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Roundtable Discussion: Reverse Supply Chain

Participants:

Karen Peterson, Vice-President and Research Director, Gartner.
C Glenn Mauney, Senior Vice-President, Manufacturing Services, Genco Distribution Systems.
Mike Nardella, Senior Vice-President, Logistics, ReturnBuy Inc.
Devangshu Dutta, Director, Creatnet Services Ltd.

In recent years, “reverse supply chain/logistics” has assumed much importance in supply chain management. We invited experts in supply chain management to give their views on various issues related to reverse supply chain/logistics. Some of the issues that were discussed include why companies are giving so much importance to reverse supply chain/logistics? Do companies need to change their existing supply chain management systems to implement reverse supply chain/logistics? On what activities companies should pay attention while implementing reverse supply chain/logistics? And is the technology used for implementing the reverse supply chain/logistics same as that used for implementing the forward supply chain?

The Discussion….

1. In recent years, companies are giving importance to the reverse supply chain. Why are they doing so? What benefits can companies get from the reverse supply chain?


Karen Paterson : I see three main reasons why enterprises are focusing more on the reverse supply chain: 1)The world wide economic environment has made cost saving initiatives more attractive and 2) In many industries (such as high tech and aerospace), better management of the reverse supply chain translates into higher customer service and, consequently, higher customer satisfaction and 3) Industries and the enterprises within them are realizing that management of the reverse supply chain is a revenue opportunity. For example, GE Aircraft engines makes more in servicing its aircraft engines than it does when initially selling them. Companies are able to reduce their costs, increase revenue and increase customer service.

C Glenn Mauney : Reverse logistics are taking on an increasingly important strategic role in the supply chain for a number of reasons:

• There is growing recognition of the value that can be recaptured from the unproductive assets resulting from returned merchandize. Those companies who have focused on the reverse supply chain have reported significant reductions in inventories, improvement in cash flow, reduced labor and improved customer satisfaction.

• There is increased competitive pressure to provide an effective, efficient returned goods process. The increase of catalog and e-business shopping resulted in a liberalization of return policies in order to gain customer trust and reduce risk.

• The increased emphasis on new products and product “freshness” has caused a need to clear the distribution channel more often— requiring an efficient means to bring back obsolete, outdated, or clearance items.

• Many countries/states have instituted regulatory requirements regarding recycling and product disposition that requires increased record keeping and tracking.

• The cash flow and bottom line impacts resulting from inefficiencies in reconciling returned goods and credits is significant.

Mike Nardella : Reverse logistics is one of the last frontiers for controlling supply chain costs. It is also becoming a larger challenge for retailers/etailers as returns policies are becoming more lenient. By improving the RL process flow and handling of returns, companies can significantly reduce supply chain costs and provide better recovery for their returned products which impact the bottom line.

Devangshu Dutta : Reverse supply chain would refer to getting goods back from the consumer (trade or individual) and reconditioning them for resale or processing them for disposal. The reasons can include damage, seasonal inventory, restock, salvage, recalls and excess inventory.

This has happened for a long time in a few supply chains, such as catalog and mail order businesses, where “returns” can range from 5% to 50% of gross sales, depending on the merchandize. Reasons could vary, including reasons such as extra purchases by the customer because she was not sure of the size that would fit. These returns would need to be (a) collected from the customer (unless the customer sent them back by a courier or mail), (b) received in a returns warehouse, (c) reconditioned if feasible (such as reironed and repacked) and (d) posted into “fresh inventory” for resale (if reconditioned), or sent into a rejections/disposals inventory. Apparel retailers have also had returns although a much smaller percentage, where the returns might be handled at the store level itself if repairs or reconditioning is minor.

In the case of some products – e.g., refrigerators in the USA – it is a legal requirement for a company delivering a new product to take away the old one because of hazardous materials used in the product. Thus, in this case, the reverse supply chain needs to be not only well managed, but also tightly integrated into the delivery mechanism. Or, for example, beginning in 2003, the EU will require tire manufacturers to recycle at least one old tire for every new tire they sell.

