Reverse Supply Chain: Completing The Supply Chain Loop
Cognizant 20-20 InsightsReverse Supply Chain: Completingthe Supply Chain LoopExecutive SummaryReverse Supply ChainTraditionally, businesses have concentrated onimproving the forward supply chain for theirproducts (e.g., manufacturer-wholesaler-retailer).However, as the business environment becomesmore competitive, it becomes increasingly important for them to concentrate on optimizing thebackward loop, as well. Reverse logistics practiceshave been in existence for a long time, especially inthe automotive industry, where manufacturers tryto recover value from recycling car parts.Reverse supply chain refers to the movement ofgoods from customer to vendor. This is the reverseof the traditional supply chain movement of goodsfrom vendor to customer. Reverse logistics is theprocess of planning, implementing and controllingthe efficient and effective inbound flow and storageof secondary goods and related information for thepurpose of recovering value or proper disposal.In this whitepaper, we’ve defined the reversesupply chain process, the steps involved and howit can be used as a strategic business weapon.Examples of how the consumer electronics,automotive and retail industries handle reverselogistics are offered. We also provide an overviewof key trends and best practices that will powerthe reverse logistics process going forward. Alsocovered are reverse supply chain models such ascentralized postponement of returns, decentralized preponement of returns, use of informationtechnology in enabling supply chains and the zeroreturns policy adopted by some consumer electronics players. In the end, we briefly look at theinherent challenges that a reverse supply chainfaces, such as managing customer expectationson returns policies, partnering with other playersin the supply chain and handling the mountingpressure from regulatory authorities.cognizant 20-20 insights january 2011Typical examples of reverse supply chain include: Product returns and management of theirdeposition. Remanufacturing and refurbishing activities.Management and sale of surplus, as well asreturned equipment and machines from thehardware leasing business.In these cases, the resource goes at least one stepback in the supply chain. For instance, productsmove from customer to distributor or manufacturer. Other instances of products reversingdirection in the supply chain are manufacturing returns, commercial returns (B2B and B2C),product recalls, warranty returns, service returns,end-of-use returns and end-of-life returns.There are various types of reverse supply chains,and they arise at different stages of the productcycle; however, most return supply chains areorganized to carry out five key processes:
Product acquisition: Obtaining the used productfrom the user by the reseller or manufacturer. Reverse logistics: Transporting products to afacility for inspecting, sorting and disposition. Inspection and disposition: Assessing thecondition of the return and making the mostprofitable decision for reuse. Remanufacturing or refurbishing: Returningthe product to its original specifications. Marketing: Creating secondary markets forthe recovered products.revenue, often to a market segment unwillingor unable to purchase a new product (e.g., usedcars). Another common use of returns is as spareparts for warranty claims to reduce the cost ofproviding these services to customers.In certain cases, legal requirements make itmandatory for product companies to take backtheir old and used products (e.g., in the case ofrefrigerators in the U.S., companies are mandatedto take back old products because of hazardousmaterials used in their manufacture). In such acase, the reverse supply chain needs to be notonly well managed, but also tightly integratedinto the delivery mechanism.Figure 1 demonstrates a simplified schematic ofa generic reverse supply chain for commercialproduct returns. The customer returns theproducts to the reseller (product acquisition), fromwhere they are shipped to the returns evaluationlocation (reverse logistics) for issuing credit andproduct disposition (inspection and disposition).Diagnostic tests are performed to determinethe commercially optimal disposal action for thereturned product.Another example comes from Europe, where tiremanufacturers need to recycle at least one old tirefor every new tire they sell. In India, a commonuse of reverse supply chains is for promotingsales of new consumer products. Older productsare collected, reconditioned and resold at priceslower than the fresh products but much higherthan “scrap” or salvage value.There are various types of disposition actions,including remanufacturing if this is consideredto be cost effective. Some organizations simplytreat all product returns as defective. There arereturned products that may be new and never used,and these are returned to the forward distributionchannel. Other products may be sold for scrap orrecycling, usually after physically destroying theidentity of the product. Remanufactured productsare sold in secondary markets for additionalThe importance of reverse supply chain is demonstrated through a statistic originating in theU.S. that suggests nearly 20% of everythingthat is sold is returned. This number obviouslyvaries by product and channel type; nevertheless,with the high ratio and challenging economicconditions, addressing returns within the reversesupply chain can help cut costs, increase profitmargins or both.Reverse Supply ChainSupplyOriginal Supply ChainProduction waste by-productsManufacturingCommercial returnsDistributionEnd of use returnsOriginal UseOrder UseTradeEnd of use returnsReuseRedistributionRemanufacturingReverse LogisticsRecyclingFigure 1cognizant 20-20 insights2CollectionSelectionDisposal
