MOVING FORWARD WITH REVERSE LOGISTICS

Logistics Asia, 1/1/2008

While outward processes tend to get all the attention, putting some focus on your reverse logistics flows can yield signifi cant benefits.

SVEN VERSTREPEN reports.

Over the past few years, the subject of reverse logistics (RL) has been gaining increasing attention and awareness in the supply chain community, both from practitioners and researchers. In the corporate world, reverse logistics has become the focal point of many improvementinitiatives.

This can be attributed to increased regulatory pressures – e.g. green laws, end-of-life returns – on collecting waste; consumer expectations – commercial returns, warranty and service returns; and intrinsic manufacturer benefits of collecting reuseable products – cost savings from reuse, positive image through environmentally waste disposal, etc.

Because most companies do not yet measure the extent of their reverse logistics activities, the exact value of reverse logistics activities is difficult to determine in financial terms. However, the American Reverse Logistics Executive Council recently estimated reverse logistics costs to be approximately four percent of total logistics costs, which is equivalent to approximately 0.5 percent of total US GDP, i.e. many billions of dollars. But until today, similar estimates for Asia and other regions have not been published.

In some industries, such as automotive, consumer electronics (e.g. mobile phones, PCs), value recovery of returned items can be significant. In addition, through swift reprocessing of products and packaging materials, company inventory levels and turnover can be reduced.

Particularly for industries characterized by relatively short product lifecycles, such as consumer electronics and IT, delays in processing of return flows can be expected to have a significant negative impact on value recovery, making it even more important for companies in this segment to payattention to their return processes.

But despite its higher profile, the full potential of reverse logistics appears to be underexploited in practice.

All too often, reverse logistics is overlooked by companies, when, in actual fact, considerable savings could be realized through deploying relatively simple means. Since many of their outbound processes have already been squeezed and optimized, more logistics managers should look at howthey are handling reverse flows.

MAKING DEFINITIONS
But what exactly is “reverse logistics”? As new insights come along and ways of thinking in this area evolve, the definition of the term has itselfundergone significant changes.

In the late nineties, Rogers and Tibben-Lemke defined reverse logistics as “the process of planning, implementing and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal”. Notably, this definition did not take into accountpackaging materials.

A few years later, the now defunct European Working Group on Reverse Logistics expanded this view and defined reverse logistics as “the process of planning, implementing and controlling the backwards flows of raw materials, in-process inventory, packaging and finished goods from a manufacturing, distribution or use point to a point of recovery or properdisposal”.

Most recently, in 2006, the Reverse Logistics Association expanded the definition beyond returns processing to include repair, customer service, parts management, end-of-life manufacturing, and order fulfillment. The Supply Chain Council, meanwhile, takes a purely operational, processbased view on the matter. Its SCOR model (version 7.0, 2006) gained popularity with large companies as a means to benchmark and re-engineersupply chain flows and processes.

For our purposes, we define reverse logistics as all physical and administrative processes related to the movement of trading and packaging materials from the pointof- use to the point-of-manufacture, encompassing collection, inspection, disassembly, reprocessing and/ordisposition of returned items.

When it comes to why products are returned from the point of use, there are a number of reasons, and these will affect a logistics manager's willingness to set up a reverse logistics system and process. Generally, products reverse direction in the supply chain as a result of the following factors:
1. Manufacturing returns
2. Commercial returns
3. Product recalls
4. Warranty returns
5. Service returns
6. End-of-use returns
7. End-of-life returns

And common return reasons within these categories:
• Product damaged in transport
• Product does not meet customerexpectations
• Delivery has missing parts
• Product has a quality defect
• Cancellation of sale by customer
• Product delivered too late
• Customer found a betteralternative
• Bad forecast or overstock

FLANDERS STUDY
Centered in Belgium but also extending north into the Netherlands and south into France, the Flanders region is a prime location for European logistics facilities. In fact, it hosts more than 350 European distribution centers, which equates to an average density of three per 100 square kilometers.

Flanders' preferential position can be attributed to its strategic location in the heart of the so-called “Blue Banana region”, which encompasses the major production and consumption centers in Europe. It also offers a high quality, dense hinterland transportation network, moderate rental prices for real estate, and the availability of a multilingual and highly productive logistics workforce.

