Sunday, May 22, 2011

Reverse Supply Chain: An Evolving Business Imperative

  • In US, nearly 20% of everything that is sold is returned back to the manufacturing
  • Reverse logistics in the US costs companies roughly $100 billion per year
  • Reverse logistics represents anywhere from 3 to 35 % of a company’s bottom line.
  • Moving product back through supply chain is 4 to 5 times costlier than moving it forward
  • In 2008, about 60% of Americans have avoided certain brands because of a recall

As evident from above, reverse supply chain is a significant and at the same time an ignored topic. Executives choose to focus more on  forward supply chain as its impact on bottom-line is more substantial. But now their is a need to address it while formulating business strategy, primarily for following three reasons.

- Business Efficiency: Marginal cost of improvement in forward supply chain has been rising. Reverse supply chain is being seen as a low hanging fruit to increase business efficiency. Also reverse supply chain can offer a wealth of actionable intelligence to improve the product design, process design and operations.
- Market Drivers: Reverse supply chain offers various sources of revenue from auctions, refurbishments, recycling and others. Also how a company manages its warranties, product recalls have a significant impact on its brand image.
- Non-Market Drivers: Current regulations (like Bioterrorism, WEEE and others) list chemical and hazardous waste disposal requirements. More such regulations are expected in future to effect EPR (Extended Producer Responsibility) to protect environment and human health. 

For benefit of readers, lets explore the breadth of what constitutes a reverse supply chain:
  • Returned Products: Products may be returned from any point in outbound supply chain because of Excess, Short, Damaged, Refused reasons.
  • Recalled Products: Sometime companies need to recall certain batch of products due to defects which went unnoticed during product design and manufacturing.
  • EOL/EOU products: EOL(End of Life)/EOU(End of Use) products refer to products discarded after use. 
  • Containers: Some companies own their containers which go as assets in accounting books. Companies end up carrying a excess buffer of these mobile assets as they don't have real-time visibility into location and inventory of empty containers.
  • Cases/Pallets/Racks: These are also considered as mobile assets. They are either to be handed over to forward supply chain or disposed off.

Having clarified the breadth of reverse supply chain, we now examine the areas business strategists need to look at. Following areas are key to drive business efficiency and address market and non-market demands.

Disposition Strategies & Gating:  There are several disposition alternatives like Auction, Donate, Redistribute, Repair, Refurbish, Recycle, Incineration, Landfill or Energy generation. The first step is to recognize the choices available because most companies limit themselves to redistribute or repair or dispose. 

Next step would be making the right disposition choice and routing the returns accordingly. The gating choice is dictated by regulations and cost-benefit analysis. Reverse supply chain can become a revenue source from just a cost center with wise disposition choices.

Traceability is maintained in forward supply chain, but it breaks down in returns. Proper traceability using barcodes, RFID, GPS avoids mix-up of returns with forward flowing items/components. Also it avoids returns landing up at un-intended places which may put the company under legal risks.

Mobile assets like containers, pallets, cases may not have any traceability at all. Traceability would enable efficient management of these assets and free up the capital locked up in excess buffers.

Financial Control: 
Long 'Returns to Credit' cycle can harm a company's relations with its customers, retailers, and distributors. A good approach is to internally develop a SLA of 1 week and improve the processes to achieve it.

Tax implications is another area of attention. For instance, VAT paid in managing returns largely go unclaimed as the accounts dept. does not get timely information. Also visibility into custom duties and other taxes paid for returns can guide the company in optimizing the routes and destinations of returns.

Root Cause Analysis & Feedback
The National Retail Federation (NRF) estimated that fraudulent returns cost upto $3.68 billion in 2010. As high as 70% of claims are in 'No Fault Found' category. By collecting and analyzing the data at time of claims helps to identify the patterns in fraudulent claims and plug the loop-holes.

For genuine claims, root cause analysis in reasons of product failure can help product and process design.

In cases of returns due to excess/short/damage, a collaborative root cause analysis with logistic providers and distributors can help to reduce such incidents.

Overall reverse supply chain has a lot of actionable intelligence which can be leveraged to improve product and process design and also reduce the quantity of those goods in reverse supply chain which should not have been there in first place.

Recall/Warranty/Repairs Support: 
Product recalls are one of the most undesirable situation a company wants to be in. Recalls carry risk to company's image and hence should be handled with care. Proper customer helpdesk support goes a long way  in pre-empting any bad mouthing from customers in public domain. 

In case of food recalls, regulations also step in and hence an extra effort is required in generating and maintaining compliance reports.

Warranties/Repairs is another sensitive area for customers where providing customers the necessary information and regular updates goes a long way in assuaging their concerns. A company's website should be the first source of information and allow creation of RMA (Return Material Authorization) followed by helpdesk.

Logistics Optimization:
Working closely with third party logistics providers and using transport optimisation techniques can make reverse supply chain efficient. Good news is some of the third party logistics providers have recognized the need and hence are differentiating themselves from other providers on reverse supply chain capabilities. 

Performance Management:
'One cannot improve what one cannot measure' holds true for reverse supply chain. A bunch of KPIs need to be defined within the Balanced Scorecard of the company to monitor the progress. Some of the KPIs can be 'Returned Goods as % of Sales', 'No Fault Found ratio', 'Reverse Supply Chain costs as % of Operating Expenses', 'Product & Process Improvement initiatives', 'VAT Recovered as % of Total Returns' etc..

An effective reverse supply chain management also offers benefits to the Logistics Provider and the Customer. It can reduce driver downtime and improve delivery response for a logistics provider. For customers, it would mean peace of mind while dealing with returns, recalls. 
Fixing reverse supply chain is not about reverse logistics alone. Also with evolving business conditions, it will no longer be a choice in future. Companies who address it now in holistic way will not only derive business efficiency but also competitive advantage in time to come.

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