In India, reverse supply chains have been used for promoting sales of new consumer products (witness the multitude of exchange offers in the case of consumer durables)—the products collected back are reconditioned and resold at prices lower than fresh products, but much higher than “scrap” or salvage value.

The reason many companies are beginning to focus on this would become evident from an American statistic: Nearly 20% of everything that is sold is returned. Obviously, as mentioned earlier, this varies a lot by the type of product or the channel. Nevertheless, given the high proportion, in this troubled economic, this is also being seen as a source of cutting costs or increasing sales profit margins or both.

The benefits that companies can draw from managing their reverse supply chains well includes capturing lost profits (such as increasing the proportion of products that can be resold at non-discounted prices), improving their cash and inventory cycle by reusing products in a timely manner (the faster reconditioned merchandize is integrated into fresh stocks, the lower the need for fresh inventory and new investment/cash) and lower costs. An example is Kodak, which remanufactures its single use cameras after the film has been developed (it has recycled over 310 million cameras in the last ten years)— that has an obvious impact on costs and profitability.

2. Do companies need to change their existing supply chain management systems to implement reverse supply chain?

Karen Paterson : In most cases, they do. Most enterprises do not have supply chain management systems, which handle the reverse supply chain, or, if they do, the existing applications are disconnected (transportation isn’t tied to customer service which isn’t integrated to repair solutions) or incomplete. Historically, the reverse supply chain has been under-invested— including the systems to support it.

C Glenn Mauney : Depending on the volumes and complexity of the returned goods flow, there is some information capture specialization and processing efficiencies in returned goods processing that requires some unique systems support and functionality. Tightly integrated automatic data capture, system directed disposition support, unique receipt handling, credit processing, comprehensive and flexible reporting and efficient integration with a variety of other business systems are functional capabilities often not supported in standard WMS or ERP systems. Reverse processes are often paper intensive and require a high degree of flexibility to handle all the exceptions. To date, very few firms have successfully automated information surrounding the returns process (such as the GENCO1 proprietary R-Log® system) and few good in-house reverse logistics management information systems exist.

Mike Nardella : Yes, companies need to make a major paradigm change. No longer can Fortune 500 companies accumulate returns in the back of the warehouse or stores and ignore the issue of returns. No longer can they just liquidate them for pennies on the dollar. They must handle returns with the same caliber of technology, expertise and commitment as in present forward logistics practices.

Devangshu Dutta : Only if their business requires it and can allow it. In some cases, a commercial reverse supply chain is not really feasible (e.g., food) and may only be used for those goods which are defective where a batch may need to be recalled.

3. To earn maximum profits from the reverse supply chain, what activities should companies pay attention to when implementing reverse supply chain?

Karen Paterson : The first and most important activity is to actually understand where the reverse supply chain will contribute to profits. This is a strategic activity that includes executive management. Initiatives that don’t tie in to executive strategy are usually either doomed to failure or will have limited ability to support corporate profitability.

C Glenn Mauney : The key reverse logistics management elements include: Gatekeeping-deciding which products to allow into the reverse logistics system, Collection-assembling the products, Sortation-deciding what to do with each product, Disposition- sending the products to their desired destinations. The initial focus should be on the desired business outcome of the reverse logistics process and then the policies and procedures that are in place to support that outcome. Then the various elements indicated above should be assembled to insure maximum flexibility, efficiency and visibility.

Mike Nardella : Companies should review the following activities to maximize profits from reverse supply chain initiatives; (1) improve recovery by sending returns direct to a company like “Returnbuy, Inc.,” which accepts returns, inspects and repairs them and then resells them for higher margins through various Venues versus traditional Liquidation, (2) reduce cycle time for obsolescence and thus increase value through cutting out the intermediate steps of how returns accumulate while losing value, (3) companies need to determine the cost benefit of present returns policies, (4) there is a growing need to develop or obtain Software to assist in processing and evaluation of returned products.

