Reverse Logistics: Strengthening the Forgotten Supply Chain

Reverse Logistics Magazine, Mar/Apr 2008

As business practices and globalization continue to evolve, enterprises strive to expand the boundaries of integration to drive business value. One way to achieve this is by deploying reverse logistics strategies. These every day activities can have a profound impact on the bottom line. However in order to capture this value, there are unique barriers to integration that must be overcome.

What is Reverse Logistics?

Reverse logistics is the supply chain that flows opposite to the traditional process of order, fulfillment and customer delivery. It is the combined processes of planning, implementing, and controlling the flow of raw materials, in-process inventory, finished goods, and related information from the point of consumption to the point of origin. Reverse logistics activities include customer returns, disposal of excess inventory, and the return of obsolete inventory. Also known as the aftermarket service and supply chain, reverse logistics is critical to organizational output. The ability to control these processes for the purpose of recapturing value or proper disposal of scrap in an efficient and cost-effective manner can yield quantifiable savings for manufacturing entities.

Reverse logistics is a very complex process; it is not supply chain backwards. Material flow characteristics, supply and demand dynamics, and technology considerations are fundamentally different than what their forward logistics counterparts address. For example:

• Irregular material flow: Return processing is highly dynamic and inconsistent. Factors such as product variations and conditions, processing requirements, warranty and extended warranty provisions dictate the workflow steps to which a given return is subject. There is no single supply chain flow; the reverse logistics path can be very complicated.
• Multi-condition inventory: Supply chain management systems are not designed to manage inventory in various condition states, such as repaired, remanufactured, defective, damaged or obsolete. These conditions are critical factors in reverse logistics processes; often reverse logistics consignments are small volume/high value shipments of goods which are often key components to a network, hence express delivery is often needed.

Additionally customs scrutiny is much more acute when screening remanufactured and defective units; inventory forecasting, planning and financial management specific to valuation are also crucial factors.

To describe reverse logistics in action, consider a telecommunications carrier. Many carriers provide their customers an "advance exchange service" where an equivalent functional unit is delivered to the user before the defective unit is returned. The carrier may source the replacement from a 3PL that is managed by the original equipment manufacturer (OEM). Instead of returning the defective unit to the 3PL and then the OEM, the defective unit is routed directly to a repair center for disposition. Integrated reverse logistics in this context enables the remote management of the reverse supply chain.

Reverse Logistics Challenges

Typically, reverse supply chains have little automation, and are characterized by unknowns and poorly managed assets that sit in warehouses, where losses are typically accepted or absorbed. An opportunity of this magnitude has driven many companies to find new ways to optimize reverse logistics practices and to streamline operations and drive profits.

The pursuit of profit and competitive advantage drive ever-evolving reverse logistic models. Companies today have shifted their reverse logistics operations to business models that require the coordination of multiple tiers of administration and logistics operations with outsourced partners such as OEM, contract repair centers, 4PL networks etc. If an enterprise lacks an integrated reverse logistics process before outsourcing, an extended enterprise business model will add complexity to an already challenging business environment.

Leveraging the Power of Reverse Logistics

The key to successful reverse logistics is the ability to integrate business proposal development, international trade compliance, project management, contract administration and product management into daily operations across the enterprise. This can only be achieved through intelligent, dynamic decision-making. To optimize performance, reverse logistics functions must operate in a manner that is both tactical and operational. Tactical plans and schedules reverse the supply chain in order to meet supply and demand. The operational team executes plans in the context of dynamic and changing business environments including frequent technology updates, outsourcing of manufacturing or the change of OEM suppliers, international trade restrictions, foreign exchange controls, etc. Tactical and operational level decision-making functions are by nature distributed across reverse supply chains. As a result, these functions must be optimized both locally and across the extended enterprise.

The challenge is for corporate entities to overcome management and execution barriers as they apply to the value that integrated reverse logistics delivers. First, bring reverse logistics to the boardroom. The lack of recognition for the strategic importance of reverse logistics and the cross-functional nature of reverse logistics processes spans multiple organizations within an enterprise. Executive leadership is fundamental to the alignment of people, process, technology and financials that hinder the path to integration. Secondly, execute flawlessly at each point in the process. The ability to execute well across the reverse logistics lifecycle is the foundation for achieving integrated reverse logistics. Those that are successful understand that the dynamics of reverse logistics integration requires a new approach to execution that:

• Involves the enterprise as a whole (sales & marketing, finance, project management supply chain operations, contract administrations, customer service etc.)
• Addresses the complexities of today’s supply chain environments
• Understands the limitations imposed by cross-border transactions, such as:
• inability to export defective goods due to customs regulations requirements for additional export licenses
• levy of additional duties and taxes on definite restrictions regarding the remittance of foreign exchange related to exports:
• only permit Temporary Exports for repair and return
• typically impose time limitation for the repair cycle
• requirement to track serial numbers through the repair process
• no allowance for warranty provisions
• require proof of prior import

To build an integrated reverse logistics enterprise it is essential that you understand your customers and their markets. You need to:

• Involve your customer in the strategy planning for repairs and returns
• Understand constraints imposed by customs in your customer market
• Provide inventory to facilitate efficient replenishment
• Identify the true costs associated with the import of replacement inventory
• Determine if re-manufactured inventory is permitted
• Evaluate complexities surrounding export permits
• Assure that defective or obsolete inventory may be recovered i.e. export of inventory to destinations other than initial origin
• Investigate if international warranty provisions are honored by local authority
• Determine if "like for like" operations are permissible
• Understand quality certification requirements imposed by local authority
• Clarify if duty reimbursement is possible for DOA (dead of arrivals) and if it is subject to limitations

While the business of Reverse Logistics is not new, the complexities associated with international business, manufacturer outsourcing, and remote logistics management have added cost and time to efficient execution. Leading companies are finding ways through the use of technology, process improvements, and an understanding of the restrictions imposed by foreign customs to continuously expand the boundary of integration. Understanding and provisioning for these factors will assure customer satisfaction and directly impact the bottom line.

About the Author:

As the Global Product Executive for the Logistics product suite with the Global Trade Services group at JPMorgan, Bernie Hart leads a business of 650+ employees that delivers end-to-end global risk management and operational solutions that drive cost savings, increase efficiency and provide best-in-class compliance across physical and financial supply chains. Prior to its acquisition by JPMorgan, Bernie Hart joined Vastera in October 1999 and created the company's Managed Services business model which enables manufacturers to outsource all or portions of their international trade and supply chain operations. From 1985 to 1999, Mr. Hart held various management positions at IBM, focused on International Trade. As the Senior Manager of IBM's North American Distribution Systems, Mr. Hart was responsible for the development and maintenance of international logistics applications with more than two thousand users worldwide in support of the movement of $20 billion of goods annually.