Reverse Logistics as aStrategic WeaponFor any company, strategic variables are thosethat have a long-term bottom-line impact. Thesevariables must be managed effectively, efficientlyand proactively — not tactically or reactively —for the viability of the company. Until recently,most companies concentrated only on businessfunctions such as finance or marketing asstrategic variables. Logistics capabilities werelooked at as a strategic variable during the late1970s and 1980s. Most companies now look atreverse logistics as holding an important strategicrole, but this function has yet to gain the statusof a strategic variable. The importance of reverselogistics is increasing for a number of reasons: Companies are seeing tangible benefits fromthe value that can be recaptured from unproductive assets resulting from returned merchandise, such as significant reductions ininventories, improvement in cash flow, reducedlabor and improved customer satisfaction. There is an increase in competitive pressure toprovide an effective, efficient returned goodsprocess. The increase in catalog and e-businessshopping has resulted in a liberalization ofreturn policies in order to gain customer trustand reduce risk. Product lifecycle compression and an increasedemphasis on introducing new products andproduct “freshness” has created a need toclear the distribution channel more frequently,requiring an efficient means to bring backobsolete, outdated or clearance items. Increased regulatory requirements regardingrecycling and product disposition — especiallyaround products having environmental hazards— has increased the need for precision recordkeeping and tracking.Examples of Reverse LogisticsAcross IndustriesComputer/Electronics IndustryThe computer and electronics industry is knownfor short product lifecycles. A big market hasemerged for used PCs — both in developing anddeveloped countries. According to Gartner, 37million secondary PCs were refurbished andexported to emerging markets in 2008, and themarket research firm predicts that this numberwill rise to 69 million by 2012.1 In 2007, nearly68 million secondary PCs had to be discardedworldwide. In emerging countries, approximatelycognizant 20-20 insights15 million secondary PCs had to be discarded in2007. Gartner estimates that by 2012, emergingcountries will need to dispose of a total of 30million secondary PCs annually. The need andopportunities for reuse of obsolete productscannot be over emphasized.Building to order is an effective way to minimizethe return chain, as it allows manufacturers topostpone final transformation of the productuntil the end of the channel and configure theexact computer that the customer wants. Theinventory holding period decreases sharply withthis approach. This is in sharp contrast with therest of this industry, which typically will have 30to 60 days of inventory pre-sold into the channel.Manufacturers/retailers that sell directly to thecustomer and build to order have significantlylower return rates than the rest of the industry.Statistics indicate that return rates for thesecompanies are around 5%, about half of what therest of the industry experiences. In the words ofone executive interviewed, “We send out a millioncomputers. Pretty soon, most of them comeback.” The build-to-order model, combined withdirect sales, eliminates this problem.Manufacturers also contract with remanufacturing specialists to develop solutions to thisproblem. These specialists work with manufacturers to evaluate the root cause of returns, excessand obsolete machines, and develop methods tocontrol cost and return rates. These companiestest, recondition, repair, repack and then resell themachines. The functions of service center, warrantyrepair and other servicing are often outsourced toa third party that specializes in this business. Theseprograms have led to lower returns.Automotive IndustryThe automobile industry is one of the largestindustries in the world and deals with the mostexpensive of consumer goods. Therefore, it is notsurprising that reverse logistics is an importantsubject for this industry. The three primary areas inwhich reverse logistics plays a significant role are: Salvage of parts and materials from end-of-lifevehicles. Remanufacturing of used parts.Stock-balancing returns of new parts fromdealers.The big three automakers in the U.S. have joinedtogether to form the Vehicle Recycling Development Center (VRCD) in order to increase the3
