Reverse Logistics as Competitive Strategy
By Edward J. Marien -- Supply Chain Management Review, 3/1/1998
Conventional wisdom holds that the flow of goods in a supply chain typically ends with the consumer. In reality, however, a number of supply chain functions occur after final distribution of the product to the consumer (as suggested by the simplified supply chain schematic in Exhibit 1). Yet even waste disposal, probably the most basic post-consumer activity, is nowhere to be found on most supply chain flowcharts.
Within this evolving environment, many leading businesses now realize that a reverse logistics system—combined with source-reduction processes—can be used to gain competitive advantage. As they take responsibility for post-consumer waste, they are striving to generate revenue or achieve cost savings—or at a minimum, keep from losing money from regulatory compliance.
Making Reverse Logistics ProfitableA number of organizations are capitalizing on reverse logistics opportunities. Companies such as Eastman Kodak (reusable cameras), Hewlett-Packard (printer toner cartridges returned for refilling), and Sears (25-percent reduction in packaging) have implemented successful reuse and recycling programs.2 These initiatives not only have reduced the amount of waste fed into the supply chain and the landfills, but also have lowered operating costs for these companies.
All of these organizations have begun to think of the reverse logistics process as "investment recovery" as opposed to simply minimizing the cost of waste management.3 They have been able to recover their cost investments from one or more of the following areas: raw material and packaging procurement, manufacturing, waste disposal, and current and future regulatory compliance. Furthermore, many of the programs implemented by these leaders bring the added benefits of improved employee morale and public image.
For these companies, the benefits outweighed the costs of their reverse logistics and source-reduction programs. Yet cost is a real issue. At multiple points in the typical supply chain, materials and supplies flow back up the chain or to waste sites. All of the "REs" associated with these reverse flows bring cost implications. Returns and recalls are obvious examples. But other "REs" include refusals, reworks, recyclables, rejects, reprocessed overruns, reuse, remake, redo, residues, reorder, resale, and returnable shipping containers and pallets.
These "REs" can be a real operational nightmare for companies—costly to process and administer. The direct and indirect costs of correcting them can be staggering. In some industries, such as direct catalog sales, returns alone can run as high as 20 percent of sales.
Supply chain professionals must deal with the strategic issues of how to handle these reverse logistics challenges at various points in the supply chain. One way is to shift the responsibility by minimizing the cash flow into the capital equipment, operating systems, facilities, and people needed to support such activities. Through this "cost minimization" approach, firms spend money on their primary business and on logistics activities that directly serve customers, ignoring or shifting costs of the "REs" to customers, consumers, government, and society.
Another approach is to passively wait and be regulated into action. Companies can satisfy customer demands and government regulations by acting in a passive, "follow the rules" manner. Although this approach minimizes costs, it continues to shift the burden of waste disposal to the general public.
A more proactive alternative attempts to stimulate customer demand and reduce the cost to both the company and to society. As the automotive industry's experience has demonstrated, battery returns can be a means of reducing waste management costs, while at the same time enhancing customer satisfaction and lowering production costs. By recycling 90 percent of the lead from used batteries, manufacturers have kept demand for new lead in check, thereby holding down costs to consumers.
Another proactive strategy is to reduce the amount of materials used in producing and delivering products. The computer industry has had some success here by developing smaller and more powerful products. Less material is used in producing and packaging the goods; meanwhile, logistics costs drop along the supply chain. This source-reduction strategy benefits all supply chain members as well as consumers.
One more highly effective strategy is to reengineer how business is conducted. Through this "paradigm shifting" approach, firms step back and take a hard look at what values reverse logistics processes can add for consumers specifically and society in general. An insightful book on this subject is Jeremy Rifkin's The End of Work. The author identifies activities that are changing the way in which business is conducted and discusses the impact on supply chain activities and costs.
Rifkin offers a number of examples to support his thesis. One describes how music production companies now tap into communications systems to download new CD releases to computers in retail outlets.4 In these micro-production retail outlets, consumers select the new release they want. A blank CD is sourced, the recording is made, the promotional package jacket is printed in color, and the CD is assembled for sale. Logistics costs drop sharply as local, flexible micro-manufacturing costs are increased. Think about the impact of this development on inventory costs and any close-out costs.
