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IJPDLM 40,3

Reverse logistics capabilities: antecedents and cost savings

Eric P. Jack, Thomas L. Powers and Lauren Skinner
University of Alabama Birmingham, Birmingham, Alabama, USA
Abstract
Purpose The use of reverse logistics has received increased attention in the literature, although the role that reverse logistics capabilities plays in enabling rms to achieve cost savings has not been empirically examined. Reverse logistics capabilities can enable retailers to enhance their return policies and improve their overall cost position. This paper aims to address these issues. Design/methodology/approach Based on a survey of 295 retailers, this paper evaluates the inuence of customer and retailer related antecedents of reverse logistics capabilities and their subsequent impact on cost savings. Findings The results indicate that resource commitments and contractual obligations positively inuence reverse logistics capabilities and that these capabilities result in cost savings. Customer opportunism is found to be negatively related to reverse logistics capabilities. It is also reported that reverse logistics capabilities partially mediates the relationship between resource commitments, contractual arrangements, and reverse logistics cost savings. Originality/value This work builds on the recent research in reverse logistics; however, unlike other contributions in this research stream, the role of retailers who perform a critical role in this area is addressed. Keywords Reverse scheduling, Contracts, Cost reduction, Retailers Paper type Research paper

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Received June 2009 Revised October 2009 Accepted December 2009

International Journal of Physical Distribution & Logistics Management Vol. 40 No. 3, 2010 pp. 228-246 q Emerald Group Publishing Limited 0960-0035 DOI 10.1108/09600031011035100

Introduction Reverse logistics has received increased attention in the marketing and supply chain literature as it reects the ability of a rm within a channel of distribution to positively inuence the relationship that it has with its customers (Horvath et al., 2005). Reverse logistics also has major cost implications for both the rm and its supplier (Daugherty et al., 2005). For many retail organizations without adequate capabilities to implement a reverse logistics strategies, returns may improve customer service but are a nancial burden with the costs exceeding the benets. The use of reverse logistics is increasingly becoming a competitive necessity in an overall supply chain strategy (Daugherty et al., 2001). Despite the importance of reverse logistics to both researchers and practitioners, there are relatively few studies that have used empirical data to investigate this key product ow that exists in many supply chains (Srivastava and Srivastava, 2006). Within the reserve logistics domain, the product returns process has emerged as a key element that can inuence the customers purchase decisions and thus, an effective product returns process is viewed as a competitive advantage (Stock et al., 2006). Todays cash strapped customer is extremely risk adverse and in response to this reality, some retailers view relatively liberal returns policies as critical to retaining consumers. Furthermore, with the increase of online purchases, many customers are concerned with how an online purchase will translate into a store return, if necessary.

It must be kept in mind, however, that because of the increase in returns and their associated costs many retailers have recently become more restrictive in their return policies. The results of a survey conducted by Harris interactive reported that:
[. . .] 92% of customers are somewhat or very likely to shop again [. . .] if the returns process if convenient [. . .] on the other hand, 82% are not likely or not very likely at all to shop again [. . .] if the returns process is inconvenient (Mermelstein, 2006, p. 15).

Reverse logistics capabilities

This business practice is now prevalent across all retail formats from brick and mortar to e-tailing, making research in the area timely and managerially relevant. This work builds on the recent research on reverse logistics in the following areas: antecedents and consequences of product returns (Petersen and Kumar, 2009); product returns processing (Stock and Mulki, 2009); managing product returns (Stock et al., 2006); and developing effective logistics programs (Richey et al., 2005). However, unlike other contributions in this research stream, we specically focus on the perspectives of retailers who perform a critical role in reverse logistics. Since the process of consumer returns begins with the retailer, this research focuses on the reverse logistics capabilities that retailers develop in order to implement their returns policies and move returned products back upstream. Reverse logistics capabilities include the accuracy and the availability of information that is used, and the process and timeliness of reverse logistics information. Reverse logistics capabilities also include the internal and external connectivity and usefulness of that information. These capabilities represent a bundle of information-related processes that enable a rm to better manage its reverse logistics activities that may in turn relate to cost savings. The purpose of this research is to determine how reverse logistics capabilities impact the relationship between antecedents (customer and rm related) and the cost savings achieved from reverse logistics strategies. The specic research questions examined in this research are: RQ1. What are the relationships between customer orientation, customer opportunism, resource commitments, contractual arrangements, and reverse logistics cost savings? RQ2. How do reverse logistics capabilities mediate these relationships? In order to address these research questions, path analysis and multiple regression models are developed and tested to analyze these relationships based on a survey of 295 retailers. This research contributes to the literature by empirically testing and validating the impact of the factors that inuence reverse logistics cost savings for retailers. In the following section, a literature review is presented that examines the issue of reverse logistics and identies the antecedents that contribute to cost savings. Following the literature review, the methodology is presented including the path analysis and multiple regression models that were used to test the hypothesized relationships. The hypotheses are tested and managerial implications and directions for future research are provided. Background Reverse logistics involves all activities associated with a product or service after the point of sale with the ultimate goal being to optimize or make more

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efcient aftermarket activities, thus saving money for the rm involved (Rogers and Tibben-Lembke, 1999). Reverse logistics has been dened as:
[. . .] the process of planning, implementing, and controlling the efcient, cost effective ow of raw materials, in-process inventory, nished goods, and related information from the point of consumption to the point of origin for the purpose of recapturing or creating value or proper disposal (Rogers and Tibben-Lembke, 1999, p. 2).

