Why reverse logistics? Why pursue an area of business management that has often been under-estimated, overlooked, and often not understood? Businesses face many challenges in the current economy trying to find new and innovative methods to derive additional revenue or profit within their organization. Returns management and tight inventory control is being explored by industry professionals to improve efficiency and increase profits. The top questions asked by industry professionals are “What do reverse logistics best practices really mean? How do we measure customer satisfaction?” (Thompson, 2010)
The triple bottom line was the concept of John Elkington, founder of SustainAbility who believed a company should measure their success not only by profit, but by people’s accountability and planet accountability (Economist, 2009). At the time there was a growing public awareness that forced many companies to consider corporate responsibility and set ethical standards to ensure manufacturers did not take advantage of indigenous people or their environment where there were unregulated markets.
The management of e-waste has evolved and has become a growing problem for companies. Most consumer electronics were making their way to landfills, or being exported to developing countries. The Environmental Protection Agency (EPA) was concerned about “exports being mismanaged abroad, causing serious public health and environmental hazards, and representing a lost opportunity to recover valuable resources effectively” (EPA, u.d.). Many electronic manufacturers and retailers have attempted to utilize their existing business footprint to capitalize managing e-waste generating new streams of income. Companies looking at reverse logistics initiatives should consider relevancy of the return or recycle program to corporate objectives to help determine how to approach an existing customer base to market a reverse logistics program for profit.
Value Added Services
Consumer demand drives product development, improvements to customer service, as well as many other income producing opportunities. When considering launching an effective reverse logistics operation an integrative management value proposition should be considered identifying the economic value, market value, and relevancy (Bowersox, et al, 2010, p. 5-6). An organization determines the strategy they want to employ to collect, refurbish, or recycle goods. Once the good is received it is evaluated to identify profitability of refurbishing the unit, using viable parts, or sending it to a recycling.
A company should consider how they intend to collect returns. If a manufacturer decides to control the collection process, the investment is driven by remanufacturing cost savings and quality control of the product. Indirect collection systems using a third party or shared resource produce an immediate savings. A manufacturer with indirect collection typically has a unique product line that would not impact their competitiveness in the marketplace if competitors were to purchase refurbished parts (Sevaskan and Wassenhove, 2006, p10-11). The concern is that a third party refurbishing a product or a shared facility could potentially sell remanufactured parts to a competitor in the wholesale market driving down product cost. In a case study, Kodak’s single use camera is a primary product and benefits from a direct collection process, where Xerox print cartridges would benefit from a third party remanufacturer because the return is not going to significantly impact the price points of their printers should a competitor choose to buy refurbished cartridges in the wholesale market (Sevaskan and Wassenhove, 2006, p13-14).
Gatekeeping parameters should be established to automate the decision-making on whether or not the return is valid. Without proper gatekeeping, a company might find themselves flooded with products that cannot be processed and inflate costs of managing returns. “Good gatekeeping is the first critical factor in making the entire reverse flow manageable and profitable” (Third Eye, 2003, para. 13). Once the item is accepted, determining where the item will be sent for central processing, how the items will be transported, and what will happen to returns after they have been inspected and sorted. Collection of information about the return through an authorization process is beneficial to planning for workflow to help expedite processing from reconditioning, repair, reutilization, resale, or deconstruction. A product that should have never been accepted as a return or sent to the wrong destination can become costly.
The conventional returns management model takes into account only those costs related to bringing the returns back into the system, along with the cost of warehousing and returns request management. The costs that impact the total reverse flow of product could impact customer retention efforts, product reworking, redistribution, inventory management, overheads allocated to other departments, and cost of disposal (Kimball, u.d. and Rogers, et al, 2008).
Where are the profits?
Reverse supply chains differ from forward supply chains in information flows, physical flows, and cash flows. A company should consider what information they are capturing on the forward flows and how that will impact and expedite the process of the reverse flow. Processing efficiency in returns will work to optimize slow moving inventory, repairs, warranties, and disposition instructions.
The physical flow drives the information flow and the differences between the reverse flow and forward flow of goods need to be considered within the organization. Forward flows are much more direct, and easily planned to account for sporadic demands or random routing of product. Reverse flows are more difficult to anticipate, tend to follow both fixed and random routings. Most of the challenges companies face is a result of an inadequate supportive infrastructure to manage information. By clearly defining the returns process and flow of goods and the impacts throughout the organization, a company can strategically plan what information should be captured. Without considering the information and product flows, a company could inadvertently create inconsistencies in process management impacting costs (Kimball, u.d., p. 3-4).
