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Every day one is made aware of the current state of the economy - with an ever growing population and a large portion of South Africa's GDP being attributed to export market it is becoming increasingly important to conserve the resources and raw materials that South Africa has been so richly blessed with (Vogt, Pienaar and de Wit, 2005). This coupled with the fact that small and large businesses alike are taking every possible measure to make cuts and savings on products and services, to give themselves some sort of advantage in a highly competitive environment is making the use of reverse logistics extremely important.
This report will attempt to explain what reverse logistics is, and elaborate on different areas of reverse logistics .The importance that effective management in reverse logistics, more specifically the returns process plays in business today will also be discussed. Furthermore an attempt will be made to identify possible strategies to improve to reverse logistics function of businesses.
The approach of this report will be that of the use of literary sources to help understand certain concepts, and approaches so that a holistic view of reverse logistics role in a business can be seen. Case studies and interviews will also be used to illustrate certain points.
What is reverse Logistics?
Reverse logistics - simply put, incorporates all the activities of logistics in reverse.
Therefore according to Grant, Lambert, Stock and Ellram (2006) reverse logistics can be defined as:
" 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."
If the activities found in the above definition are managed efficiently, the long term profitability of the business should be affected positively. (Grant, Lambert, Stock and Ellram, 2006)
In the distribution process one will find that there is the flow of products, Information and money - this is the same for the reverse distribution process, only the direction that the above mentioned are flowing in changes. For the sake of this report the focus will remain upon the movement of products. (Grant, Lambert, Stock and Ellram, 2006)
Flow of Products:
In a logistics system raw materials will flow from the point of origin through the various channels in the supply chain until it reaches the end user as the end product. At some point in this process it could happen that products may have to be return due defects in quality, incorrect volumes, product recalls or disposing of waste materials that are a result of the manufacturing process - this is what triggers the reverse flow of products. These are in essence non value adding activities and should be well managed to reduce any costs and in the long run improve profitability. (Vogt, Pienaar and de Wit, 2005)
The reusable items that flow through the supply chain are value carriers and hold value of their own. Glass coke or beer bottles, gas cylinders and the like are examples of value carriers. The inefficient and ineffective management of these items can lead to either, a surplus or shortage, either way a negative impact will result. Massive cost savings can be realized with efficient management. (Vogt, Pienaar and de Wit, 2005)
The Importance of Managing Reverse logistics Effectively
Reverse logistics management is becoming more and more important within businesses especially with the current economic climate. Businesses should be looking to cut cost while creating a sustainable customer base. This can be done by effectively managing reverse logistics.
Firstly it is important to assign a reverse logistics manager. Having a customer service manager, returns manager, remarketing and all different departments, all functioning separately to execute reverse logistics can only cause confusion and redundancy. Assigning a manager who controls all activities that fall within the reverse logistics umbrella is the starting point to simplifying the process of reverse logistics.
The next step to efficiently managing reverse logistics is to implement procedures and structures that are simple and effective. It is important not to deviate from the procedures that have been put in place by the organization.
Below (fig 1.1) is an example of a returns process.
Simple Returns Process Model. Fig 1.1
Gate keeping is one of the most important activities in managing reverse logistics. It is the process of assessing whether the product being returned should enter the reverse flow or be disposed of - this screening of products can reduce unwanted costs significantly. It is important to train employees in gate-keeping, so that they are empowered to make well informed decisions. Good gate-keeping practices will go a long way to managing reverse logistics more efficiently (http://www.slideshare.net/anandsubramaniam/reverse-logistics-1579341- 22 Sept 2010)
Reverse logistics and customer services:
Grant, Lambert, Stock and Ellram (2006) define customer service as:
"â€¦ a process which takes place between the buyer, seller and third party. The process results in a value added to the product or service exchanged. This value added in the exchange process might be short term as in a single transaction or longer term as in a contractual relationship. The value added is also shared, in that each of the parties to the transaction or contract are better off at the completion of the transaction than it was before the transaction took place. Thus, in a process view: Customer service is a process for providing significant value added benefits to the supply chain in a cost- effective way"
Customer service can be broken down into three groups: Pre-transaction, transaction and post-transaction. The point where customer service and reverse logistics begin to overlap is at the post-transaction group. The elements of this group are:
Installation, warranty, repairs and parts
Customer claims, and returns
Temporary replacement of products
(Grant, Lambert, Stock and Ellram, 2006)
The Link between customer service and logistics is an important one and clear, constant communications between marketing and reverse logistics functions is imperative to managing the process efficiently and effectively. Good customer service can turn a dissatisfied customer into a satisfied one. This can help in creating a sustainable customer base.
