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15

Reverse Logistics: A New Wave

After reading the chapter, the students should be able to


understand:
Concepts, scope and objectives of reverse logistics
Reverse logistics system design considerations
How reverse logistics is used as a competitive tool

In a competitive environment, the philosophy of accepting product


returns as a competitive tool has resulted in huge challenges to
logisticians. Today, logistical support means going beyond forward
logistics to include product recall, product disposal and product
recycling. The logistics design objectives include reverse material
flow system to support the life cycle of the product.

Reverse logistical competency is a result of


worldwide attention to environmental concern.
Dale S. Rogers and Tibben-Lembke, Ronald1
15.1 WHY REVERSE LOGISTICS?

Traditionally, in the supply chain of an organization there is a


unidirectional flow of goods, that is, from the manufacturer to the
end-user. Almost the entire attention of a logistician has been
focused on the forward logistics activities. Once the product is
sold and delivered to the user, the manufacturer feels that there is
an end to his responsibility. Manufacturers think that their
responsibility is limited to the extent of replacement of defective
products covered under the warranty or those damaged during
transit. What is happening to the used materials, packaging waste,
disposable product waste generated by the finished products
supplied by them? The leftover material and wrappers cause
environmental pollution and create problems of disposal for the
civic authority. However, in the wake of growing concern about
environmental pollution, developed countries across the world
have passed legislations that require manufacturers to take care of
products discarded by their customers after usage. Leading
corporations across the world are taking this as an opportunity to
develop a system for reverse material flow. They are focusing on
reverse logistics in order to use it as a tool for competitive
advantage. It is estimated that reverse logistics costs account for
approximately 0.5 per cent of the total United States gross
domestic product (GDP).2 Therefore, reverse logistics is becoming
an integral component of the profitability and competitive position
of retailers and manufacturers.

Reverse logistics may be defined as a process of moving goods from


their place of use to their place of manufacture for reprocessing,
refilling, repairs or waste disposal. It is a planned process of goods
movement in the reverse direction, done in an effective and
cost-efficient manner through an organized network. It can be a
stand-alone or an integrated system in the companys supply chain.

15.2 SCOPE OF REVERSE LOGISTICS

Reverse logistics, though considered a drain on the companys


profits, can be leveraged as a tool for customer satisfaction in
todays competitive markets. More and more manufacturing firms
are thinking of incorporating the revere logistics system in their
supply chain process. The reasons for this are:
Growing public concern about environment pollution
Government regulations on product recycling and waste disposal
Growing consumerism
Stiff competition

The reverse logistics network can be used for various purposes such
as refilling, repairs, refurbishing, remanufacturing, and so on.
Depending on the nature of the product, unit value, sales volume
and distribution channel, reverse logistics can be organized and
designed into a system for the following activities.

Refilling
In industries such as soft drinks, wine, oil and LPG distribution,
reverse logistics is integrated to their regular supply chain because
of the reusable nature of the packages, such as glass bottles, tin
containers and metal cylinders. In the case of soft drinks industry,
the delivery van enroute to retailers a, b, c (see Figure 15.1) delivers
the filled bottles and collects the same number of empty bottles
from them for delivery to the factory. No extra transportation costs
are involved in the process, as the delivery van originates and
terminates its journey at the factory, where these reusable bottles
are refilled for redelivery to the customers. Such an arrangement is
called a hub and spoke distribution system.

Figure 15.1 Reverse goods flow for refilling


A similar arrangement is in use by the petroleum companies
(Hindustan Petroleum, Bharat Petroleum and others) for refilling
of LPG cylinders. Truckloads of filled LPG cylinders are dispatched
from the bottling plant for delivery to the dealers godown. On
return trip, the same truck carries the empty cylinders from the
dealers for depositing at the bottling plant. With metal cylinders
such as these, the recovery rate (due to less damage and prolonged
life of the cylinders) is to the extent of 99.9 per cent.

