Reverse Logistics: An Untraversed Road

Reverse

Logistics, an integral and crucial part of any supply chain, is still

an unorganized business sector in India. However, this doesn't mean

that the companies are not paying any attention to this aspect of

supply chain. The consumer is the key today and everything is driven

towards keeping this segment smiling. This has resulted in the

evolution of supply chain management in this country. Now, the result

of which is a tremendous profitable business scope for solution

providers. For newbies, who are yet to understand the concept of

reverse logistics, this critical aspect of any supply chain

management involves the process of planning, implementing, and

controlling the efficient, cost-effective flow of raw materials,

in-process inventory, finished goods and related information from the

point of consumption to the point of origin for the purpose of

recapturing value or proper disposal. More precisely, reverse

logistics is the process of moving goods from their typical final

destination for the purpose of capturing value, or proper disposal.

The

market

size of third-party service providers is yet to be measured, as it is

still at a nascent stage and is unorganized. Interestingly, the focus

area these days is from warranty repairs to refurbishment services,

in short the integrated life-cycle of products. The OEMs and ODMs are

turning to a low-cost outsourcing model for their warranty support

and repair needs. The nature of this business is such that the

manufacturer and vendor community along with solution providers are

charting out strategies addressing the issue in a holistic manner. In

this space, there are few names to reckon with, which include Accel

Frontline, InTarvo Technologies, Aforeserve.com, Reverse Logistics Co

and a few more. These are the ones who have realised the business

potential and are the leaders in this sector.

Most of

the OEMs like to keep their eggs in one basket, may be 2 or 3

maximum. Not all solution providers get this opportunity, but they

can do it for their own customers. However, when they will do it for

their customers, the OEMs will want to support them through heir own

partners ie their reverse logistics players. Like for example, Dell

does all these activities through its appointed player and similar

kind of system is followed by Acer. Nitin Shah of Allied Digital

Services said, “Many companies use third-party players like DHL,

Accel to move their products from consumer to either the repair

centre or the OEM. Except for the call centre facility through which

the first level consultation is provided to customers for immediate

response to the problems, the rest is taken care by the reverse

logistics company appointed by the vendors.” He further added,

“This is like an aggregator business and any company would like to

outsource it to a network player with required skillset to execute

the job efficiently.”

PAIN

POINTS

In India,

a majority of players in this space are usually focusing on 1 or 2 of

the verticals of reverse logistics services, hence missing out on the

overall integrated services portfolio. Fewer full-service providers

operate in this arena, and have major thrust in metropolitans and

large cities and the irony is that the upcountry market goes for a

toss, when it comes to keep the IT-driven systems up and running at

the helm of managing reverse logistics. As of today, the external

factors that contribute to the inefficiencies in the industry include

industry fragmentation, constrained transport infrastructure,

regulatory issues and lack of trained resources. Internal factors

that pose challenges for the industry are customer expectations,

lack of scalability and accessibility,

reduced profit margins and market slowdown.

The set

of

challenges in this segment are multifold and the primary one is the

'age-old' challenges versus the 'new' challenges that

companies face today when managing their reverse logistics supply

chains. On this in a discussion forum, Moataz Sadaqah, SCM analyst,

Eli Lilly- European SSC, said, “Let's start with visibility and

track returns, managing and tracking the warranty for each part. And

I consider the biggest challenge is to standardize the process

globally.” He further mentioned, “These challenges are normally

faced by most of the organizations globally to standardize the

process and operate with minimum exception process (not CSR). There

is always customer special requirements (CSR), but once the process

is standardized globally this can deliver required result even with

several different CSR. Global standardized processes are not achieved

by just writing the process or using same ERP or return software

globally. The complexity core here is to implement the same process

to different regions where process does not complain with regulation

and laws, culture and the way the competitors operate.”

While,

Rich Madrid, consultant, Madrid Enterprises, stated, “From a reuse,

repair or warranty perspective, until a company is able to get its

No- Defect Found (NDF) rate under control, you probably want to have

some type of regional processing of returns. You can deploy a global

process, but there may be regional nuances in the internal return

decision (ie, VAT considerations), or a 3PL provider may offer advice

on the cost and benefits of specific regions and potential

workarounds.” He further added that tracking the returns is a

critical first step, and this calls for clear rules on 'transferred

not received' inventory and 'received not transferred'

shipments between all entities. However, how competitors operate is

the power of innovation that keeps us on our toes and looking for a

better 'mousetrap'.”