Industry Segments React in Different WaysAs these reverse logistics and waste-reduction strategies go from passive to active, they increase value for customers and build loyalty. With consumers becoming more concerned about the environment, firms must look beyond their shipping and receiving docks. They can gain real competitive advantage by rejecting the conventional notion that once the product is out the door, waste management becomes somebody else's problem.
The following section shows how some industries are strategically allocating resources to respond to the reuse and recycling imperative. The classification scheme identified below was developed as a means of identifying how different types of companies are responding to the environmental challenges. The following six categories of companies were identified:
Category A—high-technology companies characterized by high R&D expenditures, low cost of goods, and low logistics costs as a percentage of sales. Firms in this category—such as Eastman Kodak, Hewlett-Packard, and Motorola—have invested heavily in basic R&D for new product development and in process manufacturing R&D. These investments are leading to new products that use less material than the products they replace. And this, in turn, has led to less waste generation and lower logistics costs.
One interesting development finds film and digital processing moving closer to point of need or use, thereby reducing waste generation and improving customer service. Localized film processing has sped up picture processing and reduced costs. Retail clerks now operate in-store micro-production centers, saving transportation, logistics, and operating costs.
Category B—high-technology firms characterized by rapid product obsolescence, high costs of goods sold, and medium to high logistics costs. With their emphasis on minimizing costs to increase margins, these firms tend to leave disposal to consumers and salvagers. They typically concentrate on distributing to channel members and consumers, who then must deal with product disposal themselves. Among the companies in this category are Compaq, Dell Computer, and Gateway 2000.
Category C—high-technology firms with high R&D expenditures, low costs of goods sold, and low logistics costs as a percentage of sales. These companies typically are experiencing radical change. Companies in this category, which includes IBM, are moving toward smaller processors with lower logistics costs. In the process, they are using fewer resources to distribute goods. These firms generally have less product replacement in comparative time periods than Category A and B firms.
Category D—companies characterized by high-end consumer products shipped direct-to-consumer; low to medium costs of goods sold as a percentage of sales; and low R&D expenditures, but high logistics costs. These firms, which include catalog companies such as Lands' End and Spiegel, are faced with product returns that run 10 to 20 percent of sales. Once the sale is finally complete, the consumer is responsible for product disposition, with many of the items passed on to charitable organizations for reuse. Wastes from shipping materials are minimal. The main challenge is to deal with the after-market returned goods, a costly activity. Competitive advantage lies in knowing how to minimize the costs of returned goods and make it easy for customers at home to "shop" remotely for quality goods. These firms compete with local retail outlets, which make it convenient for consumers to shop for and return goods.
Category E—firms selling low-end consumer durables with high costs of goods sold, high potential for polluting the environment, and relatively low basic and process R&D expenditures. These companies are highly motivated to find ways of dealing with the after-market. Indeed, most have been regulated into action. Because of the high costs of goods sold, these industries have established systems to reuse or recycle products in manufacturing processes. Tire and battery manufacturers are among the companies in this category that have done this successfully.
Category F—firms with products that incur low costs of goods sold, relatively low R&D expenditures, medium to high logistics costs, and comparatively little change. These firms generally exhibit little motivation to proactively manage wastes. They tend not to deal with reverse logistics issues until regulated into action. Among the companies included here are paint manufacturers and producers of beverage containers and shipping, packaging, and unitizing materials. As they bear the brunt of increased regulation, however, these organizations then become highly motivated to manage the after-market to capture and re-use materials in the production process.
Paint Industry Poses Special ChallengeWhat steps are specific industries within these broad categories taking to develop and implement reverse logistics and waste-reduction strategies? To address this question for one such business sector—the paint industry—a research project was conducted at the University of Wisconsin in conjunction with the Sherwin-Williams Company (SW), a leading paint manufacturer. The team's objective: To investigate alternative reverse- logistics strategies pertaining to the aftermarket for empty paint containers and residues.
In selecting an industry not historically known for its proactive approach to waste management and conservation, the team sought to assess progress across a number of key activity areas. What strategies have firms in the paint industry adopted on their own to enhance the environment and reduce wastes? What have they done in response to government regulations? What basic process changes have occurred and what strategies can firms with similar characteristics pursue?
The research began with a review of waste-management literature from the public and private sector. Team members then met with Sherwin-Williams' employees at corporate headquarters who were addressing waste-management issues in post-distribution markets. During the initial research and information-collection phase, the team also conducted on-site plant and distribution center visits to review the company's conservation and environmental control practices.
