The Increasing Importance of Reverse Logistics in Technology Companies

by David Cope, MGH Consulting

Reverse Logistics Magazine, March/April 2007

The environment in which Logistics and Service Professionals find themselves is changing rapidly and they are under pressure to keep up. Manufacturing is increasingly being outsourced to ODMs, leaving the “manufacturer” as either an assembler, or in the extreme, purely the brand on the product.

This changes the reverse logistics dynamic as the repair supplier base reduces and the links between Manufacturing and Service become weaker. Often the move to increased outsourcing of manufacturing drives up the size and cost of the repairables, which, when uncontrolled, has a devastating effect on stock holdings and obsolescence.

Add to this the ever increasing global legislation on hazardous materials, such as WEEE and RoHS. These force operations to not only look at reverse logistics for repairables, but for a much wider range of low cost parts, previously treated as consumables.

All this occurs against a backdrop of pressure on system prices and the need for the service organization to minimize its warranty costs, while striving to improve the quality of its service delivery, through better fill. This market change now affects companies that previously didn’t even consider having a reverse logistics loop and many of these organizations at the consumer end of market have the most ground to make up. Companies need to take a “drains up” approach to their reverse logistics operations.

They need to be asking themselves, whether the operation they have today will work tomorrow;

• Does the repair supplier base fit with the manufacturing profile?
• Are we optimizing the push back of warranty costs to our suppliers?
• Are we WEEE compliant in Europe and do we meet the developing environmental legislation in the Americas and Asia Pacific?
• Are we realising any potential revenue from the salvage of precious metals and other valuable materials in our waste components?
• Are we paying for repairs that are covered under the supplier warranty?

How challenging the solution to these questions is, is very dependent on the level of maturity of the reverse logistics operation. Figure 1 depicts five stages of maturity of reverse logistics.

Although there are large variances in individual companies, we can roughly plot different market sectors against this profile. At the mature end of the spectrum we see the best-in-class IT organisations who are heavily focused on pushing back warranty costs to their component suppliers and keeping tight controls on their Service Supplier base. At the less mature end of the scale we see many of the consumer electronics companies where parts have historically all been deemed as consumable and expensed on issue.

Companies finding themselves in one of the first three boxes are more than likely feeling the need to react. The challenge is how? Especially when starting with nothing. Many companies need to change both their geographic and their functional perspective of reverse logistics.

Geographic perspective

For global organisations, reverse logistics is a global operation and needs to be viewed as one. Trying to manage and control a myriad of country initiatives, or manufacturing led repair groups is close to impossible. So one of the first challenges is to get everyone looking at the issues from a regional and global level. One key question that operations should be asking themselves is; Is this a regional, few place or localize activity? Figure 2 gives some examples of where key processes tend to fall.

Functional perspective

Reverse logistics used to be the dirty end of logistics, simply focused on repairables. It was targeted on minimizing repair costs, minimizing new buy and meeting the outbound demand for repaired stock. In today’s world reverse logistics is not just about repairables. For every part, the question is not just “does it make sense to repair,” but also;

• What needs to be done with the disposal of this material to meet environmental legislation?
• Is there a warranty on the product that can be reclaimed?
• Can R&D or the original suppliers improve reliability by testing returns?
• By collecting the material can abuse of the warranty system be reduced?
• Can we generate revenue from the recycling of valuable waste materials?

Summary

There really isn’t a choice for most European companies whether to review their reverse logistics, as the financial ramifications of not complying with WEEE and other environmental legislation will become too great. The differentiator is that the companies who achieve excellence in this area not only meet environmental targets, but are able to significantly reduce the cost of service and warranty, and this is not a bonus restricted to any continent. With ever increasing pressure on product margins, 1 or 2 percent out of the warranty cost starts to look extremely attractive.

Reverse Logistics Magazine, March/April 2007