Editor’s note: The SCM thesis Optimizing Reverse Logistics Costs to Encourage a More Sustainable Future was authored by Ana Eislyn Cabrera García and Varsha Gurumurthy, and supervised by Dr. Sreedevi Rajagopalan (sreedevi@mit.edu). For more information on this research, please contact the thesis supervisor.

In a world increasingly driven by e-commerce, circularity, and efficiency, reverse logistics has evolved from a back-office function to a strategic priority. Yet many companies still manage product returns with outdated tools, particularly when it comes to how those returns are priced and understood.

One of the most common practices? Charging customers a flat restocking fee, often set years ago with little data to support it. While simple, this approach can hide real costs, create friction with partners, and leave valuable efficiency gains on the table. In some cases, it may even work against sustainability goals.

In our project, we partnered with a global equipment manufacturer to investigate what was actually driving the cost of returns. The company had been charging a fixed restocking fee for nearly a decade. But with rising reverse logistics volumes and growing pressure for cost efficiency and environmental responsibility, the question became: Are return fees aligned with the actual costs of reverse logistics operations? Are we applying the return fee in a way that reflects fair and consistent treatment across customers?

Activity-Based Costing: A smarter lens for reverse logistics

That is where Activity-Based Costing (ABC) comes in. Rather than relying on one-size-fits-all fees, ABC assigns costs to the actual activities performed: receiving, inspection, repacking, processing, and more. This methodology brings clarity to which returns are truly resource-intensive, and which are not.

By adopting ABC, companies gain a clearer understanding of where time, labor, and materials are spent, and where inefficiencies or overcharges may be occurring. The result is more accurate cost recovery, better partner relationships, and the ability to make strategic decisions about staffing, automation, and sustainability efforts.

From cost recovery to circular responsibility

Reverse logistics is not just a financial challenge, it is an environmental one. Unnecessary returns, excess handling, and inefficient processing all contribute to carbon emissions and material waste. A flat-fee model does not differentiate between returns that require intensive refurbishment and those that simply go back on the shelf or into recycling. ABC, on the other hand, makes those differences visible, and manageable.

For companies pursuing circularity or ESG goals, ABC can be a powerful enabler. It helps ensure that cost-reduction initiatives do not conflict with environmental responsibility, and that pricing strategies reflect true operational effort, without discouraging the legitimate returns that support product reuse or responsible disposal.

This is not just about improving accounting accuracy. It is about building a more transparent, efficient, and sustainable reverse logistics system, one where companies recover costs responsibly, customers are treated fairly, and unnecessary waste is minimized.

A call to action for industry leaders

Whether you are in manufacturing, retail, automotive, or tech, if your company handles returns, now is the time to modernize how you manage them. ABC is not just an accounting upgrade, it is a strategic shift toward transparency, efficiency, and sustainability.

Revisiting your restocking fee model through the lens of Activity-Based Costing could unlock hidden savings, reduce unnecessary labor, and strengthen your relationships with customers and partners. Pair it with thoughtful penalty systems for non-compliant returns, and you will not only recover costs more effectively, but you will also shape behavior in a way that reduces friction and waste.

Reverse logistics is no longer an afterthought. It is a space for innovation. Let’s start treating it that way.