• Cognizant 20-20 Insights

Reverse Supply Chain: Completingthe Supply Chain Loop

Executive SummaryTraditionally, businesses have concentrated onimproving the forward supply chain for theirproducts (e.g., manufacturer-wholesaler-retailer).However, as the business environment becomesmore competitive, it becomes increasingly impor-tant for them to concentrate on optimizing thebackward loop, as well. Reverse logistics practiceshave been in existence for a long time, especially inthe automotive industry, where manufacturers tryto recover value from recycling car parts.

In this whitepaper, we’ve defined the reversesupply chain process, the steps involved and howit can be used as a strategic business weapon.Examples of how the consumer electronics,automotive and retail industries handle reverselogistics are offered. We also provide an overviewof key trends and best practices that will powerthe reverse logistics process going forward. Alsocovered are reverse supply chain models such ascentralized postponement of returns, decentral-ized preponement of returns, use of informationtechnology in enabling supply chains and the zeroreturns policy adopted by some consumer elec-tronics players. In the end, we briefly look at theinherent challenges that a reverse supply chainfaces, such as managing customer expectationson returns policies, partnering with other playersin the supply chain and handling the mountingpressure from regulatory authorities.

Reverse Supply ChainReverse supply chain refers to the movement ofgoods from customer to vendor. This is the reverseof the traditional supply chain movement of goodsfrom vendor to customer. Reverse logistics is theprocess of planning, implementing and controllingthe efficient and effective inbound flow and storageof secondary goods and related information for thepurpose of recovering value or proper disposal.

Typical examples of reverse supply chain include:

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Product returns and management of theirdeposition.

Remanufacturing and refurbishing activities.

Management and sale of surplus, as well asreturned equipment and machines from thehardware leasing business.

In these cases, the resource goes at least one stepback in the supply chain. For instance, productsmove from customer to distributor or manu-facturer. Other instances of products reversingdirection in the supply chain are manufactur-ing returns, commercial returns (B2B and B2C),product recalls, warranty returns, service returns,end-of-use returns and end-of-life returns.

There are various types of reverse supply chains,and they arise at different stages of the productcycle; however, most return supply chains areorganized to carry out five key processes:

cognizant 20-20 insights | january 2011

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Productacquisition:Obtainingtheusedproductfrom the user by the reseller or manufacturer.

Reverse logistics: Transporting products to afacility for inspecting, sorting and disposition.

Inspection and disposition: Assessing thecondition of the return and making the mostprofitable decision for reuse.

Remanufacturing or refurbishing: Returningthe product to its original specifications.

Marketing: Creating secondary markets forthe recovered products.

revenue, often to a market segment unwillingor unable to purchase a new product (e.g., usedcars). Another common use of returns is as spareparts for warranty claims to reduce the cost ofproviding these services to customers.

In certain cases, legal requirements make itmandatory for product companies to take backtheir old and used products (e.g., in the case ofrefrigerators in the U.S., companies are mandatedto take back old products because of hazardousmaterials used in their manufacture). In such acase, the reverse supply chain needs to be notonly well managed, but also tightly integratedinto the delivery mechanism.

Another example comes from Europe, where tiremanufacturersneedtorecycleatleastoneoldtirefor every new tire they sell. In India, a commonuse of reverse supply chains is for promotingsales of new consumer products. Older productsare collected, reconditioned and resold at priceslower than the fresh products but much higherthan “scrap” or salvage value.

The importance of reverse supply chain is dem-onstrated through a statistic originating in theU.S. that suggests nearly 20% of everythingthat is sold is returned. This number obviouslyvaries by product and channel type; nevertheless,with the high ratio and challenging economicconditions, addressing returns within the reversesupply chain can help cut costs, increase profitmargins or both.

Figure 1 demonstrates a simplified schematic ofa generic reverse supply chain for commercialproduct returns. The customer returns theproductstothereseller(productacquisition),fromwhere they are shipped to the returns evaluationlocation (reverse logistics) for issuing credit andproduct disposition (inspection and disposition).Diagnostic tests are performed to determinethe commercially optimal disposal action for thereturned product.

