Turning returns into revenue: How reverse supply chains create value — and reduce waste

New research reveals how companies can profit from returned and excess inventory — reducing waste while navigating networks that are more complex than traditional supply chains.

Returning something to the seller may feel like the end of an unwanted item. In reality, it can mark the beginning of that item's journey through a secondary market — one that can extend a product’s life rather than sending it to a landfill. Likewise, unsold inventory may appear to be a loss to a retailer or manufacturer, but for those who understand reverse supply chains, it can be a profitable opportunity.

That's why Dale Rogers, ON Semiconductor Professor of Business and professor in the NASPO Department of Supply Chain Management, set out to dissect the structure of reverse supply chains so practitioners could better leverage them.

"Reverse supply chains are more complex than traditional forward supply chains," he says, adding that this misunderstanding means many organizations miss out on a way to turn loss into gain.

To conduct the analysis, Rogers teamed up with his son, Associate Professor Zachary Rogers, and Assistant Professor Marat Davletshin, both of Colorado State University. The team also included W. P. Carey graduate research associate Rohan Korde, Iowa State's Haozhe Chen, and Curtis Greve of Liquidata, an AI-powered platform for analyzing inventory and estimating resale value.

Together, the researchers evaluated more than 256,000 transactions representing $504 million in inventory that moved through a reverse logistics liquidator over five years. The study shows that reverse supply networks differ significantly from forward supply chains, but understanding these differences can help organizations leverage resale channels.

Moving ahead in reverse

What constitutes a reverse supply chain? It typically involves large retailers or manufacturers selling overstock and returned merchandise to secondary-market buyers through reverse-logistics platforms like the one used in this study.

Platforms are central to reverse supply chains. They aggregate returns and excess inventory for retailers and manufacturers, creating marketplaces where large sellers can connect with smaller resellers. They also handle transactions and shipping logistics.

Companies using these platforms include household names such as Walmart, Target, Rite Aid, and CVS. Secondary-market buyers fall into several tiers. "We have the value retailers, folks like Ross, Marshalls, T.J. Maxx, and Home Goods," Rogers explains. Outlets and dollar stores are also secondary-market players, as are eBay salvage buyers, some of whom make a living reselling a truckload or a pallet of goods from sellers like Macy's or Amazon.

Rogers believes more corporate managers should take these sales opportunities in the reverse supply chain seriously. The secondary market represents more than $800 billion in annual sales — about 3% of U.S. gross domestic product.

In some cases, secondary markets outperform primary ones. "A Nike or a Polo can make a higher margin in their outlets than they can getting a wholesale price when they sell to Dick's Sporting Goods," Rogers says. "With their outlet stores, they're probably getting around 70% of the retail price. When they sell to a retailer, they're getting around 50%."

Still, selling to a retailer like Dick's Sporting Goods can be simpler because forward supply chains are less complex than reverse ones, according to the team's recent study.

Simply more complex

The researchers used triads to map which players in the reverse supply chain were connected — and for how long. To create the triads, the team treated buyers, sellers, and the platform itself as nodes in the network. Transactions on the platform reflected the direction of interaction between connected nodes.

This approach exposed several differences between reverse and forward supply chains. Reverse networks are significantly less stable than forward ones, in which 52% of the company ties remain in place for five years or longer. In reverse supply chains, that percentage is 39%, indicating that relationships are less deep or formalized than in forward supply chains. Buyers — often smaller companies — enter and exit the network (or platform) opportunistically.

"You might have some resellers that you know pretty well, and you may tend to use them, but the reverse supply chain isn't like moving a couple of truckloads to Walmart every week," Rogers says. "It's much more dynamic."

Forward networks are typically also centralized around large buyers. The relationships are direct, not mediated by a middleman, such as the liquidation platforms used in a reverse supply chain.

Reverse supply networks expand and contract in response to macroeconomic shifts. When consumer confidence is high and retail inventory-to-sales ratios are low, more resellers enter the reverse network. The researchers suggest that this occurs because higher sales can lead to more returns, and higher inventory levels can create more overstock. Both of those conditions offer greater opportunities for resellers.

At the same time, when consumer confidence is low and retail inventories are high, sellers in the reverse supply chain networks push more merchandise into the channel. This creates swings between buyer markets and seller markets in this channel. "Reverse supply networks dynamically evolve and adapt quickly," Rogers says. It's another complexity for businesses to handle.

The taint of failure

Still, instability isn't what keeps businesses away, Rogers says. It's the misconception that reverse supply networks aren't moneymakers and the embarrassment that comes from needing them in the first place.

Only 30% of goods in secondary markets come from customer returns; the remaining 70% comes from overstocks. "They look at these goods as a mistake. With some companies, the buyers who bought the stuff that didn't sell get into trouble," Rogers notes.

Beyond the financial upside, these networks also reduce waste by keeping usable goods out of landfills

Companies also risk a public relations backlash when disposing of unsold goods rather than donating or channeling them through reverse supply networks. In 2010, the H&M store on 34th Street in Manhattan was shamed in The New York Times for slashing and throwing away unsold merchandise. Upscale fashion label Burberry took a public relations hit in 2018 when the BBC reported that it had destroyed clothing and accessories worth more than $90 million. Similar stories have surfaced about Amazon, Nike, and others.

Rogers says most people understand forward networks, but even those in the supply chain may be uncomfortable with the complexity of reverse networks. Many managers also misunderstand the economics of these markets. "They just say, this is obsolete stuff, or it's not selling. We need to get rid of it," he notes.

Some also worry that they won't have control over where their merchandise goes. That, too, is a misconception. "The platform is working for the sellers," Rogers says. "Maybe the seller doesn't want the stuff sold in a certain area, like the U.S., or maybe that seller doesn't want it to go to a certain outlet." Sellers can make those rules.

Finally, Rogers says some sellers are "worried about cannibalizing their top-quality market, so they just burn the merchandise or put it in a landfill as opposed to getting residual value." He has a more realistic and profitable view of overstocks and potential cannibalization.

"If a company — especially a luxury brand — doesn't sell into lower-end markets, knockoffs may fill the gap," Rogers says. "Companies may as well capture that residual value. Reverse networks are a significant economic — and environmental — opportunity."