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Introduction
After Global Agreement for Trade and Tariff came into existence in the 1990s, the overall supply chain process used in companies changed completely. Companies started sourcing raw materials and finished goods from thousands of miles away to gain cost advantage even though those were available nearby the point of consumption (Kannan and Sasikumar, 2009). Supply chain suddenly became the main differentiating factor between companies. The supply chain process increased the overall goods movement, which increased the greenhouse gas emission enormously. Increased level of demands started generating huge amounts of waste and this became a concern for the governments. Increased environmental consciousness started putting pressure on the governments to implement rules and regulations for green supply chain practices. Increasing focus and attention have been attached to pollution prevention and minimization rather than waste management at the end of the life cycle (Kannan and Sasikumar, 2009). This mission gave rise to the concept of reverse logistics where more focus was laid on reuse of products and materials.
Reverse logistics is becoming increasingly prevalent in supply chain management. It is now a critical area in the supply chain. The growing concern of global warming, scarcity of resources, governmental regulations and consumer pressure are increasingly pushing companies to adopt reverse logistics as their strategic objective. However, till date the adoption of reverse logistics in the supply chain is minimal even though it can create sustainable competitive differentiation for the companies, both environmentally and economically. This essay will discuss the process of reverse logistics with special focus laid on its economic and environmental benefits. This paper will also examine the business benefits of building a supply chain with a robust reverse logistics process.
Background
Definition
Figure: A typical reverse logistics process (Rubio and Jiménez-Parra, 2014)
Reverse Logistics is defined as the process of moving goods from the point of consumption to the point of origin to recapture the value or for proper disposal. Reverse logistics also tries to avoid returns, reduce material flow in the forward system, if possible without compromising the demand fulfillment and possible recycling and reuse (Wright, Richey, Tokman and Palmer, 2011). Reverse logistics affects all the parties involved in the supply chain channel, right from customers, retailers, and logistics partners to manufacturers. Returns can be triggered by the customers, retailers, logistics service providers or manufacturer themselves. The returns can be of the product or can be of the packaging material.
Characteristics
Product
Figure: Characteristics of a Reverse Logistics chain (Icenhour, 2014)
There are many reasons for returning a product or packaging. The percentage of products returned varies considerably from one industry to another. For example, typically, magazine industry sees more than 50% return of its products (Deloitte, 2015). On the other hand, auto industry only witnesses 4-8% return of its products (Rubio and Jiménez-Parra, 2014). Return logistics chain is required for various reasons. One of the primary reason can be that the end customer is not happy with the product performance or quality and wants to return the product. Warranty claims may require a company to gather the product from the customer and send it back to the manufacturing location. Companies by mistake can deliver wrong products to the customers, which also requires a robust return management process to collect the wrong product and deliver the right product as soon as possible (Icenhour, 2014). Manufacturers often provide the retailers with an option to return the unsold stock. This requires the manufacturers to create a reverse logistics process. At the end of the life cycle of a product, manufacturers want the old product back quickly so that it does not cannibalize the new version (Rubio and Jiménez-Parra, 2014). This happens regularly in the automobile segment where old versions are taken out of the market as soon as new variants are introduced. Sometimes manufacturers need to recall products for correcting a product safety issue, design issue or critical limitation. This happens often in the automobile, pharmaceutical and toy industries (Icenhour, 2014).
With an increase in e-commerce, the number of purchases of products on the internet has gone up substantially. With the internet purchasing, the number of returns has gone up substantially too. Companies such as Amazon process about 20% returns of their goods (Kannan and Sasikumar, 2009).
Environmental Factor
New environmental laws are getting introduced by almost all the governments around the world, which is forcing companies to revisit their supply chain processes to reduce the carbon footprint. Companies that are not implementing reverse logistics processes are often penalized if they are not carbon emission target compliant. This is hurting their bottom line. Disposing materials as landfill is not allowed for most of the products (Icenhour, 2014). Collection and proper treatment of the product are required before those can be disposed of. This is forcing companies to establish reverse logistics process.
Product cycles have gone down substantially. With increased competition, companies are coming up with new products and variants more often. This requires a reverse logistics process to remove the old product from the market and replace it with the newer one. If this is not done quickly, the cost of obsolescence can be as high as 12% of the total supply chain cost (Deloitte, 2015).
