due tomovement by staff.

Rail transport sector. Five major railway stations responded to this study. Three ofthe stations admitted that customers took baggage trolleys despite a £1 depositsystem. The scale of which varied from 12 lost trolleys per year at £225 each (£2,700per year) to 33 lost trolleys per year (£7,425). It was revealed that one of the stations(railway station B) was in close proximity to the town centre, which was a highlypopulated student city. There was a precedence of students paying the £1 depositand taking the trolley off-site to transport baggage to their accommodation or thenearest bus.

Local council sector. There was no data provided concerning loss costs associatedwith refuse wheeled bins from the local councils. The individuals approached did notknow of any incidents regarding loss of thefts of property such as this. One respondent,Council B, in Northern Ireland did anecdotally comment that such equipment had thepotential to be stolen from new properties and resold to house owners. This system ofpurchasing new refuse bins for new properties, however, is not generic to the UK.

DiscussionThis research provides an exploratory examination of current reverse logistics practicein the UK and determines the impact of customer non-compliance in returningdistribution equipment back to the source, in both B2B and B2C relationships. Fromthe results discussed above it can be seen that there are two main themes that emerge:

(1) Financial repercussions from customer non-compliance.

(2) Operational repercussions from customer non-compliance.

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Financial repercussions from customer non-complianceThe main financial repercussions were in the form of financial losses. The resultsindicated that the cause of stock loss (shrinkage) was multiple and varied, rangingfrom customers using equipment internally as a storage receptacle, leaving them in aholding yard, using them to move stock forward in the supply chain, or damagingthem. The stock loss as generated/facilitated by the customer generally seemed tobe one of negligence as opposed to exploiting the opportunity to indulge in illegalactivities or trying to get the upper hand in the relationship (Bailey, 1994). However,that is problematic, as it is more an unconscious behavioural trait, which may be moredifficult to eradicate.

In B2B relationships. The costs included figures of £100,000 to £140 million worthof lost pallets, £120,000 worth of tote boxes and £5-7 million worth of beer kegs peryear. There were assumptions as to the level of organised criminal activity resellingdistribution equipment items such as pallets, beer kegs, and wheeled bins. Pallets areknown to have a legitimate resale market, and suppliers frequently use second-handpallets for distribution. Comments were made as to the possibility of vehicle drivers to‘‘lose’’ some pallets and make some money for themselves, but the extent of this wasnever quantified. Beer kegs, aluminium and steel, according to one source were highlydesirable especially in their melted form after being processed in illegal smelts. Theproduct’s price was also affected by its market value at any point in time.

In B2C relationships. Whilst the B2C trading relationship is different the resultsstill indicated problems in this category. Within a B2B relationship behaviouralrequirements can be built into the contractual agreement and can be reviewed andpenalised against this contract. Within a B2C relationship there is a weighty onus onthe customer to behave and be compliant when using such services as supermarkets,airports etc, and to appreciate that there is no ownership of the business’s distributionequipment, it is merely a loan and it is there that the service ends.

Trolley loss from supermarkets also appeared to be significant, especiallyconsidering that the ‘‘customer’’ orchestrates this activity purposefully and notunconsciously. RFID was seen as a potential solution to this problem. The introductionof RFID into one retail chain reduced loss by 66 per cent since fewer trolleys could betaken off-site due to the wheel locking mechanism that was enforced. The loss for a UKretailer of its fleet per year was between 16-18 per cent, costing £1.5-2 million.

The lowest level of financial loss was demonstrated in airports and major trainstations. For the airports, the main source of non-compliance was internal customers.On major train stations there appeared to be evidence of loss, but with costs rangingfrom £2,700 to £7,425 per year, the situation was probably more annoying thanproblematic.

Operational repercussions from customer non-complianceReverse logistics systems are based on the return of products back to their source, bethey products sold to the customer or the packaging. One of the systemic weaknesses isthat customers are more interested in the product’s delivery and not the transportationdevice or distribution equipment. They fail to realise that there is an actual priceattached to the pallet that they receive their order on, especially if it is part of a palletpooling system, managed by a third party. In this instance they may not make anymoney from it, but they will certainly lose money if they do not return it.

