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Designing the Reverse Supply Chain
APICS Nashville ChapterNovember 16, 2010
Joseph D. BlackburnJames A. Speyer Professor of Management
Owen Graduate School of ManagementVanderbilt University
Nashville, TN
Joe Blackburn 2010
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What is the reverse supply chain?
All the activities required to recover a returned or used product from a customer and …
Reuse itRecycle itRemanufacture itDispose of it
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The Forward Supply Chain
RawMaterials
PartsFabrication
ModuleAssembly
ProductAssembly
Distribution Customer
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The Forward & Reverse Supply Chain
RawMaterials
Restock
Return Stream
Scrap
PartsFabrication
ModuleAssembly
ProductAssembly
Distribution Customer
End-of-Life
Disposal
Product Collection &Inspection
ProductRemfg.
Component Reuse
MaterialRecycling
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Why is the reverse supply chain important?
Sustainability
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Migrant child from Hunan province sits atop one of countless piles of unrecyclable computer waste imported from around the world. Guiyu, China. December 2001. Copyright Basel Action Network.
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Why is the reverse supply chain important?
Sustainability Regulation
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Regulation:Extended Product Responsibility
Europe: Producers are financially responsible for take-back and
recycling of batteries, packaging, vehicles and all electrical consumer products
Japan Producers are responsible for recycling cars and
electronic products US
21 states have passed product take-back legislation
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Why is the reverse supply chain important?
Sustainability Regulation Business Opportunity
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The On-line Apparel Sales Reverse Supply Chain
RawMaterials
Restock
Return Stream
PartsFabrication
ModuleAssembly
ProductAssembly
Distribution Customer
Product Collection &Inspection
Markdown
~ $22 billion
$ 3-4 billion
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Value of Returned Product Flows
Consumer Electronic Returns Exceed $2 billion annually
Construction Equipment Co. has a $2 Billion $/year used parts business
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Why is the reverse supply chain important?
Sustainability (It’s good for the planet) Regulation (It’s the law) Business Opportunity ($$$: It’s good for
business)
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The Reverse Supply Chain Poster Child
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The ‘Single-Use Camera” Closed-Loop Supply Chain
RawMaterials
ModuleReuse
PartsFabrication
ModuleAssembly
ProductAssembly
Distribution Customer
Developing
Disassembly
Inspection/Test
MaterialRecycling
Parts Reuse
(Rear & front body, switch)
Main unit, lens, flash
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Two views on the RSC
A waste stream approach:Fundamental issue: minimize the
amount of money the firm loses
A value stream approach:Recovery and reuse can be profitable
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Extracting Value from the RSC
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Activities in the Reverse Supply Chain
Product Returns
Management
RemanufacturingOperational
Issues
RemanufacturedProducts Market
Development
Timing, quantity, quality ofused products:
Product acquisition mgmtReturn rates
Develop channels,Remarket, Secondary markets,
Cannibalization
Reverse logisticsTest, sort, disposition
Disassemble Repair,
Remanufacture
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A Process Perspective on the Reverse Supply Chain
Product Returns
Management
RemanufacturingOperational
Issues
RemanufacturedProducts Market
Development
Front EndDo I have access to used products?
Back end Does anyone want to buy?
EngineCan I recover value
at a reasonable price?
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How hard are these key activities?
