Driving Returns in the Reverse Logistics Service Chain

by Bill Pollock and Sumair Dutta

Reverse Logistics Magazine, Edition 16

In a study of nearly 200 manufacturers and service providers conducted in December 2008, 74% of firms indicated that the effective management of the reverse service supply chain was either "extremely" or "very" important to their organization's operational and financial performance. This percent was up significantly from 61% in a study conducted only one year earlier, reflecting the increasing importance of reverse logistics to the marketplace, our customers - and our own organizations. Even more so, nearly 60% of respondents indicated that due to the current volatile economic climate, this level of importance is actually increasing.

Aberdeen utilizes its proprietary PACE framework in the design and analysis of all of its hundreds of Benchmark surveys conducted each year. PACE is designed to highlight the key strategies and capabilities employed by firms that attain Best-in-Class status through their excellence in meeting and overcoming internal or market pressures. The framework also serves as a roadmap for non-Best-in-Class firms to duplicate the strategies enforced and capabilities developed by Best-in-Class firms so as to improve their service performance.

The four key components of the model may be defined as "the Pressures, Actions, Capabilities and Enablers (PACE) that indicate corporate behavior in specific business processes." These terms are defined as follows:

• Pressures - external forces that impact an organization's market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive)
  
• Actions - the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product/service strategy, target markets, financial strategy, go-to-market, and sales strategy)
  
• Capabilities - the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products/services, ecosystem partners, financing)
  
• Enablers - the key functionality of technology solutions required to support the organization's enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing and management)
  

Pressures (P)

Aberdeen research clearly shows that as competitive and economic pressures take their toll on business operations, an increasing number of companies have considered the reverse service supply chain as an avenue to manage costs, minimize risk and drive additional revenue by actively managing and tracking the return, repair, refurbishment and remarketing of assets. Effective management of the disposal of assets ensures regulatory compliance and can also drive "green" benefits - another fairly "new" business/socio-economic goal.

While the current economic environment has certainly pushed some service organizations to establishing that fine balance between managing service-related costs and driving customer satisfaction, almost a third (31%) of the surveyed firms indicate that it is also driving them to re-evaluate their reverse service supply chain so as to be sure they are minimizing the costs normally associated with logistics and inventory. In addition, firms are also keeping an eye on the customer and want to ensure that their return, repair and exchange processes are well aligned with the customer's needs in mind, along with the added goal of minimizing the time that a customer is forced to spend with an asset or part that is not performing.

While only 17% of firms indicated that the need to drive new revenue streams through reverse logistics was a top pressure, this percent was up somewhat from only 11% the year before. However, nearly twice as many of the Best-in-Class companies (31%) indicated that this was a key driver for them in optimizing their use of the reverse service supply chain - a strong indication of their interest to drive incremental revenue streams while maximizing the utilization of every possible service part and asset.

Actions (A)

The strategic actions taken by Best-in-Class firms to alleviate the aforementioned cost, economic and customer management pressures align well with the major pillars of Aberdeen's Competitive Framework model (i.e., Best-in-Class, Industry Average and Laggards) focusing on key areas such as process, knowledge management, organizational support and performance measurement. Essentially, our research confirms that most leading firms are looking to develop improved visibility into the return lifecycle of the assets and/or parts for which they are responsible.

With this visibility also comes the ability to denote standardized returns, repair, resale or disposal processes across the entire reverse service supply chain - an effort that is generally a prerequisite for their ability to effectively reign in the various costs associated with return and repair activities. Standardized processes, made available and known to the eventual asset operator can also help a great deal in both managing and setting customer expectations regarding returns and replacements - thereby assisting in the management of the overall customer experience. Improved visibility into these activities also affords the organization the ability to forecast and plan for future return needs and volumes.

As competition and economic environments have taken control, an increasing number of companies have considered the reverse service supply chain as a strategic avenue to manage costs, minimize risk and drive additional revenue by actively managing and tracking the return, repair, refurbishment and remarketing of assets. Effective management of the disposal of assets also ensures regulatory compliance and can drive "green" benefits. Figure 1 illustrates the specific strategic actions that most companies are most likely to take to address the market pressures they face on a day-to-day and long-term basis.