In B2B relationships. The initial operational repercussion for a supplier is having tosource alternative equipment if stock is not returned or returned damaged. The second

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repercussion is the resolution of this problem. To address the second repercussionbusinesses will need to devise a returns policy of which the customer is aware, ispractical for both parties and can be met.

A respondent from a logistics association commented likewise stating that thearrangement of equipment and packaging returns has three steps that requireadherence:

(1) make the customer aware that the packaging has to be returned as part of thesupply arrangement;

(2) be rigorous and impose financial penalties for non-returned products; and

(3) facilitate the return via one-for-one system, use of third party or arrangementwith customer.

The findings indicate that item 3 was enforced as collections of returned items weremade on a regular basis, just not as many as there should be. There is little evidencefrom this analysis that customers were actually briefed and acknowledged the issuesurrounding return of distribution equipment. There was more to suggest that theywere informed when things were going wrong, but not before such problems came tolight.

In B2B and B2C relationships. For both B2B and B2C relationships, a repercussionof an ineffective returns system and practice is the degeneration of tradingrelationships unless the matter is resolved. This resolution is dependent on the natureof the relationships and the companies involved. Practical steps should be taken by thesupplier to deal with non-compliance concerning returning distribution equipment,such as informing the customer through educational videos, introducing depositsystems, and more importantly and possibly more effectively, by verbal or writtencommunication. Businesses should consider this as an option in the early stages ofnegotiation regarding non-compliance.

Two more radical solutions, which do not involve direct action from the customerare the use of third party logistics providers and the installation of RFID technology.Both options assist the company and indirectly assist the customer as well.Respondents considered RFID as a tool, which was viewed as expensive but beneficial;however, it was reliant on staff compliance in its proper use. Asset management was anobvious choice, with businesses choosing to use such services as opposed torelinquishing control and outsourcing the returns facility.

ConclusionsRisk is an issue requiring attention in supply chains and it is clear that the issue of non-returned distribution equipment has both a financial and operational risk. Aside fromthe use of asset management through RFID, third parties, or outsourcing, this riskcould be minimised by taking a firmer stance with customers on this issue and moreeffectively communicating the problem with them in order to come to an agreed courseof action. Bailey (1994, p. 36) states that there is a small minority of customers whowish to take customer service too far . . . and who are determined to take organisationsfor a ride. Bailey continues to say some demands and requests are inspired by a lack ofknowledge or understanding by the customer of what is possible or reasonable.

From the literature and findings presented in this study it can be concluded thatthere are specific facilitators influencing effective returns behaviour in B2B and B2Crelationships. These are summarized in Table VI.

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Table VI.Critical criteria thatfacilitate effective

returns behaviour inB2B and B2Crelationships

Facilitators B2B B2C Comments

Contracts 1 3 Contracts are used in both relationships;between businesses, which dictatesexpected performance; and betweenbusinesses and customers, whichdetermines returns policies, and consumerrights. The latter may only be applicableif there is a problem with the product orservice.

Penalties 1 3 Used in B2B arrangements to enforceperformance. These are used less in end-customer to business trading, unless in theform of restricted returns policies e.g. acredit note instead of cash returns.

Incentives 3 1 Not as applicable in B2B relationships asthere is less scope for influencing buyingbehaviour after a contract/arrangement isestablished. Consumers however are veryhappy to be indulged with incentives.

Deposit system 3 1 The deposit system works in bothrelationships. For some B2B parties it isperceived as a sign of mistrust or theopportunity for suppliers to get more cash.For end-users it’s a way of life in order touse the service – this is not to say that allindividuals are content to do so.

Trust 1 1 This is highly applicable in bothrelationships but is easier to perceive inB2B relationships through performanceand reputation. Within B2C arrangements,trust may not be as important, ascustomers can be fickle and swayed bycost, service and incentives.

Goodwill 3 1 Not so evident in a business environmentas money is at stake. More evident in B2Ctrading, and customers like to see visibleevidence of this and some latitude if theydo make mistakes.

Legal obligation 1 3 Contracts once enacted enforce the legalobligation of parties within therelationship. More evident in B2Balliances.

