Strategic Evaluation of the Market for Reverse Logistics Management Software

by Michael R. Blumberg, CMC

Reverse Logistics Magazine, July/Aug 2008

Strategic Evaluation of the Market for Reverse Logistics Management Software

by Michael R. Blumberg, CMC

A lot of attention has been given in recent years to the idea of automating reverse logistics processes and adopting state of the art software. Although most industry participants believe significant increases in bottom line profitability, customer satisfaction and quality can be achieved vis-à-vis systemic and operational (i.e., process improvements) in the Reverse Logistics (RL) supply chain, the amount of investments made to date by businesses involved in Reverse Logistics, does not appear to match the opportunity for improvement which we believe is possible.

To understand the status quo, as well as facilitate adoption, one most look at both the supply side and the demand side of the equation for RL Software. On the supply side, the lack of available off the shelf solutions is one of the primary reasons why RL providers of all stripes (e.g., OEMs, 3PLs, etc.) and sizes for not turning to off the shelf solutions providers. Although there are several categories of vendors (see Figure 1) who offer RL functionality, there does not appear to be a single software vendor category that offers the full breadth of system functionality required in an end-to-end RL Solution. The typical functions in an integrated, end-to-end solution will include:

• Warranty & Return Management
• Recall Management
• Transportation & Logistics Management
• Critical Inventory/Parts
• Management
• Disposition Management
• Depot Repair Management
• Asset Recovery & Disposal/eWaste Management
• Liquidation Management
• Regulatory Compliance
• Management
• Business Analytics & Reporting

System Requirements & Vendor Capability

Indeed, a comparative analysis (Figure 2) of RL feature functionality by vendor category identifies potential gaps in the market. As such, enterprises engaged in RL activities have typically been unwilling to invest in commercial off the shelf software, as most systems have been perceived as too limited in scope. In addition, integrating multiple systems into a best-in-class solution does not seem feasible or practical in the short run because it is not clear what value this type of solution will have. As such, software vendors are placed into a competitive situation by selling against existing legacy systems and/or semi-automated and manual processes of RL. This status quo provides a misconception that the RL software market is dominated by replacement sales when in fact the need is for new or upgraded systems with expanded software functionality.

Another shortcoming on the supply side is a lack of software functionality tailored to the specific needs of different end-user market segments within the RL industry. It seems that most vendors assume a “one size fits all” from the perspective that RL system functionality is the same regardless of end-user customer demographics. A review (Figure 3) of system requirements by industry segment suggests this is not the case. For example, a manufacturer in the electronics industry will most likely require different RL feature functionality then a retailer in the consumer products industry.

Market Demand

As we mentioned previously, we believe the slow adoption rates are not only due to supply side factors but demand side as well. At issue is the historical difficulty in determining the market value and economics of RL software. From the vendor side, many of the enterprise software vendors have historically looked at RL from a very narrow perspective and viewed RL software as a subset of vertical markets and industry sectors. Furthermore, most enterprise vendors are organized according to vertical industry sector. The problem is that RL software is a horizontal technology which cuts across many different vertical market segments. In essence, the view that many software developers have with respect to RL as a

subset is too myopic and makes it difficult to determine the market size and forecast for RL software. The fact of the matter is that many enterprise software vendors assume the RL market is small or does not exist simply because they do not have a true handle on the market size as result investment in and promotion of RL software is not made.

In an attempt at “cutting the Gordian knot,” we have commissioned our research on the size of the RL Software Market. Our analysis suggests that market for RL related software, containing functionality as described above, represents a $1.0 Billion in North America alone. The market is anticipated to experience a Compound Annual Growth Rate (CAGR) of 12.7 % over the next 5 years. These market estimates are reflective only of end-user segments involved in the support of electronic, electro-mechanical or electrical components. As such, the market is potentially larger when apparel, packaged goods, consumer products and pharmaceutical segment are considered.

More important than the size of the market on advancing RL system adoption rate, is the ability of both vendors and end-user organizations to determine the financial impact of systemic improvements on RL operations on bottom-line profitability and top line revenue. Typically, the need to automate RL business functions and processes is identified at an Operations level and as a result, most vendors have focused their sales efforts on managers and executives of RL Operations. These efforts have often led to failure and frustration among all parties because the C-Level buy-in could not be obtained.

The fact of the matter is that decisions regarding the purchase of enterprise software are not simply made on the basis of the ability of these systems to improve operational performance but also of the ability of these systems to improve financial performance. These are exactly how decisions are made in the ERP, CRM, and SCM markets. Operations and Sales & Marketing Executives have been able to identify not only how new software functionality allows them to capture, track, and report on metrics related to operational performances but also demonstrate the impact of the functionality on financial performance. Experience shows that the C-Level suite puts a greater priority on acquiring new software functionality when they understand how this new software can both measure and impact financial performance of the company.

Summary & Conclusions

Our research and observations indicate that there is huge pent up demand for fully integrated, end-to-end solutions in the market. It may be a matter of time before a single vendor or group of vendors step up to the plate with a fully integrated and robust solution. However, vendors who can create a business case based on improvements in financial performance, will facilitate the usage of best-of-breed solutions within the market. Vendors are thus advised to conduct primary research on market needs, requirements, unmet gaps and willingness to pay, in order to size the market and demand. End-users in turn are advised to conduct the appropriate level of analysis and planning in order to build the business case. The optimal approach involves the structured framework identified in Figure 4. This approach involves development of RL System Functional Specification based on review of the company’s strategic plans and analysis of functional gaps within current systems. The functional specification should require a definition of requirements with respect to process & procedures, masks and screens, etc. A state-of-the-art evaluation should be conducted in parallel to further define requirements and identify potential vendors. A Request for Proposal (RFP) should then be submitted to a short list of qualified vendors leading to the evaluation and selection of the vendor of choice. This structured framework ensures a disciplined, focused and efficient approach, in terms of both time and cost, to selection and implementation of an optimal software solution.

Michael R. Blumberg is a Certified Management Consultant (CMC) and President & CEO of Blumberg Advisory Group, Inc. His firm focuses on providing strategic and tactical assistance to client organizations for improving the overall profitability and quality of aftermarket service operations. Mr. Blumberg has established himself as an expert and industry authority on Reverse Logistics and Closed Loop Supply Chain Management.