The UB Group, at one of their plants, fills 3 lakhs beer bottles of


London Pilsner (a leading beer brand in Maharashtra) every day.
The recovery rate of empty glass bottles from the market is 92 per
cent, as 3 per cent of the bottles are broken and 5 per cent of them
are lost or put to other usages. Due to the cost difference of 2025
per cent between new and old glass bottles, which contributes to
the extent of 1215 per cent in the total manufacturing cost of the
product, the firm saves a lot by using the used bottles. They have
developed a stand-alone reverse logistics system for recovery of the
empty bottles through scrap vendors, who collect these bottles at a
throwaway price from such places as hotels, clubs, pubs and bars.

Logistics service suppliers, who lease pallets to their various clients


for packing and moving goods, keep a pool of pallets at fixed
locations. Customers draw the pallets for use and deposit them at
the assigned centre after usage. The damaged pallets are repaired
or replaced regularly, keeping the required quantity in circulation.
The return of the pallets is on an exchange basis. The pallet supplier
is the common link between the buyer and the seller, with whom he
co-ordinates the reverse logistics operation. This system is quite
common in developed countries.

In India, box containers used in the multimodal transportation


system are leased by the Container Lease Corporation Ltd. (CLCL),
which keeps an inventory of empty box containers at Inland
Container Depots (ICDs) operated by the Container Corporation of
India (CCI) or private agencies. Customer requirements of
containers for packaging and movement of goods in the domestic or
foreign markets are drawn from these depots. The containers are
loaded at container freight stations operated by the CCI or others.
The empty containers, after de-stuffing of materials, are deposited
at the container depot nearest to the place of delivery for further
reuse and reverse flow to the place of origin. Thus, the entire
movement of containers in forward and reverse logistics is
controlled by CLCL.
Shaw Wallace has integrated the reverse flow of empty bottles with
their regular forward distribution system. The empty bottles are
collected at the area distribution warehouse with the help of their
dealers, who are in touch with hotels and scrap dealers. The latter
have their own network to collect empty wine bottles from
households, hotels, clubs and pubs. The bottles thus collected at
field warehouses are sent back to the factory for refilling. The
recovery of empty bottles is to the extent of 8588 per cent of the
supply.

Repairs and Refurbishing


This is a regular feature for service-based products under warranty,
which manufacturers have to incorporate in their product offerings.
Almost all consumer durables such as television sets, audio systems,
washing machines, fans, and refrigerators, as well as all industrial
products need repairs on a regular basis. Refurbishing is done for
the goods returned by customers during the warranty period
because of damage, defects or their performance being below the
promised level. Manufacturers establish the reverse logistics
system not only for offering free service during the warranty period
of the product, but also for extending services beyond the warranty
period on a chargeable basis. In addition to extending value-added
services to customers, the system is a major revenue earner for the
company. The reverse logistics system operates through the
companys service centres, where the repair and refurbishing take
place. The collection of products is done through the dealer
network. The collected products are dispatched to the nearest
service centre for overhaul, repair or refurbishing. The
documentation and payment collection is the responsibility of the
concerned dealer. For a large-value industrial product,
coordinating with and locating the customer does not pose any
problem, as the number of customers is small, and besides, they are
personally known.

Product Recall
This is an emergency situation wherein the products distributed in
the markets are called back to the factory because of any of the
following:
Product not giving the guaranteed performance
Quality complaints from many customers
Defective product causing harm to human life
Products beyond the expiry date
Products with defective design
Incomplete product
Violation of government regulations
Ethical consideration
To save the companys image

The above situations may arise very rarely. The likely reasons may
be production shortcuts, bypassing stage inspections, employee
negligence, human error or management negligence. Product recall
in these situations puts a huge financial burden on the company.
No organization designs in advance a reverse product flow system
for deployment in anticipation of such eventualities. However,
many firms, on such occasions, have shown a great deal of
organizing ability in mobilizing the companys resources to achieve
this time-bound objective.