Adding to

this discussion, Lee Coleman, project manager, Nexicore Services

said, “The concepts of standard practices are very loose as you

travel the world. One issue is, religious days and national holidays

cause problems with reporting for global accounts. We had to create a

way for our reporting tool to pick out country to create TAT

(turn-around-time) reports due to this issue otherwise we would

inaccurately report performances, usually to our detriment.”

The

challenges are dynamic and subjective in nature. Many experts debate

on which is of more concern in reverse logistics? Whether it is

returns management, repair and remanufactureor value recovery and B

product sales? Michael McNair, national logistics manager, NBN

Project at Visionstream, mentioned, “The average real cost of

appliances is declining and the volume of appliances sold globally

continues to climb. From a triple bottom line perspective, in my

opinion, they are all complementary. Hard to give priority to any one

of them. A good returns management framework would include a strategy

for collection or disposal of products in the field, sorting of the

products returned and then decisions made, according to the process

(with weighted value given to sustainability or cost recovery) based

on the corporate agenda.” He further added, “There is certainly a

lot of value in remarketing appliances in second channels and they

often attract the segments, which are not shopping for new products,

so if they are marketed ethically it is a genuine opportunity to

recover cost and increase marketshare. If the products are indeed

resold and of good quality the word of mouth is invaluable.” While,

Harjit Kumar Khurana, service head, Nippo Batteries, stated, “I

think focus should primarily be on how to reduce returns rather than

how to manage them. There will then be less need for an organization

to remanufacture/recover value etc.” Also, manufacturing is

increasingly being outsourced to ODMs, leaving the 'manufacturer'

as either an assembler, or in the extreme, purely the badge on the

product. This changes the reverse logistics dynamics, 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.

Another

major pain point is the customs issues that plague operations and

impact performance. Nitin Shah said, “Another interesting point is

the involvement of SEZ where it becomes difficult to remove the

defective components out. Many times OEMs have replacement zones out

of india which make the process difficult and tedious due to the

government laws and custom duties involved.”Companies need to take

a 'drains up' approach to their reverse logistics operations. The

diagram below depicts 5 stages of maturity of reverse logistics. The

actions needs to be taken considering in which box they fall.

WORK

AROUNDS

Buisiness

models are always based on certain fundamentals. If a solution

provider gets it right, reverse logistics program can increase a

company's bottom line by 4% to 10% of sales. Highlighting on a few,

Jim Hauer, experienced sales manager from Greater Boston Area,

stated, “Choosing the right point of return is a very important

element of a very good reverse logistics program. Key factors on the

point of return include geography, testing/screening/

refurbishing/repairing capability and expertise on the type of

product being returned (white goods companies get lost on high tech

equipment), and market knowledge on the product being

returned (if hard drives are the key items/ what is being returned

then a company familiar with the hard drive market-prices,

channels, etc. is key). The speed and efficiency of the reverse

supply chain is very important. Products tend to devalue over time,

wherein 30 days can be a critical timeframe as a matter of fact.”

Adding to

this, Muralee Konda,manager, business development, 7Hills Business

Solutions, stated, “In reverse logistics there are multiple

processes involved and dependencies on thirdparty service providers

right from time of request to return based on the type of products

handled and the industry vertical. Defining KPI would be the need of

the business which is important for tracking and improvement. It

would be a continuous process and it would change with the time and

the business goals.” He further added, “However some standard

KPIs would be frequent consumables used in repairs, which would be

useful in identifying and improvement of product/ s, cost involved

right from receiving to delivery, time consumed at each stage of

reverse logistics and finally, resources and consumables used per

incident. In a comprehensive manner, Curtis Greve, managing partner,

Greve-Davis states the 'Five Rights of Reverse Logistics.'

