Reverse Supply Chain Logistics

Supply chain management takes into account all the companies and processes involved in the production of goods and services, from suppliers to manufacturers to wholesalers to retailers to final consumers and beyond (disposal and recycling). Because of increased consumer awareness, government oversight, and legally imposed environmental constraints, the stages beyond final consumption have become more important, leading to the need for safe return of products from the field as well as for more

environmentally-friendly products and by-products, such as recyclable containers and packaging materials. As a result, logistics planning must now consider both forward and return flows of products, parts, subassemblies, scrap, and containers. This is known as reverse supply chain logistics.

In their 2002 Harvard Business Review article, Guide and Wassenhove describe a reverse supply chain as “the series of activities required to retrieve a used product from a customer and either dispose of it or reuse it.” Donald F. Blumberg describes reverse logistics as the “coordination and control, physical pickup and delivery of the material, parts, and products from the field to processing and recycling or disposition, and subsequent returns back to the field where appropriate.” This may include the services related to receiving the returns from the field, and the processes required to diagnose, evaluate, repair, and/or dispose of the returned units, products, parts, subassemblies, and material, either back to the direct/forward supply chain or into secondary markets or full disposal.

FORCES BEHIND THE REVERSE SUPPLY CHAIN

A confluence of various economic and political forces has created an entirely new spectrum of goods at what was once considered the end of the supply chain. These goods include the following:

• Products that have failed, but can be repaired or reused
• Products that are obsolete but still have value
• Unsold products from retailers
• Recalled products
• Parts repaired in the field that still have value
• Items that have secondary usage, i.e. items that have another usage after they have exhausted their original use
• Waste that must be accounted for and disposed of or used for energy production
• Containers that must be returned to their origin or some sort of consolidation facility

Among the most powerful forces influencing the development of reverse supply chain logistics is the increase in both environmental legislation and consumer awareness and concern. Frequently, due to legislation, the original manufacturer is now responsible for final disposal of the product. New state laws passed since the early 1990s are mandating an increasing shift to waste reduction and recyclability in products and product packaging. Consumers are also increasingly paying attention to the recycled content and recyclability of packaging as well as the environmental friendliness of both products and production methods.

Another important factor includes a steady rise in customer returns because of increased demand for customer service and satisfaction, the frequent use of warranty returns, and the proliferation of rental businesses. Large retail chains usually have an agreement with suppliers allowing them to return goods. While originally intended to cover failed products, it has expanded to cover perfect goods that simply have not sold. From the consumer perspective, the buyer may return a good simply because they have decided not to keep it. Perhaps the largest source of increasing returns is the rapid increase of Internet purchases, which leads to increased returns as consumers buy merchandise “sight unseen” only to be disillusioned or dissatisfied with their purchase. Many e-retailers offer free returns and even free-shipping on returns in an effort to attract customers.

Consumer expectations have also changed as product life-cycles have been shortened by rapid technological advancement that makes products become obsolete more quickly. This has led to an increased demand for repairs, re-manufacturing, upgrades, or recalibration as well as discarding potentially valuable products that are no longer viewed as such by the current user. For example, many consumers purchase new televisions even though the one they own still has a useful life because the most recent model is larger, more advanced, or has new features.

The competitive environment of the twenty-first century global economy has also played a significant role in the rise of reverse supply chain logistics. An increase in global competition brought on by the advancement of free-trade agreements and the rapid economic rise of such newly industrializing nations as China, India, and Brazil has led to an increased drive to reduce costs. Firms are striving to take advantage of potentially good items and waste materials through reuse, recycling, or secondary usage. There has been an increased use of returnable or reusable containers for both public-relations purposes and in response to dwindling or increasingly expensive raw materials such as paper.

Finally, there is the issue of product recalls mandated by federal safety guidelines. The U.S. Consumer Product Safety Commission (CPSC), which protects the public from risks of injury or death from more than 15,000 types of consumer products, has issued over 4,000 product recalls and recall alerts. The globalization of the supply chain has resulted in a greater number of recalls as products are increasingly produced in countries with few environmental or safety regulations or poor enforcement of existing laws. The spate of Chinese-manufactured toys that were recalled in 2006 and 2007 dramatically highlighted this problem. In 2006, 467 products made in China were recalled by the CPSC, an annual record and nearly double the number from the beginning of the 2000s.

