Third Eyesight

Companies spend more time and money in fine-tuning their forward supply chains while ignoring their backward supply chains. However, in todays 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 todays 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 companys 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.

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.

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

Importance of reverse logistics relative to other issues

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.

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.

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.

Anindya Roy is a Faculty Associate with ICFAI Press