Stages of Reverse Logistics
Figure: Four Main Stages of Supply Chain (Rubio and Jiménez-Parra, 2014)
As discussed, in the previous paragraph, organizations need to develop a reverse logistics process not only for environmental reason, but also for economic benefit. A typical reverse logistics process has four stages; local screening, collection, sorting and disposition (Wright, Richey, Tokman and Palmer, 2011).
Local Screening
Local screening is done at the point of consumption of a product. Screening is mainly done as per specification given by the manufacturer (Rubio and Jiménez-Parra, 2014). For example, for a glass bottle manufacturer like Owens Illinois, local screening process is extremely important. The manufacturer specifies that different color glass bottles should be collected in separate bins. A color mix can not only add additional step to the reverse logistics process but also can make the recycling process ineffective if different colored glass bottles are melted together. Another good example of the local screening is the process followed by Nintendo. Nintendo rewarded the retailers who provided the name of the purchaser and the product registration information during the collection process. This way Nintendo was able to track the production date of the product in the reverse logistics chain and decide on further action for those products (Rubio and Jiménez-Parra, 2014).
Collection and Consolidation
Collection is a difficult and cost intensive process in the reverse supply chain. It is not always easy for retailers to contact the customers for collecting products. Different processes need to be set up to facilitate the collection process. For example, AT&T currently has mobile recycle bins setup at every of its mobile store outlets. In fact, it is providing financial incentives to the customers for returning the mobiles to AT&T after they stop using the product (Kannan and Sasikumar, 2009).
Sorting
Sorting may not be as cost intensive as the collection process, but it is the process that determines the efficiency and effectiveness of a supply chain process. For example, if the sorting process can sort amber color glass bottles from flint color glass bottles efficiently, then the glass melting plants can recycle 100% of the glass bottles as glass is infinitely recyclable (Rubio and Jiménez-Parra, 2014). However, any mix of colors can result in contamination leading to a painful and costly separation process of amber color agents from the flint glass.
Disposition and Recovery
Products in the reverse logistics chain can be disposed of in many ways but there are three prevalent ways products are treated at the disposition stage of a reverse logistics chain. Firstly, some of the products can be sold as-is. For example, with some minimal maintenance, mobile phones can be sold as new. Additionally, old products that are in good condition can be sold through e-auction (such as ebay) or deep discount stores. Companies can also sell the collected products in the secondary market (Rubio and Jiménez-Parra, 2014). Secondly, a lot of products can be reused after repairing. Many electronic devices can be resold as repaired or refurbished products at a discounted price. Book is another segment in which old books are often sold after minimal repair or modification by the collector or the original book publisher at a deep discount in the secondary market. Finally, if the products cannot be repaired or refurbished for further use, they are disposed of as scraps or donated to charity (Rubio and Jiménez-Parra, 2014). The main issue in this stage is to dispose of the product in a secure and environment-friendly way. Disposing of a product is not only important from the environment perspective, but is also equally important for the company to do it in a cost-effective way.
Benefits of Reverse Logistics
Economic
One of the main reasons for minimal adoption of reverse logistics process is cost. Many leaders and managers consider the extra cost burden associated with managing the old product a wastage of money that adds no value to the organizations. However, that perspective is changing fast as leaders find economic benefits in the reverse logistics process.
Firstly, reverse logistics provide the company with a better leverage to serve customer experience (Solvang, Deng and Solvang, 2007). Customers now require more customized experience than before. A robust reverse supply chain can quickly reach to the unsatisfied customers and replace the faulty product or parts with a new or better one. This certainly helps improve the customer satisfaction. Highly satisfied customers are loyal to a company and work as good brand ambassador for the organization. Reverse logistics indirectly helps in achieving higher revenue.