KEY COMPONENTS OF THE REVERSE SUPPLY CHAIN

Guide and Van Wassenhove list five key components to the reverse supply chain:

1. Product acquisition. The used product must be retrieved.
2. Reverse logistics. Once collected, used products are transported to some sort of facility for inspection, sorting, and disposition.
3. Inspection and disposition. The returned products are tested, sorted, and graded. Diagnostic tests may be performed to determine a disposal action that recovers the most value from the returned product. If a product is new it may be returned to the forward supply chain. Others may be eligible for some form or reconditioning while others may be sold for scrap or recycling.
4. Reconditioning. Some products may be reconditioned or completely remanufactured. Most people have seen products labeled factory reconditioned which implies it is used but like new and may have a warranty. Some products may have parts that can be extracted for reuse or as spare parts. Others go for salvage or recycling.
5. Distribution and sales. Reconditioned or remanufactured products may be sold in secondary markets where customers are unwilling to purchase a new product. In other instances the firm may need to create a new market if demand is not currently present. Of course, there are distribution needs in getting the product to the secondary market.

Blumberg lists a number of important characteristics that need to be managed, coordinated, and controlled if the reverse supply chain is to be economically viable:

• Uncertain flow of materials—firms often do not know when a return item will arrive nor are they certain of its condition. The item may be like new or may require substantial repair or even disposal. Field service engineers often try a new part in a field failure, assuming the old part is bad. Subsequently, the old part is returned. When it turns out that the new part did not fix the problem, the old part is still returned as bad, thus creating a flow of mixed good and bad parts. Typically, 30 to 35 percent of high-tech returns are perfectly good.
• Customer diversity—the return flow can be quite diverse and dependent upon the specific customer or end user. This may require considerable knowledge of specific customers and their use of the product.
• Time—from a cost or service perspective it may be desirable to return/repair/process an item as quickly as possible so that it may be quickly disposed of or reused.
• Value improvement—the firm will of course want to maximize the value of its return goods by transforming them into the state that will provide the most revenue or least cost.
• Flexibility—where demands fluctuate, the facility, transportation or other services may need to be flexible to support the firm's goals for the returned material.
• Multiparty coordination—since reverse logistics almost always involves multiple parties, an efficient and rapid real-time communication system or network is needed.

CLOSED-LOOP SUPPLY CHAIN

Increasingly, it is found that the original supplier is in the best position to control the return process. The basic reverse supply-chain logistics model operates independently of the forward supply chain that delivered the original product. When a firm controls the full process of forward and backward shipment the result is called a closed-loop supply chain.

The closed-loop supply chain generally involves a manufacturer, although sometimes it is the buyer, taking responsibility directly for the reverse logistics process. The products, parts, etc. are returned and recovered directly by the original manufacturer or through indirect (dealer) channels representing the original manufacturer's own field service force. The primary difference in this and the reverse supply chain is that in this model the entire direct and reverse flow can be and usually is controlled by the original manufacturer.

Within a closed-loop system involving a consumer market the primary interaction is between the retailer and the original manufacturer. Returns can be failed products or simply those purchased and returned. In this model there are two reverse linkages, consumer to retailer and retailer to original manufacturer.

