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REVERSE LOGISTICS
A Supply Chain Opportunity


Contributed by: Computer Sciences Corporation

 

 

Most practitioners have their own understanding of the fundamental processes involved in an extended supply chain network. The novice will tell you it starts upstream with suppliers supplying suppliers, moves through manufacturing and production and goes downstream through distributors or direct to the business customers.  An improvement effort starts within the four walls of a business by drawing a process map and working on product, information and financial flows to improve the key steps in the linkage that will save time, money and use of assets. 

The journeyman will go further and explain that a supply chain continues externally, until products and services have been delivered to the end consumer.  System improvement involves order management, planning and distribution, inventory management and effective customer satisfaction.  This counselor knows that supply chain is about bringing the key process steps to best practice and optimized conditions, while receiving high satisfaction ratings from the customers and consumers.

The seasoned professional will shake his or her head and calmly explain that the journey is not ended until the products and services delivered have been accepted.  If there is dissatisfaction with the results of the supply chain and something is returned, the processing continues.  We stand with those who favor this extended enterprise view of supply chain, which results in the total satisfaction of the end consumer.  There is a great opportunity in that sense, to focus on the generally forgotten or too often lower priority area of attention given to finishing the job – going the last few feet in the linkage.  When it comes to completing the end-to-end processing, companies should do two things:

  • Take the full view and understand the total cost of supply chain, which includes having and dealing with returns
     

  • Realize the opportunity that an analysis of the return part of the system offers in terms of finding and solving problems, better satisfying
    customers and consumers, and discovering a way to increase revenues

What is Reverse Logistics?

When considering any area of business as an opportunity for improvement, begin with having an understanding of just what you are trying to change.  What is Reverse Logistics?  The broader concept of logistics is described by The Council of Supply Chain Management Professionals (CSCMP) 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.

Wikipedia defines the narrower concept we are considering as: Reverse logistics is the logistics process of removing new or used products from their initial point in a supply chain, such as returns from consumers, over stocked inventory, or outdated merchandise and redistributing them using disposition management rules that will result in maximized value at the end of the item’s useful life.  

For our purposes, reverse logistics includes all the activities that are mentioned in the definition above, with the difference that reverse logistics encompasses all of these activities as they operate in reverse.  Therefore, according to authorities Dr. Dale S. Rogers and Dr. Ronald S Tibben-Lembke, reverse logistics becomes:

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.

To settle on a specific definition, reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or achieving proper disposal to the satisfaction of the customer or consumer.  Remanufacturing and refurbishment activities may be part of the procedure.  Reverse logistics includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, and excess inventory.  It also includes recycling programs, hazardous material programs, obsolete equipment disposition, and asset recovery.

For a practitioner, the disposition choice is determined by the most profitable alternative:

  • Reconditioning – when a product is cleaned and repaired to return it to a “like new” state 
     
  • Refurbishing – similar to reconditioning, except with perhaps more work involved in repairing the product.
     
  • Remanufacturing – similar to refurbishing, but requiring more extensive work; often requires completely disassembling the product

 

  • Resell – when a returned product may be sold again as new
     
  • Recycle – when a product is reduced to its basic elements, which are reused – also referred to as asset recovery.

Case Examples

A business printer field service and reverse logistics model helps explain how an operating system works.  The process for such a firm starts when a business customer with a problem calls an original equipment manufacturer (OEM) or third party customer support contact, both of which are used in an attempt to diagnose the problem and provide problem resolution instructions if applicable.  An OEM field technician or third party certified technician attempts to repair the equipment on-site.  If unable to make the repair, the unit is sent to the OEM or certified third party repair facility, where a regional-based loaner or exchange program may be available.  The unit is then repaired at the OEM or third party repair facility.  The OEM then ships the returned unit or comparable unit back to the customer, or places the unit in used stock if an exchange is previously provided.  A field technician is then scheduled to install the loaner unit, exchange units, or repair equipment at the customer site

 As an example, consider firms involved in the aftermarket sales and services business, and how reverse logistics plays a role.  Products in this business can include accessories, replacement parts, and repair and service parts.  The services could include: product and technical support, training, product documentation, warranty and claims management, and field service repairs.  As an adjunct to these products and services, reverse logistics fits the definition by providing for: exchanges and in-warranty repair, out-of-warranty repair, maintenance, upgrades and retrofits, remanufacturing, and end-of-life asset recovery and hazardous material disposal.

In the aftermarket business, field services and reverse logistics are generally considered one of the harder areas to manage, coordinate and operate efficiently.  The area is often forgotten or given little consideration regarding launch of new products, importance to overall customer satisfaction and loyalty, and company profits.

