REVERSE SUPPLY CHAIN LOGISTICS

Consumer awareness, enhanced by legally imposed green law constraints, have lead to the need for safe return of products from the field as well as more environmentally friendly products. As a result, logistics planning must now consider both forward and return flows of products, parts, subassemblies, scrap and containers. It seems that an entirely new spectrum of goods has emerged at what was once considered the end of the supply chain. These goods include:

• 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.

In their 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.

As a point of contrast, Blumberg describes forward logistics as "the overall management and coordination and control of the full direct service logistics pipeline, including the flow of the original material, parts and the final products to the central warehouse and distribution system, as well as the initial physical flow down to regional and local supply points to the end user or purchaser."

A number of forces seem to be influencing this increase in need for reverse logistics activities. These include:

• The previously mentioned green forces such as legislation and consumer awareness and concern. Frequently, due to legislation, the original manufacturer is now responsible for final disposal of the product. The increasing value of return products increases the need for safe return from the field.
• Increased number of customer goods returned for credit as a result of increased demand for customer service and satisfaction. 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.
• Shortened product life cycles. As products become obsolete more quickly the possibility of and potential for returns increases.
• The drive to reduce costs. Firms are striving to reuse potentially good items through reuse, recycling or secondary usage. For example, Ford Motor Company has a program for recycling plastic bumpers into tail light housings.
• Increase in e-commerce sales. The massive increase of sales made via the Internet is conducive to increased returns as consumers buy merchandise "sight unseen" only to be disillusioned or dissatisfied with their purchase.
• Increased demand for repairs, re-manufacturing, upgrades, or re-calibration.
• Potentially valuable products that are no longer viewed as such by the current user. Consumers may purchase a new TV or washer/dryer even though the one they own still has a useful life.
• Increased use of returnable or reusable containers.
• Warranty returns. For many items with warranties, the good is first returned and then its disposition determined.
• Rental returns. The proliferation of rental businesses ensures the return of used but still valuable furniture and appliances.
• Product recalls. Products may be recalled by the manufacturer due to potential failure in the field or safety concerns.

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

1. Product Acquistion. 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 through:

• Rapid returns to the manufacturer for reuse.
• Ability to liquate 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:

• Simplifying processes of retail and whole-sale 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 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 tend 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, by diverting new and scrap products from the main flow, flow time for items requiring additional work, repair and reconditioning, is reduced. 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 U.S. alone is estimated at $100 billion per year. With this kind of volume the importance of the reverse supply chain can only go up.