Capabilities (C)

Real-time visibility supported by leading service organizations also enables real-time capture of reverse service supply chain performance. To this effect, some of the key performance indicators tracked by leading service firms (in addition to customer satisfaction) are: total repair/refurbishment costs, repair turnaround times, spare part inventory turns, cost of spare part inventory, part defect rate and velocity of returns. The capture of these data enables the development of forecasts of future return needs that could assist in improved planning and resource allocation to expedite part and product returns. In fact, forty-one percent (41%) of leading service firms are actively involved in using performance data for future forecasting, when compared to 25% of non-Best-in-Class firms.

To further boost the velocity of returns for products and parts, leading firms are incentivizing their regional service depots and field technicians based on their timely return or transfer of parts or products to repair depots. While not widely adopted, 21% of leading firms currently have such incentives in place compared to only 11% of all other firms. On average, firms that do have such incentive structures in place tend to perform better in key performance metrics with regard to the velocity of returns of products and parts, and even more so with respect to parts (Figure 2).

Enablers (E)

The investment in partners to manage portions of the reverse service supply chain is one of the top five strategies for leading service firms. Currently, disposal, repair and logistics functions are those that respondent firms are most likely to outsource, and this is consistent with leading service firms as well (Figure 3). However, it is interesting to note that while inventory management is noted as one of the most challenging areas to manage, most companies have still been hesitant to outsource their inventory holdings as of yet. Still, Aberdeen research reveals that 38% of all firms indicate they are currently looking for their partners to provide greater assistance with inventory holdings so as to minimize costs and even some of the risk associated with excess inventory.

While there is significant interest among respondent companies in the use of partners to assist in their reverse logistics activities, there are considerable challenges acknowledged with leveraging a third-party network - challenges that can become formidable to manage given the global nature of most service supply chains. As such, responding firms indicate that visibility into the performance and quality of a third party network is the most daunting obstacle they have yet to overcome.

Summary and Recommendations

Whether a company is trying to move its performance in reverse logistics and customer service from Laggard to Industry Average, or Industry Average to Best-in-Class, based on the most recent Aberdeen research, the following recommended actions should help spur the necessary performance improvements.

• Increase real-time visibility of the service organization into the status and location of parts and products in the reverse service supply chain.
  
• Track the velocity of returns.
  
• Standardize returns processes and returns commitments in service contracts.
  
• Improve on-site or pre-visit diagnostic capabilities to stem No-Faults-Found (NFFs).
  
• Promote collaboration between the repair engineers and the service/design teams.
  
• Increase and improve return/replacement forecasting.
  
• Evaluate incremental revenue opportunities from refurbished products.
  

The data and information included in this article represents only a small portion of the analysis and recommendations included in the upcoming Aberdeen Benchmark Report entitled "Driving Returns in the Reverse Logistics Service Chain." To learn what leading organizations are doing, or planning, to counteract the effect of the current economic and other pressures, make sure to download a copy of this report as soon as it becomes available (scheduled for April 2009).

Bill Pollock is Vice President-Principal Analyst heading up the Strategic Service Management practice at Aberdeen Group. He is a frequent speaker, presenter and keynoter on services-related topics for a variety of venues including Aberdeen's Chief Service Officer (CSO) Summit and RLA's North American Conference & Expo, and has published more than 150 articles and features in services journals including Reverse Logistics Magazine and others. Bill can be reached at (610) 399-9717, or via e-mail at bill.pollock@aberdeen.com.

Sumair Dutta is a Senior Research Analyst in the Strategic Service Management practice at Aberdeen Group. In that role, Sumair researches and examines how service executives are utilizing technology and streamlining business practices to improve post-sales service and support processes, analytics and management. Sumair may be reached via telephone at (773) 857-2123, or by e-mail atSumair.dutta@aberdeen.com.