recyclability of cars. At VRDC, the focus is onlearning to build vehicles that can be disassembledmore easily. The center is investigating one of thenewest trends in engineering, Design for Disassembly (DFD). With DFD, product disassembly is madeeasier by reducing the number of parts, rationalizing the materials and snap-fitting componentsinstead of using chemical bonds or screws.Unlike other environmentalWith DFD, product initiatives for manufacturdisassembly is made ing, DFD offers the possibilityeasier by reducing of many unintended positiveeffects, such as remanufacturthe number of parts, ing. The automobile industryrationalizing the may be the industry with thematerials and snap- longest history of making useof old products. According tofitting components the Auto Parts Remanufacturinstead of using ers Association (APRA), thechemical bonds market for remanufacturedauto parts is estimated at 34or screws. billion, annually. The APRA alsoestimates there are 12,000remanufacturing firms (including large-scalecompanies) involved in the auto parts industry.One particular company remanufactures morethan four million alternators, starters and waterpumps every year. Between 90% to 95% of allstarters and alternators sold for replacement areremanufactured.Automakers want to maintain a closed-loop systemwith their parts. When a vehicle needs a newtransmission, it is their hope that the consumerwill bring the car to a dealer that will replace theold transmission with a remanufactured one. Thedealer will send the old transmission (now calleda transmission “core”) to the automaker forremanufacturing. In this way, the automaker willmaintain a stable supply of transmission cores.The estimated cost of reverse logistics in theIndian auto and auto components industry isaround 0.5% to 1% of total sales. The reverselogistics segment has been growing at the samerate for both the auto and auto componentsindustries during the same period.Retail IndustryReverse logistics in the retail industry is depictedin Figure 2.Industry Practices and Emerging TrendsMarginal Value of Time for Product ReturnsA study of commercial returns shows the returnsprocess as a shrinking, leaking pipeline. As aproduct moves through the reverse supply chain,more than 45% of its asset value is lost in theprocess. This loss is due to two prime reasons:the downgrading of the product to a lower valueproduct as it gets remanufactured, salvaged forparts or scrapped; and the product’s decreasein value with time. Electronic goods like PCs canlose value in excess of 1% per week, and the rateincreases as the product reaches the end of itslifecycle.Retail’s Forward and Reverse Supply ChainsForward Logistics Information Flow for RetailASNSalesforecastPlannedshipments to DCShipments to DCASNPut awayat storeShipmentsto storeActual salesProduct FlowInformation FlowReverse Logistics Information Flow for RetailProduct todispositiondestinationSorting anddispositiondecision-making‘Milk run’collection toDC/CRCCollectedat storeReturninformationto DCProduct FlowInformation FlowFigure 2cognizant 20-20 insights4Customerreturns item
Shrinking Pipeline of Product Returns20% New, RestockProduct ( 190)Loss in Asset Value 45%Row ofReturns 100015% Scrap ( 0)10% SalvagedComponents ( 20)10% “Low-touch”Refurbished ( 75)Figure 3Figure 3 shows how product returns lose timevalue in the reverse supply chain. However, thisloss depends on product type; some products likePCs and laptops have a higher time value depreciation as compared with machine tools, etc.Centralized EfficientReverse Supply uation &Test FacilityPartsRecoveryScrap45% Repair &Remanufacture( 250)Once the product condition is determined at thetesting facility, it is appropriately disposed of (i.e.,sent for restocking, refurbishing, salvaging orscrapping). This model achieves economies of scaleat each level, thus enabling minimization of processing costs. An efficientIt is also easier on the retailer, reverse supplywhich doesn’t have to sortreturns or ship them to multiple chain focuses onlocations, as well as the third- processing productparty credit issuer, which has returns at an overallto issue credit at one time forlower cost.multiple product returns.In the previous model, we saw that product differentiation is delayed until all returns are shipped to thecentral facility. This can be thought of as a postponement strategy. On the other hand, for products likePCs where the asset value loss over time is relativelyhigh, we can prepone the testing and evaluation ofDecentralized Reverse SupplyChain with PreponementFigure 4An efficient reverse supply chain focuses onprocessing product returns at an overall lower cost.This supply chain model sacrifices speed over costefficiency and is typically applicable to productswith shorter time/value depreciation.The cost efficiencies in the supply chain areobtained by centralizing the testing and evaluationof the returned product at a central facility, afterwhich credit is issued. The retailer or resellerdoesn’t partake in any product evaluation at theirend. Shipping costs are minimized by shipping thereturns to the vendor in bulk.cognizant 20-20 insightsRestockRefurbishProductReturnsTest &Repair FacilityPartsRecoveryScrapRetailers andResellersFigure 55