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Reverse logistics has become a competitive necessity for several reasons including: increasing trend in customer returns, the increasing use of consignment inventory, shorter product lifecycles, and more demanding customers (Daugherty et al., 2001). Reverse logistics is increasingly being considered as a strategic process that captures value through customer satisfaction and cost control (Richey et al., 2005; Rogers and Tibben-Lembke, 2001). As the volumes of returns increase world wide, rms are no longer able to ignore the reverse ow of products (Stock et al., 2002). In a retail context, reverse logistics involves the process of handling and the eventual disposition of goods returned from customers (Horvath et al., 2005). As retail margins become narrower, reverse logistics has become a major concern for retail managers due to the costs of storage, loss of current sales, potential recoverable product value, and the importance of both customer and channel partner relations (Daugherty et al., 2005). When an end customer begins the reverse logistics process, it is usually with a retailer. How well the retailer manages the reverse logistics process may determine its cost savings as well as the customers satisfaction with the retail encounter (Horvath et al., 2005). Antecedents of reverse logistics capabilities In their research, Petersen and Kumar (2009) focused on customer buying behavior and they dened the antecedents and consequence of product returns from that perspective. In this research, we are interested in the factors that derive inuences reverse logistics capabilities and resulting cost savings from the perspective of the retailer. Reverse logistics cost savings are the savings that the retailer incurs from implementing reverse logistics processes to support their returns policies. In order to understand what factors may inuence reverse logistics capabilities and resulting cost savings, we consider specic antecedents. These include elements that are related to the relationship between the retailer and its customers, elements that are internally related to the rms reverse logistics resources and its contractual policies with suppliers. Customer orientation and customer opportunism reect the retailers customer-focused intentions and process-driven relationships with its customers, while, resource commitments reect the managerial, technical, and nancial resources that are applied to reverse logistics processes. Contractual arrangements represent the back-end processes with other channel members that involve the development of common goals. Finally, reverse logistics capabilities represent the internal capabilities and processes that the rm deploys to effectively implement its reverse logistics activities. The conceptual framework that guides this research is shown in Figure 1. It is hypothesized that reverse logistics capabilities are related to four antecedents (the rms customer orientation, customer opportunism, resource commitments, and contractual commitments), and that these capabilities, in turn, are related to reverse logistics cost savings. Customer orientation. A customer orientation represents the retailers attitudes and activities that work toward satisfying customer needs (Deshpande et al., 1993).

Customer orientation H1 Customer opportunism

Reverse logistics capabilities

H2 Reverse logistics capabilities H5 Reverse logistics cost savings

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H3 Resource commitments H4 Contractual arrangements

Figure 1. Hypothesized model

Customer orientation involves several aspects that are reected in the measure used in this research. These include that product and service development is based on customer-focused information, the retailer has a good sense of how its customers value its products and services, the retailer is customer-focused, the retailer competes based on customer driven differentiation, and that the retailer believes that the business exists to serve customers. A customer orientation implies that an organization can develop a sustainable competitive advantage by understanding and meeting the needs of their customers (Deshpande et al., 1993). A customer-oriented rm understands and meets the real needs of its customers, therefore becoming more likely to have satised customers who come back and tell their friends (Brady and Cronin, 2001). This process can entail fostering long-term relationships with customers to create a sustainable competitive advantage (Brady and Cronin, 2001). Customer orientation involves a rms willingness to put its customers rst to create customer value. One of the ways that retailers can create customer value is by working with suppliers who will minimize costs. It is because of these supplier benets that retailers strive to develop strong relationships with their supply chain partners. One of the main ways that a retailer can work with suppliers to create value for the nal consumer is by working towards developing reverse logistics capabilities that foster a customer-driven returns policy for the customer. A higher level of customer orientation is hypothesized to encourage the retailer to develop the capabilities to improve return processes for the consumer. Therefore: H1. Customer orientation is positively related to reverse logistics capabilities. Customer opportunism. Opportunism occurs when an individual or organization acts in its own self-interest (Williamson, 1975, p. 6). Opportunistic behavior may be evident in buyer-seller relationships in which one party uses the relationship to improve his/her own position at the expense of the other. Opportunistic behavior is

