Integrated Reverse Logistics: New Ways to Streamline Operations, Drive Profits, and Delight Customers

by Ray Martin, Strategic Consultant for Click Commerce, Inc.

Reverse Logistics Magazine, Spring/Summer 2006

What is old is new again. A quick search on Amazon.com pulls up over one thousand business books with the term "integrated" in the title. This word, which is defined as "to make a whole by bringing all parts together" has been applied to logistics and supply chain concepts for decades.

The intent of this article is not to stake claim that integration is critical to reverse logistics success—this is a given. Integration in the context of reverse logistics, or any business area, is a means to an end, not the end itself. As technology, business practices and globalization continue to evolve; enterprises will continue to expand the boundaries integration to drive business value.

The purpose of this article is twofold. First barriers to integration unique to reverse logistics environments will be highlighted. Second, success drivers that industry leaders are leveraging to push beyond those barriers will be identified and discussed in the context of the business value integrated reverse logistics delivers.

Barriers to Integrating Reverse Logistics Activities

Typical reverse supply chains have little automation, and are characterized by blind spots and poorly managed assets that sit in warehouses and repair centers where losses are accepted or absorbed. The consequences are dramatic—according to the Reverse Logistics Executive Council inefficient reverse supply chain processes could reduce an organizations profit by approximately 30%. While the upside potential seems clear cut, today's enterprises are faced with multiple barriers to achieving the benefits of integrated reverse logistics.

Bringing reverse logistics from the backroom to the boardroom

As David Wyld discusses in an article from the winter/spring 2006 edition of the Reverse Logistics Magazine, the lack of recognition for the strategic importance of reverse logistics can impede an enterprise's ability to capture the benefits of effective reverse logistics practices. Due to the cross-functional nature of reverse logistics processes that can span multiple organizations within an enterprise, executive leadership is imperative to clear the logjams—people, process, technology and financial—that hinder the path to integration.

Reverse logistics isn't your forward supply chain going backwards

The same rules do not apply. Reverse logistics material flow characteristics, supply and demand dynamics, and technology considerations are fundamentally different than its forward logistics counterparts must address.

• Irregular material flow—Returns processing is highly dynamic and non-deterministic, driven by variations in product and product condition, processing requirements that vary by client and contract, and disposition outcomes that dictate the workflow steps a given return goes through. Unlike the forward supply chain, in which delayed differentiation is often used in postponement strategies to drive inventory benefits, product entering the reverse supply chain is already differentiated, but the differentiation is not always known.
• Multi-condition inventory—Traditional ERP and supply chain management systems are not designed to manage inventory that exists in multiple condition states, such as new, repaired, remanufactured, etc. These condition states are critical in driving dynamic reverse logistics processes, effectively forecasting and planning inventory across the reverse supply chain, and accurately managing the financial aspects of the inventory, such as valuation.
• Complex order flows—One customer return can cause multiple returns, work (i.e. repairs) and fulfillment orders that are linked together when it comes to satisfying the customer. Since the genealogy of these linked orders can span multiple systems, facilities, and even trading partners, visibility and control over these order flows is critical to ensure customer service levels are met in the most cost and time-effective manner.

The 21st century reverse supply chain

The pursuit of profit and competitive advantage has resulted in rapidly evolving reverse logistics models. Many companies are shifting their reverse logistics operations to business models that require the coordination of multiple tiers with outsourced business partners, such as 3PLs and contract repair centers. While the promise of such change is compelling, closing the gap between opportunity and results can feel like changing the tires on a moving car. If an enterprise lacks an integrated reverse logistics environment before outsourcing, a shift to an extended enterprise business model can add complexity to an already challenging environment.

Closing the Gap between Opportunity and Results

According to a March 17, 2005 AMR Research article, "Reverse Logistics and WEEE: You Have To Keep Them Separated," "Dealing with returns drains 5% to 9% of total supply chain costs, and is set to rise with the implementation of the Waste Electrical and Electronic Equipment (WEEE) and End of Life Vehicle (ELV) directives as well as the increase in e-commerce." An opportunity with this order of magnitude has instigated many companies to push the boundaries of integrated reverse logistics practices to find new ways to streamline operations, drive profits, and delight customers. On top of that, some forward thinking companies have created new lines of revenue through their expertise in providing integrated reverse logistics services that cut through the barriers referenced above.