Moral obligation 2 3 Not applicable in B2B relationships, butmay be applicable to consumers whenbuying and returning ethics are taken intoconsideration.

Corporate obligation 3 2 Highly applicable to B2B relationships ascompanies reputations are at stake. End-users may not have such considerations.

Long-term allianceprospects

1, 2, or 3* 2 Highly applicable but may be business/customer dependant in a B2Benvironment. Customers as end-users arefickle with their loyalty and substitutesare readily available.

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The findings from this research indicate that there are a number of distinct optionsavailable to companies in both B2B and B2C relationships in managing returns. Themajority of the options presented are applicable to both groups; however, corporateresponsibility and outsourcing may not be as evident in B2C environments.

Option I – communication (B2B and B2C)Communication is critical in managing returns effectively. Communication can befacilitated through the contractual process; reviewing relationship progress betweenbusinesses, or approaching customers directly and commenting on their behaviour.Communication can be seen as a critical partnership attribute in supply chain alliances,strategic or not, and a source of risk if communication is lacking. This measure coupledwith effective conflict resolution dictates that problems between parties should bemanaged ‘‘head-on’’ and quickly, to align buyers and suppliers (see Breen et al., 2006).

Option II – incentives (B2B and B2C)A customer incentive system is another approach. There are various reasons whyincentive-related issues arise in supply chains (Narayanan and Raman, 2004). From theempirical data gathered, it is noted that in general the interests of one section of thesupply chain are not shared with another, i.e. the supplier is not effectively workingwith their customer, in communicating their expectations and arrangements with themand subsequently monitoring and enforcing it. Companies who are failing to do thisshould take comfort from the success of relatively simple systems such as depositsper item and consider their application. Alternatively, the incentive level may also bean issue. If the benefit of not returning items is greater than the incentive to return thenabuse and deviant behaviour are more likely to occur. For example, in a B2Crelationship the cost of a trolley is substantially higher than a £1 coin, which appearsto be the current incentive to return it to a store. An additional bonus is that it can beused as a material-handling and movement apparatus once off-site.

Option III – introduce contracts (B2B and B2C)In this option once both parties have agreed the content, performance can bemonitored. The initial wrangling has taken place before the contract is initiated and allparties are satisfied with the output. This option, however, is not as clear-cut forservice-centred consumers, where contracts prior to service delivery is not feasible, e.g.customers are not asked to read and sign contracts before they use supermarkettrolleys. Whereas, with other transactions e.g. buying on-line on internet sites, theymay have to agree virtually to a user agreement/registration before they use theservice.

Option IV – enforcement (B2B and B2C)The option calls for enforcement of a structured, penalty-based system. Educatingcustomers on a supplier’s responsibilities and expectations is required. This educationis done formally through negotiated or dictated contract arrangements. From a B2Cperspective, customers buying products and using equipment such as baggage andsupermarket trolleys know that the equipment facilitates the service process and ifanything enhances the service experience, but remains the property of the retaileron-site. Enforcement of this is through RFID technology and deposit systems, whichshould reduce incidences of loss.

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Option V – remind customers of their corporate responsibility (B2B)According to De Brito and Dekker (2003, p. 225), environmental consciousness,legal, and economic forces have brought more attention to systems with reverse flows,and to its control. Businesses in a competitive market cannot afford not to respectthe position and the influence of other parties as this can affect their reputation andfuture trade.

Option VI – remind customers of their moral and legal responsibility (B2C)Companies can provide information to customers highlighting their policies regardingreturns, and hope to influence ethical behaviour in buying and returning goodsand distribution equipment alike. The proposed options correlate with themanagement strategies proposed by Babakus et al. (2004) in managing unethicalcustomers: 1) say that you prosecute thieves and where appropriate act on thisstatement; 2) reward ethical behaviour; 3) stand your ground when you believe acustomer is trying to cheat you and 4) insist on a high standard of ethics from yourstaff and suppliers.

Option VII – asset management (B2B)Subcontract the ‘‘chasing’’ to an asset management company. The research findings didindicate that in the beverage and brewery industry steps are taken in Europeancountries to resolve the issue of asset shrinkage through more effective assetmanagement.

