Rise of Reverse Logistics

Introduction:

Reverse logistics is the backward flow of previously shipped products or parts from the point of distribution or consumption to upwards the supply chain for possible recycling, energy harvesting or disposal. Though it is fairly a new concept, it is gaining increasing importance in today’s business organization, not only as a sustainable practice but also as a profit center. Strategic decision factors associated with reverse logistics are investment in building and operating the chain, overall quality, customer service, environmental and legal concerns, whereas operational factors are cost-benefit analysis, picking- transportation and warehousing, re-manufacturing, reprocessing, packaging etc.

Reverse logistics evolution:

Reverse Logistics, in early days was mostly focused on convenience in terms of simplified return process and customer satisfaction. In case of retail business, the companies that did not support the process found themselves at a strategic disadvantage to those that did, and were eventually forced to support the same. Eventually they started seeking the same concessions from manufacturers and distribution channels. Manufacturers and distributors, in turn began to put effort on planning and consolidating freight for return products to reduce expenses related to fuel and labor. Cost comparison done over various alternatives e.g. centralized versus localized warehousing, collaborative transportation management, outsourcing of logistics activities and deployment of information technology. Later, manufacturers began to consolidate depot warranty repair operations inside the same facility to maximize the utilization of parts, labor, warehouse and materials. Electronics and computer products have shorter product life cycle. Reverse logistics activities are mostly dedicated to recover and reuse materials e.g. lead, copper, aluminum gold, plastics and glass contained within E-waste (includes computers, televisions, cell phones, audio equipment and batteries). The activities are also dictated by compliance and regulations like RoHS, WEEE and controls on Lead and Mercury based materials.    Performing those activities is not only financially rewarding, but in the case of hazardous materials, it is conforming to the legislation. In service industry, uniqueness and responsiveness are the key factor. Designing reverse supply chain elements in terms of gathering the data that pertains to customer call centers, extended warranty services, spare parts, resale value, parts procurement costs and impending returns often requires extensive collaboration, integration and data exchange within and among organizations. Nevertheless, organizations which carefully crafted these elements will enjoy the competitive advantages of improved bottom line and precision management.

Driving factors for the upsurge of interest in reverse logistics:

A) Harvesting valuable materials, mainly from electronic products results in good amount of savings.

B) Ease of return and repair can be viewed as an added value to customer.

C) Companies can enhance marketing efforts by analyzing reasons for returns and conducting ongoing defect analysis. Learning from this can be used to guide product design and engineering to prevent future defects and returns.

D) As landfill fees increase, and options for disposal of hazardous material decrease, legally disposing of non-salvageable materials becomes more difficult.

E) Growing concern for environment raises attention to the afterlife of commercial products. Logistics managers of socially responsible organizations are putting efforts to ensure that the discarded items which are not bio degradable can be moved back to the supply chain for necessary actions. This also helps the brand building of the organization as a responsible corporate citizen.

Reverse logistics objectives:

Activities related to reverse logistics are designed to serve the following objectives-

A) Reduced use of resources is considered as the most responsible alternative. Measures are to be taken at the early phases of product life cycle, starting from conceptualization and design so that most efficient use of physical resources becomes possible. Design aspects should also include the impacts on packaging, transportation, warehousing and product handling.

B) Reuse of the product comes in the next level of importance. Modular design sometimes facilitates reuse of parts of a product. Timely and convenient up gradation can extend product life (most suitable example is software up gradation which can be done without even a CD, through internet). Rechargeable instruments and batteries can be used several times before being discarded.

C) Recycling and recovering energy has an inseparable relation with reusing. If a discarded product is broken down in parts, some of them can be reused, others can be recycled. Recovering energy results in savings for the community.

D) Physical components which cannot be utilized any more must go to a landfill. The landfill should be responsible enough so that it does not cause any impairment to environment.

Reverse logistics considerations over product life cycle:

 Various aspects of reverse logistics should be built into product design phase like possibility of reuse of the product or its components and efficient uses of resources and energy. By making designs modular, the assembly and disassembly times can be reduced which enhances remanufacturing. Standardization, especially in terms of fasteners, interfaces and tools, always supports remanufacture. Use of specialty components or tools may render remanufacture of assemblies impossible and degrade serviceability if these specialty components cannot be contained any more. Packaging and shipping factors are also to be considered at the design phase, as well as the network of warehouses and transportation is required to be in place. Network design is extremely important for today’s supply chain spread across the globe. Highly efficient customer services are required to accommodate returned products and customer concerns during introduction of the product.  Reverse logistics events in maturity phase are generally fulfills day to day operational activities like handling returns, repackaging and inspection. In the decline phase, final return and disposal needs to be documented and preparation should be taken for legal and/or environmental concerns, especially applicable for hazardous material.