In the 1980s, a leading Indian auto manufacturer launched a


multi-utility vehicle in the Indian market. Soon after the launch,
there were large-scale complaints from customers due to the
defective gearbox design. All the vehicles dispatched to the
customers were called back within a short time by deploying their
dealer network and the companys sales force, so they could be
refitted with the gearbox of improved design. In the meantime,
redesigning of the gearbox was competed on a war footing.

Johnson & Johnson Health Care, a U.S. multinational company,


introduced milk powder in the South African markets as a
substitute for breastfed milk for newborn babies. However, due to
large-scale deaths of babies who consumed the powdered milk,
Johnson & Johnson Health Care called back the entire unsold
powdered milk stocks in the market under a time-bound program
and gave compensations to the victims on ethical grounds. The
cause of the deaths was contaminated milk prepared under
unhygienic conditions and not the milk powder. The company
failed to educate the mothers on a hygienic process for milk
preparation during its sales campaign.

The scope and effectiveness of the recall process is dependent on


the type of the product, its distribution network, consumption
pattern and unit value. The recall process is very effective in the
case of industrial products of high unit value, dispatched directly to
a small number of customers. The customer being knowledgeable,
extends his/her cooperation in the process. However, in the case of
mass-consumed products distributed through a multi-level channel
structure, identifying the product location becomes problematic. It
is easier to trace the product location within the boundaries of the
channel network. Once the product is sold and handed over to the
user, the degree of effectiveness of the product recall process
reduces drastically because of the following reasons:
Lack of customer database
No motivation on the part of the customer to return the product
Product not meant for critical use

In the case of service-based products, such as consumer durables,


which are accompanied with warranty cards, the product can be
located, provided the documentation is maintained at the point of
sale. This makes the recall process easy.

In the wake of stiff competition and growing consumerism, many


manufacturers have put in place a product recall system as a
value-added service to build competitiveness. The recall of
defective products during warranty period is now the most
common feature of customer service offers. In fact, it is cost burden
on the part of manufacturers. However, many companies now
consider product recall as an opportunity to increase customer
satisfaction and an asset recovery operation as well. Nestle India,
for example, take back the yogurt every day from their distributors
after the expiry of its 24-hour shelf life. Similarly, Monginis, a
Mumbai-based leading bakery products producer, collect the cakes
from their distributors when the products shelf life is over. The van
delivering fresh products to the distributors collects by default the
products that are not sold and their shelf life is over.

Recycling and Waste Disposal


The left out materials, used products and wrapper wastes cause
environmental pollution and create problems of disposal. Hence, in
developed countries, governments are devising regulations to make
manufacturers responsible for minimizing the waste by way of
recycling the products. Germany is the first country in the world to
implement such regulations. According to the law, the
manufacturer is responsible for taking back pallets, cardboard
boxes, wrappers, strapping and such other things that are used for
protecting the products during transit. They have implemented a
three-stage packaging ordinance. In the first stage, wrappers or
packaging wastes are collected from households by retailers. In the
second stage, these waste items go from the retailers to the
manufacturers who, in the third stage, send them across to the
packaging manufacturer for recycling or disposal. The levy for
recycling is indicated on the product by green dots. In Germany,
the FMCG manufacturers have jointly promoted Dealers System
Deutschland (DSD) with common funding for collection of
packaging waste of FMCG products. They have reduced cost of
retrieving and recycling the packing waste through economies of
scale by joining hands together. In the United States there is a law
to take back from customers car batteries, soda bottles and so on.

Fig. 15.2 Three-stage reverse logistics system for car recycling


In Europe, Volkswagon (a leading auto manufacturer) is the first
company that has effectively developed a car recycling supply chain
system. The car is mostly an assembly of components made out of
metal that can be easily recycled.

