Reverse Supply Chain: Completing the Supply Chain Loop

• Cognizant 20-20 Insights

Reverse Supply Chain: Completing
the Supply Chain Loop
Executive Summary Reverse Supply Chain
Traditionally, businesses have concentrated on Reverse supply chain refers to the movement of
improving the forward supply chain for their goods from customer to vendor. This is the reverse
products (e.g., manufacturer-wholesaler-retailer). of the traditional supply chain movement of goods
However, as the business environment becomes from vendor to customer. Reverse logistics is the
more competitive, it becomes increasingly impor- process of planning, implementing and controlling
tant for them to concentrate on optimizing the the efficient and effective inbound flow and storage
backward loop, as well. Reverse logistics practices of secondary goods and related information for the
have been in existence for a long time, especially in purpose of recovering value or proper disposal.
the automotive industry, where manufacturers try
to recover value from recycling car parts. Typical examples of reverse supply chain include:

In this whitepaper, we’ve defined the reverse • Product returns and management of their
supply chain process, the steps involved and how deposition.
it can be used as a strategic business weapon.
Examples of how the consumer electronics,
• Remanufacturing and refurbishing activities.

automotive and retail industries handle reverse • Management and sale of surplus, as well as
logistics are offered. We also provide an overview returned equipment and machines from the
of key trends and best practices that will power hardware leasing business.
the reverse logistics process going forward. Also
In these cases, the resource goes at least one step
covered are reverse supply chain models such as
back in the supply chain. For instance, products
centralized postponement of returns, decentral-
move from customer to distributor or manu-
ized preponement of returns, use of information
facturer. Other instances of products reversing
technology in enabling supply chains and the zero
direction in the supply chain are manufactur-
returns policy adopted by some consumer elec-
ing returns, commercial returns (B2B and B2C),
tronics players. In the end, we briefly look at the
product recalls, warranty returns, service returns,
inherent challenges that a reverse supply chain
end-of-use returns and end-of-life returns.
faces, such as managing customer expectations
on returns policies, partnering with other players There are various types of reverse supply chains,
in the supply chain and handling the mounting and they arise at different stages of the product
pressure from regulatory authorities. cycle; however, most return supply chains are
organized to carry out five key processes:

cognizant 20-20 insights | january 2011

• Product acquisition: Obtaining the used product revenue, often to a market segment unwilling
from the user by the reseller or manufacturer. or unable to purchase a new product (e.g., used
cars). Another common use of returns is as spare
• Reverse logistics: Transporting products to a
parts for warranty claims to reduce the cost of
facility for inspecting, sorting and disposition.
providing these services to customers.
• Inspection and disposition: Assessing the
condition of the return and making the most In certain cases, legal requirements make it
profitable decision for reuse. mandatory for product companies to take back
• Remanufacturing or refurbishing: Returning their old and used products (e.g., in the case of
the product to its original specifications. refrigerators in the U.S., companies are mandated
to take back old products because of hazardous
• Marketing: Creating secondary markets for
materials used in their manufacture). In such a
the recovered products.
case, the reverse supply chain needs to be not
Figure 1 demonstrates a simplified schematic of only well managed, but also tightly integrated
a generic reverse supply chain for commercial into the delivery mechanism.
product returns. The customer returns the
products to the reseller (product acquisition), from Another example comes from Europe, where tire
where they are shipped to the returns evaluation manufacturers need to recycle at least one old tire
location (reverse logistics) for issuing credit and for every new tire they sell. In India, a common
product disposition (inspection and disposition). use of reverse supply chains is for promoting
Diagnostic tests are performed to determine sales of new consumer products. Older products
the commercially optimal disposal action for the are collected, reconditioned and resold at prices
returned product. lower than the fresh products but much higher
than “scrap” or salvage value.
There are various types of disposition actions,
including remanufacturing if this is considered The importance of reverse supply chain is dem-
to be cost effective. Some organizations simply onstrated through a statistic originating in the
treat all product returns as defective. There are U.S. that suggests nearly 20% of everything
returned products that may be new and never used, that is sold is returned. This number obviously
and these are returned to the forward distribution varies by product and channel type; nevertheless,
channel. Other products may be sold for scrap or with the high ratio and challenging economic
recycling, usually after physically destroying the conditions, addressing returns within the reverse
identity of the product. Remanufactured products supply chain can help cut costs, increase profit
are sold in secondary markets for additional margins or both.