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counteractive to collaborative behavior, which involves a trusting relationship (Williamson, 1975, p. 26). When opportunism exists it represents a source of potential harm and undermines perceptions of trustworthiness (Williams, 2007). Returns policies are often seen by retailers as a zero-sum game; retailers consider return policies as the cost of doing business (Padmanabhan and Png, 1997). Empirical research indicates that accepting retailer returns in periods of minimal uncertainty actually benet the manufacturer (Padmanabhan and Png, 1997), ignoring the impact on the retail channel partner. Customer opportunism may increase returns and consequently reverse logistics costs. When deciding where to shop, and what to buy, the retailers return policy is important to customers, thus causing opportunistic customers to take advantage of the retailers reverse logistics policies. As an example, customers may purchase products for a one-time use and then return the product for a number of reasons, some of which are unethical (Seiders and Berry, 1998). Despite liberalization of return policies across industries, some rms have tightened the restrictions on the no questions asked return policies. Some retailers continue to offer liberal return policies in the hopes of developing a service-based competitive advantage which puts pressure on competitors to do the same. However, high levels of customer opportunism may force the retailer to lower its reverse logistics capabilities that may also reduce the availability of these capabilities for other customers. Therefore, it is hypothesized that: H2. Customer opportunism is negatively related to reverse logistics capabilities. Resource commitment consists of the nancial, technical, and managerial resources that are committed to reverse logistics capabilities. Each of these resources are necessary for reverse logistics capabilities to be realized and implemented. Financial resources by denition are necessary to fund a strategic process such as reverse logistics. Given the role of information identied as the source of reverse logistic capability, investment in this area becomes necessary. Investing in information technology can help retailers develop a sustainable competitive advantage by developing technological capabilities that are difcult for other retailers to imitate (Day, 1994; Srinivasan et al., 2002). Technical resources of the organization must also be put into place in order to carry out the creation of these capabilities. Retailers that encourage a technological orientation are likely to have improvements in their overall rm and service performance (Zhou et al., 2005). Investing in technology can improve reverse logistics capabilities allowing for more efciency between the retailer and the supplier. Reverse logistics capabilities are not solely based on the funding of technology. In order for meaningful capabilities to be created, management must expend time and effort to determine the capabilities required and the means necessary to create them. Managerial resources include the skills, experience, knowledge, and intelligence of the employees in a rm (Richey and Wheeler, 2004). It is hypothesized that there is a positive relationship between the deployment of resources and enhanced reverse logistics capabilities. Therefore: H3. Increased levels of resource commitments are positively related to reverse logistics capabilities. Contractual arrangements. Contractual arrangements are part of a socialization process with other channel members that involves arranging relationships that deliberately promote goal congruence (Wathne and Heide, 2000). Socialization implies

that the retailer develops contractual relationships in order to promote partnerships that are oriented towards effective reverse logistics. Governance mechanisms must be in place in order to strengthen the relationships between the retailer and its key supplier. In order for rms to minimize the risk of opportunism from their supply chain partners, they can implement governance mechanisms to reduce the amount of opportunistic behavior. One of the methods for reducing the risk is to implement formal contracts. Formal contracts outline the goals, responsibilities and benets of the supply chain partner relationship. Contracts can act as a building base for implementing future governance mechanisms in times of uncertainty. Contracts can contribute to improved performance in partner relationships with minimal uncertainty (Cannon et al., 2000). Based on the positive outcomes related to capabilities that may accrue due to benecial supplier contracts, it is hypothesized that: H4. Contractual arrangements are positively related to reverse logistics capabilities. Reverse logistics capabilities represent the internal processes that the rm uses to effectively implement its reverse logistics activities. These capabilities address several different areas as seen in Table I, however, they are all aspects the use of information to better manage the reverse logistics process. The specic reverse logistics capabilities that are considered include the accuracy and the availability of information that is used, and the process and timeliness of reverse logistics information. Reverse logistics capabilities also include the internal and external connectivity and usefulness of that information. These capabilities represent a bundle of information-related processes that enable a rm to better manage its reverse logistics activities and are hypothesized to be positively related to reverse logistics cost savings. Therefore, it is hypothesized that: H5. Reverse logistics capabilities are positively related to reverse logistics cost savings. These hypothesized relationships between the antecedents and consequences of reverse logistics capabilities are seen in Figure 1. This conceptual model reects the relationships developed from the literature review and the method used to test these relationships. Methodology Measurement scales The scales used in this research were adopted from previous research or were developed specically for this study. Each construct was measured on a seven point Likert scale. Customer orientation was measured using ve items adapted from Deshpande et al. (1993). Of the original nine-item scale, ve items were retained. These ve items focus specically on the service differentiation of the retailer. Customer opportunism was developed for this research and was evaluated from the perspective of the retailer based on a ve-item scale in which retailers were asked to rate how likely their customers were to alter or falsify information in the returns process. This scale was based on previous research in the business to business context of opportunism (Joshi and Arnold, 1997). Resource commitment was measured by using a three-item scale based on the nancial, technical, and managerial resources that are committed to reverse logistics activities developed for this research. Respondents were asked to

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Factors (reliabilities) Customer orientation (0.863)