Effectively managing reverse logistics results in:
Reduction of costs
Reduction in wasted Time
Improved customer satisfaction
In the following case study the effect of poor management and lack of processes and procedures. (http://www.blumberg-advisor.com/Reverse-Logistics-Today/bid/19682/How-To-Market-Reverse-Logistics-7-Steps-To-Success, 2 Aug 2010)
Instalek case study:
Instalek specializes in the sourcing, procurement and importing of machine spares for industry. One of the sub divisions of Instalek manufactures and sells industrial coding printers.
The following is a short account of Instaleks dealings with one of its overseas based clients.
One of Instaleks clients returned a printer recently and were informed by the clients that the printer heads where not working properly. This is not an uncommon situation so Instalek took out the printer heads and disposed of them. They then proceeded to manufacture and install brand new ones. Once installed the printer was tested to see if the new heads were in working order, only to find that the problem wasn't the heads in the first place. Instead the printer had the wrong ink installed.
Not only did this waste time for Instalek. It also wasted thousands of rands on manufacturing new printer heads. Furthermore Instaleks clients faced downtime resulting in significant financial loss and severe dissatisfaction.
This could have all been avoided by simply testing the printer first, and identifying that the printer had the incorrect ink.
So it can be seen that having poor, or no reverse logistics management and processes in place can cost you time, money and possibly risk losing clients.
(C.Gouws, 2010, pers.comm.10 Aug)
Improving the reverse logistics process:
When looking at improving reverse logistics in a company it is critical that all relevant parties understand the importance of reverse logistics in the context of the business. This recognition alone can bring about improvement in efficiency. It is important to map out the current reverse logistics process so that a holistic view of the relationships and different components within the business can be seen. (http://mhmonline.com/facilities-management/mhm_imp_2139/ - 15 Sept 2010) Now that it can be seen what is taking place in the reverse logistics process, objectives a company want to accomplish with regards to reverse logistics should be identified. (http://www.bizforum.org/whitepapers/CSC-3.htm - 2 Aug 2010)
Some common objectives identified by Chuck Poirier are:
Improved customer satisfaction and loyalty.
Reduced repair, replacement or re-shipment costs.
Gain feedback from the process to eliminate root cause.
Improve understanding of the reasons for returns.
Utilize common systems and automate the returns process to the extent possible.
Differentiate the firm's services from those of the competition.
(http://www.bizforum.org/whitepapers/CSC-3.htm - 2 Aug 2010)
It is now important to bridge the gap between what is currently being done to accomplish these objectives and what must be done to meet them. (http://www.bizforum.org/whitepapers/CSC-3.htm - 2 Aug 2010)
Centralized Returns Centers:
Centralized Returns Centers (CRC's) are facilities that are completely devoted to handling the returns of goods. Stores will send their returned products to either an outsourced CRC or in some cases an organization may have internal CRCs.
According to Rogers and Tibben-Lembke (1998) in a centralized system
"â€¦All products for the reverse logistics pipeline are brought to a central facility, where they are sorted, processed, and then shipped to their next destinations. This system has the benefit of creating the largest possible volumes for each of the reverse logistics flow customers." (Rogers and Tibben-Lembke, 1998)
Reverse Logistics can be improved through CRC's by:
Increasing Standardization and Information visibility: By introducing CRCs standardization of processes will occur, thus making it significantly easier to identify mistakes and errors and then take the necessary action in correcting them. With the increase in standardization comes simplicity, this brings about consistency in the reverse logistics process as well as improved visibility.
Improving space utilization: By sending Returned products to CRCs instead of storing them in the actual store a more efficient usage of space can occur. Especially in retail stores where every square meter of space should be allocated to Products that can be sold.
Cost savings due to labour: Less labour is needed to complete tasks by introducing CRC's - thus cutting costs.
Cost savings due to transport: Transport Costs are generally the largest cost component of Logistics. The same goes for reverse logistics. When CRC's are involved, trucks can be running on a schedule, picking up all returned products from stores. This will largely reduce transport costs due to consolidation of freight.
Enhanced customer service: by having an efficient returns system in place customer service is enhanced. For example making use of a CRC the time a product spends in the reverse pipeline is minimized - allowing stores to return goods to the customers more quickly or offering credit to customers.