Identify

the right source of the returned assets — Determining who returned

the product is perhaps the most critical step in any returns or

reclamation process. In a returns process, the receiving process is

what triggers the financial transaction with the customer. The

customer can be impacted directly, or in the case of retail returns,

the store's inventory will be negatively impacted. Crediting the

right entity for the assets they returned is critical. Diagnose the

right condition of the goods returned, which means whether the item

is new, used, defective, abused, etc. Recognizing the condition will

drive proper dispositioning of the goods. Properly diagnosing the

condition of any returned asset will impact the OEM/ODM, subsequent

recovery rates if liquidated, or will increase disposal costs. If,

for example, an item is new and has never been used, it might be

returned to the OEM/ODM for full cost credit. But if the condition is

mis-diagnosed, it may end up in the dumpster. This results in a loss

of value on the item plus additional rubbish removal fees.

Determine

the right disposition of goods processed in the reverse pipeline.

There are only 6 dispositions for any asset flowing through any

reverse logistics pipeline. The 6 dispositions are as follows: Return

to OEM/ODM for full or partial cost credit; Return to warehouse for

distribution next season; Sold on the secondary market for anywhere

between 2% and 90% of original value; Donated to charity, recycled

and, destroyed — sent to a landfill or incinerated. As one can

clearly see, determining which 'disposition bucket' returned

goods end up in having dramatic impact on whether a company pays

additional costs or if they receive significant credit for parties

down the line. Design the right process to efficiently process

returned assets in a timely fashion. Returns processing is critical

to ensuring companies maximize the value of goods flowing through

their reverse logistics/reclamation pipeline. Many companies do not

appreciate the importance of timely processing of returned goods.

Keep in mind that returned assets are not like wine. They don't get

better with age. Typical returns don't come in good packaging and

their condition will deteriorate over time, as will their value. For

example, electronic returns will lose 10% of their value per month on

the secondary market. Similarly, the percent of product that has to

be recycled or thrown in the dumpster will grow the longer product

sits on the dock. Processing goods efficiently and learning to deal

with seasonal spikes is critical to the overall contribution from the

reclamation center or returns process. Ensure the right amount is

charged to the right party for the processed returns.

Once the

goods have been received, sorted, and processed, the final step is to

ship product to the next party in the reverse supply chain. With

returns, this is more complicated than in distribution because the

value of the goods will vary based on disposition, the ship to point

will depend on the disposition, and the charges for the items depend

on the returns agreement and the party receiving the goods. There are

some companies which give credit for goods but only want specific

models sent back to them. The other models not returned to the

OEM/ODM might be recycled, destroyed, or liquidated. The variations

are endless and often there are consolidation fees, disposal fees,

and packaging fees that complicate the final billing even more.

For the

uninitiated, returns can be a confusing and costly part of their

supply chain. If, however, once the solution provider intends to

venture in to the business of reverse capabilities and incorporates

the above mentioned points, they may find significant amounts of

hidden profits that one can recover. Business benefits can be

measured using following metrics which include SLA compliance, repair

turn-aroundtime, cycle time, output yield, quality levels, and repair

failures.

WHY THIS

BUSINESS

There is

tremendous scope of opportunity yet to tapped by solution providers

in this space. Primary benefits of having reverse logistics

management include cost reduction, administration consolidation,

protected revenue and income, liability protection, resource

optimization, productivity and efficiency gains, and above all

customer experience improvement.

Shah

said,

“There is a huge opportunity in this sector because now things are

getting organized. Earlier many companies were using conventional

methods and they were expecting all the sales partners to take care

of warranty support also. And they were not capable of doing that

effectively as it is not their core strength.” Furthermore, he

added, “The companies now adopt a regional approach to manage their

reverse logistics involving regional partners and this will reduce

the burden on the OEM. The competition is so intense that repair or

replacement on a stipulated time becomes critical and this creates

opportunity for solution providers who can step and execute the

preliminary activities.”

The gains

are numerous here if partners decide to foray into this segment. The

level and quality of service will determine the profitability. As the

partners can then capitalize on end to end visibility, providing

maximum operation performance. Furthermore, one can improve asset

utilization and optimize customer service and SLAs. All this will

give a solution provider an edge over others in the competition.