Scaled items

Factor loadings 0.740 0.840 0.787 0.847 0.838 0.791

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Table I. CFA results

1. Our product and service development is based on customer-focused information 2. We have a good sense of how our customers value our products and services 3. We are more customer-focused than our competitors 4. We compete primarily based on customer driven product and service differentiation 5. We believe that this business exists to serve customers Customer opportunism (0.931) 1. Sometimes our customers will use any means necessary to further their own interests at the expense of this organizations protability 2. In our negotiations, sometimes our customers exaggerate the extent of product damage, or damage caused by us, in order to get concessions from us 3. Sometimes our customers make adjustments in their story to cope with changes in our customer service policy 4. Sometimes our customers alter the facts slightly in order to get what they want 5. Sometimes our customers promise to do things without actually doing them later Resource commitments (0.950) Please indicate the levels of resource commitment to reverse logistics/returns handling within your company (using one to seven Likert scale) 1. Financial resources 2. Technological resources 3. Managerial resources Contractual arrangements (0.950) 1. When discussing sensitive issues with our key supplier, they sometimes ask us to refer to our contract 2. Our key supplier follows the letter of the law when it comes to our contract with them 3. When we need a concession from our key supplier it is not uncommon for them to refer back to our past written agreements 4. When issues arise, our key supplier is more likely to follow a formal written agreement that develop a new gentlemans agreement Reverse logistics capabilities Please assess your rms information system (0.946) capabilities in the following areas related to reverse logistics 1. Accuracy of information 2. Availability of information 3. Daily download of information 4. Formatted on exception basis 5. Formatted to facilitate usage

0.911 0.901 0.921 0.840

0.899 0.897 0.900 0.831 0.770 0.890 0.860

0.830 0.851 0.810 0.840 0.858 (continued)

Factors (reliabilities)

Scaled items 6. 7. 8. 9. 1. Real-time information Timeliness of information Internal connectivity/compatibility External connectivity/compatibility We are realizing cost savings because of our reverse logistics activities 2. We incur lower compliance costs with environmental regulations due to our returns handling method 3. Our strategy for dealing with returned merchandise improves our cost position relative to our closest competitors 4. Our reverse logistics program is saving us money

Factor loadings 0.893 0.889 0.874 0.878 0.762 0.725 0.771 0.790

Reverse logistics capabilities

Cost savings (0.893)

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Note: Factors, standardized reliabilities, and factor loadings

Table I.

indicate the degree to which their rm devoted managerial, technical, and nancial resources towards developing reverse logistics strategies. Contractual arrangements were measured using a four-item measure developed by the authors to measure the extent to which retailers and suppliers engage in a contractual relationship that was relevant to this research. For example, respondents were asked to rate the extent to which they developed formal contracts with their suppliers, used these contracts, or referred back to the contract in times of uncertainty. Reverse logistics capabilities were measured by nine items developed also as part of this research. In order to develop a comprehensive list of reverse logistics capabilities, a content analysis of the returns policies of the top 100 retailers as rated by Fortune magazine was conducted. Based on this, the authors developed the comprehensive list of what processes retailers were using to implement their returns policies with their customers. These capabilities were found to directly related to the use of information use and were found to consist of one dimension when validity was examined and together produced a high reliability score. Cost savings were measured using four items designed specically for this research. Respondents were asked to indicate their cost savings due to reverse logistics activities, and if these activities reduced costs due to lowering environmental compliance costs and if they reduced the rms cost position relative to competitors. It should be noted that each of the cost savings items reect a different perspective on realizing cost savings from engaging in reverse logistics activities, however, as explained below, each of these item loaded on the same dimension for cost savings, and contributed to an acceptable reliability score. Data collection The survey was administered using an online survey instrument. While there is some debate about online surveys, research suggests that internet panels do not have a signicant negative impact on the data (Dennis, 2001; Pollard, 2002) and in many instances allow researchers to conduct high-quality research (Braunsberger et al., 2007). For this survey, the customer panel chosen was retail business owners and top