Devangshu Dutta : In addition to the usual supply chain activities, reverse supply chains also include more than one of the following elements:

  • Returns (companies are not typically geared for this process),
  • the picking of individual items from the customer (while the forward supply chain might have delivered batches),
  • exchanges,
  • warranty tracking,
  • repairs,
  • “de-manufacturing”,
  • disposal.

The collection process, inspection and sorting and remanufacturing processes are the most labor/time intensive and therefore can be either a source or a sink of time and profitability.

4. Some companies are outsourcing certain activities of the `reverse supply chain,’ while others are carrying out all the activities themselves. On what basis should companies determine the activities they should outsource and the activities they should carry out themselves?

Karen Paterson : Companies should determine which items are core competencies and NOT outsource these items. On others, determining factors would include cost to serve and available skills.

C Glenn Mauney : Many factors will determine the optimal mix of in-house versus outsource activities. The primary deciding factor is based on the overall strategic direction of the enterprise and what core competencies are considered critical to support that strategy. Other factors that come into play include: Space utilization, labor savings opportunities, transportation costs, information system capabilities and resources, asset recovery/value recapture potential

Mike Nardella : Unless companies are able to commit to technology, conveyors and sortation and time resources, they should look to outsource returns. Companies such as catalog centered usually have sophisticated reverse Logistics handling processes because of the high return rates and lenient return policies.

Devangshu Dutta : The same as any other outsourced activity: The parameters for evaluation are in-house cost vs. outsource, whether the company treats this as a core competence and strategically important area to be retained inhouse and whether the company has the specific skill and infrastructure required or whether a specialized service provider would be better equipped to handle it.

5. Is the technology used for implementing the reverse supply chain same as that used for implementing the forward supply chain?

Karen Paterson : At a high level, it is. However, there are a number of items which vary from the technology/applications required in the forward supply chain. Some of these are: 1) Repair optimization; 2) slow moving inventory optimization; and 3) reverse logistics.

Mike Nardella : The technology is similar in that it should be real time and as sophisticated, but different in that it needs to be specifically customized for varying client needs.

Devangshu Dutta : Some of the technology involved is similar (e.g., real time inventory tracking), while other areas are quite different (e.g., warranty tracking, or de-manufacturing i.e., dis-assembly of a product). The overall basket is different from technology employed in the forward supply chain, but needs to be integrated with the forward chain, especially if the goods can be resold.

6. What are the barriers to implementing and managing reverse supply chain effectively?

Karen Paterson : The main barriers are: Change management, cost, competency and technology.

C Glenn Mauney : A recent survey indicated a number of internal and external barriers to the successful execution of a reverse logistics program. These were (in order of response):
• Importance of reverse logistics relative to other issues

• Company policies

• Lack of systems

• Competitive issues

• Management inattention

• Financial resources

• Personnel resources

• Legal issues.

Mike Nardella : There is a mindset that reverse logistics is a step-child and treated more like a necessary evil instead of the back-end process of a well oiled logistics process. Another barrier is that to truly understand and handle reverse logistics requires a commitment from Senior Management to dedicate a team of individuals, software, conveyor systems and unique process flows to do it well.

Devangshu Dutta : The barriers can be classified into two categories:

Internal barriers : That is the preparedness in terms of processes, systems and infrastructure of the company to handle the returns process.

External barriers : Amenability of the customer (e.g., would a company’s image suffer if the consumer knows that he may be sold a reconditioned product), availability of external infrastructure etc.

7. In future, will companies give as much importance to the reverse supply chain, as they give now to forward supply chain?

Karen Paterson : That really depends on the enterprise and the industry. In industries where service can contribute to the profit margin (such as aerospace) or industries where the reverse supply chain is required for optimal customer service (such as high tech), they will. In industries where the reverse supply chain sometimes contributes to cost reduction (such as fast moving consumer goods), the reverse supply chain will not be as important.

