Reverse Logistics and Supply Circles: The Manufacturer's Competitive Advantage

Today, I am excited to introduce to you Max Moriarity as a guest writer for today's post.  Max provides an interesting  perspective on Reverse Logistics (RL).  All too often, I hear of RL as a pure service-related play.  However, Max shares good insight on how manufacturing companies can leverage the RL supply chain as a competitive advantage.  

This is a snapshot of manufacturing as a grand industry(-ish), but as I pointed out in the RL blog post earlier this month, some companies do redeploy returned assets into other programs.  And in some instances,  companies are able to harvest parts (a.k.a. parts reclamation) from returned product to be used to refurbish other products (i.e. refurbished phones from the earlier article).  This is a huge cost mitigation strategy and an area flourishing in the high-tech industries especially.  Before I get too excited, here's Max:

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McKinsey released a great story about two weeks ago exploring the idea of circular economies and supply circles.  After reviewing McKinsey’s extensive research and analyses, it led me to start thinking about how manufacturing companies can leverage advanced reverse logistics practices to their advantage.

As McKinsey noted, volatility in the commodity market and increases in global consumption have dramatically increased raw material prices reaching all time highs.  In fact, McKinsey states, “with supplies of many raw materials becoming harder to secure, commodity price volatility may not be a temporary phenomenon”[1].  This volatile environment has necessitated the need for manufacturing companies to think well outside of the proverbial box to lower the cost of inputs to create one output.  It is this need that has led to the concept of supply circles, where manufacturers not only create products but utilize reverse logistics to obtain materials from recycled or returned products.

Manufacturers who understand the value in a strong reverse logistics operation will benefit from creating a new source for procurement of valuable materials and components from recovered or recycled products.  Additionally, manufacturers will be able to further refine their product designs to fully take advantage of these recycled materials as well as improve how their products are produced.

Instead of just seeing reverse logistics as a way to deal with mistakes, companies who realize the importance strategic reverse logistics operations can gain a significant competitive advantage over their competitors.  The list of companies who failed to innovate and adapt includes many well-known companies like Circuit City, Blockbuster and Kodak.  In order to remain viable in today’s competitive economy, I will remind everyone that it was H.G. Wells who said, "adapt or perish, now as ever, is nature's inexorable imperative." 

Max is a consultant in the Supply Chain Operations Practice of Chainalytics.  Max has advised clients in designing and implementing supply chain transformations in the areas of reverse logistics strategy,  distribution network strategy, and large-scale transportation network optimization.  For more information, visit Max's LinkedIn profile here.

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[1] McKinsey & Company (n.d.).  From Supply Chains to Supply Circles.  In McKinsey & Company. [Website]. Retrieved August 16, 2012, from http://www.mckinsey.com/features/circular_economy

Excuse Me, Your Reverse Logistics Is Starting to Smell

Irv Grossman, VP of Supply Chain Operations in Chainalytics, wrote a very interesting article regarding the similarities between fishing and Reverse Logistics.  If you haven't had a chance to read it, go ahead and take the time to read it first (here) and then come back.

What I've seen, as has much of the industry, is a growing focus on the Reverse Logistics side of the supply chain.  Reverse Logistics (RL) is the inverse of Forward Logistics (FL) where RL encompasses products from the consumer back upstream.  In contrast to FL, RL can embody much more complexity as it's dependent on potential failures (think: general buyer's remorse, warranty, insurance, etc.) in addition to the lead time associated after new product launches.  (FYI, there's more reason it's very complex -- I'm being kind and simplifying to a couple main points.)

As Mr. Grossman points out, cycle times from receipt to disposition of assets once the assets have re-entered the supply chain are extremely critical.  In fishing, the longer you hold onto fish, the less valuable and stronger the scent.  Similarly, especially in high tech industries, product sitting in inventories start to lose value -- and fast.  (In all my experience, I haven't noticed these products starting to smell, yet.)  

