Roundtable Discussion: Reverse Supply Chain


January 15, 2003


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:

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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