The research methodology included limited benchmark investigations of other industries. Specifically, the team documented reverse logistics findings related to consumer and industrial vehicle tires; vehicle batteries; motor oils; alcoholic, soda, and dairy beverage containers; electronic equipment; and paper and corrugated wastes. Current practices at the retail outlets also were documented.
Early in the investigation, the study team decided to focus on latex water-based paints. With SW and other paint companies strategically shifting more product development from solvent- to water-based paints, this seemed to be the logical focal point. Disposal of solvent-based product, moreover, already is tightly regulated and many reverse logistics programs for these products are well under way.
As with many business sectors, the paint industry has been working to minimize the impact of its products on the environment, focusing primarily on the manufacturing processes. Water-based paints—which are biodegradable and not harmful to the water supply—have been substituted for solvent-based products wherever feasible. In the Original Equipment Manufacturer (OEM) durable markets, for example, electrostatic powder processes now are used in coating automobiles, tractors, appliances, lawn equipment, and other products. This means less waste from the painting process as well as reduced air and ground pollution. Furthermore, recycling of the water used in manufacturing reduces both water usage and minimizes the potential for waterways and ground water pollution. In addition, the industry now is reworking paint overruns and residues back into the manufacturing processes.
These are among the examples of how paint manufacturers have responded to more stringent environmental and conservation regulations—while demonstrating a social responsiveness and a desire to reduce costs. Yet while the industry has made important strides, it recognizes that even more needs to be done. The most pressing challenge revolves around what to do with those empty and partially filled cans, pails, and drums after the sale and use of products. Exhibit 2 depicts the typical flow of goods from the suppliers to the consumers. Full paint containers flow through various marketing channels and supply chains to Do-It-Yourself (DIY) painters and to Professional Paint Markets (PPM). Currently, the vast majority of the empty containers and applicators end up in landfills and the liquid residuals down the sewers.
As part of the effort to document this trend, the study team identified four segments of water-based latex paint residues and wastes:
- Segment 1—production overruns or unsold latex in the distribution channel. The Sherwin-Williams representatives on the team felt that the industry had the mechanisms and infrastructure in place to handle product in this segment. The unused, uncontaminated paint could be transshipped to other stores, returned to plants for opening and reintroduced into manufacturing operations, or sold to salvage markets for sale in volume at reduced prices.
- Segment 2—full cans of possibly contaminated paint that purchasers had returned to dealers. Though some of this paint was already tinted to user specifications, lenient customer-service policies allowed for return. Product in this category was either sold in the stores at reduced prices or sold to the salvage market. Neither alternative addressed the problem of cans and containers ending up in landfills.
- Segment 3—partially filled cans of leftover paint that users had stored for years. The shelf life of most latex paint is three years—less if stored in unheated garages in cold climates. Industry surveys show, however, that many users keep old paint in rusty cans in their basements or garages for more than 20 years.
- Segment 4—empty cans, plastic pails, and drums. Steel and metal composition drums with capacities of five gallons or more can be readily recycled, and thus were not included in the study. Empty tin cans can be salvaged for their metal content, though many metal recyclers do not want to deal with paint cleaning costs. Plastic pails are rarely recycled because of their composition and low recycling ratings. Most paint cans and plastic pails end up in landfills, therefore, taking up space and increasing disposition costs for local government.
Most states and local communities still allow residential and commercial painters to trash their Segment 3 and 4 containers and residues in landfills, providing that empty and partially filled containers are first opened and dried. (A notable exception is the Canadian province of British Columbia, which has barred paint and containers from landfills.) Yet state and local agencies have begun implementing landfill regulations forcing manufacturers and channel members to take responsibility for the reverse logistics of their paint products.
These actions include:
- A ban on landfilling, requiring users to sort out the cans for user-site pickup.
- A ban on landfilling, with local agencies establishing designated drop sites within their communities. Manufacturers and local agencies then are required to establish a disposition process. (This is similar to the practice of returning used motor oil to designated drop-off sites.)
- A ban on landfilling, requiring dealers to establish a can deposit program. Users return the containers to the stores, which are responsible for disposition. Many states currently have a deposit program for beverage containers.
