Reverse Logistics in Supply Chain Management

The evolution of reverse logistics for manufactured products is developing in direct proportion to the rapid advancements in technology and the subsequent price erosion of products as new and improved products enter the supply chain at a faster pace. With such thin margins and so much competition, mismanagement of the supply chain can be devastating. Those organizations with the infrastructure to capture and compare the composite value of components with real time intelligent analysis and disposition based on changes in refurbishment cost, resale value, spare parts, repair and overall demand will not only become more profitable, but such flexibility and scalability will allow them to outmaneuver and eliminate the competition.  domestic freight companies

This is a case of modern Darwinism. It is survival of the fittest. It requires collaboration an integration within Supply Chain Logistics, or appear on the endangered species list. Even the mighty predator, the Tyrannosaurus Rex, was doomed to extinction by the constant progress of evolution. Today, technology drives evolution at an astounding pace. The ability to capture, migrate, integrate and facilitate the intelligent analysis of data is akin to the invention of fire. This is what will separate the companies who can walk upright from the ones that will be stuck in the tar pits of slow response.

The early days of Reverse Logistics were measured by convenience and customer accommodations. The focus was on the front end of the return process, the ability for consumers to be able to return unwanted or defective merchandise. The ability to facilitate a consumer return was a courtesy that turned into a compelling competitive differentiator in retail. The companies that did not support consumer returns found themselves at a strategic disadvantage to those that did, and were eventually forced to adopt the same consumer conveniences or lose those customers to the competition.

It did not take long for retail merchants to seek the same concessions from manufacturers and distribution channels. Stock rotation became a normal condition of business, and processes for returning defective merchandise became standard practice. Although this is accepted as commonplace today, it has not always been this way. Even today there are cultural differences with regards to consumer returns, especially for product that is not defective and returned because of ‘customer remorse’.

As the cost of Reverse Logistics continued to increase, and as the methods of transportation became more sophisticated, manufacturers and distributors began to look for alternatives in transportation for savings. Planning and consolidating freight for return products was identified as a way to reduce expenses related to fuel and labor. This also led to detailed analysis of transportation options, like truck, air and railway. In Supply Chain Logistics business you are either the one driving the truck, the one pumping the gas, or the one paying the other two.

The next step in the evolution of Reverse Logistics was the experimentation and cost comparison between multiple local hubs and single consolidated returns centers. The simple analysis for savings contrasted the costs of warehouse space and manpower to the amount of freight and transportation fees for handling the back end of the Supply Chain. Other factors also played a significant role in the financial analysis, including volume, material costs and inventory controls.

As the costs of Reverse Logistics continued to rise, the importance of returning refurbished merchandise to market also became more significant. Organizations began to place financial significance on the devaluation of product for every day lost in transportation, handling, processing or warehousing. As technology and features improved, price and demand for aging product diminished, as did the ability to recoup costs from returns. Speed to return to market could be measured in resale value.

In the next step of Reverse Logistics evolution, there was an awakening and realization that reverse logistics is only a portion of the entire back-end services solution. Consolidation meant more than merely consolidating returns, it meant consolidation of activities related to back-end support operations. Manufacturers began to consolidate spare parts and materials in the same warehouse as the returned merchandise, discovering that it is less expensive to move parts and packing materials across an aisle than across state lines. Spare parts used to refurbish returns were placed in the same building. Taking this concept one step further, manufacturers began to consolidate depot warranty repair operations inside the same facility to maximize the utilization of parts, labor, warehouse and materials. This activity often required collaboration between previously diverse management and operational groups within large organizations. The collaborative effort reduced expenses for all participating departments and groups within the organizations.

The next major step in the evolution of Reverse Logistics is collaboration with partners and external resources. It is a greater awakening and realization of integration with the entire Supply Chain by leveraging data exchange. It begins with an understanding of the value of the components that comprise a completed manufactured product, the Bill of Materials (BOM). The Bill of Materials is also used by manufacturers to forecast, procure and manage an inventory of spare parts that are used for repair. Frequently, the combined cost of the individual components exceeds the cost of the original retail product. Furthermore, due to price erosion, the cost to repair some products exceeds the cost of replacing the entire unit. Manufacturers must make quick financial decisions regarding the return on investment to refurbish returned products, repair or replace defective warranty products, and the potential resale value for refurbished products returned to market. Manufacturers must also weigh the potential cost if inventory for procuring spare parts to support warranty, extended warranty and out of warranty regulations. To be truly effective, manufacturers must make these decisions before the returned product enters the reverse logistics supply chain, not after it is in it.

Manufacturers have the ability to gather data on activities that drive demand. Contributors to demand planning include failure rate or rate of repairs that require spare parts. At the very front end, potential return trends and potential repair trends can be identified by customer technical support or customer care phone calls. Quality analysis of returns and defective products can also be used to identify demands for spare parts planning. Resale value trends for refurbished products and seasonal sales cycles can be used to predict demand and resale value for refurbished products, and if the product is cost effective to refurbish or repair. In some cases the parts can actually be sold for more greater margin than the whole product. At the very least, parts can be harvested from return products to mix and match repair of other defective return products, avoiding expensive spare parts procurement when applicable. All of these factors contribute to planning the demand for a refurbished product or the component parts.

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