REVERSE LOGISTICS IN PRACTICE: BMW REVERSE LOGISTICS FOR USED CARS

In Germany, if a car completes 1215 years on the road, it is the


responsibility of the owner to pay a requisite amount and hand over
the used vehicle to the automobile manufacturer through the
authorized collection centre or dealer. BMW has developed an
exclusive dismantling plant for car recycling. The used cars are
collected through the reverse logistics system, which is a part of
their forward supply chain. The plant is equipped with high-tech
tools, and special methods are employed for rapidly dismantling
cars to extract useful stuff from them. With the existing facilities, it
takes 20 minutes to dismantle the full car. They have this plant at
Lohhof near Munich, which is the only facility promoted by BMW
as a competence centre and technology forum for all matters
relating to recycling of the vehicle. Every year they dismantle
20,000 cars at Lahhof, which is equivalent to 3600 tonnes in
weight. This comprises 1700 tonnes of body shell, 200 tonnes of
operating fuel (oil, fuel), 20 tonnes of plastics, 30 tonnes of
non-ferrous metal and 5 tonnes of batteries. The BMW plant earns
USD 1.5 million by selling dismantled parts from end-of-life
vehicles (ELVs). The biggest challenge in the dismantling and
recycling task is to tackle material like mercury, cadmium,
haxavalent chromium and lead that are now a part of vehicles.
According to the European Union (EU) directives, there is a ban on
the use of the above materials from 1 July 2003 on environmental
grounds. Mercury is used in headlight bulbs, lead and cadmium in
batteries, and so on. Although BMW is paid for the old vehicles and
earns USD 1.5 million p.a. by selling used parts, however, these
earnings are far less than the investments on the facility they have
developed. BMW has created a database on dismantling and
recycling parts, which is called IDIS, with active inputs from the 20
carmakers and contains information on 2000 components
fabricated by these manufacturers. With lessons learnt from BMW,
other auto manufacturers like Mercedes and Porsche are
developing their recycling and dismantling facilities due to
stringent environmental regulations in the EU. In Germany alone,
1.4 million ELVs get ready for recycling each year.

Source: Business Line, 4 June 2002.

Matushita Recycling Plant for Electronics


After the Japanese Government passed The Electric Home
Appliances Recycling Law in April 2001, the Matushita group that
sells its products under the brand name National and Panasonic set
up the recycling plant in 2002 for processing one million units (TVs,
refrigerators, air conditioners and other electronic goods) to reduce
the national waste. They recover glass (57 per cent of the TV
weight ), metals (80 per cent from air-conditioner) and plastics
through waste recycling process. Matushita has set up a reverse
logistics system for collection of used electronic equipments at
specified collection centres in Japan. The customers have to pay
nominal charges for products that are to be recycled. The charges
for recycling are fixed by the manufacturers. At the Matushita plant
the products of Toshiba, GE and JVC are also recycled.

Source: The Economic Times, 12 October 2002.

Seconds TV Industry in India

TV dealers collect old TV sets at INR 30004000 against exchange


schemes to push the new stock. They resell the old models in other
markets at INR 6000 or more, covering transportation and minor
repair charges. The seconds TV market in India is estimated at 34
lakh pieces per annum valued at INR 180240 cr.

Source: ET Knowledge Series 2002.

For product refurbishing, for example, Sony USA, a consumer


electronic giant operating in the United States, uses its regular
dealer network for reverse flow of video or audio systems returned
by the customers within the warranty period.

In India, the Supreme Court is in the process of imposing a ban on


charging and discharging of automotive batteries on the grounds of
pollution, and the union government is coming out with a new
legislation making it mandatory to return used batteries to
manufacturers for recycling and disposal.
Remanufacturing
Manufacturers in the developed countries are putting into practice
a new concept of remanufacturing that emerged in the late 1990s.
During usage the product undergoes wear and tear. The worn parts
are replaced with the new ones and the performance of the product
is upgraded to the level of the new one. The practice is more
prevalent in the defence establishments where fighter planes are
checked after each flight for their performance level, which is every
time brought to the level of new one without any compromise on
the quality front. Similarly, equipments sold in the markets can be
checked after use to qualify for the remanufacturing process and
brought to the remanufacturing unit. A leading cell phone company
in Europe has outsourced its remanufacturing activities to a few
vendors in Europe and developed a separate network for reverse
flow of the used or discarded products held by the customer for
only short periods before switching over to the latest models. The
company has identified a huge market for remanufactured
products in the developing countries. The investment in
remanufacturing and related reverse logistics supply chain can be
justified on the basis of economies of scale. A critic, however, says
that the remanufacturing will solve the problem of waste disposal
in developed countries, but create new dumping grounds in the
developing countries.