The key to integrated reverse logistics is intelligent, dynamic decision making. In order to optimize performance, reverse logistics functions must operate in an integrated manner across both tactical and operational decision horizons. The tactical level plans and schedules the reverse supply chain to meet anticipated supply and demand conditions. The operational level executes plans in the context of dynamic and changing business environments. Tactical and operational level decision making functions are by nature distributed across the reverse supply chains, and must be optimized both locally (i.e. within a return or repair center) and across the extended enterprise.

Below are some common success drivers that are characteristic of companies achieving success through integrated reverse logistics.

Execute flawlessly at each point in the process

The ability to execute well across the reverse logistics lifecycle is the foundation for achieving the integrated reverse logistics vision. While many have the strategic intent to act on reverse supply chain strategies that lower costs, increase efficiency and enhance customer service, many fall short.

Those that are successful realize that the dynamics of the 21st century reverse logistics requires a new approach to execution—one designed to address both the enterprise and network complexities of today's supply chain environments.

As an example, a large direct-to-consumer retailer has developed integrated systems and processes to effectively manage their consumer returns environment from return inception to final disposition. They provide a customer friendly returns process that simplifies the task of processing and shipping a product for exchange or credit. This process is integrated with the return center and warehouse so that returned product is efficiently processed. With all the necessary order, credit processing, product disposition and distribution touch points seamlessly integrated, the company is able to minimize handling cost, maximize customer service, and shrink the time it takes to re-capture value associated with the returned product.

Extend reverse logistics processes beyond the enterprise

Many companies are shifting their reverse logistics operations to business models that require the coordination of multiple tiers with outsourced business partners, such as 3PLs and contract repair centers. For original equipment manufacturers (OEMs) and brand owners maintaining visibility and control over an outsourced reverse supply chain is critical to maintaining customer service levels without compromising profitability.

For example, a wireless telecommunications carrier might provide a customer with an advanced exchange service that requires a cell phone be replaced in advance within 24 hours of the request. In this case the carrier may source the replacement from a third party logistics hub managed by the OEM. The return is routed directly to a contract repair provider for disposition processing. Integrated reverse logistics in this context enables the virtual management of the reverse supply chain, as the Carrier and OEM never physically touch the replacement or return product. The result: lower cost per return and shorter cycle times from return inception to value re-capture.

Create dynamic reverse logistics networks

In order to optimize performance, reverse logistics functions must operate in an integrated manner across both tactical and operational decision horizons. Due to the variability in supply and demand patterns, close linkages between planning and execution will result in a dynamic decision support framework that optimizes inventory positions and reverse supply chain processes based on real-time conditions. The ability to push the disposition decision as close to the inception of the return as possible, and the flexibility to coordinate extended reverse logistics processes allows industry leaders to move from static to dynamic reverse logistics networks.

For example, a large contract repair and reverse logistics service provider has linked return forecasting and planning with dynamic decision making to optimize the disposition and routing of product returns. Forecasting return and repair conditions provide better insight into the long-term capacity requirements needed to process returns. Integrating decision support at the operational level allows the service provider to optimize the return flow based on real time conditions such as service levels, repair capacity, inventory positions, and demand patterns across the network. The result: competitive advantage by providing reverse logistics services that are better, faster, and cheaper than the competition.

As the famous economist Joseph Schumpeter once stated, "Profit is the payment you get when you take advantage of change." While barriers to integrated reverse logistics exist, leading companies are finding innovative ways through the use of technology and process improvements to continuously expand the boundary of integration. Whether you are a brand owner, OEM or reverse logistics service provider, integrated reverse logistics provides new ways to streamline operations, drive profits, and delight customers.

About the author: Raymond Martin, a Strategic Consultant for Click Commerce, Inc., has more than 12 years of experience assisting Fortune 1000 companies in the redesign of their supply chain processes for dramatic improvements in productivity, cost and customer services. Mr. Martin's areas of expertise include reverse logistics, warehouse and transportation management, order fulfillment, inventory management, and supplier collaboration.

Click Commerce, Inc., (Nasdaq: CKCM), a leading provider of on-demand supply chain management solutions, enables millions of users in 70 countries to collaborate, in real time, with business partners across the extended enterprise. Click Commerce solutions support the unique business processes of multiple industry segments such as manufacturing, aerospace and defense, and high-tech. More information can be found at www.clickcommerce.com.

Reverse Logistics Magazine, Spring/Summer 2006