In a specific case example of how complex the situation can become and how allowances are made to assure proper services are provided, we can take a look at what Microsoft did when it decided to introduce its XBOX.  The details help make the point about the importance of paying attention to the full supply spectrum, including reverse logistics.  Microsoft decided to have the main product manufactured by Flextronics.  Accessories would be produced by a variety of manufacturers.  Distributors and electronics retailers were to perform the warehousing, distribution, and end customer sales functions.  Solectron was used for aftermarket warranty and customer repair services.  Microsoft took the time to ensure the above capabilities were fully operational before the first XBOX was sold to an end consumer and that any returns would be processed effectively by the designated party.

In another example, a cell phone reverse logistics model proved very beneficial for a firm selling such products under their brand name.  This firm had the cell phones manufactured by LG Industries, Samsung, Motorola and others.  Accessories were again manufactured by a variety of firms.  Order taking and initial end consumer billing was performed by Amazon.  Forward logistics, including warehousing, carrier service programming and order fulfillment were performed by CellStar.  Cellular carriers such as Verizon and Sprint provided the monthly service.  Extended warranty and product protection insurance was provided by lock/line.  The customer call center service and reverse logistics was performed by CellStar.

Money is Hidden in Returns

Reasonable estimates made of the costs involved in the area we are considering indicate that reverse logistics as a part of supply chain could equal a half percent of the U.S. Gross Domestic Product, an enormous sum that often simply detracts from financial performance.  Saving some of that money is one avenue for finding benefits.  Understanding how to use reverse logistics to differentiate a business and build satisfaction and revenues with customers is generally hidden in the twilight of this area.

 If we take a look under the covers of this often neglected part of supply chain, we’ll see how a company can better understand the opportunities to eliminate many of the reasons for returns and turn dissatisfaction into satisfaction.  The idea is to take a look and consider where you might do a better job with a nuisance part of your business.

 Let’s start by considering some common objective for reverse logistics initiatives.  These include:

•         Improved customer satisfaction and loyalty

•         Reduced repair / replacement unit costs

•         Reduced replacement turnaround times

•         Feedback on hardware design and ease of use

•         Feedback on OEM quality

•         Feedback on end consumer education and first level customer support

•         Improve understanding of real reasons for hardware returns

•         Reduce overall level of returns

•         Standardize returns processes across enterprise where possible/desired

•        Utilize common systems across enterprise and automate the returns process to the extent possible/desired

•         Handle increased volumes of returns due to new products, programs, business partners

•         Enable demand driven supply chain concepts for returned products

•         Differentiate company services from the competition

Reverse Logistics Completes the Supply Chain System

Exhibit 1 – Reverse Logistics: Returns, Customer Service, Field Service, Repair and Replacement

Now let’s look at how you turn the objectives into benefits.  A glance at Exhibit 1 shows reverse logistics can include a multiplicity of actions, from returning goods from a consumer to the retailer or provider, receiving customer service or  having field service take place to repair or fix the item in question, or having the product sent to a third party for repair or replacement.  The fact is that reverse logistics includes virtually all of these services, and we counsel a broad perspective should be taken to not let this area be a burden to the business.

Most companies tend to place the involved operations in the hands of a subsidiary part of an existing logistics function and pay little attention to the effect it can have on the company’s brand, financial performance or supply chain efficiency.  A better view is to take a harder look at this area of the supply chain and find ways to turn what is typically a nuisance into something of value to the business.

To make sense out of what we’re considering, let’s remember that reverse logistics includes all of the activity related to the final disposition of products that must be removed from the supply chain system.  Such activity involves the processes related to removing products from a supply chain that do not have value for the customer or end consumer.  These products may be the result of poor workmanship, over-stocked inventory, outdated or obsolete design, damages, or general dissatisfaction with product performance.  For whatever reason, someone at the end of the downstream side of the supply chain says “I don’t want it” and the smart supplier will make it easy to return the goods.

The goal is to make certain the least damage is done to the firm’s brand and reputation, and to handle the process so it results in a positive rather than a negative impression.  A system of disposition management is required to handle such situations in an effective and rewarding manner, with the understanding that reverse logistics is far different than forward logistics. 

In the return situation, there must be a convenient point of collection for receiving the goods or to remove these goods from the supply chain.  This process step can require inspection, re-packaging, storage, and salvage of any residual value that might exist; and the development of a transportation mode that is compatible with the existing forward system of supply.  The range includes credits for unwanted goods that are returned to inventory, payment for damage that may or may not be a fault of the supplier, replacement of obsolete product, and simply accepting the return of goods that have no apparent problem.  Much of the goods in the last category are re-conditioned or re-packaged to go back into the system or to an alternate buyer.  There are many examples of firms using this type of system to turn what used to be an out-of-pocket loss into a profit by re-selling the returned goods to a satisfied customer.

Exhibit 2 – Reverse Logistics Model – Small Logistics Partner

In the model depicted above, the partner receives the returned goods and makes a test to determine if the need is for disposal, there is a major defect and the unit must be repaired, or there is a cosmetic defect and the unit can be refurbished.  In either of the latter cases, the unit is repaired and placed in stock for subsequent used stock order fulfillment. 

