What Is Reverse Logistics Business Essay


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 origin to the point of consumption for the purpose of Conforming to customer requirements.

To be more precise, reverse logistics is the process of moving goods from their final destination for the purpose of capturing value, or proper disposal. (Rogers and Tibben-Lembke)

Typical reverse logistics activities would be the processes a company uses to collect used, damaged, unwanted (stock balancing returns), or outdated products, as well as packaging and shipping materials from the end-user or the reseller. (Rogers and Tibben-Lembke)

The science of reverse logistics includes return Policy administration, product recall protocols, repairs processing, Product repackaging, parts management, recycling, product disposition management, maximizing liquidation values and much more. (Curtis Greve and Jerry Davis)

And yet reverse logistics seldom receive much attention - that is, until something goes wrong. Many executives go out of their way to avoid dealing with returns because it can be ugly and is thought of as nothing more than a cost of doing business. What many fail to realize is that the average manufacturer will spend 9% to 15% of total revenue on returns, according to a 2010 Aberdeen Group study. They are often unaware of the impact returns management can have on their customers, their resources or their bottom line. In fact, improving reverse logistics can help company increase revenue up to 5% of total sales. If ignored, critical reverse logistics functions can cost companies millions in lost profits due to damaged customer relationships and external liabilities that could have an enormous impact on their business. Effectively managed, however, reverse logistics can enable organizations to find hidden profits, improve customer satisfaction and minimize liabilities. (Curtis Greve and Jerry Davis)

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How is Reverse Logistics different from forward logistics?

Reverse logistics is different from traditional logistics or forward logistics, as forward logistics is mainly concerned with movement of goods from a production line through a distribution center and retail outlets and finally to the end user which a planned activity.

Reverse Logistics in contrast follows a different flow, the main difference is that reverse logistics is not a planned activity like the forward logistics but it is in response to actions by consumers or downstream channel members.

Reverse logistics also includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls, and excess inventory. It also includes recycling programs, hazardous material programs, obsolete equipment disposition, and asset recovery. (Rogers and Tibben-Lembke)

Typical reverse logistics activities would be the processes a company uses to collect used, damaged, unwanted, or outdated products, as well as packaging and shipping materials from the end-user or the reseller. Once a product has been returned to a company, the firm has many disposal options from which to choose. If the product can be returned to the supplier for a full refund, the firm may choose this option first. If the product has not been used, it may be resold to a different customer, or it may be sold through an outlet store. If it is not of sufficient quality to be sold through either of these options, it may be sold to a salvage company that will export the product to a foreign market. If the product cannot be sold "as is," or if the firm can significantly increase the selling price by reconditioning, refurbishing or remanufacturing the product, the firm may perform these activities before selling the product. If the

Firm does not perform these activities in-house, a third party firm may be contracted, or the product can be sold outright to a reconditioning/remanufacturing/refurbishing firm.

Subject background.

Reverse logistics has been around us for a long time. According to Walden (2005), reverse logistics‟ history can find its root from the American Civil War. Of course there would be other literature that record reverse logistics activities even earlier than American Civil War, but these activities were not systematically recorded or widely recognized. To better understand reverse logistics, We will have to look into some of the important events in the reverse logistics history. At the end of the American Civil War, General William T. Sherman realized that the nature of his armies' campaign would be a matter of supply and mobility and that his operations through hostile territory would be difficult (Overby, 1992). He faced intricate task of supplying his soldiers on the march. Today's retail returns issues find their roots in the customer service policy of Montgomery Ward's (Walden, 2005). Montgomery Wards is an American furniture shop established since 1872 their policy was if the customer is not 100% satisfied, they could bring it back for a full refund.

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Industry Background

Size of Reverse Logistics

A conservative estimate is that reverse logistics accounts for a significant portion of U.S. logistics costs. Logistics costs are estimated to account for approximately 10.7 percent of the U.S. economy. However, the exact amount of reverse logistics activity is difficult to determine because most companies do not know how large these are. Of the firms included in this research, reverse logistics costs accounted for approximately four percent of their total logistics costs. Applying this mean percentage to Gross Domestic product (GDP), reverse logistics costs are estimated to be approximately a half percent of the total U.S. GDP. Delaney estimates that logistics costs accounted for $862 billion in