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management retail executives who had frequent interactions with their key suppliers, as they are usually the ones who are most likely to engage in leadership behaviors. The survey instrument invited 1,429 respondents who visited the online survey. However, respondents who did not answer yes to the key question, do you interact directly with your key suppliers? were not allowed to continue through the survey. Respondents were asked this question in order to ensure their awareness of their contractual agreements with their suppliers. Of those that answered yes to the aforementioned question, 318 completed the survey, a response rate of 23 percent. Twenty-three of these completed surveys were dismissed due to all neutral answering or to incompletion, leaving 295 total, representing a nal response rate of 20 percent. Respondents were asked to specify their industry (textiles, automotive, etc.), but most responded retail so it was impossible to categorize most respondents by North American Industry Classication System codes. An analysis was conducted to examine whether any non-response biases were present in the data. Tests were conducted to rule out any potential non-response bias by comparing early to late responders on all study variables and demographics. No signicant differences were found between early and late respondents across the study variables. Reliability and validity In order to test for the statistical conclusion validity of the survey and to address possible instances of covariation, several statistical tests were performed on the data. To assess the responses for normality, tests for skewness and kurtosis were performed on each of the indicators for each construct. None of the items in the survey showed inappropriate skewness or kurtosis. The data appeared to be normally distributed. The next step in evaluating the constructs presented in the conceptual model was to perform a conrmatory factor analysis (CFA) to evaluate the dimensionality and reliability of each of the scales. Researchers normally use the correlation matrix of the observed variables in order to identify the underlying factors that can potentially explain the variation in the data. Thus, a CFA was performed on all of the responses in order to validate these constructs. Principal component analysis was used along with a varimax orthogonal rotation in order to effectively detect the factors. This CFA demonstrated that six distinct factors explained 77.5 percent of the variability in the data. These six factors are displayed in Table I along with their standardized reliabilities and the factor loadings of the individual scaled items. Results and ndings As a rst step towards evaluating the strength of the relationships between the constructs, a bi-variate correlation analysis was performed using the Pearson correlation analysis and these results are shown in Table II. This analysis showed that all the variables in the model except for customer orientation were positively related to reverse logistics cost savings. It was also found that the moderating variable (reverse logistics capabilities) was positively related to the outcome variable (cost savings) and also positively related to two independent variables (contracts and resources). While this correlation analysis of the direct relationships was interesting, it did not provide further insights about the indirect linkages between the independent variables that drive these cost savings, particularly with reverse logistics capabilities as the mediator in this model. The next step in the analysis was to use path analysis to test the hypothesized relationships.

Customer orientation Customer orientation Contracts Reverse logistics capabilities Cost savings Resources Customer opportunism 1 0.024 20.041 0.046 20.047 0.067

Reverse logistics Cost Customer Contracts capabilities savings Resources opportunism

Reverse logistics capabilities

1 0.263 * * 0.259 * * 0.340 * * 0.263 * * 1 0.590 * * 0.269 * * 2 0.021

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1 0.455 * * 0.125 * 1 0.249 * * 1 Table II. Correlation analysis

Note: Correlation is signicant at *0.05 and * *0.01 levels (two-tailed)

Path analysis Path analysis was used to establish model t and to identify the direct and indirect effects of the hypothesized cause variables on effect variables (Ahmad et al., 2004). A beta coefcient is calculated for each path and the coefcients sign indicates the direction of the relationship (positive or negative) and its magnitude represents the strength of the interrelationship between the variables. The x 2 statistic relative to the degrees of freedom, the goodness of t index (GFI), the adjusted goodness of t index (AGFI), the comparative t index (CFI), the normed t index (NFI), and the root mean square error of approximation (RMSEA) were used to gauge the adequacy of the models. The criteria used to evaluate path models include: . a non-signicant x 2 statistic indicating that the measured variances and covariances of the underlying variables are accurately reected by the linkages hypothesized in the model; . x 2 statistic per degree of freedom where a desirable ratio is less than 3; . the GFI, AGFI, CFI and NFI where values above 0.85 are desirable; and . the RMSEA should be less than 0.10 (Bentler and Bonett 1992). The model was rst tested using the full sample and then by sub-groupings of responses based on the length of relationship that the retailer had with its key suppliers (short, medium and long). As shown in Table III, using the full sample, while the majority of the t indices were supportive of a good t (x 2/df 4.13, GFI 0.99, AGFI 0.90, CFI 0.98, NFI 0.97, and RMSEA 0.106) the x 2 statistic was signicant, indicating a lack of t. However, there is some evidence that the x 2 statistic tends to be signicant for large samples (Streiner, 2006). Therefore, we considered the model using sub-groupings of responses based on the length of relationship between the respondent and their key suppliers. Using this approach, we found statistically valid results where all the t indices were acceptable and the non-signicant x 2 statistic indicated that the measured variances and covariances of the underlying variables are accurately reected by the linkages hypothesized in the model. For example, for the long-term relationships sub-sample, all the t indices were supportive of a good model t (x 2/df 1.49, GFI 0.98, AGFI 0.90, CFI 0.98, NFI 0.96, and RMSEA 0.07).

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Table III. Summary of path and regression analysis results

Path analysis results x 2/df 4.31 GFI 0.99 AGFI 0.90 CFI 0.98 NFI 0.97 RMSEA 0.10 Hypotheses Beta values H1 2 0.04 H2 2 0.11 H3 0.19 H4 0.18 H5 0.39

