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Managing in Reverse: The Strategic Importance of Reverse Logistics

by David C. Wyld, Southeastern Louisiana University

Reverse Logistics Magazine, Winter/Spring 2006

Introduction

There are some unmistakable truths about top corporate execs. CEOs and EVPs love to walk the aisles of their stores, which are shiny and freshly waxed in anticipation of their "surprise" visit. Yet, on such field trips, they rarely see the stock rooms, and they are often hustled past the return counter. Likewise, corporate big wigs like to don a specially personalized hard hat, climb in the golf cart or Gator, and ride around the distribution center, seeing "neatness" on parade - rack after rack, pallet after pallet, shipment after shipment of new merchandise. Yet, they are most often not afforded the same "royal treatment" when they tour their firm's return processing area. Big-time business execs also love to arrive in the limo (or at least the very full size rental car) to be at the plant for the first moment of operation of their newest, fastest, most automated piece of machinery, but they are never there when the machine that was great a decade ago is relegated to the back of the warehouse and "the ash heap of history."

Reality has set-in, and companies around the globe are recognizing that supply chain management doesn't reach a nice, tidy "end" with the delivery of a product to the customer. What happens with electronics, products, machinery, etc.:

Smart executives today are recognizing that there are significant costs and likewise, significant potential revenue to be derived at what was formerly thought of as the end of the supply chain. Likewise, third and even fourth party providers are building significant businesses by fulfilling the need for providing these specialized services to businesses and their customers.

Thus, there is significant interest in managing the so-called "flip side" of the supply chain. Writing in the Harvard Business Review in 2002, Guide and Van Wassenhove labeled the reverse supply chain as "the series of activities required to retrieve a used product from a customer and either dispose of it or reuse it." This area is now commonly referred to as reverse logistics, defined by the IQ Business Group to be: "The process of managing the movement of specific goods away from their typical final destination in order to maximize its value or for proper disposal." The domain of reverse logistics is also referred to by other terms, including:

This flip or reverse - side of the supply chain is far less glamorous, far less neat and orderly, and far less predictable than the forward-facing supply chain. The operational characteristics of reverse logistics are indeed fundamentally different and inherently more complex than the forward logistics involved in manufacturing and distribution. As Clay Valstad, Director of Reverse Flow and Specialty Distribution for Sears, categorized the principal difference between forward and reverse logistics as being that: "on the forward side, you deal with order. On the reverse side, you deal with chaos, trying to create order." Think of it, on the procurement side, an organization is dealing with an organized flow of items, coming into its possession in an organized manner (in truckloads, pallets, and cases), being clearly labeled and packaged, and arriving in anticipated quantities. On the opposite end, in reverse logistics, companies are dealing with an irregular flow of goods and materials, a random assortment of all types of goods and materials in various conditions.

Chuck Martin, CEO of the Net Future Institute keenly observed that in today's current economic climate, organizations "cannot afford to be excess in anything." Yet, corporate executives often have no clue how much used or surplus equipment their company is sitting on - or where it is. Likewise, companies often have no idea how much their returned merchandise and surplus assets their "reverse supply chain" - is costing them, or how much they have to gain through extracting value from what are largely thought of as "castaway goods."

The Costs of Being Inefficient in Reverse

In 2006, according to estimates from Donald F. Blumberg, the total North American market for reverse logistics services is forecast to exceed $45 billion. Gailen Vick, President of Reverse Logistics Trends, Inc., projects that most firms spend between 3 to 6% of their bottom-line on reverse logistics activities. Today, much of these expenditures and efforts are happening "under the radar" and out of the range of true executive focus. In effect, they are often looked upon as a tax or a drag on a firm's performance. Companies are increasingly realizing that there are significant costs associated with handling this reverse flow of goods (Table 1 outlines some of the hidden costs involved in handling surplus). All of these hidden costs of surplus detract from an organization's financial results. Specifically, they work to lower a firm's ROA (return on assets) and its liquidity. Once an organization takes steps to reduce the "drag effects" of unnecessary surplus, the firm's financial and operational health improves.

Today, organizations are not just simply seeking to minimize their reverse logistics costs, as many firms are seeking to improve their recoveries on goods and assets at the end of the flip side of the supply chain. By actively marketing their surplus getting an unneeded asset out of their hands and deriving positive revenue from it the process - companies are finding that they can produce significant gains. If a firm can sell its surplus assets, then these incremental revenues can enhance the company's financial standing. In fact, in a recent white paper, ATKearney found that 70-90% of every dollar generated through asset recovery goes straight to the bottom-line. This accounts for the rapid growth of a host of used machinery sales outlets or "'B' channel," for goods that have been
Table 1 - The Hidden Costs of Surplus
Cost Area Implications
Opportunity Costs Surplus assets have little value, but they tie-up cash and consume management's time and attention, taking away from the organization's primary mission.
Poor Space Utilization Surplus assets take-up space on shelves and in warehouses, crowding-out more productive, revenue-generating items and activities.
Monitoring Expenses Surplus assets must be tracked and monitored, at a cost, and with activity that could be better directed at revenue-generating activities.
Maintenance Costs Many surplus assets must be maintained in order to be kept is usable condition at a cost.
Insurance Costs Surplus assets must be insured against loss or destruction, as well as for liability purposes.
Higher Taxes Surplus assets may well increase a company's property and/or state tax liabilities.
Depreciation Expenses Surplus assets depreciate more rapidly than other assets.
through a reverse flow. While the "B" channel is intended to operate separately from a company's primary sales channel, the "B" channel can also handle first quality and never used items as well. By operating as a "B" channel, companies can derive positive revenue, without harming their "A" channel.

Reverse Logistics and Competitive Advantage

With today's hypercompetitive business environment, every company must undoubtedly concentrate on maximizing the efficiencies and effectiveness of its forward supply chain. However, we have reached the point where electronic methods for both acquisition and sales support have become de facto standards for all large firms. Dr. Michael Hammer, the founder of the reengineering movement, has observed that because e-procurement, ERP, and CRM techniques have become competitive necessities today, "competitive advantage must be sought in parts of the value chain that thus far have been either overlooked or under-addressed."

The flip side of the supply chain is an area that executives of companies should look towards to gain competitive advantage today. A multiplicity of market and legal forces are helping to propel the centrality of reverse logistics in today's business environment.

Managing in Reverse

"Managing in reverse" means a paradigm shift for many firms. It means proactively:

It also means looking upon surplus and excess as revenue opportunities, rather than time, space, and manpower wasters. Finally, it means that companies will have to make serious choices about how much reverse logistics activities to take-on, dependent upon both its role in the value chain and its mission. Such activities are often not the core function of the organization. Corporate leaders should carefully weigh the trade-off that must be made between the insourcing and outsourcing of reverse logistics operations.

In the end, companies that embrace reverse logistics are likely to be the real winners across industries, and those who ignore it risk becoming surplus in today's era of global competition.

David C. Wyld (dwyld@selu.edu) currently serves as the Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is also the Director of the College of Business & Technology's Strategic e-Commerce/e-Government Initiative. He is a much published author on contemporary issues in business strategy and the management of technology. In addition, Dr. Wyld has served as a consultant to major corporations on a wide range of topics.

Reverse Logistics Magazine, Winter/Spring 2006


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