the returned product using a decentralized modelso that the unused products can be restockedimmediately. This testing can be performed at thepoint of return by the reseller/retailer, but it wouldneed to be technically feasible, and it might requireexpertise development among resellers. Moreover,resellers would need to be incentivized throughshared savings contracts with manufacturers, orvendors can set up a vendor-managed inventoryprocess with large retailers and maintain their owntechnicians to test the returned products.Information Technology in ReverseSupply ChainsInformation technology can be used in variousways to improve the reverse logistics in industries.One of the main uses of IT is to enable itemtracking in the supply chain, enabling vendors tosee the travel history of the item. This can help inquickly discerning whether products are as goodas new and should be put back into the forwardsupply chain. This tracing ability also enablesforecasting of product returns based on historiclinkage between product returns and sales.Reverse logistics also involves refurbishing/testingfacilities at multiple locations, routing of vehiclesbetween retailers and these facilities, as well asscheduling of operations, all of which can be aided byinformation technology. It was found that a Germanrecycling network could reduce its transport volumeby 20% based on software optimization.In high-tech products, the customer often ends upordering parts that may not fulfill the product’stechnical specifications (e.g., printer cartridges)and thus end up returning the product unused. Ifthe transaction takes place online, the company canallow/disallow parts ordering based on the modelspecification (e.g., printer) that the user enters onthe Web site. Again, complicated electronics itemslike VCRs, PCs, etc. require complex set-up specifications, and so, in addition to a simplified usermanual, remote online support for fault detectioncan greatly reduce the number of product returns.Technology can also be embedded in high-valueproducts such as heavy engineering machines,auto engines, etc. to keep track of the usage themachine was subjected to during the time it wasused by the customer. For example, Bosch usesan inexpensive “data logger” chip in the electricmotor of its power tools, which records the numberof hours of use and the speed at which the toolhas been operated. This enables the company todetermine if it should send the tool for remanufac-cognizant 20-20 insightsturing or recycling based on the number of hoursused and the speed at which the tool was run.Zero Returns PolicyUnder this policy, the manufacturer does not allowproducts to be returned through the channel.They instruct retailers downstream to dispose oftheir products appropriately and provide a returnallowance for that purpose. This frees the upstreammembers of the supply chain from the burden oflogistics for product returns; it increases the samefor the downstream members. The return allowancecan be as much as 4% of sales by manufacturer tothe retailer. This approach is used by several electronics companies, with mixed results. The productsthat were supposed to have been scrapped uponreturn have found their way to secondary markets.Environmental ConcernsIncreased regulations by U.S. and European governments are causing manufacturers to invest in reverselogistics processes to ensure proper disposition oftheir products. Computer manufacturers such asDell and Hewlett-Packard have received criticism fornot properly disposing of the e-waste they generate.Land-filling practices are being overhauled due tostiffer disposal regulations, which have increasedoperating costs. Some companies are trying toapply internal research to establish environmentally friendly measures; however, the truth is thatno company will implement processes that are notsustainable to them in the long run. If legislationforces them to do so, they will have to pass on theincreased manufacturing costs to customers.Challenges persist across the manufacturingvalue chain for managing the reverse logisticsprocess. Chief among them:1. Meeting consumer needs: Customers wantthe best price and completely flexible and hassle-free returns policies.2. Volume management: Retail returns are around 60B annually, and total returns across theU.S. high-tech service industry are forecast at 818B through 2008. Especially during peakseasons, most of these ret
automotive and retail industries handle reverse logistics are offered. We also provide an overview of key trends and best practices that will power the reverse logistics process going forward. Also covered are reverse supply chain models such as centralized postponement of returns, decentral-ized preponement of returns, use of information technology in enabling supply chains and the zero .
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