Reverse Supply Chain

Supply Original Supply Chain
Production waste by-products
Manufacturing
Commercial returns
Distribution
End of use returns
Original Use
Order Use

Trade End of use returns
Collection
Reuse
Redistribution
Remanufacturing Selection

Recycling
Reverse Logistics Disposal

Figure 1

cognizant 20-20 insights 2

Reverse Logistics as a 15 million secondary PCs had to be discarded in
Strategic Weapon 2007. Gartner estimates that by 2012, emerging
countries will need to dispose of a total of 30
For any company, strategic variables are those
million secondary PCs annually. The need and
that have a long-term bottom-line impact. These
opportunities for reuse of obsolete products
variables must be managed effectively, efficiently
cannot be over emphasized.
and proactively — not tactically or reactively —
for the viability of the company. Until recently, Building to order is an effective way to minimize
most companies concentrated only on business the return chain, as it allows manufacturers to
functions such as finance or marketing as postpone final transformation of the product
strategic variables. Logistics capabilities were until the end of the channel and configure the
looked at as a strategic variable during the late exact computer that the customer wants. The
1970s and 1980s. Most companies now look at inventory holding period decreases sharply with
reverse logistics as holding an important strategic this approach. This is in sharp contrast with the
role, but this function has yet to gain the status rest of this industry, which typically will have 30
of a strategic variable. The importance of reverse to 60 days of inventory pre-sold into the channel.
logistics is increasing for a number of reasons: Manufacturers/retailers that sell directly to the
customer and build to order have significantly
• Companies are seeing tangible benefits from
lower return rates than the rest of the industry.
the value that can be recaptured from unpro-
Statistics indicate that return rates for these
ductive assets resulting from returned mer-
companies are around 5%, about half of what the
chandise, such as significant reductions in
rest of the industry experiences. In the words of
inventories, improvement in cash flow, reduced
one executive interviewed, “We send out a million
labor and improved customer satisfaction.
computers. Pretty soon, most of them come
• There is an increase in competitive pressure to back.” The build-to-order model, combined with
provide an effective, efficient returned goods direct sales, eliminates this problem.
process. The increase in catalog and e-business
shopping has resulted in a liberalization of Manufacturers also contract with remanufac-
return policies in order to gain customer trust turing specialists to develop solutions to this
and reduce risk. problem. These specialists work with manufactur-
ers to evaluate the root cause of returns, excess
• Product lifecycle compression and an increased
and obsolete machines, and develop methods to
emphasis on introducing new products and
control cost and return rates. These companies
product “freshness” has created a need to
test, recondition, repair, repack and then resell the
clear the distribution channel more frequently,
machines. The functions of service center, warranty
requiring an efficient means to bring back
repair and other servicing are often outsourced to
obsolete, outdated or clearance items.
a third party that specializes in this business. These
• Increased regulatory requirements regarding programs have led to lower returns.
recycling and product disposition — especially
around products having environmental hazards Automotive Industry
— has increased the need for precision record The automobile industry is one of the largest
keeping and tracking. industries in the world and deals with the most
expensive of consumer goods. Therefore, it is not
Examples of Reverse Logistics surprising that reverse logistics is an important
Across Industries subject for this industry. The three primary areas in
Computer/Electronics Industry which reverse logistics plays a significant role are:
The computer and electronics industry is known
for short product lifecycles. A big market has • Salvage of parts and materials from end-of-life
vehicles.
emerged for used PCs — both in developing and
developed countries. According to Gartner, 37 • Remanufacturing of used parts.
million secondary PCs were refurbished and
• Stock-balancing returns of new parts from
exported to emerging markets in 2008, and the dealers.
market research firm predicts that this number
will rise to 69 million by 2012.1 In 2007, nearly The big three automakers in the U.S. have joined
68 million secondary PCs had to be discarded together to form the Vehicle Recycling Devel-
worldwide. In emerging countries, approximately opment Center (VRCD) in order to increase the


recyclability of cars. At VRDC, the focus is on transmission, it is their hope that the consumer
learning to build vehicles that can be disassembled will bring the car to a dealer that will replace the
more easily. The center is investigating one of the old transmission with a remanufactured one. The
newest trends in engineering, Design for Disassem- dealer will send the old transmission (now called
bly (DFD). With DFD, product disassembly is made a transmission “core”) to the automaker for
easier by reducing the number of parts, rational- remanufacturing. In this way, the automaker will
izing the materials and snap-fitting components maintain a stable supply of transmission cores.
instead of using chemical bonds or screws.
The estimated cost of reverse logistics in the
Unlike other environmental Indian auto and auto components industry is
With DFD, product initiatives for manufactur- around 0.5% to 1% of total sales. The reverse
disassembly is made ing, DFD offers the possibility logistics segment has been growing at the same
rate for both the auto and auto components
easier by reducing of many unintended positive
effects, such as remanufactur- industries during the same period.
the number of parts, ing. The automobile industry
rationalizing the may be the industry with the Retail Industry
Reverse logistics in the retail industry is depicted
materials and snap- longest history of making use
of old products. According to in Figure 2.
fitting components the Auto Parts Remanufactur-
instead of using ers Association (APRA), the Industry Practices and Emerging Trends
chemical bonds market for remanufactured Marginal Value of Time for Product Returns
auto parts is estimated at $34
or screws. billion, annually. The APRA also A study of commercial returns shows the returns
estimates there are 12,000 process as a shrinking, leaking pipeline. As a
remanufacturing firms (including large-scale product moves through the reverse supply chain,
companies) involved in the auto parts industry. more than 45% of its asset value is lost in the
One particular company remanufactures more process. This loss is due to two prime reasons:
than four million alternators, starters and water the downgrading of the product to a lower value
pumps every year. Between 90% to 95% of all product as it gets remanufactured, salvaged for
starters and alternators sold for replacement are parts or scrapped; and the product’s decrease
remanufactured. in value with time. Electronic goods like PCs can
lose value in excess of 1% per week, and the rate
Automakers want to maintain a closed-loop system increases as the product reaches the end of its
with their parts. When a vehicle needs a new lifecycle.