Product Acquisition
Reverse Logistics
Test
Sort
Grade
Remanufacture/
Refurbish
Remarketing
Product Life Extension
Jet engines Easy Easy Hard Hard Easy
Refillable Containers
Toner cartridges Easy Easy Easy Easy Easy
Tire Retreading
Commercial Easy Intermediate Intermediate Intermediate Easy
Consummer Electronic
Reuse
Cellular PhonesHard Easy Easy Easy Intermediate
Industrial Remanufacturing
Copiers Intermediate Intermediate Hard Hard Hard
Tire Retreading
Passenger cars Easy Hard Intermediate Intermediate Hard
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Product returns represent a value stream
not just a waste stream
Extracting Value from Product Returns
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The Growing Problem of Product Returns
Value of Products returned to retailers > $120 billion (and growing)
On-Line Sales produce higher return rates than Bricks-and-Mortar Sales
For time-sensitive products, much of the returned product’s asset value is never recovered: lost in the reverse supply chain
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Types of returns Commercial returns
30 to 90 day free returns policy in US Consumer Electronics returns about 8% of sales;
many not defective HP: return costs are > 2% of annual gross sales
Repair / warranty returns Leasing End-of-use returns
Cell phones: 80% replaced after first year of use End-of-life returns
Mandatory take-back in EU (WEEE)
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Time-Sensitive Product Return Streams
Short life-cycles; high obsolescence risk Returned product loses value rapidly Time delays in returns process flow are
costly & “Value of time” a key variable Examples: PCs, phones, fashion goods,
telecom equip.
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The Shrinking Pipeline for a Printer Manufacturer
15%Scrap
15% New & Warranty Pool
$150 million
15% “Low-touch”Refurbished
5% SalvagedComponents
50% Repair & Refurb.
Loss in Asset Value >$75 million
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A Printer can lose 20% of its value waiting for disposition
Replacement Stock
Sequencing Decision
ProductReturns
In Field & Return
Pipeline
Queue forInsp.&Testing
Inspection&
Testing
Repair orRefurbish
SalvageComponents
Scrap
~2 months ~40 days
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Time
Value of Returned Product ($)
T0
StartShipping
T1
BeginPhase-out
Product Return (New)
Processing Delay (t)
$ Cost of Delay
ReturnTo Stock
Marginal Value of Time
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Example: price erosion notebooksAverage price erosion laptops
all channels
0 10 20 30 40
Age (months)
Avera
ge p
rice
Quality 1
Quality 2
Price erosion: quality 1: $25 per month
quality 2: $40 per month
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Time
How does the Marginal Value of Time (MVT) influence Reverse Supply Chain Strategy?
e.g. PowerTools (Bosch)
e.g. Printers (HP)
% ValueRetained
Time-Insensitive (Low MVT)
Time-Sensitive(High MVT)
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The value of lead time reduction
HP inkjet printers (US): One day reduction between evaluation and
remanufacturing $72k One day reduction between remanufacturing and
the secondary market $79k
Bosch Power Tools: One day reduction between evaluation and
remanufacturing $11k One day reduction between remanufacturing and
the secondary market $12k
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How Should Your (Reverse) Supply Chain be Designed?
(Fisher’s Model)
Yes No
No Yes
Functional Product
Innovative Product
Efficient Chain(Cost-based)
Responsive Chain(Time-based)
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Centralized, “Efficient” RSC Design
Re-stock
Remanufacture
PartsRecovery
Scrap
ProductReturns
Retailers &Resellers
Centralized Evaluation & Test Facility
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Decentralized, Responsive Returns Network
Re-stock
Refurbish
PartsRecovery
*
Scrap*
*ProductReturns
Test & RepairFacility
Retailers &Resellers
**
Evaluation of Product
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How to maximize value recovery?
The longer it takes to put a returned product back on the market, the lower the likelihood that there are economically viable reuse options.
Cost minimization typically leads to slow and centralized returns handling and high product value erosion.
What are the design implications?
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Proposed Design Strategy Matrix for Reverse Supply Chains
SupplyChain
Centralized,Efficient
Low “time value” Product
High “time value”
Decentralized,Responsive
Match
Match X
X
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Reverse Supply Chain: Can Early Product Differentiation (“Preponement”) improve profitability?
N
R
C S
N = New or RestockR = Refurbishable UnitC = Salvageable ComponentsS = Scrap
N
R
C
S
N
R
C
S
Restock
Refurb
RecoverComponents
ScrapDisposition& TestingCenter
Field
Restock
Scrap
R
CD&T
Early Product Differentiation:
Delayed Product Differentiation:
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Under what conditions would the preferred RSC design be
Centralized & (Cost) Efficient? Decentralized & Responsive
(“preponement model”) ?
