10. Reverse Logistics and Sustainability

Reverse logistics, an often-overlooked process that can help companies reduce waste and improve profits, is, as the name implies, the reverse of what we’ve described so far in terms of planning and operations. It can be defined as the process of planning, implementing, and controlling the efficient flow of recyclable and reusable materials, returns, and reworks from the point of consumption for the purpose of repair, remanufacturing, redistribution, or disposal

To take this a step further, with today’s environmental concerns, organizations need to try to integrate environment thinking into the entire supply chain process, forward and reverse. This includes product design, material sourcing and selection, manufacturing processes, delivery of the final product to the consumers, and end-of-life management of the product after its useful life.

In a perfect world, of course, there would be no need for much of the material handled in reverse logistics, and later in the book, we discuss ways to use Lean thinking to reduce waste in the supply chain, but for now we will examine concepts and applications in this area.

There are a variety of reasons for the reverse logistics process, including the following:

Processing returned merchandise, including damaged, seasonal, restock, salvage, recall, or excess inventory

Green initiatives such as recycling packaging materials/containers

Reconditioning, refurbishing, remanufacturing of returned product

Disposition of obsolete inventory

Hazardous materials recovery and electronic waste disposal

So, depending on the specific reasons for the process existing in the first place within an organization, the reverse logistics network can be used for a variety of purposes, such as refilling, repairs, refurbishing, remanufacturing, and so on, depending on the nature of the product, unit value, sales volume, and distribution channels.

Let’s look at some of the major reasons mentioned here in some more detail.

Manufacturers may establish the reverse logistics system not only for offering free service during the warranty period but also for extending the services beyond the warranty period on a chargeable basis.

The system usually operates through the company’s service centers where repair and refurbishing takes place.

The physical collection of defective products is performed through a dealer network. The collected products are sent to the nearest service center for overhaul, repairs, or refurbishing.

In case of large refillable water bottles, for example, the delivery truck delivers filled bottles to and collects the same number of empty bottles from them for delivery to the factory. No extra transportation costs are involved in the process because the same delivery truck originates and terminates its journey at the factory where these reusable bottles are refilled for redelivery to customers.

Typically, this type of arrangement is accomplished via a hub-and-spoke distribution system (that is, a centralized distribution system where inventory is shipped from a central location to smaller locations or directly to consumers, similar to a bicycle hub-and-spoke configuration).

Product not giving the guaranteed performance

Quality complaints from many customers

Defective products causing harm to human life

Products beyond expiry date

Products with defective design

Incomplete product

Violation of government regulations

Ethical considerations

Save the company image

A product recall puts a large financial burden on a company, but in the competitive scenario, the companies consider recall as an opportunity to increase customer satisfaction.

Similarly, equipment sold can be checked after use to the remanufacturing process and be brought back to the remanufacturing unit.

The investment in remanufacturing and related reverse logistics supply chain can be justified on the basis of economies of scale.

In many countries, governments are devising regulations to make manufacturers responsible to minimize waste by recycling products.

Let’s look at some industries to examine why the return rates are so high.

For example, in the remanufacturing of toner cartridges, there are 12,000 remanufacturers, employing 42,000 workers, that sell nearly $1 billion worth of remanufactured cartridges annually.

Components in working order are sold as is (for example, parts from junkyards).

Components such as engines, alternators, starters, and transmissions are refurbished before they can be sold.

Materials are reclaimed through crushing or shredding.

Automotive recyclers handle more than 37% of the nation’s metal scrap, and the remanufactured auto parts market is estimated at $34 billion annually.

Besides those tangible costs, there are intangibles that greatly impact the customer, such as increased customer wait times, loss of confidence in the supply system, and the placement of multiple orders for the same items.

The returns may arrive via many carriers and in a variety of packages, either on full pallets or individual containers.

The concept of pre-postponement can be useful in this process, where companies such as Sauder Woodworking Company, which makes ready-to-assemble furniture, processes returns as close as possible to the point of sale so as to determine quickly which returns were recoverable and which were not.

The sorting can be based on how the items have been returned (that is, pallets, cartons, packets) or the type, size, or number of the return. This process generally takes 3 days or less to accomplish.

There is usually some kind of processing station where they are processed by order of their receipt, type of product, customer type or location, physical size of the items, and so forth.

Paperwork that came with the return is separated from the item and compared with the electronic records to identify any discrepancies.

The last part of this step is the marketing of products that have been repackaged, repaired, refurbished, or remanufactured, which are usually shipped to secondary markets.

Returns-to-revenue: Companies that ensure timely delivery and processing of returns position themselves to save more or earn more from the returned product. From refurbishing, repackaging, and reselling to parts reclamation and recycling, returned products are often untapped sources for revenue. With the secondary, discount market for products continuing to grow, there is even more reasons to think about returns as revenue opportunities.