15.3 SYSTEM DESIGN CONSIDERATIONS

In 1996, the auto giant General Motors had a problem handling


30,000 defective parts per month for replacement within the
warranty period, which were returned by customers from various
places to their plants at different locations. To overcome this
problem they, along with UPS Worldwide Logistics, jointly
developed a reverse logistics system using their 200 dealers as
collection and disposal centres to initiate documentation and
pre-checks for further dispatch and processing to GMs Orion plant.
The centralization simplified the process for GM engineers and
suppliers wanting to examine the parts to understand what
improvements are necessary. As all the parts are sent to one
location and UPS tracks their shipment, online feedback to
customers is feasible. The success of the reserve logistics system in
achieving the desired objectives will depend on the efficiency and
effectiveness of the following subsystems.

Product Location

The first step in the callback process is to identify the product


location in the physical distribution system of the firm. The product
may be lying in the companys mother warehouse or distribution
warehouse, dealers godown, or with the retailer or the customer.
Locating the product becomes quicker and easier if it is in the
companys warehouse or depot, or with the distributor, where
tracking can easily be done. But once it enters the retail network,
the task becomes really difficult because of the large number of
retailers, wide geographical spread and lack of proper
documentation. This is even more true in the case of FMCG or
mass-consumed low unit price products.

The product location becomes more difficult after it is sold and


handed over to the customer. Locating the product is a bit easier in
the case of industrial or high-value products, owing to the limited
number of customers and the personal touch with clients as a result
of direct selling.

Product Collection System

Once the product location is identified, the collection mechanism


gets into operation. Collection can either be done through the
companys field force, channel members or a third party. However,
proper guidelines or instructions have to be given to motivate the
customer to return the products. The customer is biggest hurdle in
the retrieval of the product, as he does not want to part with
something that he owns. The collection centres should be located at
the proper location to ensure wider coverage and minimum
collection cost. The companys intermediaries are the most effective
centres in product callback, as far as cost and coverage are
concerned. With proper training, the intermediaries can carry out
the preliminary inspection of the called back/returned products
before inducting the same into the system for further processing.

Product Recycling/Disposal Centeres


These centres may be the companys manufacturing plant or the
mother warehouse from where the finished products were
dispatched to the market or some other fixed location in the reverse
logistics network. The called-back products are inspected before
they are further processed for repair, refurbishing,
remanufacturing or waste disposal. The investments facilities for
these activities depend on the objectives of the system, cost
implication, complexity of the operations and the expected gains.

Documentation System

The tracing of the product location becomes easier, if the proper


documentation is maintained at each channel level. However, at the
time of handing over the product to the customer, the information
on the users name, address, contact phone numbers, application,
and other personal data, if collected through proper documentation,
can form a good database that can be used in case of product
callbacks. The product warranty card, with product and customer
details duly filled in at the point of sale, is commonly issued for
service-based products, such as consumer durables and industrial
products. However, only the card remains with the customer as
proof of purchase to be produced at the time of claims during the
warranty period. No supporting record is usually maintained at the
dealers end. Except for high-value industrial products, no records
are kept by retailers for consumer durables or mass-consumed
products. The documentation system in reverse logistics, however,
ensures the maintenance of customer-product database at the point
of sale. To ensure the smooth running of the system, a procedure
has to be introduced for entry, exit and flow of the called-back
products in the system for tracking and tracing.