C Glenn Mauney : It is clear that more and more attention is being devoted to the reverse supply chain as companies recognize the critical importance of managing the entire product life cycle. Good reverse logistics is a critical piece of product life cycle management. By integrating the forward and reverse supply chains, a “closed loop” is developed which brings the optimal efficiencies and visibility to the distribution and manufacturing processes—resulting in enhanced customer service, reduced inventories throughout the chain, accelerated cash flows, reclaimed value that is traditionally lost, and significant bottom line impact.

Mike Nardella : Tradition has been that reverse logistics activities are perceived important but only as a necessary evil. Over the past several years companies are realizing the importance of reverse logistics activities as a value-added service. In time it will be elevated in importance—but very slow and gradual with only successful companies giving it the respect it deserves.

Devangshu Dutta : The relative importance will be based on the company’s products and the nature of its business. However, one thing is certain, if a reverse supply chain is required and can be built into the company’s business, the most important factor will be integrating it with the forward supply chain. The two will have to be designed and managed together.

   
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How Efficient is Your Reverse Supply Chain?

Companies spend more time and money in fine-tuning their forward supply chains while ignoring their backward supply chains. However, in today’s competitive business environment when there is both external and internal pressure, companies can no longer ignore reverse supply chains. Efficient reverse supply chains bring many benefits to the companies. However, reverse supply chains are different from forward supply chains and most of the existing forward supply chains are not designed to handle reverse supply chains.

In today’s highly competitive business environment, the success of any business depends to a large extent on the efficiency of the supply chain. Competition has moved beyond firm-to-firm rivalry to rivalry between supply chains. Managers in many industries now realize that actions taken by one member of the supply chain can influence the profitability of all others in the supply chain. Companies like Wal-mart are trying to squeeze more costs out of their supply chain to offer everyday cheaper price to the customers. On the other hand, more and more companies are focusing on their core competencies while outsourcing the rest. But without efficient and effective supply chain, companies cannot benefit from outsourcing.

Supply chain is defined by The Council of Logistics Management as “the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements.” However, a company’s supply chain is not limited to delivering products to the end-consumers. What about the defective products that are returned by the consumers back to the company?

Though reuse of products and materials is a common phenomenon, companies have long ignored this part of the supply chain, known as reverse supply chain or backward supply chain. A common example of reverse supply chain is the soft drinks bottles pickup and delivery system, where soft drink bottles are returned and reused repeatedly. Companies were so long under the impression that returns compared to sales generate little or no money. However, with the growth of direct-to-consumer channels like catalogs and Internet, sales returns of merchandize by the consumers has increased. C Glenn Mauney, Senior VP, Manufacturing Services Genco Distribution System, says, “there is growing recognition of the value that can be recaptured from the unproductive assets resulting from return merchandize.” Goods worth over $100 bn are returned to US retailers annually. According to Devangshu Dutta, Director of a supply chain solutions company, “nearly 20% of everything that is sold in America is returned.”

The Council of Logistics Management defined reverse supply chain as “the process of planning, implementing and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal.” (Refer Figure 1)

Reverse logistics also includes remanufacturing and refurbishing activities, processing returned merchandize due to damage, seasonal inventory, restock, salvage, recalls, excess inventory and recycling programs, hazardous material programs, obsolete equipment disposition, and asset recovery.

Necessity of Reverse Supply Chain

The foremost reason behind companies giving importance to reverse supply chain is that it reduces operating costs by reusing products or components. For example, previously, Estee Lauder Companies Inc., used to dump nearly $60 mn worth of its products into landfills every year. However, after setting up reverse supply chain it has been able to reduce the volume of destroyed products by half.