 In a broader situation, as shown in exhibit 3, the process becomes more involved.  Now we see the unit is returned based on the “return from” location and goes to a designated center.  The same type of processing takes place, but may also include factory direct repair if authorized by the OEM.  This model is more appropriate where large volumes of product are to be processed.

Exhibit 3 – Reverse Logistics Model – Large Repair Partners

A model used by a satellite TV service provider is described in exhibit 4, where we see different business partners being used for returns processing and minor defect removal versus major product defect repair.

Exhibit 4 – Model for Satellite TV Service Provider

Where there is sufficient volume, cost savings for using a regional test and refurbishment center can be significant.  As shown in exhibit 5, we see the results of an actual example.  In this case, the total annual savings of $3.5 million was based on 1.4 million returns.

Exhibit 5 – Projected Cost Savings for Refurbishment Center

Reverse Logistics and the Supply Chain Maturity Model

Improving the reverse logistics process starts with making selections from the list of objectives a firm wants to accomplish with its attention to this generally neglected area of supply chain.  Our list includes the following common intentions:

  • Improved customer satisfaction and loyalty – don’t lose customers because of a bad experience
  • Reduced repair, replacement or re-shipment costs – handle the process in an effective manner
  • Gain feedback from the process to eliminate root causes – demonstrate to the customer that the firm studies its problems and makes them go away
  • Improve understanding of the reasons for returns – get to the bottom of why the system did not function in a fail-safe manner
  • Utilize common systems and automate the returns process to the extent possible – Find the way to turn a problem into an opportunity for better customer satisfaction and a source of revenue
  • Differentiate the firm’s services from those of the competition – Use the experience to gain customer confidence and build new sales

With such a list in hand, the next step is to determine what is currently taking place to meet the objectives versus what must be done to assure they are fully met.  The procedure must follow some basic principles, including:

  • Move credit/flag product receipt point for returned product as close to the customer as possible
  • Minimize shipping costs
  • Minimize refurbishment/repair costs
  • Minimize hand-offs between organizations, facilities, systems, etc. in order to reduce costs and overall cycle time

CSC has developed a proven methodology for helping take this step.  In Exhibit 6, we see the characteristics and capabilities a firm demonstrates, as it moves up the familiar supply chain maturity model.  Beneath each level of the model, we see industry examples showing what a company can achieve as it makes its progress to higher levels of achievement.  CSC has been very successful using this calibration matrix to help a firm position its reverse logistics activities against what can be achieved.

 Exhibit 6 – Maturity Grid – Reverse Logistics

 

Concluding Case Study Example

A concluding case study will help demonstrate the kind of hidden values we’ve been considering.  The firm is a major provider of logistics services to the wireless communications industry, serving network operators, agents, resellers, dealers, and retailers, located in North America, South America and Asia.  Sales are in excess of $2 billion.  The business problem was typical of the industry.  Strong competition and low margins were prevalent factors on traditional forward logistics services.  The firm needed to improve its business customer and end customer service levels.  There were increasing business customer demands for more timely and useful data.  Existing processes were fragmented, inconsistent and error prone.  It was a very labor and paper intensive situation.

The company did have a vision: Focus on diversification into higher margin product and service lines.  Position the firm to provide more value added customer services with higher profit margins – especially around reverse logistics including end customer support, advanced exchange programs, asset recovery, warranty and repair services.    

The solution that emerged included some very typical steps in a reverse logistics situation.  The firm assessed its existing application architecture and technical infrastructure along with the high level business requirements needed to achieve its vision.  A packaged application was recommended to address gaps in reverse logistics capability and leverage existing IT infrastructure.  The firm reviewed its existing operations and business processes and introduced industry best practice concepts for reverse logistics.  Business process improvement workshops were conducted, which were used to highlight opportunities for standardization and guide new application software configuration, enhancement and implementation.  Finally, the firm performed custom enhancements as needed and implemented new software to enable enhanced reverse logistics capability.

The results were impressive:

  • Re-designed business processes, new reverse logistics application capability and outsourcing of non-core functions allowed them to expand and improve level of service to customers, increase sales revenue stream by adding new customers, and increase overall profit margins
  • The new reverse logistics solution enabled the following typical improvements for their business customers (before versus after):

–        Reconcile warranty credit – from 30+ days  to <8 days

–        Average cost recovered per returned unit – from $0 to $90

–        Time to process return – from 45+ days to <10 days

–        Average cost of replacement unit – from $150 to $100

–        Enhanced diagnostic reporting and status visibility for business partners and end consumers

In conclusion, reverse logistics should be taken out of the supply chain twilight and brought into the open, so it can become an area of opportunity, as opposed to being a necessary evil.  Companies should select one area of the business, where they can test the concept and develop a model for using what takes place as a source of knowledge for better satisfying customers and turning an area of cost into an area of profit.


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