Closed-loop systems allow firms to track the product and its failure-and-repair experience, thereby revealing how to cost-effectively service and support field service. Also, the close control and rapid recovery provided by a closed-loop system allows minimum inventory for field support. Blumberg states that inventory value is maximized in the following ways:

• Rapid returns to the manufacturer for reuse
• Ability to liquidate products, parts, and subassemblies with value to secondary markets
• Controlled recycling or disposition within environmental and other legal requirements
• Ability to efficiently process returns back into the original direct supply chain

Reducing inventory often produces significant additional efficiencies and results to the firm including the following:

• Simplifying processes of retail and wholesale return, reducing labor cost
• Reducing undesirable shrinkage and damage from returns
• Improving the database and visibility of products throughout their life cycle
• Reducing disposition cycle times, thereby, increasing cash flow

Blumberg also states that the strategic value of closed-loop reverse logistics management operations will have a very positive effect in terms of:

• Reducing the cost of returns
• Increasing the value of the salvage merchandise
• Capturing vital information and reliability, maintainability, and dependability of products supported
• Reducing transportation and warehousing expenses and time including the partial or full elimination of small package shipments
• Automating and fully controlling the total returns process

General experience dictates that the introduction of closed-loop supply chain management can result in the bottom line direct savings of 1 to 3 percent or more of total revenues, particularly for organizations in a mature or stagnating market.

RESPONSIVE VS. EFFICIENT

By strategic design, forward supply chains generally strive to be either efficient; that is, designed to deliver the product at a low cost; or responsive, meaning designed for speed of response. Obviously, there is a trade-off between the two structures; the quest for low cost (efficiency) would involve foregoing actions that would increase responsiveness, while striving for increased responsiveness almost always involves an increase in cost (or a decrease in efficiency).

Blackburn, Guide, Souza, and Van Wassenhove suggest that reverse supply chains follow a similar structure even though most currently strive to be efficient. They propose that reverse supply chains may be structured as efficient or responsive depending upon the type of product returned. Their research indicates that for reverse supply chains, the most influential product characteristic is marginal value of time (MVT). They also propose that efficient reverse supply chains can achieve processing economies by delaying testing, sorting, and grading until the products have been collected at a central location. This works well for products that have a low marginal value of time. However, for items with a high marginal value of time, for example, PCs, a responsive reverse supply chain is appropriate. Early diagnosis, for example by field testing, can maximize asset recovery value by accelerating returns to their ultimate disposition, a process they call preponement (as opposed to the postponement tactic prevalent in forward supply chains). Also, diverting new and scrap products from the main flow for items requiring additional work, repair and reconditioning, reduce flow time. Therefore if efficiency is the objective, then the reverse supply chain should be designed to centralize the evaluation activity. If responsiveness is the goal, a decentralized evaluation activity would be appropriate in order to minimize time delays in processing returns.

The total value of returned products in the United States alone is estimated at $100 billion per year. The factors influencing this trend—such as environmental legislation and awareness, rising consumer expectations, and global competition—are unlikely to be reversed any time soon. With this kind of volume and the strength of the underlying factors, the importance of improving reverse supply chain logistics is likely to continue increasing in the foreseeable future.

SEE ALSO Inventory Management; Inventory Types; Logistics and Transportation; Production Planning and Scheduling; Purchasing and Procurement; Quality and Total Quality Management; Supply Chain Management

BIBLIOGRAPHY

Blackburn, Joseph D., et al. “Reverse Supply Chains for Commercial Returns.” California Management Review 46, no. 2 (2004): 6–22.

Blumberg, Donald F. Introduction to Management of Reverse Logistics and Closed Loop Supply Chain Processes. Boca Raton, FL: CRC Press, 2005.

Guide, V. Daniel R., Jr., and Luk N. Van Wassenhove. “The Reverse Supply Chain.” Harvard Business Review 80, no. 2 (2002): 25–26.

Lipton, Eric S., and David Barboza. “As More Toys Are Recalled,Trail Ends in China.” New York Times, 19 June 2007. Available from: http://www.nytimes.com/2007/06/19/business/worldbusiness/19toys.html.

Pochampally, Kishore K., Satish Nukala, and Surendra M. Gupta. Strategic Planning Models for Reverse and Closed-Loop Supply Chains. Boca Raton, FL: Taylor & Francis, 2008.

“Recalls and Product Safety News.” U.S. Consumer Product Safety Commission. Available from: http://www.cpsc.gov/cpscpub/prerel/prerel.html.

Sarkis, Joseph. Greening the Supply Chain London: Springer,2006.