Regression analysis results Model ( p-value) 0.00

SE 0.07 0.05 0.05 0.05 0.03

p-value 0.63 0.02 0.00 0.00 0.00

Beta values 20.04 20.11 0.18 0.19 0.39

SE 0.07 0.05 0.05 0.05 0.03

p-value 0.63 0.02 0.00 0.00 0.00

So, although it was demonstrated that using path analysis, the hypothesized model meets the requirements for a good statistical t, the authors acknowledge the technical shortcomings associated with these path analysis results. Therefore, the decision was made to evaluate the research hypotheses using both path analysis and multiple regression analysis. While regression analysis does not explicitly account for measurement error, the readers should note that the results for the hypotheses from both the path analysis and the multiple regression analysis were consistent. Multiple regression analysis In order to evaluate H1-H4 multiple regression was used to test the inuence of customer orientation, customer opportunism, resource commitments, and contractual agreements on reverse logistics capabilities. Then, H5 was evaluated by regressing reverse logistics capabilities on reverse logistics cost savings. As seen in Table IV, H2-H4 were supported. Customer opportunism (H2; b 2 0.113, p 0.021), Resource commitments (H3; b 0.179, p 0.000) and contractual arrangements (H4; b 0.194, p 0.000) were found to be signicantly related to reverse logistics capabilities. As hypothesized, customer opportunism was negatively related, and resource commitments and contractual arrangements were positively related. As seen in Table V, H5 was also supported with reverse logistics capabilities found to be signicantly related to reverse logistics cost saving (b 0.385, p 0.000). Customer orientation (H1) was not signicantly related to reverse logistics capabilities. The reader should note that the results for these hypotheses were consistent under both path analysis and regression analysis methods. Next, a post hoc analysis was performed to evaluate how reverse logistics capabilities mediate the relationship between the dependent variable (reverse logistics cost savings) and the four antecedents (customer orientation, customer opportunism, resource commitments, and contractual arrangements). Baron and Kenny (1986) recommended that mediation tests be done using three equations, where Y is the outcome variable, X is the independent variable and M is the mediator: Y b10 b11 X error M b20 b21 X error Y b30 b31 X b32 M error 1 2 3

Terms 4.141 20.036 20.113 0.179 0.194 0.073 0.049 0.047 0.052 0.123 0.001 0.016 0.044 0.042 0.877 1 0.497 1 4 1 1 1 1 290 294 6810.323 60.019 0.345 7.885 21.214 20.394 427.538 487.557 6810.323 15.005 0.345 7.885 21.214 20.394 1.474 1.658

Beta

SE

df

Dependent variable (RL capabilities) R2 Sum of squares Mean square

F-ratio 10.178 0.234 5.349 14.390 13.833

p-value 0.000 0.629 0.021 0.000 0.000

Intercept Model H1 Customer orientation H2 Customer opportunism H3 Resource Commitments H4 Contractual arrangements Error Total (adjusted)

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Table IV. H1-H4 multiple regression results

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In the rst equation the direct path is tested between the independent variable and the outcome (Y reverse logistics cost savings; X each antecedent separately: customer orientation, customer opportunism, resource commitments, and contractual agreements). In the second equation, each of the independent variables are regressed on the mediator (M reverse logistics capabilities; X each antecedent: customer orientation, customer opportunism, resource commitments, and contractual agreements). In the third equation both the independent variable and the mediator are regressed on the outcome variable (Y reverse logistics cost savings; X each independent variables and M reverse logistics capabilities). For mediation to occur each equation must be signicant and there should be an improvement in R 2 between equations (2) and (3). For full mediation to occur, the beta for X in equation (3) should be non-signicant. For partial mediation, the beta for X in equation (3) must be less than the beta for X in equation (1). As seen in Table VI, equation (1) was only signicant for resource commitment and contractual arrangements. Thus, only these two antecedents could be considered as mediated by reverse logistics capabilities. For both resource commitment and contractual arrangements equations (2) and (3) were also signicant. In addition, there were improvements in R 2 from equations (1)-(3) for both variables when the Mediator was included in the model in equation (3). For example, for resource commitments, R 2 changed from 0.207 to 0.442 and for contractual arrangements, R 2 changed from 0.067 to 0.359. Finally, in both instances there was evidence of partial mediation because the correlation between X and Y was reduced when the mediator was accounted for in the model (resource commitments changed from b 0.235 to 0.165 and for contractual arrangements it changed from b 0.148 to 0.061). Therefore, the relationships between both resource commitments and contractual arrangements, and cost savings were partially mediated by reverse logistics capabilities. However, reverse logistics capabilities did not serve as a mediator for customer orientation nor for customer opportunism. Discussion Using responses from 295 retail managers, this research has empirically evaluated the relationships between three entities: antecedents (customer orientation, customer opportunism, resource commitments, and contractual arrangements), the mediator (reverse logistics capabilities) and the outcome variable (logistics cost savings). Overall, these results tell a very interesting story. When the direct linkages between the antecedents and the moderating variable (reverse logistics capabilities) are evaluated using regression analysis we found signicant relationships as hypothesized for H3 and H4, indicating positive linkages between resource commitments and reverse logistics capabilities, and between contractual arrangements and reverse logistics capabilities. For H2, (customer opportunism) the result was negative and signicant indicating a negative relationship as hypothesized. We also found a positive and signicant relationship for H5, indicating a direct and positive relationship between
Variable (X) Dependent variable (Y) Cost savings Beta 0.385 R2 0.348 Signicance ( p-value) 0.000