There are various types of disposition actions,including remanufacturing if this is consideredto be cost effective. Some organizations simplytreat all product returns as defective. There arereturnedproductsthatmaybenewandneverused,and these are returned to the forward distributionchannel. Other products may be sold for scrap orrecycling, usually after physically destroying theidentity of the product. Remanufactured productsare sold in secondary markets for additional

Reverse Supply Chain

Supply Original Supply ChainProduction waste by-products

Commercial returns

End of use returns

Manufacturing

Distribution

OriginalUse

OrderUse

Trade

Redistribution

End of use returns

Reuse

Remanufacturing

Collection

Selection

DisposalReverse LogisticsRecycling

Figure 1

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Rrse Logistics as aStrategic WeaponFor any company, strategic variables are thosethat have a long-term bottom-line impact. Thesevariables must be managed effectively, efficientlyand proactively — not tactically or reactively —for the viability of the compny. Until recently,most companies concentrated only on businessfunctions such as finance or marketing asstrategic variables. Logistics capabilities werelooked at as a strategic variable during the late1970s and 1980s. Most companies now look atreverse logistics as holding an important strategicrole, but this function has yet to gain the statusof a strategic variable. The importance of reverselogistics is increasing for a number of reasons:

15 million secondary PCs had to be discarded in2007. Gartner estimates that by 2012, emergingcountries will need to dispose of a total of 30million secondary PCs annually. The need andopportunities for reuse of obsolete productscannot be over emphasized.

Building to order is an effective way to minimizethe return chain, as it allows manufacturers topostpone final transformation of the productuntil the end of the channel and configure theexact computer that the customer wants. Theinventory holding period decreases sharply withthis approach. This is in sharp contrast with therest of this industry, which typically will have 30to 60 days of inventory pre-sold into the channel.Manufacturers/retailers that sell directly to thecustomer and build to order have significantlylower return rates than the rest of the industry.Statistics indicate that return rates for thesecompanies are around 5%, about half of what therest of the industry experiences. In the words ofone executive interviewed, “We send out a millioncomputers. Pretty soon, most of them comeback.” The build-to-order model, combined withdirect sales, eliminates this problem.

Manufacturers also contract with remanufac-turing specialists to develop solutions to thisproblem. These specialists work with manufactur-ers to evaluate the root cause of returns, excessand obsolete machines, and develop methods tocontrol cost and return rates. These companiestest, recondition, repair, repack and then resell themachines.Thefunctionsofservicecenter,warrantyrepair and other servicing are often outsourced toathirdpartythatspecializesinthisbusiness.Theseprograms have led to lower returns.

Automotive Industry

The automobile industry is one of the largestindustries in the world and deals with the mostexpensive of consumer goods. Therefore, it is notsurprising that reverse logistics is an importantsubject for this industry. The three primary areas inwhich reverse logistics plays a significant role are:

• Companies are seeing tangible benefits fromthe value that can be recaptured from unpro-ductive assets resulting from returned mer-chandise, such as significant reductions ininventories, improvement in cash flow, reducedlabor and improved customer satisfaction.

There is an increase in competitive pressure toprovide an effective, efficient returned goodsprocess.Theincreaseincatalogande-businessshopping has resulted in a liberalization ofreturn policies in order to gain customer trustand reduce risk.

Productlifecyclecompressionandanincreasedemphasis on introducing new products andproduct “freshness” has created a need toclear the distribution channel more frequently,requiring an efficient means to bring backobsolete, outdated or clearance items.

Increased regulatory requirements regardingrecycling and product disposition — especiallyaroundproductshavingenvironmentalhazards— has increased the need for precision recordkeeping and tracking.

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Examples of Reverse LogisticsAcross IndustriesComputer/Electronics Industry

The computer and electronics industry is knownfor short product lifecycles. A big market hasemerged for used PCs — both in developing anddeveloped countries. According to Gartner, 37million secondary PCs were refurbished andexported to emerging markets in 2008, and themarket research firm predicts that this numberwill rise to 69 million by 2012.1 In 2007, nearly68 million secondary PCs had to be discardedworldwide. In emerging countries, approximately

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Salvage of parts and materials from end-of-lifevehicles.

Remanufacturing of used parts.

Stock-balancing returns of new parts fromdealers.

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