Companies have started realizing the importance of reusing products or components; as a result, reverse supply chains are becoming essential part of business. “Retailers/e-tailers are facing challenges as returns policies are becoming more lenient,” opines Mike Nardella, Senior VP, Logistics, return buy. C Glenn Mauney supports his views, according to him, “the increased emphasis on new products and product “freshness” has caused a need to clear the distribution channel more often, requiring an efficient means to bring back obsolete, outdated or clearance items.” For example, Xerox replaces or upgrades hundreds of office printing machines every month.

In some cases companies are forced to set up reverse supply chains because of environmental regulations. C Glenn Mauney, opines, “many countries/states have instituted regulatory requirements regarding recycling and product disposition that requires increased record keeping and tracking. For example, from 2003, European Union is bringing a legislation that will require tire manufacturers operating in Europe to arrange for the recycling of one used tire for every new tire they sell. Some companies are using reverse supply chains as an integral part of new businesses.

For many large manufacturing and technology companies, aftermarket services forms a significant portion of their revenue. Also, providing timely and efficient service has become a key competitive differentiator in many industries. Karen Peterson, VP and Research Director, Gartner, agrees. According to her, “better management of the reverse supply chain translates into higher customer service and consequently, higher customer satisfaction; and industries and the enterprises within them are realizing that management of the reverse supply chain is a revenue opportunity.” For example, GE Aircraft engines makes more in servicing its aircraft engines than it did in initially selling them.

Some firms have also set up reverse supply chain capabilities for altruistic reasons. Nike encourages consumers to bring their used shoes back to the store from where they were purchased. These shoes are shipped back to Nike, where they are shredded, which are then donated to make basketball courts and running tracks. The company also donates funds to help build and maintain those courts. By doing this, companies enhance the value of their brand and also encourage people to purchase their products.

The Starting Point

Though companies have been successful in fine-tuning their traditional supply chains, they need to make change in their existing supply chain management systems to implement reverse supply chain management systems. Says Karen Peterson, “most enterprises do not have supply management systems which handle the reverse supply chain or, if they do, the existing applications are disconnected.”

Opined Mike Nardella, “companies need to make a major paradigm change. No longer can companies accumulate returns in the back of the warehouse or stores and ignore the issue of returns.” The first step in any successful reverse supply chain management system is to define the rules of reverse supply chain system. Karen Peterson views, “the first and most important activity is to actually understand where the reverse supply chain will contribute profits.” Adds C Glenn Mauney, “the initial focus should be on the desired business outcome of the reverse supply chain process and then the policies and procedures that are in place to support that outcome.” Many companies accept all types of returns while others do not. A lot also depends on the type of product. The return policy of the companies should clearly mention the type of return. Customers return products for repair or replacement. Channel partners return goods because of excess inventory or products exceeding their shelf-life. Original equipment manufacturers also initiate recalls. Ford recalled its Explorer model because of faulty tyres. Companies also need to educate the customers and establish new points of contact with them.

The different activities in reverse supply chain process are gatekeeping; collection; inspection and sorting; reconditioning; disposition; and redistribution. In gatekeeping, it is decided which products to be allowed in the reverse supply chain, otherwise companies might be flooded with products which cannot be recycled, remanufactured or disposed. Good gatekeeping is the first critical factor in making the entire reverse flow manageable and profitable. Next, is the process of collection of the chosen items. A major issue in collection is the high uncertainty regarding locations from where used produced products need to be collected, their quantity and timing. Once collected, the items need to be transported to locations for inspection and sorting. The inspection and sorting is necessary to decide what to do with each item. Companies might capture value from returned products by reconditioning components for reuse or by completely remanufacturing the products for resale. Disposition is the activity which decides where the items will finally go. Disposition of items is based on quality or product configuration. In redistribution, the company plans to sell the recycled product. While doing so the company first needs to determine whether there is demand for the recycled product or whether a new market must be created.