Consider this: in the fast-paced world of cell phones, devices can lose at least 1% per week.  Let's do some back-of-the-napkin math and extrapolate what this may mean... You accept 20,000 devices per week through your returns process.  The blended cost of a phone is roughly $350 (Nielsen estimates 2/3 of sales are smartphones with average smartphone COGS of $550, feature phones representing 1/3 of sales at $250 COGS) (see source 2).  Extrapolating, you can be losing $70K per week!  Aghast!  What can you do?!

Fear not!  There are ways to maximize value and create a leaner RL supply chain!

One of the most crucial areas companies are targeting is "simply" stopping returns from even occurring.  In the consumer electronics world, the key area of opportunity is tackling No Trouble Found (NTF), No Fault Found (NFF) or Cannot-Duplicate (CND) devices (NTF, NFF, and CND are by and large synonymous).  Accenture estimates 68% of returns are NTF (see source 3).  Indeed in my own experience, I've seen NTF rates reach as high as 60-65% including 30-35% purely software-related.  Addressing NTF devices not only reduces costs from the point-of-return and further up the supply chain, but it also increases customer satisfaction as he/ she is able to keep the device.  Happy customers make loyal customers, right?  Just watch the Genius Bar at any Apple store...

Once the product has entered the supply chain, however, companies are tackling the dispositioning problem. That is, how can we, the company, now maximize value recovery?  I know several companies (carrier, OEMs, retailers) are choosing one or a combination of the below solutions:

• Speed up cycle times from receipt to disposition.  Depending on how many touchpoints of companies' RL supply chain, companies can significantly inventory and maximize recovery by consolidating touch-points.
• Maximize value recovery through optimal liquidation channels.  That sounds good, right?  What does that mean?  Optimal channel management is being able to select the RIGHT secondary channels to disposition through bulk sales, auctions, or otherwise.  Maximization of value includes the balance of capturing the most value per device while also clearing inventory of more obsolete products.  This may include the use of auctions and bulk sales.
• Maximize value recovery through redeployment through channel/ program management.  Different from the preceding bullet as I wanted to highlight the liquidation aspect of cell phones above.  This solution is more related to redeploying returned assets into the company's other programs (i.e. insurance, warranty, loaner phone, etc. programs).  If you've ever returned your computer for a warranty claim with an OEM, for example, you most likely received a refurbished unit back.  The key for the OEMs and companies performing the returns is, again, maximization of value.  Companies must understand the back-end value and determine necessary refurbishment costs to bring a returned asset to a quality level acceptable for redeployment.

This is not an exhaustive set of solutions.  However, these are a few prominent methods companies are employing to address their RL processes.  The Reverse Logistics supply chain can be one of the toughest areas of operations to tackle and a key cost-driver.  However, it can also by a key operational competitive advantage.  Luckily, there's an evolution of technologies and solutions in today's high-tech world, especially, to maximize value for not just the companies, but to end-consumers as well.  Triaging devices before returns and dispositioning those devices that do enter the RL supply chain with a sense of urgency and a bit of intelligence will ensure maximum value recovery and keep those returns from smelling fishy.

Sources and Research:

1. Grossman, Irv. (2012,  June 5). What Fishing Teaches Us about Reverse Logistics.  [Blog]  Retrieved from http://www.chainalytics.com/blog/service-supply-chain/what-fishing-teaches-us-about-reverse-logistics/

2. Two Thirds of New Mobile Buyers Now Opting For Smartphones. (2012, July). Retrieved from http://blog.nielsen.com/nielsenwire/online_mobile/two-thirds-of-new-mobile-buyers-now-opting-for-smartphones/
3. King, Joe. Carving Out a Path to Aftermarket Service Profitability Starts with the Basics. [PDF] Retrieved from  http://www.cscmpsfrt.org/resources/Documents/Value%20Recovery.pdf

4. AberdeenGroup. Industry Best Practices in Reverse Logistics. [PDF] Retrieved from http://www.ismsv.org/library/RevLogistics.pdf