Expediting the reverse logistics process: without the use of CRC's , retailers store all returned products, often leaving them for a large amount of time before sending unorganized, large batches of returns to the manufacture. This resulted in returned products loosing value. With CRC's the disposition time can be reduced greatly. This can be seen for example by having regular "pick-ups" of returned products from retail stores as opposed to sending products back all at once in large batches
(Rogers and Tibben-Lembke, 1998)
The danger of having CRC's is that Employees become complacent with regards to Gate-keeping and simply begin to ignore it completely, allowing any products into the reverse logistics process. It is important to note that the need for properly trained employees who are empowered to make decisions regarding the Gate-keeping is extremely important and cannot be over looked. If all returned goods from a store were sent to CRCs without being inspected first, it could happen that many products may need to be thrown away. This obviously is not efficient, for example unnecessary transport costs have been incurred by first transporting the product to a CRC, Only to be thrown away. (Rogers and Tibben-Lembke, 1998)
Rogers and Tibben-Lembke (1998) have identified some Benefits of having CRCs:
Simplified store procedures
Improved supplier relationships
Better returns inventory control
Improved inventory turns
Reduced administrative costs
Reduced store level costs
Refocus on retailer core competencies
Improved management information
(Rogers and Tibben-Lembke, 1998)
From the above information it can be seen how the use of Centralized returns centers can help reverse logistics run more efficiently.
Wood bender case study:
Wood bender - a company that manufactures chairs is based in Somerset West was founded in 1988 and is owned and managed by Charles Mast. Wood bender find their niche in their ability to bend wood. There is no other company in South Africa and very few in the world who have these capabilities. Any competitor that requires Bent wood for their furniture must look to outsources internationally. This allows Woodbender to manufacture products at a much lower cost, increasing profit margins significantly.
This business is built upon "Making sure the customer gets what they want" and if there is a problem with any of the products they can be returned no questions asked. Mr. Mast stated that approximately 70% of Woodbenders returns come from their clients who are most profitable to the business. It is by this logic that Woodbender places utmost importance on completing the returns process in a timely manner - whether it's for products to be refurbished, repaired or replaced.
Charles Comments on the importance of satisfying customers.
"One of the perks of bending our wood internally is that when we get returns we can manufacture a new part immediately, saving time and ultimately making the client happy. In this way we have created a competitive advantage that has led to a sustainable customer base"
Upon visiting Woodbenders factories it was discovered that one out of the five facilities is dedicated to returns - all returned products entering into the reverse logistics process get sent to this Centralized returns center(CRC), where they are then dealt with accordingly. The way that Woodbenders run their returns process has a focus on simplicity.
Wooderbenders returns process:
Client contacts Woodbenders with regards to faulty product, and depending on the location of the client,
The products get shipped to Woodbenders CRC where they are then inspected.
Or a representative from Woodbender will be sent out to inspect the product at the clients site - if the products in question are then deemed fit to enter the reverse flow, they are either shipped to the CRC or the company that Woodbenders outsource their upholstery from.
Once the problem has been identified the next course of action is rectify the error. A new part is manufactured, and the product is reassembled.
The finished product is then returned to the client from the CRC or the outsourced upholstery company
It is through simplifying the returns process by using a CRC and a "customer satisfaction" based returned policy that Woodbender is able to create customer loyalty.
At the conclusion of an interview with Mr. Mast, he comments on what principles Woodbender use in running an efficient returns system:
"The problem with most businesses today is that Reverse Logistics isn't paid enough attention to. We make sure of two things, one that our returns are handled as quickly as possible, and two, that we minimize the costs of returns as far as possible"
The two principles applied by Woodbender should be a focus of any organization.
(C.Mast, 2010, pers.comm, 20 Sept)
A survey done asking the businesses involved to rate the importance of reverse logistics shows that sixty percent of all business surveyed view reverses logistics as unimportant and therefore dedicate little time and few resources to this function of logistics. This is a view that must be corrected and until businesses view Reverse logistics as important, time, money and valuable resources will be lost, furthermore without paying proper attention to the link between customer service and reverse logistics it will be difficult to build a sustainable customer base.
Having the reverse logistics function well managed is of utmost importance. Employees handling returns should be well trained in policies and procedure pertaining to reverse logistics and empowered to make decisions by management. Some main benefits of effectively managing reverse logistics are reducing costs, saving time and improving customer satisfaction.
It is important to take a holistic view of the supply chain and see what areas are causing pain with regards to reverse logistics. Once this has been done it is important to seek ways to improve on these areas. Making use of CRCs goes a long way in improving the reverse logistics process by increasing standardization, saving costs from labour and transport, enhancing customer service and speeding up the returns process.