Retail’s Forward and Reverse Supply Chains

Forward Logistics Information Flow for Retail

ASN ASN
Sales Planned Shipments to DC Shipments Put away Actual sales
forecast shipments to DC to store at store

Product Flow
Information Flow

Reverse Logistics Information Flow for Retail
Product to Sorting and ‘Milk run’
Collected Customer
disposition disposition collection to at store returns item
destination decision-making DC/CRC

Return
Product Flow information
Information Flow to DC

Figure 2


Shrinking Pipeline of Product Returns

20% New, Restock
Product ($190)

Loss in Asset Value >45%

Row of
Returns
$1000 15% Scrap ($0)

10% Salvaged
Components ($20)

10% “Low-touch” 45% Repair &
Refurbished ($75) Remanufacture
($250)
Figure 3

Figure 3 shows how product returns lose time Once the product condition is determined at the
value in the reverse supply chain. However, this testing facility, it is appropriately disposed of (i.e.,
loss depends on product type; some products like sent for restocking, refurbishing, salvaging or
PCs and laptops have a higher time value depre- scrapping). This model achieves economies of scale
ciation as compared with machine tools, etc. at each level, thus enabling min-
imization of processing costs. An efficient
Centralized Efficient It is also easier on the retailer, reverse supply
Reverse Supply Chain which doesn’t have to sort
returns or ship them to multiple chain focuses on
locations, as well as the third- processing product
Restock party credit issuer, which has returns at an overall
to issue credit at one time for
multiple product returns. lower cost.
Refurbish
In the previous model, we saw that product differen-
Product Centralized
tiation is delayed until all returns are shipped to the
Returns Evaluation &
Test Facility Parts central facility. This can be thought of as a postpone-
Recovery ment strategy. On the other hand, for products like
PCs where the asset value loss over time is relatively
high, we can prepone the testing and evaluation of
Scrap

Figure 4
Decentralized Reverse Supply
Chain with Preponement

An efficient reverse supply chain focuses on Restock
processing product returns at an overall lower cost.
This supply chain model sacrifices speed over cost
efficiency and is typically applicable to products Refurbish
with shorter time/value depreciation. Test &
Product Repair Facility
Returns
The cost efficiencies in the supply chain are Parts
obtained by centralizing the testing and evaluation Recovery
of the returned product at a central facility, after
Scrap
which credit is issued. The retailer or reseller
doesn’t partake in any product evaluation at their Retailers and
Resellers
end. Shipping costs are minimized by shipping the
returns to the vendor in bulk. Figure 5