Secondly, if handled correctly, reverse logistics can become a profit center from a cost center (Solvang, Deng and Solvang, 2007). Many companies are able to do it successfully. Mobile phone supply chain is a glaring example of the same. However, the main problem is the price setting. Marketing managers are experts at price setting, but they do not have any clue about the pricing of used products. The best practice is to auction old products or negotiate prices with the buyers. Some of the supply chain do not have the potential to become profit centers but they can reduce the manufacturing cost substantially. Glass bottle manufacturers do not have the luxury to resell their products. Although some glass bottle suppliers of Pepsi and Coca Cola reuse the collected bottles (after washing) if the quality of the collected bottle in the reverse logistics network exceeds the minimum bottle quality inspection standards (Kannan and Sasikumar, 2009). However, most of the bottles need to go back to the glass furnace for melting. Using the glass bottles reduces the energy requirement in the furnace drastically, which decreases the operation cost. Therefore, with the use of cullet(recollected and broken glass) through a robust reverse logistics chain, glass companies can reduce operational cost immensely. In a furnace, if 40% cullet is used along with other raw materials, then the overall energy requirement comes down by 15% (Kannan and Sasikumar, 2009).
Finally, reverse logistics helps companies achieve greenhouse gas emission standards. Many companies sell products, which if not disposed of in a proper way, can cause huge environmental impact (Solvang, Deng and Solvang, 2007). With the current strictness of regulations in practice for environment protection, any improper waste disposal can incur companies a huge penalty. Reverse logistics helps in the collection of the hazardous parts or products from the supply chain after the use. Once collected, companies may reuse these parts or dispose them in an environment-friendly way. This reduces the chances of incurring a penalty cost (Icenhour, 2014). Battery industry is a prime example of how if batteries are not disposed of properly, they can cause severe damage to the water layer and cause soil contamination. Amaron has created a cost incentive scheme for the repair shops and maintenance shops that retrieve batteries from the customers. Amaron purchases those batteries from the repair shops (Kannan and Sasikumar, 2009).
Environmental
In the whole supply chain process, reverse logistics is the only inherently green process (Solvang, Deng and Solvang, 2007). Reverse logistics includes processes such as remanufacturing, refurbishment, reuse, recycling and asset recovery and all of those are green processes.
Higher percentage of products recycled through a reverse process chain ensures lower requirement of the product in the forward chain as some of the product demands will be fulfilled from the refurbished products collected through the reverse logistics process (Kannan and Sasikumar, 2009). This means less resources will be used and less energy will be required to manufacture products. Less energy requirement leads to less greenhouse gas emission. Less resource usage preserves the environment. Additionally, higher reuse of products implies that less amount of waste is generated in the supply chain (Kannan and Sasikumar, 2009). In some of the industries, the cost of disposal is very high. For example, in the battery or electronics industry, the cost of disposal often prohibits a company from implementing reverse logistics. They just dump the waste to a developing country such as India or Nigeria where environmental norms are less stringent. To avoid this, companies such as Dell and IBM are implementing de-manufacturing techniques in the reverse chain to reduce new manufacturing as much as possible. This has reduced the overall waste generation drastically and is helping the bottom line to improve.
Major Challenges
Reverse logistics is a poorly understood concept in business. Leaders often consider reverse logistics process non-value adding and wasteful. Additionally, managers and leaders have no idea how technology can help create a reverse logistics chain that can create a competitive advantage for a company.
Figure: Managerial Awareness about Reverse Logistics Process (Deloitte, 2015)
Presently, managerial awareness of reverse logistics is low. In fact, only 19% global managers understand reverse logistics fully and are aware of its implications for the organizations (Deloitte, 2015). The lack of understanding is the number one reason behind the slow adoption of reverse logistics process.
Another major issue is the difficulty in tracking the value of reverse logistics. For example, a company can earn $5,000 by selling a flexographic press for a registration system, but if the system the company sold is a defective one, then it is not easy to determine the value of such system. The company may replace the faulty machine with a new one but determining the price of the faulty one is difficult. The faulty one may be repaired by changing little components and then can be resold from the repair pool.
Tracking warranty and routing status are painful processes. More and more customers want to know the real time status of their returned/faulty products for warranty claim and routing status. If a product is repaired in-house then the tracking is not difficult, but if it goes to a third party original equipment manufacturer (OEM) for repair, then it becomes extremely complex to manage (Deloitte, 2015). For example, AT&T sells mobiles to its customers. In case if a customer complains about some problem with the phone, AT&T’s reverse logistics needs to determine the optimized route for collecting the phone from the customer and then delivering it to the nearest Samsung repair center (Matthi, 2015). This requires integration of the transportation process, integration with Samsung repair facilities and with AT&T repair tracking and monitoring system. This at times is not easy to integrate.