1997. The estimate of this research, based on the respondent sample, is that reverse logistics costs amounted to approximately $35 billion in 1997. The magnitude and impact of reverse logistics varies by industry and channel position. It also varies depending on the firm's channel choice. However, it is clear that the overall amount of reverse logistics activities in the economy is large and still growing. Within specific Industries, reverse logistics activities can be critical for the firm. Generally, in firms where the value of the product is largest, or where the return rate is greatest, much more effort has been spent in improving return processes. The auto parts industry is a good example. The remanufactured auto parts market is estimated (by the Auto Parts Remanufacturers Association) to be $36 billion. For example, 90 to 95 percent of all starters and alternators sold for replacement are remanufactured. By one conservative estimate, there are currently 12,000 automobile dismantlers and remanufacturers operating in the United States. Rebuilding and remanufacturing conserves a considerable amount of resources. According to the ARPA, about 50 percent of the original starter is recovered in the rebuilding process. This may result in saving several million gallons of crude oil, steel, and other metals. ARPA estimates that raw materials saved by remanufacturing worldwide would fill 155,000 railroad cars annually. That many rail cars would make a train over 1,100 miles long. (Rogers and Tibben-Lembke)

Reverse logistics didn't catch much attention of the business world until the last decade. In early 90s, the Council of Logistics Management published two studies on reverse logistics. The first was written by J. R. Stock (1998) which systematically reported on how to set up and how to operate reverse logistics programs, his book also tried to discover the potential of reverse logistics. Rogers & Tibben-Lembke (1999) however, presented an extensive collection of various reverse logistics business statistics data categorized by industry types. For example, the magazine publishing industry has the highest reported returns (50%). Magazines have a short shelf life; if they can't be sold out close to the publication/cover date, they have to be returned or disposed. Rogers & Tibben-Lembke (1999) also reported that other industries with high average returns include book publishers (20-30%), catalog retailers (18-35%), and greeting cards companies (20-30%). Besides above mentioned studies, some other articles focus the optimization and management of reverse logistics appeared on the characteristics of reverse logistics for remanufacturing systems. Although the Council of Logistics Management has already given a definition to reverse logistics, reverse logistics has been evolving since the date it was recognized, as a result, its real definition vary largely on what company or industry segment intended to explain it (Krumwiede & Sheu, 2002). Dowlatshahi (2000) described a holistic view of reverse logistics with 11 factors; he further divided these factors into two main categories: strategic factors and operational factors. Strategic factors consist of strategic costs, overall quality, customer service, environmental concerns, and legislative concerns. The operational factors consist of cost-benefit analysis, transportation, warehousing, supply management, remanufacturing and recycling, and packaging (Dowlatshahi, 2000).

Telecommunications Equipment

As the telecommunications and wireless landscape constantly evolves and new technologies

rapidly emerge, companies in this industry are challenged with declining customer

retention rates, falling asset recovery rates, and increasing inventory carrying costs. In

this industry (as well as in high tech, consumer goods, and medical device manufacturing)

an 80% to 85% asset recovery rate is common. Manufacturers that fail to recover

valuable products and parts from the field must write off the value of these assets against

the business. And assets that do not get recovered cannot be refurbished and placed back

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into inventory - thereby impacting the amount of value that manufacturers are able to

reclaim from damaged products and parts. In fact, nearly one-third of polled companies

reported that asset recovery was a top challenge for their firms - and nearly 30% of

telecom and utilities firms are currently outsourcing this aspect of reverse logistics.

The mobile phone market is in turmoil. After years of continuous growth, the global economic downturn has had a marked effect on sales in both developing and mature markets. With major pressure on revenue and margin, service organizations are being forced to cut costs rapidly, with the danger that they will do so at the detriment of customer service, increasingly the key market differentiator. The device landscape has changed markedly with the move to smart-phones and with this a rapid change in the manufacturer landscape.

Five years ago, after sales was viewed by many operators & retailers as an unfortunate by product and cost of doing business. Previously ignored and rarely truly understood and managed, it is essential today that operators & retailers start to see their after sales operations as both a considerable cost risk and a potential customer winner. (David Cope, MGH Consulting)

Medical Device Manufacturers

Due to the criticality of the equipment they service, medical device manufacturers must

ensure that machine downtime is minimal. As such, these firms are tasked with managing

inventory levels effectively to ensure optimum availability of service parts as well as efficiently

triaging returns and rapidly putting repaired parts back in the supply chain.

Literature Review

"Reverse Logistics is a process whereby companies can become more environmentally efficient through recycling, reusing and reducing the amount of materials used. Viewed narrowly, it can be thought of as the reverse distribution of materials among channel members. A more holistic view of Reverse Logistics includes the reduction of materials in the forward system in such a way that fewer materials flow back, reuse of materials is possible and recycling is facilitated". (Carter and Ellram, 1998, p. 85). The fact of reducing materials used in the processes is according to some authors (Rogers and Tibben-Lembke, 1998) considered as Green Logistics and not Reverse Logistics, although the same authors agree in that the bound line between both concepts is not always clear. On the other hand, Carter and Ellram seem to keep tight to the same channel in which the forward flow was generated, against the more broad view in which other companies outside the business chain could be favoured from the returns flows.