Protecting profits: Handling returns properly and tracking all activities is critical to help companies avoid fines and penalties from various government regulatory agencies such as the FDA, the Consumer Product Safety Commission, and other state and federal agencies.

Customer loyalty: According to a nationwide survey conducted in 2005, 95% of customers will not buy from a company if they have a bad returns experience. This, in part, explains why companies considered best in class in reverse logistics enjoy a 12% advantage in overall customer satisfaction over their competition

Disposal benefits: Knowing what is returned and where it ends up makes it easier for companies to deal with regulatory issues and evaluate returned stock for possible secondary sales channels.

There are also other beneficial byproducts to disposing of products, such as avoiding excess inventory carrying costs, avoiding excess taxes and insurance, and managing staff levels.

Maximize recovery rates: Mishandled or completely misplaced returns affect the efficiency of any reverse logistics process, but it also means that products could end up a being a total loss for a company instead of an opportunity for resell or a spare parts resource.

It can also be used to increase the switching costs of changing suppliers to lock customers in by taking back unsold or defective merchandise quickly, while crediting the customer without delay. Many retailers and manufacturers have liberalized their return policies in recent years due to competitive pressures. One e-tailer, Zappos.com, even encourages returns as a way to increase customer loyalty.

Many companies use reverse logistics to clean out customer inventories, so that they can purchase more new goods. That way, fresher inventories can demand better prices, which in turn protects margin.

Still others use reverse logistics as a form of good corporate citizenship, using the process for altruistic reasons, such as philanthropy. These activities enhance the value of the brand and are a marketing incentive to purchase their products.

There is also the opportunity to recapture value and recover assets, as in some cases a large portion of bottom-line profits is derived from asset recovery programs. The profit comes from materials that were previously discarded.

Legal disposal issues can create a concern because landfill fees are increasing and the options for the disposal of hazardous material are decreasing. So, legally disposing of nonsalvageable materials becomes more difficult (and may be subject to fines if not done properly) (Rogers & Tibben-Lembke, 1998).

It is a bit easier in the case of industrial or high-value products because of the limited number of customers and personal interaction with the clients due to direct selling.

This can be done either through company’s field force, channel members, or third party. However, proper instructions have to be given to motivate the customer for returning the products.

Third parties are often used if it is not an area of expertise for a company and the third party can do it cheaper and more efficiently.

For example, Best Buy (a major electronics retailer) created a business unit... to focus on developing sales of consumer electronics into the secondary markets... No longer was the handling of customer returns, return to vendor, and overstock a cost center sitting in a dark corner, but now it was transformed into a profit center... at Best Buy, maximizing profit in the reverse logistics business is involving partnerships with both new and existing customers as well as manufacturers and third-party service providers (3PSs).

Online stores and auctions: With product testing, inventory management, listing, payment collection, and order fulfillment, Best Buy has built an integrated supply chain to take returned product from the stores and resell it to its value-seeking customers through eBay, a private online store, and other online channels. Best Buy recently acquired Dealtree, its provider of these services.

Trade-in, an online program was launched in 2007, offering customers a fast and easy alternative to selling online themselves, or just letting working products sit in a drawer. It allows customers to recapture economic value, and through the Dealtree technology, Best Buy has instant access to current market value of products.

Refurbishment: Working with a variety of 3PSs, Best Buy has been integrating refurbished products into its warranty replacement program and selling direct to consumers.

Recycling: In 2008, Best Buy began testing offering free recycling in several markets. They have been building up a network of local certified recyclers and plan to roll nationwide in 2009 (Reverse Logistics Magazine, 2009).

The called-back products are inspected before they are further processed for further repairs, refurbishing, remanufacturing, or waste disposal.

Investments in facilities for these activities depend on the objectives of the system, cost implication, complexity of the operations, and expected gains.

Returns arriving faster than processing or disposal.

Large amount of returns inventory held in the warehouse.

Unidentified or unauthorized returns.

Lengthy processing cycle times.

Unknown total cost of the returns process.

Customers have lost confidence in the repair activity.

Lack of information about the reverse logistics process can result in the process being out of control. As the saying goes, “If you aren’t measuring it, you can’t manage it.”

Overall, in many companies, management inattention and the lack of importance of reverse logistics, especially handling returns and nonsalable items, has resulted in restrictive policies in this regard. This may be in part due to not wanting their returns being used to cannibalize existing sales. Recently, there seems to be a trend toward reducing or eliminating restrictive policies and attempting to handle returns more effectively to recover value from what can be a valuable resource (Rogers & Tibben-Lembke, 1998).

These elements, depending on how they are handled, can either positively or negatively impact a company’s profitability. The elements are as discussed in the following subsections.

It is the first critical factor to ensure that the entire reverse flow is both manageable and profitable. In the past, companies have put most resources into the forward logistics process and have given very little time and effort into the reverse process.