Reverse Supply Chain vs. Forward Supply Chain

Reverse supply chains differ from forward supply chains in information flow, physical distribution flow and cash flow. To manage reverse supply chain, companies need sophisticated information systems. Some of the technology involved in reverse Supply chain is similar while in some areas the technology used differs from that of traditional supply chain. According to C Glenn Mauney, “depending on the volumes and complexity of the returned goods flow, there is some information capture specialization and processing efficiencies in returned goods processing that requires some unique systems.” Technology used in reverse supply chain such as realtime inventory tracking system (bar codes and sensors) are similar to that used in the forward supply chain. On the other hand, Devangshu Dutta said that activities such as warranty tracking or de-manufacturing of product is different. Agrees Karen Peterson. According to her, “repair optimization; slow moving inventory optimization; and reverse logistics,” are the areas where reverse supply chain differs from forward supply chain.

In designing a successful reverse supply chain, it is important to know what type of product will be returned at which point in time at which place and in which condition. Hence, importance of data is immense. C Glenn Mauney opines, “tightly integrated automatic data capture, system directed disposition support, unique receipt handling, credit processing, comprehensive and flexible reporting are some of the important functional capabilities in reverse supply chain.” However, the legacy systems or the standard enterprise resource planning systems used by companies are not effective to support these functional capabilities. What is required is a data warehouse with extranet and intranet technology.

   
Table 1: Barriers to Reverse Logistics
Barrier
Percentage
Importance of reverse logistics relative to other issues 39.2%
Company policies 35.0%
Lack of systems 34.3%
Competitive issues 33.7%
Management’s inattention 26.8%
Financial resources 19.0%
Personnel resources 19.0%
Legal issues 14.1%
    Reverse supply chain also differs from forward supply chain in physical distribution flow. In the reverse supply chain, inbound logistics consists of defective units and other returns from customers. Inbound logistics follow sporadic or random routing. On the other hand, outbound logistics consists of repaired and remanufactured products; recycle items; or products meant for disposition. Outbound logistics follow both fixed and random routings. In forward supply chain, inbound logistics consists of flow of parts to a factory from the suppliers, which are consolidated, high-volume in nature and follows fixed routing. Outbound logistics in the forward supply chain consists of finished product from the factory to the customers, which is a single unit shipment and follows random routing.

Cash flows in reverse supply chain are in terms of credits and discounts. Customer expects to get a refund on a return, in the form of credit card reversal or a cash discount. Unit warranty tracking is done by product serialization. While in forward supply chain, cash flows are mainly in terms of cash. Customers purchase goods with cash or credit cards.

Barriers to Reverse Supply Chain

Successfully implementing reverse supply chain is still a problem for companies, as they face a number of obstacles. Mike Nardella views that reverse supply chain is still treated more like a necessary evil of the back end process of a logistics process. Another barrier according to him is that there is lack of commitment on the part of senior management. Senior management should show commitment in the form of dedicating a team of individuals, software and conveyor systems for reverse supply chain. Devangshu Dutta opines that there are two types of barriers, internal and external barriers. Internal barriers include preparedness in terms of processes, systems and infrastructure of the company to handle returns, while external barriers include amenability of the customer.

Conclusion

Reverse supply chain is the last frontier in the supply chain, which remains to be conquered. C. Glenn Mauney opines, “it is clear that more and more attention is being devoted to the reverse supply chain as companies recognize the critical importance of managing the entire product life cycle.” Cost reduction is not the only benefit that can be gained from reverse supply chain. It helps in understanding why products are returned. Was it returned due to quality problem? Were the stores improperly stocked? Was there a labeling problem? Answering these questions enable a company to go to the root cause of returns, resulting in better engineering, manufacturing or distribution. It also helps to get slow-moving products off the shelf, the distribution networks and warehouses. Companies that have been most successful with their reverse supply chains are those that closely coordinate them with their forward supply chains.

  By Anindya Roy
Anindya Roy is a Faculty Associate with ICFAI Press
   

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