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Efficient, Centralized
Value Responsive, Decentralized
low Restock fraction high
low t (time value) high
Implications for Network Design
Economic advantage of decentralized, responsive chain increaseswith the time value of product and restock fraction
Design for “preponement” can make the decentralized model more attractive by reducing cost of field evaluation.[Example: H-P Galileo– meters the # of pages printed by a printer]
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Examples
Hewlett-Packard Printers
t ~ 1% per weekp = 33%
Bosch Power Tools
t ~ 1% per month p < 1%
Benefits of “preponement” in a decentralized,responsive supply chain are greater for H-P
than Bosch.
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ReverseSupplyChain
Centralized,Efficient
Low MVT
Product High MVT
Decentralized,Responsive
Bosch
H-P X
X
Design Strategies: H-P & Bosch
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How to maximize value recovery?
Better disposition/market allocation decisions
Remove system bottlenecks Rapid response to minimize value erosion Quant. models can help (provided the
right data are available)
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Designing the Reverse Supply Chain for Fashion Apparel
RawMaterials
Restock
Return Stream
PartsFabrication
ModuleAssembly
ProductAssembly
Distribution Customer
Product Collection &Inspection
Markdown
~ $22 billion
$ 3-4 billion
Should you encourage on-line customers to return product to a
store?
Should you make it easy to return the product?
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Example: operational management for rapid response
Notebooks returns management at HP Europe
Returned notebooks refurbished by ODM Fragmented process designed to
minimize refurbishment costs Management did not take into account
time value
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Cumulative shipments to and from the ODM over a 10 month period
0
2000
4000
6000
8000
10000A
pr-0
2
May
-02
Jun-
02
Jul-0
2
Aug
-02
Sep
-02
Oct
-02
Nov
-02
Dec
-02
Jan-
03
Vol
ume
(cum
ul.)
Sent
Received
LEAD TIME
INVENTORYTHROUGHPUT
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Process Map: flows, lead times, inventory levels
CustomersTest, Sort,Disposition
Refurbish-ment
Warehouse(Refurbished)
Un-refurbished
ODM
SecondaryMarket
Retailers2000
1000 1000
1650
2600
1000
2800
= inventory
?
LT = 1-3 d LT = 1-3 dLT > 15 d
LT = 1 m
LT = 1.7 m
LT = 2.6 m
Bottlenecks: ODM & Warehouse (re-sale)
Value lost due to erosion:
average inventory level × erosion rate
6,400 units × $25 per unit per month = $160k per month
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Flow diagram for notebook computers
DispositionLow-touch
EMRWarehouse(Refurbished)
High-touchODM
2000 2000
2600
LT = 1.4 m
LT = 1 m
1000
Warehouse(Un-refurbished)
1000
1000
1000
1000
1000
2800
LT = 2.6 m
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The effect of better disposition
INPUT(used products)
ODMrefurbishment
TEST
Low touchrefurbishment
SALES
POLICY TEST a
a-1
Price erosion 1 (same price)
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
alpha
prof
it
ODM LT = 3 m
ODM LT = 2 m
ODM LT = 1 m`
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Roadmap for reverse supply chain redesign1. Treat returns as a value stream, as opposed to a waste
stream. (Most companies focus on cost minimization…)2. Consider the reverse supply chain from end-to-end. Any
sub-process (acquisition, reverse logistics, disposition, refurbishment and marketing) can become a system bottleneck.
3. Identify and develop the right performance metrics and track them systematically.
4. Start by constructing simple models; pay particular attention to the economic impact of time.
5. Use the insights obtained from the models to understand the economic impact of alternative designs and policies.
6. Align the organizational structure and the incentives/reward systems to unleash the potential economic profit from the reverse supply chain.
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Summary
Product returns represent a value stream, not just a waste stream.
Product’s time-value is key design variable for reverse supply chain.
“Preponement”, rather than postponement, increases asset recovery in the reverse supply chain.
Joe Blackburn 2010