Once a company can decide what information to capture, forecasting returns and customer collaboration with the return become more efficient reducing the costs of managing that return. It is also beneficial to avoid limited data visibility as it can promulgate unreliable data and information analysis. By having full visibility with the location, status, and condition of the return a firm could mitigate the effects of poor data including product development, product cycle, repair times, and customer satisfaction (Kimball, u.d., p 9-10).
Integrating information into supply chain improvements on both the forward and reverse flows reduce returns and improve efficiency. “The general concept of an integrated supply chain links participating firms into a coordinated competitive unit” (Bowersox, et al,year??? p. 6). Developing critical relationships across the supply chain to work together become a factor driving profits. Black and Decker integrate information through the returns process to improve product quality and ease of use ultimately reducing the number of returns (Rogers, et al, 2008, p. 169). Creating a feedback loop to identify areas for improvement will help lower return management costs.
Cash flows in reverse supply chains are seen in terms of credits, discounts, and reduced operating costs. Developing credit rules and policies will help manage the cash flows. “General guidelines are established with input from customers and suppliers to determine how returns will be valued and how credits will be issued” (Rogers, et al, 2008, p. 172). Customer relationship management to include the returns process can have a large impact maintaining and building customer loyalty.
To produce a profitable supply chain (forward or reverse), a stagnated inventory flow will induce added costs and create an opening for shortages whether it be stolen merchandise, damages merchandise, or a paperwork error. Feng, et al (2012) proves that without inventory controls, policies, procedures, and dedicated staff to ensure inventory transactions are accurately recorded, inaccurate data will ripple through the organization. The impacts of inaccurate data will negatively and inaccurately impact financial records and cash flow through poor decision making, Procurement operations is typically the largest expense a company bears. Poor planning and data management shared with those making buy decisions could create inventory overages or shortages. Vendor management would become negatively impacted because without accurate inventory data, the performance and quality metrics are skewed. It would be extremely difficult to project the lost revenue from poor data management as a result of product shortage. High inventory levels and stock overages as a result of poor buy decisions tie up capital and further reduce cash flow.
Secondary markets, purchasers of refurbished items, parts for re-utilization, or raw material should be identified and managed. It is just as critical to manage these partnerships to identify opportunities to reduce procurement costs of new materials. Vendor relationships as the refurbished items or raw materials are reintroduced to the marketplace.
Field and Sroufe (2007) conducted research into the use of recycled materials against virgin materials as a sustainable business structure with a concentration in the manufacture of corrugated cardboard. They explore how that affects and changes the supply chain and the structure of vendor relationships. One manufacturer decided to implement a mini-mill because raw material suppliers were unable to fulfill orders during busy seasons. Raw materials were purchased from as far as 500 miles away from the manufacturer (Field and Sroufe, 2007, p. 4452). The recycled materials and use of a dedicated mini-mill was a strategic move to fill a gap and meet their consumer demand. After implementing the new mini-mill, transportation costs were slashed. Once recycled pulp was introduced to create the cardboard products, the company found they were able to procure all needed materials within a 150 mile radius achieving considerable transport savings (Field and Sroufe, 2007, p.4452). . The supply chain is impacted because it changes the balance and dynamics throughout the supply chain. It broadens the base of suppliers creating more competition and developing alternatives in the event a preferred vendor is unable to fulfill an order. Recyclers and raw material producers are not necessarily the same. “Imbalances from market power can result from conditions that give suppliers more bargaining power than their customers” (Field and Sroufe, 2007, p.4444). A smaller company specializing in one or two products of high quality, may corner the market and be in a position to inflate costs giving that supplier advantages with relation to pricing point.
Carbon Credits: Should I Invest?
The United National Framework Convention on Climate Change (UNFCC) developed a treaty, the Kyoto Protocol, in a global effort to mitigate greenhouse gas emissions and climate change through an emissions reduction program (Koyoto Protocol, n.d. and Issues in the International, u.d. para 1) . A business that can easily cut their emissions could wind up with an extra allowance credits are traded similar to commodity cash markets that “offers standardized and cleared futures contracts on emission allowances which can be sold to other companies for an additional stream of income. Other organizations could invest in other carbon credit programs such as the capture of methane gas from landfills, solar or wind generation or reforestation programs.
The business model for this income was derived from new legislation called “Cap and Trade” that sets a limit on emissions that is lowered over time and allows for carbon credit to be traded between companies to help meet or fall below a firm’s allowable emission threshold (Cap and trade, u.d. para 1-3). The downside is that the market for carbon credits is volatile. Reuters reported “Falling carbon offset prices will lead some greenhouse gas-cutting project owners to make fewer but larger requests for CO2 credits from the U.N., while others will be pushed out of the international emissions trading market completely, analysts said, a move that could increase volatility in offset supply” (Roberson, 2013 para 5). These credits are consumption based and cannot be re-sold.