the returned product using a decentralized model turing or recycling based on the number of hours
so that the unused products can be restocked used and the speed at which the tool was run.
immediately. This testing can be performed at the
point of return by the reseller/retailer, but it would Zero Returns Policy
need to be technically feasible, and it might require Under this policy, the manufacturer does not allow
expertise development among resellers. Moreover, products to be returned through the channel.
resellers would need to be incentivized through They instruct retailers downstream to dispose of
shared savings contracts with manufacturers, or their products appropriately and provide a return
vendors can set up a vendor-managed inventory allowance for that purpose. This frees the upstream
process with large retailers and maintain their own members of the supply chain from the burden of
technicians to test the returned products. logistics for product returns; it increases the same
for the downstream members. The return allowance
Information Technology in Reverse can be as much as 4% of sales by manufacturer to
Supply Chains the retailer. This approach is used by several elec-
Information technology can be used in various tronics companies, with mixed results. The products
ways to improve the reverse logistics in industries. that were supposed to have been scrapped upon
One of the main uses of IT is to enable item return have found their way to secondary markets.
tracking in the supply chain, enabling vendors to
see the travel history of the item. This can help in Environmental Concerns
quickly discerning whether products are as good Increased regulations by U.S. and European govern-
as new and should be put back into the forward ments are causing manufacturers to invest in reverse
supply chain. This tracing ability also enables logistics processes to ensure proper disposition of
forecasting of product returns based on historic their products. Computer manufacturers such as
linkage between product returns and sales. Dell and Hewlett-Packard have received criticism for
not properly disposing of the e-waste they generate.
Reverse logistics also involves refurbishing/testing Land-filling practices are being overhauled due to
facilities at multiple locations, routing of vehicles stiffer disposal regulations, which have increased
between retailers and these facilities, as well as operating costs. Some companies are trying to
scheduling of operations, all of which can be aided by apply internal research to establish environmen-
information technology. It was found that a German tally friendly measures; however, the truth is that
recycling network could reduce its transport volume no company will implement processes that are not
by 20% based on software optimization. sustainable to them in the long run. If legislation
forces them to do so, they will have to pass on the
In high-tech products, the customer often ends up
increased manufacturing costs to customers.
ordering parts that may not fulfill the product’s
technical specifications (e.g., printer cartridges) Challenges persist across the manufacturing
and thus end up returning the product unused. If value chain for managing the reverse logistics
the transaction takes place online, the company can process. Chief among them:
allow/disallow parts ordering based on the model
1. Meeting consumer needs: Customers want
specification (e.g., printer) that the user enters on
the best price and completely flexible and has-
the Web site. Again, complicated electronics items
sle-free returns policies.
like VCRs, PCs, etc. require complex set-up speci-
fications, and so, in addition to a simplified user 2. Volume management: Retail returns are around
manual, remote online support for fault detection $60B+ annually, and total returns across the
can greatly reduce the number of product returns. U.S. high-tech service industry are forecast at
$818B+ through 2008. Especially during peak
Technology can also be embedded in high-value seasons, most of these returns are time-sensi-
products such as heavy engineering machines, tive to process and restock for resale.
auto engines, etc. to keep track of the usage the
3. Management of costs: Expense management
machine was subjected to during the time it was
can represent up to 7% to 8% of the cost of
used by the customer. For example, Bosch uses
goods. The process is labor intensive with very
an inexpensive “data logger” chip in the electric
little automation.
motor of its power tools, which records the number
of hours of use and the speed at which the tool 4. Data management: Having accurate data is
has been operated. This enables the company to important, but it is very difficult to obtain and
determine if it should send the tool for remanufac- manage relevant information. An organiza-


tion should understand the data source, know laws, regulations and processes, including the
how to analyze it and should use third-party company’s corporate social responsibility.
experts if possible.
7. Partnership throughout the product lifecycle:
5. Disposition of product: Knowing the best Having the right partner throughout the
location to handle, destroy, salvage and even product lifecycle is key. Creating a strong and
where to donate products is critical. So is the cohesive supplier agreement, jointly determin-
ability to handle a supplier return, whether it is ing the best approach, cost sharing and having
defective or working with overstock balancing. a positive relationship will help improve the
6. Regulatory compliance: Organizations require bottom line for everyone.
complete understanding of waste management

References
V. Daniel R. Guide Jr. and Luk N. Van Wassenhove, “The Reverse Supply Chain,” Harvard Business Review,
Februrary 2002.
Dr. Dale S. Rogers and Dr. Ronald S. Tibben-Lembke, Going Backwards: Reverse Logistics Trends and Practices,
Reverse Logistics Executive Council, 1998.
www.planitroi.com
Joseph D. Blackburn, V. Daniel R. Guide, Jr., Gilvan C. Souza, Luk N. Van Wassenhove, “Reverse Supply Chains for
Commercial Returns,” Harvard Business Review, February 2004.
Marc Chouinard, Sophie D’Amours and Daoud Aı t-Kadi, “Integration of Reverse Logistics Activities within a Supply
¨
Chain Information System,” Computers in Industry, Vol. 56, Issue 1, January 2005.
Marisa P. de Brito, Rommert Dekker, Simme D. P. Flapper, “Reverse Logistics: A Review of Case Studies,”
Econometric Institute Report, May 2002.

Footnote
1
Gartner Inc., “Gartner Says Emerging Markets Could Become Dumping Grounds for Secondary PCs, ”
www.gartner.com/it/page.jsp?id=1037212, June 2009.

About the Author
Nandan Kumar is a Consultant in Cognizant’s Manufacturing and Logistics Practice. He has more than
six years experience in different aspects of the heavy manufacturing industry and earned an MBA from
the Indian School of Business, Hyderabad. He can be contacted at Nandan.Kumar@cognizant.com.
Arnab Chatterjee is an Associate Consultant in Cognizant’s Manufacturing and Logistics Practice.
He has more than three years of work experience in ERP functional consulting and the logistics industry.
He has an MBA from IIM Calcutta and can be contacted at Arnab.Chatterjee2@cognizant.com.

About Cognizant

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Reverse Supply Chain: Completing the Supply Chain Loop

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