Option VIII – outsource logistics (B2B and B2C)Outsourcing in B2B relationships can be a means of relinquishing control of thereturns facility to a company specializing in this area. The outsourcing decisionreduces the use of in-house resources such as data management concerning collectionsand logistics, but does increase the initial time taken to identify an outsourcingpartner and define the terms of engagement, and also the financial outlay for thisservice. The risk is then shifted to this third party who may have processes in place todeal with such difficulties. Outsourcing may be used in a B2C environment to removethe responsibility for customer behaviour from the host company to a third party e.g.one of the major railway stations stated that it did not know of problems associatedwith baggage trolley loss as the control of this facility had been passed to an on-sitevendor.

Choosing the best optionIt would be naive to suggest that enforcing compliance in these relationships is asimple task. It may be one that can be addressed in an effective manner if the correctoption or series of options is employed. Clearly, industrial and distribution equipmentcharacteristics play a large role in choosing options. Cost-benefit analyses arewarranted for making the ultimate decision and is left for further investigation.

The findings indicate that in both B2B and B2C relationships, there is evidence ofsuppliers suffering financial loss due to customer non-compliance; the impact, however,is noticeably greater in B2B relationships, according to this sample. This is not only thefault of customer behaviour but of the businesses choosing not to address the issue orformalise its resolution via contracts or other means. The reason given in the researchfindings was that businesses did not want to ‘‘upset’’ the customer and therefore, facethe prospect of losing trade.

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Within B2B relationships especially, it would appear that there could be someless ethical opportunism within this area, whereby the costs that are being incurredby customers in charges for lost equipment may actually provide the leasingcompanies with a healthier profit margin. If this is the case, and customers are notaware of the small print or the restrictions placed on B2B trading, businesses ascustomers may become victims of their own negligence and may be forced to becompliant or pay!

In conclusion, the aim of this research was to gain an insight into the impact ofcustomer non-compliance in returning distribution equipment within the supply chainback to their source. It can be seen that reverse logistics practice in some industrysectors for suppliers is becoming an expensive business, undermining what potentiallyoffers a company a competitive advantage (Stock et al., 2002). It would be unrealisticto say that customer non-compliance is the cause of reverse systems breakdowns.However, the results show that it can contribute to operational inefficiencies andfinancial loss but there are options that businesses can adopt in order to manage theirbusiness and customers’ behaviour more effectively.

This research aimed to conduct an exploratory analysis into current industrialreverse logistics practice and determine the financial and operational impact ofcustomer non-compliance in returning distribution equipment back to their source thusreducing system effectiveness. In doing so it has highlighted the fact that the problemhas greater financial and operational implications in B2B trading relationships thanB2C relationships.

The research outputs indicate that there is scope for further work in this area.Additional work can be completed on a more detailed analysis into the costs of currentreverse logistics systems in logistics operations and the point at which RFID, assetmanagement and outsourcing become a viable option for operations both financiallyand operationally. This research would be greatly supported by awider analysis of thisissue geographically, exploring best practices internationally.

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Further reading

Hewlett Packard (2006), ‘‘Product reuse and recycling’’, available at: http://h41111.www4.hp.com/globalcitizenship/uk/en/environment/recycle/overview.html (accessed 3 July 2006).

About the authorLiz Breen completed her Doctorate at the University of Manchester Institute of Science andTechnology (UMIST, now Manchester Business School) in 2003. Her research examined there-engineering of the pharmaceutical supply chain in hospital pharmacy in the National HealthService (NHS) (UK). She held a joint senior position of supply-chain development manager withinan NHS Trust and part-time lecturing position in Operations Management at UMIST. In 2004,Dr Breen took up post at Bradford University School of Management where she remains today.Liz has been involved in researching and developing the pharmaceutical supply chain in hospitalpharmacy and the NHS in general for the past 8 years. She was recently presented with an awardfrom the Guild of Healthcare Pharmacists, Procurement, and Distribution Interest Group for themost promising research project 2005/6. Liz Breen can be contacted at: l.breen@bradford.ac.uk

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