Table V. H5 regression result

H5

RL capabilities (X)

Variable (X) Equation (1): Antecedents X Cost savings Y Customer orientation (X) RL capabilities (M) R2 Signicance level of F Customer opportunism (X) RL capabilities (M) R2 Signicance level of F Resources commitments (X) RL capabilities (M) R2 Signicance level of F Contractual arrangements (X) RL capabilities (M) R2 Signicance level of F NS N/A 0.002 0.428 0.069 N/A 0.016 0.032 0.235 N/A 0.207 0.000 Equation (1) for Y as dependent variable 0.148 N/A 0.067 0.000 Equation (2): Antecedents X RL capabilities Y NS N/A 0.002 0.483 NS N/A 0.001 0.715 0.214 N/A 0.073 0.000 Equation (2) for M as dependent variable 0.230 N/A 0.069 0.000 Equation (3): Antecedents X Cost savings Y NS 0.387 0.353 0.000 0.075 0.389 0.360 0.000 0.165 0.329 0.442 0.000 Equation (3) for Y as dependent variable 0.061 0.366 0.359 0.000

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Table VI. Results for mediation using regression analysis

reverse logistics capabilities and cost savings. However, the result for H1 (customer orientation) was not signicantly related to reverse logistics capabilities. The results from our hypotheses testing can be explained from two perspectives: front-end customer-related activities and back-end processes that are both required to effectively handle customer returns. The results for H1-H4 indicate that there is a clear delineation between the impact of front-end customer-related antecedents versus back-end process-related related antecedents. For the customer-related antecedents (customer orientation and customer opportunism) we found no positive relationships with reverse logistics capabilities. However, the antecedents that represent the back-end processes (resource commitments and contractual arrangements) were positively and signicantly related to these reverse logistics capabilities. Since we found no signicant relationship between customer orientation and reverse logistics capabilities, we believe that more research is needed to test this important relationship. On the other hand, the negative and signicant results for customer opportunism underscore the negative relationship between opportunistic customer behavior and the level of return logistics capabilities that a retailer may deploy. For example, in the presence of high customer opportunism, a retailer may have a more stringent return policy and therefore have lower capabilities. The result for H5 (that reverse logistics capabilities do improve

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cost savings) is also very important to note as it indicates that cost savings were achieved by these increased reverse logistics capabilities. Another contribution of this study was demonstrated by the mediating role that reverse logistics capabilities perform in deriving reverse logistics cost savings. The Baron and Kenny (1986) procedure was used to test the mediating effect of reverse logistics capabilities in this mode. Here, we found that these capabilities partially mediated the relationship between resources and the outcome variable (reverse logistics cost savings) and also between contractual arrangements and the outcome variable (reverse logistics cost savings). These results suggested that retailers should focus not on the independent relationships between the antecedents and the outcome (reverse logistics cost savings), but rather on the mediating role that reverse logistics capabilities play within their returns system. Retailers should focus on their internal capabilities and back-end processes as represented by their reverse logistics capabilities, resource commitments and contractual arrangements. While nancial, technical and managerial resources are used to implement the reverse logistics capabilities to handle these returns, they also facilitate reduce cost when these returns are handled in an efcient manner. Similarly, having contractual arrangements in place with key suppliers and vendors were also found to be signicant contributors from the back-end processes that are required to handle these returns. One explanation for this nding is that many retailers are electing to outsource their returns processing through third-party logistics arrangements in order to benet from more efcient returns processes that help to reduce their costs. Here, our research ndings are consistent with those of other researchers. For example, Stock and Mulki (2009) found that improvements in product returns processing can improve protability through cost reductions and higher recovery rates for returned products. They also reported that many large retailers (e.g. Wal-Mart and Target) rely on outsourcing arrangements to derive these cost savings. Our ndings are based on the perspectives of retailers who form the initial link in the reverse ow of product. Unlike traditional down-stream marketing channel ows that are initiated by manufacturers, the reverse logistics ow of product most frequently begins with a return exchange made from a customer to a retailer. As more retailers embrace more convenient or liberal return policies they create the opportunity for more complex inventory management practices impacting cost, space, and forecasting at all levels of the marketing channels and supply chains. This complexity magnies the importance of managing reverse logistics and returns policy at the retail level. In todays competitive environment, many retailers look for ways to streamline functions to realize cost savings, while minimizing the impact on their customer service offering. While the returns policy is a critical component of an organizations customer service strategy, it should not become a nancial burden for a retailer. If a retailer carefully cultivates this value-added service by developing their reverse logistics capabilities, improved performance and lower costs are realizable. When the back-end resources and contractual arrangements along with the mediating role of reverse logistics capabilities are considered systematically and holistically, they provide the foundation for competitive advantage because they are key to the returns process that retail end-customers value and use. When these three elements (resources, contracts, and capabilities) are in place, retailers can realize higher cost savings through such elements as lower compliance cost with environmental regulations, improved competitiveness, and efciencies in meeting customer needs.