The carbon market throughout most of the United States is voluntary and left to individual states to manage which contributes to market volatility. Without a national policy, the investment into a voluntary market would be difficult to justify unless there was a hidden value uncovered. The state of Louisiana received media attention after hurricane Katrina and the Gulf of Mexico oil spill (Larino, 2012. Para 3). Local governments in that area are looking to capitalize on carbon credits to offset the costs of redeveloping the coastline and wetland areas to replace trees and foliage that has been destroyed. In the United States, California, has the strictest environmental emission laws and produces a demand for carbon credits (Larino, 2012. Para. 8-9). The Louisiana project is being examined for approval to determine what carbon credits will be generated from the project. “If the California Air Resources Board, the agency overseeing the program, approves the methodology, polluters in California will be able to purchase wetlands credits for Louisiana projects bringing the two groups together” (Jennifer, L. 2012, para 9)
The decision to invest in carbon credit programs should be carefully considered. The investment should not be made for the sole purpose of producing an additional stream of income but rather to offset the cost of doing business or remediation.
Determining profitability between in-house refurbishments or deconstruction or partnering with a third party capacity to manage the waste stream, considering time, volume and capacity to process and sell the refurbished item, or raw material. .
If a remanufacturer decides an item is not viable for refurbishment and resale, will they outsource deconstruction or manage the process in-house? Identifying the price point for profit will drive the decision. E-waste recycling revenue will be difficult to achieve unless a system is in place to maximize and automate processing. Ecycling USA created a business model that reflects collection fees for large appliances and general electronics that range from $300 -$1,000 per ton (eRecycling, USA, 2011, p.4). The e-waste is fully enclosed limiting risk of environmental contamination as well as automated the sorting and processing of waste quickly. Income is produced from the sale of recaptured precious metals ranging from $60 to $7,000 per ton (eRecycling, USA, 2011, p. 3-4). Green mining (also known as Urban Mining) has become profitable in the electronics industry as precious metals are extracted from electronic goods (Green mining 101, u.d, para 1-3). The metals are then resold for the manufacture of new products. The recapture of precious metals is not just for the environmental protections associated with mining, or water contamination but from depleted sources.
An engineering student in the United Kingdom developed a method of recycling precious metals that are lost on catalytic converters. (Reusing precious metals from the streets, para 1-2). The converters shave small particles creating road dust which traditionally has been discarded by street sweepers. “Almost the same level of metals is present on the streets as there are in the places where they were originally mined” (Reusing precious metals from the streets, Engineering Today, 2008, para. 4). The escalating cost of metals has justified the cost of developing the processing equipment for street sweepers to capture the metals and prevent them from entering landfill sites.
As the supply chain evolves to a highly collaborative function, vendor management and diversifying suppliers becomes more important. Manufacturers are noticing the savings they can achieve by purchasing recycled materials ultimately saving on the total procurement costs. Similarly, throughout the reverse flow new customers of refurbished or recycled products should be identified and pursued offering competitive pricing. Without identifying who will purchase the recycled or refurbished material, costs are incurred and storage capacity limited. New York City was forced to discontinue their glass recycling program from 2001 to 2003 because they ran out of space to store post-recycled materials. The city invested in a contract in 2003 to actively market recycled materials and clear warehouse space (Biocycle, 2003).
Developing a returns management strategy is to fully understand the constraints and capabilities of the company, but also that of the physical supply chain. An organization considering a reverse logistics operation should develop close relationships with all key stakeholders to understand potential client limitations in managing returns and positioning themselves to fill the void outside those constraints.
To utilize an existing customer pipeline to offer new income producing waste stream management services, an organization must be able to show the financial benefit and added value of the reverse logistics program. Profit generated through logistics services and leveraging relationships by helping clients manage their waste stream, emissions management, and demonstrating potential savings across the business footprint, rather than creating an income stream from the return itself.
A company seeking to create a new stream of income would provide logistics capabilities and services that offer their clients with real time data demonstrating the cost savings for the investment. A successful consultant is in a position to examine the supply chain from end to end in the forward logistics cycle to identify where the reverse flow processes impact the forward flow and develop a comprehensive data collection strategy that captures opportunities for improvements, mitigate risk, and roll into relationship management.
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Republished: Reverse Logistics Magazine, Issue 51, pages 22-30 http://rlmagazine.com/edition51.php