Best Practices
Reverse logistics is still evolving. Therefore, best practices in this area are also evolving. However, there are practices that seem to work across products and categories. The first step to create a successful reverse logistics chain is to understand the full life cycle of the product or services a company offers. Often understanding the forward logistics chain helps implement the reverse logistics chain in a better way. Understanding the product can reveal information about the resource usage in the manufacturing process, hazardous nature of a product or its components and reusability of products. This helps design the waste stream and output associated with the reverse logistics process chain.
Most of the companies design their reverse logistics chain from the end-of-life disposition perspective (Pishvaee, Kianfar and Karimi, 2010). However, that creates an efficient chain for disposition but not an environmentally and economically optimized reverse logistics chain (Matthi, 2015). Reverse logistics chain design should start from the product design conceptualization and design. Designing a product in a way that reduces the overall environmental impact and maximizes the product lifespan through recycling and reusing are the first step towards designing a perfect reverse logistics chain (Pishvaee, Kianfar and Karimi, 2010).
Semiconductor industry is known for its huge environmental impact due to the usage of harmful metals in the chips and processors. Most of the companies have created a reverse supply chain that collects the chip and semiconductors after the useful life from the point of sales to dispose them as per regulations. However, Ericsson changed the design of its chips completely, and this has reduced the company’s need to dispose of the chips as these can be reused and recycled for a long period of time.
Conclusion
Reverse logistics helps managers look beyond the normal produce-to-sale life cycle. Reverse logistics process is helping businesses manage the end-of-life product management in a more environment-friendly and sustainable way. Reverse logistics provides benefits such as cost reduction, enhanced customer satisfaction, better waste management and optimized use of available raw materials (Matthi, 2015). With increased focus on the environment and tighter regulation, a better managed reverse logistics chain will be a huge differentiator for any company. However, management’s lack of understanding the reverse logistics process, non-integration of reverse logistics with the forward supply chain and difficulty in tracking value are slowing down the adoption of reverse logistics in the business community. With better awareness and more stringent environmental rules from the government, organizations will be more serious about embracing the reverse supply chain in the coming days.
References
Icenhour, M. R. (2014). Reverse Logistics Planning: A Strategic Way to Address Environmental Sustainability While Creating a Competitive Advantage. University of Tennessee Honors Thesis Commons.
Matthi, V. H. (2015). Reverse Logistics Optimization. Culminating Projects in Mechanical and Manufacturing Engineering. Paper 18
Pishvaee, M. S., Kianfar, K., & Karimi, B. (2010). Reverse logistics network design using simulated annealing. The International Journal of Advanced Manufacturing Technology, 47(1-4), 269-281.
Solvang, W. D., Deng, Z., & Solvang, B. (2007). A closed-loop supply chain model for managing overall optimization of eco-efficiency. In POMS 18th Annual Conference. Dallas Texas, USA.
Wright, R. E., Richey, R. G., Tokman, M., & Palmer, J. C. (2011). Recycling and Reverse Logistics. Journal of Applied Business and Economics, 12(5), 9-20.
Rubio, S., & Jiménez-Parra, B. (2014). Reverse Logistics: Overview and Challenges for Supply Chain Management. Int. J. Eng. Bus. Manag., Retrieved on 18th Jan 2016 from <http://dx.doi.org/10.5772/58826>
Kannan, G., & Sasikumar, P. (2009). Developing the reverse logistics network—A comment and suggestions on minimizing the reverse logistics cost. Omega, 37(3), 741-741. Retrieved on 18th Jan 2016 from <http://dx.doi.org/10.1016/j.omega.2008.03.001>
Deloitte. (2015). The hidden value in Reverse Logistics: Point of view. Retrieved on 18th Jan 2016 from < http://www2.deloitte.com/content/dam/Deloitte/be/Documents/process-and-operations/BE_POV_Supply-chain-strategy_20140109.pdf>