While other possible benecial outcomes were not tested in this research, there is empirical evidence that ultimately, satised customers can lead to repeat purchases, improved customer loyalty, increased market share, and greater nancial returns. Limitations of the research There are several limitations of the research that should be noted. One possible limitation of this study is the use of an online survey as a data collection tool. Internet surveys yield usable results, however, the survey instrument for this study employed a system into which respondents self-selected. This might create a varied type of non-response bias. In addition, the caliber of individuals who self-select into this program might not necessarily be completely representative of the retail population. Internet and paper surveys should be used to validate the ndings in this research. An additional limitation is that this research was done at a singular and specic point in time that could bias the results. For example, this study was done during the early months of summer. For many retailers, this is the slowest time of year. At this time, only their most loyal customers might come in. In order to effectively capture a better gestalt of a retail service environment, a longitudinal study might need to be done to capture service perceptions during different operating seasons and/or years. In this research cost savings were measured based on the perception of the respondent. It would be desirable to include actual cost savings in the research design, however, this information could be difcult for the respondent to report and could adversely affect the response rate. In addition, nancially related perceptual measures are often used in the literature (Narver and Slater, 1990). Another limitation of this study is that respondents were asked to rate themselves in comparison with their main competitor. Also, respondents were also asked to rate customer opportunism from the perspective of the customer. This creates an opportunity for managerial hubris as the managerial respondents cannot speak directly for the customer. Some of the constructs are better measured from customer responses. Future research should attempt to triangulate results directly with customer responses in order to minimize this limitation. Respondents were also asked to evaluate their relationships with their key suppliers. In these instances, the retailer is actually the customer, which could skew their perceptions of these relationships. In order to get a more complete picture of relationship quality, a dyadic perspective should be employed. Although it would have been desirable to conduct this study from the perspective of a dyadic relationship, the research design did not allow for this possibility. Finally, this study was limited to domestic respondents within the United States. As todays retail environment competes on a more global basis, it is imperative that we expand our research beyond traditional boundaries. Customers and retailers in other countries may have different service expectations; suppliers in other countries may well have different values. These should be examined in order to understand service requirements for retailers on a more international scale. It is also important to note that the variables examined in this study are limited by what is taking place today in rm reverse logistics activities. As the importance of reverse logistics increases there will be changes in the processes use, such as the use of collection points for online returns (Weltevreden, 2008). Summary and directions for future research There are several areas for future research that must be considered in light of the present work. The focus of the present research was on reverse logistics capabilities

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and their inuence on cost savings. The development of the capabilities measure that was done specically for this investigation resulted in items that were related to the use of information and consisted of one dimension. Future research is suggested to further explore this construct for additional dimensions and to measure it accordingly. This research was evaluated using the retailer as the primary channel member responsible for reverse logistics and its resultant cost savings. There are many other industries where the manufacturer plays a more important role in reverse logistics activities and future research can evaluate this from the manufacturers perspective, both on retailer as well as manufacturer cost savings. Reverse logistics cost savings and its antecedents may be generalizeable across industries and business settings, but this remains to be seen. Of particular interest is the role of reverse logistics in an e-commerce setting, where the e-retailer may serve in a similar capacity as the retailers examined in this study, but with signicantly different reverse logistics processes and procedures that may result cost savings derived from variables outside the domain of this research.
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Zhou, K.Z., Yim, C.K. and Tse, D.K. (2005), The effects of strategic orientations on technology-and market-based breakthrough innovations, Journal of Marketing, Vol. 69 No. 2, pp. 42-60. Further reading Dwyer, R.F., Schurr, P.H. and Oh, S. (1987), Developing buyer-seller relationships, Journal of Marketing, Vol. 51 No. 2, pp. 1-27. About the authors Eric P. Jack received his PhD in Operations Management from the University of Cincinnati. He is an Associate Professor of Management and is the Associate Dean of the University of Alabama at Birmingham School of Business. His research has been published in several journals including the Journal of Operations Management, Production and Operations Management, and Quality Management Journal. His work experience includes 21 years as a US Air Force ofcer where his responsibilities at various international locations involved facility planning, design, construction, and maintenance. Thomas L. Powers received his PhD in Marketing and Transportation Administration from Michigan State University. He is a Professor of Marketing at the Graduate School of Management at the University of Alabama at Birmingham and also holds a joint appointment in the School of Health Professions. His research interests include reverse logistics, volume exibility, and various aspects of marketing strategy. His research has been published in several journals including the Journal of Business Research, Production and Operations Management, and Health Care Management Review. Thomas L. Powers is the corresponding author and can be contacted at: tpowers@uab.edu Lauren Skinner received her PhD in Marketing from the University of Alabama. She is an Assistant Professor at The University of Alabama at Birmingham. Her research interests focus on supply chain management, retail supply chains, services within the retail supply chain, and retailing pedagogy. Her research has been published in International Journal of Physical Distribution & Logistics Management, Journal of Business Logistics, and Journal of Business Research.

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