In order to map the state of reverse logistics in Flanders, a focused survey of shippers and logistics service providers was carried out. The questionnaire focused on the following reverse logistics topics:

• Reverse logistics processes, procedures and organization
• Reverse logistics facts and figures (metrics)
• Reverse logistics systems and reporting

The study covered medium-sized to large companies, both with respect to turnover and workforce, with the majority being active on a global scale. And a number of different industry sectors were targeted, including logistics service providers, fast moving consumer goods (FMCG), healthcare, automotive, consumer electronics, construction, agriculture, IT & telecom, and retail. The key findings are summarized below:

Return Reasons
Insufficient delivery quality – transport damage, delivery errors, late deliveries, and low manufacturing quality are the most frequently cited reasons for product returns. Commercial returns – e.g. taking back obsolete stock due to mismatches in supply and demand, are a much lesser cited reason

Business Drivers (products)
For product returns, the main drivers for respondents to tackle reverse logistics were increased customer satisfaction and reduced costs. Surprisingly, the fact that for certain product categories the implementation of return policies is legally mandatory comes a distant third.

Business Drivers (packaging, support materials)
Customer satisfaction and cost reduction were also the main management drivers for reengineering the return flows of packaging and support materials, albeit it in the opposite order. As customer involvement is lower for packing materials, cost reduction is the primary focus. Less than 25 percent of respondents focus on value recovery, although the value of durable packaging and returnable transport items such as pallets should not be underestimated.

Return Destination
Returned products are most frequently resold within the original market, possibly after repair or refurbishment. An almost equally high percentage of returned trading goods is destined for destruction and write-off. Only a limited percentage of respondents are reselling products on alternativemarkets.

IT Awareness
Almost half of all reverse flows are being processed manually. IT departments have no interest in RL as it is not yet considered a core logistics process. So many companies therefore have no or limited information and reporting capabilities about their reverse flow of products.

Process Capabilities
Respondents were asked to assess the quality of their organization's current business processes for physical and administrative handling of commercial goods and packaging returns. Generally, companies' current ability to manage reverse logistics flows is weak, and this is particularly so for the physical management of packaging and support materials. Also telling is the fact that 40 percent of respondents indicate little or no attention being paid to reverse logistics in the recent past. And only 13 percent of companies have a job post of Reverse Logistics Manager. However, nearly all respondents indicated that they expect to see increased attention to reverse logistics over the next few years.

Outsourced Activities
Return logistics covers a wide variety of activities, ranging from transportation to sorting to repair to disposal The Flanders study found that activities involving customer contact – complaint handling, administration, finance – are less likely to be outsourced. For all other activities, a substantial part of the respondents demonstrate their belief that outsourcing supports the business drivers for reverse logistics. Currently, only 25 percent of the companies in the sample outsource one or more reverse logistics activities, although half of the respondents would be willing to consider reverse logistics outsourcing.

TAKING CONTROL
This survey of logistics service providers and shippers in the Flanders region of Europe indicates that reverse logistics processes are out of control for more than half of the companies surveyed. The main causes of this are a lack of ownership and targets; weak insight, measurement and reporting; poor process vision; and inadequate systems integration (to get good RL data).

A surprisingly large portion of the reverse logistics activities are the result of transport damage or wrong deliveries. In a way, these are avoidable flows. By making the outbound logistics process more accurate, companies can avoid unnecessary transport and obtain considerable cost savings. By actively managing the reverse flow and setting up a structured process, they can even realize additional savings. As a side-effect, return stocks and working capital will dwindle.

Current reverse logistics processes are not considered a priority as far as product flows are concerned, and, in particular, the management of packaging and support materials appears to be an information blind spot. With reverse logistics also not high on the CIO radar, a lot of improvement possibilities exist with regards to IT-enabling reverse flows.

The limited value recovery of products and the slow cycle time of packaging materials and returnable transport items represent an important “invisible value loss” in the supply chain and may offer a substantial untapped source of efficiency gains.