While liberal return policies, like those at L.L. Bean, Walmart, and Target, may draw customers, they can also encourage customer abuse, such as the return of items lightly used for an event or one occasion.

So, it is important to have a solid gatekeeping process. For example, the electronic gaming company Nintendo will rebate retailers if they register the game player sold to the consumer at the point of sale. By doing this, Nintendo and retailers can determine whether the product is under warranty, and also if it is being returned inside the allowed time window. The impact from this new system on their bottom line was substantial: an 80% drop in return rates.

Therefore, it is important to know beforehand what to do with returned goods. Often when material comes back in to a distribution center, it is not clear whether the items are defective or can be reused or refurbished or need to be sent to a landfill. The challenge of running a distribution system in reverse is difficult: Employees have difficulty making decisions when the decision rules are not clearly stated and exceptions are often made.

The system should create a database at store level so that the retailer can begin tracking returned product and follow it all the way back through the supply chain.

The information system should also include detailed information programs about important reverse logistics measurements, such as returns rates, recovery rates, and returns inventory turnover.

Useful tools such as radio frequency (RF) are helpful. New innovations such as two-dimensional barcode and radio frequency identification (RFID) license plates may soon be in use extensively.

Consistency in disposition decisions and minimizes errors.

A space-saving advantage for retailers who want to dedicate as much of the shop floor to salable merchandise as possible.

Labor cost reductions due to their specialization, because CRC employees can typically handle returns more efficiently than retail clerks can.

Transportation cost reductions because empty truckloads returning from store deliveries are used to pick up return merchandise.

A convenient selling tool for the easy disposition of returned items. This can be an appealing service to retailers, and may be a deal maker for obtaining or retaining customers.

Faster disposition times allow the company to obtain higher credits and refunds, because items stay idle for smaller periods of time, thus losing less value.

Easier to identify trends in returns, which is an advantage to manufacturer, who can detect and fix quality problems sooner than if these returns were handled entirely by customer service personnel.

This type of policy passes the returns responsibility onto the retailer, while reducing costs for the manufacturer or distributor.

The drawback is that the manufacturer loses some control over its merchandise.

There are five categories of remanufacture and refurbishment:

Make the product reusable for its intended purpose:

1. Repair

2. Refurbishing

3. Remanufacturing

Retrieve reusable parts from old or broken products:

4. Cannibalization

Reuse parts of products for different purpose:

5. Recycling

The objective of asset recovery is to recover as much of the economic (and ecological) value as is possible, thus reducing the final quantities of waste.

This can be a good cash-generating opportunity for companies, who can sell these goods that would otherwise end up in landfills.

Returns are sometimes charged against sales. Sales department personnel may tend to fight returns and delay them as much as possible. Accounts receivables are also impacted by returns.

Now and into the future, environmental considerations will have a greater impact on many logistics decisions.

The objective of supply chain sustainability is to create, protect, and grow long-term environmental, social, and economic value for all stakeholders involved in bringing products and services to market.

Environmental considerations have a greater impact on many logistics decisions. For example, many products can no longer be placed in landfills, and as a result, many companies must take back their products at the end of their useful lifetime. At the same time, there is a decrease of landfill availability resulting in an increase in landfill costs.

Many products are banned from being placed in a landfill either because they present a health risk, such as cathode ray tubes (CRTs) in old TVs and computer monitors, or because they take up too much space.

Products that are banned from landfills include the following: motor oil, household batteries, household appliances, paper products, tires, and some medical and electrical equipment. Product bans represent a new reverse logistics opportunity, because when companies are forced to take their products back when they are banned, they reuse the products and recapture their value. The firm is also looked upon as an environmentally friendly company.

Many companies, such as Hewlett-Packard and Xerox, have adopted an extended product responsibility (EPR) program, which focuses on the total life of the product, looking for ways to prevent pollution and reduce resource and energy usage through the product’s lifecycle.

Programs and processes like product takeback and EPR are part of a strategy that has become known as closed-loop supply chains, which are designed and managed to encompass both forward and reverse flows activities in a supply chain.

The reverse logistics activities of reuse, remanufacturing, refurbishing, and recycling have become to be known as the four R’s of sustainability. The R’s, while different, are now being used by many organizations together in a broad program where they complement to each other.

Other examples of companies using green concepts in supply chain to their advantage include the following:

Walmart, which anticipates its goal of a 5% reduction in packaging by 2013, will produce $3.4 billion in direct savings and roughly $11 billion in savings across the supply chain.

Johnson & Johnson’s energy-efficiency program resulted in an estimated $30 million in annualized savings over the 10 years prior to the company’s 2006 sustainability report.

Nestlé, through a combination of packaging source reduction, reuse, recycling, and energy recovery, saved $510 million, worldwide, between 1991 and 2006 (Futin, 2010).

The emergence of global supply chains has presented challenges, risks, and opportunities for both forward and reverse flows, including environmental or green laws, which is the topic of our next chapter.