Cost Implications

The reverse logistics system is a cost centre. However, these costs


are incurred for achieving certain company objectives that can
broadly be subdivided into the following activity heads:
Product location (by company staff, channel member, or third party)
Transportation
Product collection (Customers > retailers > plant)
Disposal (plant > suppliers > disposal)
Refilling, repairs, refurbishing, remanufacturing and waste generation
Documentation (for product tracking during entry, exit and flow in the
system)
Communication

Due to the cost implication, manufacturers invariably integrate the


reverse logistics into their forward logistics system with little
modifications. The same network components are geared up to
accommodate the reverse flow of the products with the same
efficiency and effectiveness. The investment and operating costs
involved in tuning the existing forward flow system to reverse
flow will be less than for a separate stand-alone system devoted
only to reverse flow, unless it is designed on scale economies.

Legal Issues
Under the Indian regulations, excise-paid goods once sold by the
manufacturer cannot be brought back to the plant without proper
documentation and declaration made to the excise authority. This
is a very cumbersome and time-consuming process and
non-compliance may put manufacturer in the dock. For resale of
repaired or refurbished goods, both the excise and sales tax
authorities are involved and the clearing of such goods requires
documentation, certifications and declarations. Hence, such
activities are normally carried out at service centres or at the
dealers premises.

In reverse logistics, the critical strategic points in network design


are: acquisition/collection of returned/used products, testing and
grading operations, reprocessing and redistribution/disposal. For
reverse logistics to be successful, the collaboration of supply chain
is very important. Technologies such as bar coding or
radio-frequency identification (RFID) help in making reverse
logistics more effective and responsive.

15.4 REVERSE LOGISTICSA COMPETITIVE TOOL

In todays fiercely competitive market environment, customer


retention strategies play an important role. To retain the existing
customers, manufacturers are creating switching barriers by
extending value-added service to the customers.
Procedural efficiency in the logistics operations is enhancing the
service capability of the firm to satisfy the customer. To remain
competitive and differentiated, more and more firms across the
world are displaying both speed and reliability in their service
offerings, such as:

Replacing defective goods


Repairing the used product
Refurbishing the returned product
Calling back substandard or harmful goods
Disposal of product waste

The additional services mentioned above are contributing to the


competitiveness of the company operating in a regulatory
environment. They are also creating customer value by providing a
clean environment through reverse logistics services without any
extra cost to the customer. Today, corporations across the world are
leveraging reverse logistics for growth through enhancing the level
of customer satisfaction beyond the traditional boundaries of
product and service supply.

SUMMARY

Traditionally, almost all manufacturing firms focus their attention


on forward logistics activities. However, during the past few years,
because of changes in environmental laws, increased consumerism
and stiff competition in the markets, use of effective reverse
logistics as a competitive weapon became a necessity. Soft drink
manufacturers have been practising reverse logistics for glass bottle
refilling for many years. The cost advantage in reverse logistic is
possible through the economies of scale. Today, many big
corporations across the world have either developed a stand-alone
reverse logistics system or integrated the same into their forward
logistics system. The system design takes into consideration factors
such as product locating system, product collection mechanism,
documentation, product recycling/disposal centres, cost
implication and legal aspects. In developed countries such as
Germany and the United Sates, stringent environmental
regulations have prompted the corporations to develop a three-tier
product waste recycling/disposal model through reverse logistics. A
separate stand-alone reverse logistics system has been developed
by cell phone manufacturing companies for the remanufacturing of
used products. For creating switching barriers for their customers,
companies are offering value-added services to build the
competitive edge. Corporations the world over are leveraging
reverse logistics for customer satisfaction.

REVIEW QUESTIONS

1. Discuss the role of reverse logistics in the companys supply chain.


2. Reverse logistics competency is a result of worldwide attention to environmental concern.
Support your answer with illustrations.
3. How is reverse logistics used as a tool for competitive advantage?
4. Discuss the various design considerations for the reverse logistics system.
5. Explain the concept of green marketing with illustrations. What is its relationship with reverse
logistics?
6. More and more companies are inclined to develop a reverse logistics system. What are the factors
that encourage manufacturers to develop a reverse logistics system? Explain how the manufacturer benefits
from a reverse logistics system.