Operating factors of a reverse logistics chain is somewhat different than the forward one. Forecasting is difficult because returns are more disruptive in nature- both in numbers and in quality; pricing is mostly subjective, as well as allocation of costs; speed and increased visibility may not be prioritized. In short, processes involved in reverse logistics are more complicated compared to forward logistics processes.

Financial aspects of reverse logistics:

Paying attention while designing reverse supply chain and deploying contract management can results in a sustainable profit for the organization. Maintenance contracts, extended warranties not only generate cash but also create lifetime customers. Increased revenues can be realized from "secondary" sales and from reducing discounting levels by offering fresh stock in place of unsold or slow-selling stock. Remanufactured products, especially in heavy engineering industry are finding lucrative market. In some cases, fees charged for recycling products (e.g. motor oil) are far more than the costs involved in taking back products. Investments in reverse chain may result in development of greener technologies which will conserve resources for future generation and will create new types of job. Costs that should be considered are- warranty costs, fluctuating freight costs due to small scale shipments and special handling expenses. Economics of scale benefits may not be achieved as extra transportation legs would be added to cover specific locations for returns and repairing/recycling.

Reverse logistics challenges:

The handling of reverse logistics challenges is a strategic capability and many firms are yet to exploit this capability in full extent. Lack of an effective partnership between the retailer and manufacturer causes conflicts while deciding on condition and value of the item and required responsiveness, which in turn lengthen the time for processing returns. Lack of information about the processes like authorization of return and involved costs is also major source of problem. Sometimes management is unable to justify a large investment in improving reverse logistics systems and capabilities. Some organizations do not have specific strategy for handling returns and non-salable items. Companies often focus on the cost side of reverse logistics rather than on its revenue side. To be successful, however, the revenue side needs to be managed aggressively too. Moreover, running a distribution system backward is challenging – employees have difficulty making decisions when the decision rules are not clearly stated and exceptions are often made. Because of this, automation of paper intensive return processes is also not easy.

Future trends and conclusion:

As many firms have only become aware of the importance of reverse logistics relatively in recent times, it is expected in the future they will pay considerable attention on it. To reduce the cost, firms will need to focus on improving several aspects of their reverse logistics flows like better entry point screening, partial returns credit, earlier disposition decisions, shorter processing times and superior information management. Cross-industry consortia are among viable options, where companies with a shared requirement for recycling, but without a competitive clash of interests, pool their resources so that they can cost-effectively handle reverse logistics activities. Implementing a return merchandise authorization system can generate visibility in the returns channel, by providing advance notification of incoming products, which in turn can enable improved inbound control/scheduling and workforce planning. Guidance and support from top management is vital to recognize strategic importance of the process.  It is also crucial to integrate all the functional areas that affect, or can be affected by, returned processes. Tighter linkages between the marketing and logistics functions will ensure a smooth return process with prompt and correct credits for customers. By aligning employees with reverse logistics processes ahead of time, companies can achieve desired level of responsiveness while improving throughput processing.  

It is clear that, while sometimes derisively referred to as junk; much value can be reclaimed cost-effectively from discarded products. Though the efficient handling and disposition of returned product is unlikely to be the primary reason upon which a firm competes, it can clearly make a competitive difference. Gradually, the reverse logistics will be more recognized as more than a cost minimization exercise; it will fit into a company's strategy to be a cost leader or to better serve customers.

References:

1. The Hidden Value in Reverse Logistics by Diane A. Mollenkopf and David J. Closs, Supply Chain Management Review July 1, 2005

2. Going Backwards: Reverse Logistics Trends and Practices by Dr. Dale S. Rogers and Dr. Ronald S. Tibben-Lembke, 1998

3. The Future Direction of Supply Chain: Mastering Reverse Logistics by Mark Elliott and Jonathan Wright

4. Building Competitive Operations planning and Logistics, APICS 2009 Ed.