These gains, however, will not be achieved with the current levels of management attention. Although almost all respondents expect an increase of management attention for reverse logistics, and a quarter claims they will start optimization efforts in the next three years. Companies still seem to be searching for both information and practical tools to support them in this process. Best practices, clear-cut information on legislation such as RoHS and WEEE, and guidelines for evaluation and benchmarking are needed to unlock the hidden value in the reverse supply chain.

Without a clear focus and commitment from the organization's top management, it is impossible to give reverse logistics the necessary attention, to obtain the budget for the necessary IT investments and to overcome the resistance to reengineer reverse logistics processes and create awareness for reverse logistics among suppliers and customers.

Other main barriers to reverse logistics are caused by the variable quality of returned products, the lack of appropriate performance metrics, financial constraints and lack of staff training and education.

It is very likely that when it comes to reverse logistics, Flanders does not perform worse than other regions or countries. The fact that more than two-thirds of the all interviewed companies are active on a European or global scale reinforces this belief.

Clear legislation and best practices in order to demonstrate the possibilities of reverse logistics are required. And the market is demanding RL examples, tools and roadmaps. The Flanders Institute for Logistics is currently in the process of developing such tools in order to support logistics service providers.

Return Reasons

Return Destinations

Return Activities

MANAGING THE SERVICE SUPPLY CHAIN

Effective service logistics must become a business imperative, rather than a necessary evil. By KEWILL SYSTEMS.

Service Logistics may be a fairly new business term, but it certainly isn't a new business requirement. Moving goods from one end of the supply chain to the other has always been a necessary process. However, traditionally, the balance of organizational effort and resources has been heavily on pre-sales, and as a consequence, post-sales service has suffered. Why? Because service logistics (sometimes referred to as reverse logistics) is largely regarded as a necessary evil – the after, after sales function – and therefore of little business value. Organizations prefer instead to focus on revenuegenerating tasks earlier in the forward supply chain and as a result, few have dedicated processes or policies in place to deal with the reverse logistics and returns flows. However, for companies looking to avoid the significant costs associated with returns management, eager to maximize asset recovery value, facing pressure to adhere to environmental regulations, and with a keen sense of the importance of customer satisfaction, effective service logistics must become a business imperative. THE MARKET OVERVIEW Without doubt, organizations today operate in a complex, evolving environment. A large number of independent specialized service providers all vie for the attentions of an increasingly sophisticated and demanding customer base who are embracing the immediacy of online shopping at a staggering rate. In the rush to meet this customer demand – particularly in the high-tech market – product lifecycles are rapidly diminishing and this has had a considerable effect on the complexity of managing the spare-part supply chain. Corporate citizenship and corporate social responsibility is also taking centre stage due to frequent legislative directives regarding the safe disposal of returned goods. Consumers are also applying pressure, expecting a sustainable approach to returns management. Against this backdrop, organizations are offering aggressive discounting and flexible “try before you buy” returns policies to prevent attrition and retain precious market share. However, where the customer wins, the organization loses, in the form of more complex logistics networks and a declining profit margin. THE BUSINESS RESPONSE In order to protect their bottom line, companies are focusing on reducing operational costs, implementing lean end-to-end supply chains, and ensuring just-in-time business processes. All are crucial if organizations are to recoup costs and operate a cost-effective service and repair operation. With this in mind, there is a refocusing on core corporate competencies and the creation of networks of outsourcing partners for other less strategic functions. Many are experimenting with outsourcing warehousing and delivery activities to logistics service providers – with varying levels of success - but one area that is still emerging is the outsourcing of service logistics to third-party logistics providers (3PLs). Carried out expertly, service logistics can positively impact profitability and enhance an organization's competitive edge – something that many organizations are failing to do. By allowing specialists in the field to build a strategic integrated framework built on best practices, organizations can reengineer supply chains to more effectively control the flow of materials and related information, significantly improving accuracy, reducing costs, and minimizing loss of revenue due to faulty, obsolete or missing stock. This streamlining also helps companies provide more rapid and higher quality customer support worldwide. By delivering a sophisticated, reliable whole life service, organizations can also offer superior after sales service, considerably improving customer satisfaction – a key differentiator in today's marketplace. Configurable for the complexity of specific logistics networks, Kewill's Service Logistics (SLS) is an example of a solution that can help companies manage the execution of the end-toend service supply chain.

For more information: www.kewill.com/servicelogistics

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