To illustrate how paint wastes can be managed, Exhibit 3 depicts scenarios in which Segment 3 and 4 wastes (empty or partially filled containers) are picked up at the usage sites. The reverse logistics strategies involve the flow of paint containers and residues to a recovery center that sorts the materials and markets them to one or more of the following: salvagers that recapture the cans and residues for waste processes such as can processing; waste-to-energy or waste-to-elements recyclers; brokers that sell to the scrap metal and plastic markets; and reprocessing centers that blend leftover product into "green" paints used in limited applications.
Note: The accompanying glossary of terms will be useful in identifying the players and the processes in these two scenarios.
Under either scenario presented, source-reduction strategies continued to surface as the most promising alternative for minimizing wastes and environmental effects while gaining possible competitive advantages. The basic source-reduction principles entail:
- Making things smaller and lighter, thus resulting in lower logistics costs.
- Minimizing production and distribution operations to reduce the amount of waste materials generated.
- Reusing materials and containers more than once.
- Substituting materials that are environmentally friendlier.
These source-reduction strategies actually can increase end user satisfaction while reducing costs and wastes. Examples include Johnson Controls' initiative to make batteries that are just as powerful as—yet only half the size of—the products they replace. Similarly, Sears' packaging reduction program, which cut the amount of shipping packaging in the supply chain by 1.5 million tons, saves the retailer approximately $5 million annually in procurement and disposal costs.5
The study team looked at source-reduction strategies from the customer's perspective, considering paint user values, wants, and needs. It began by investigating user buying and storage habits. The present paradigm is to sell paint to DIY users in gallons and quarts and to PPM users in five-gallon plastic pails. Increasingly, this product is being sold in retail outlets that have become mini-production sites. Through computer-controlled mixing, these outlets can provide a wide range of colors from several standard paint bases.
To paint a room, a user most often buys more than one gallon. Depending on room size, previous paint coatings, and the desired shade of paint, a user may need 1.5 to 2.5 gallons, for example, to get the job done. The user typically washes the excess latex from the applicators, sending small residues down the drain, and the can or pail is dried for disposition. Leftover paint usually is stored somewhere in the house or garage.
Why not provide a closer estimate of paint needs in other than one-gallon or quart containers? Why not use returnable containers and give the user a small plastic bottle of leftover paint for needed touchups? How about the retailer selling the paint to commercial users in returnable containers as is now done in many European countries? Many paint manufacturers already provide OEMs with liquid paints with plastic bladders from which the paint is sucked out—much like toothpaste from a tube. Though the bladders still are landfilled, they take up much less space than solid containers.
To make these kinds of source-reduction techniques work, users would be required to get fairly detailed specifications on the job to be done. The dealer would estimate the needed amount of paint, mix it, and fill a three-gallon bucket, for example, or five-gallon pail fitted with a plastic bladder. The user would then take the paint and applicators home, and after completing the job, would return unused paint in a lidded container—and maybe even the applicators—to the dealer. The retailer then would give the user a small plastic bottle of paint for touchups, and then drum the unused paint (assuming no contamination) for disposition to a reprocessor. The dealer would dispose of the plastic bladder locally and could clean the applicators for the next customer.
Although this system could apply to any buyer, the feasible way to start such a program might be with PPMs because of the volume of paint they purchase and the frequency with which they visit the retail stores. Furthermore, commercial users should be amenable to returning containers to the store—or even to a designated drop-off site—particularly if this meant avoiding local fees for disposition of empty plastic pails and paint residues.
Another source-reduction technique could incorporate paint concentrates, although this approach brings with it a number of challenges. From a marketing standpoint, the industry would have to convince consumers that paint from a concentrate is as effective as the regular product. Water quality is another issue. Will the concentrate result in uniformly effective paints when mixed with water of varying hardness and chemical levels?
Although the concentrate strategy would be difficult to implement, it has wide-reaching implications as demonstrated in certain other businesses and industries. Firms selling products such as window-washing liquid, to cite one example, are benefiting from successfully developing and marketing a "Just Add Water" version of their product. Again, this approach not only reduces the amount of waste going down the channel, but also cuts the associated packaging and logistics costs as product size and weight decrease.
These are examples of source-reduction strategies that can dramatically affect the environment while reducing costs and improving customer satisfaction. In pursuing source-reduction strategies, Sherwin-Williams—or any company, in fact—should be able to generate consumer goodwill, reduce overall costs, and stay ahead of government regulations. In fact, the real leaders can actually influence the legislation.
Needed: Reengineered Business SystemsOne central lesson learned from our research is that for source reduction to achieve optimum competitive advantage, cross-functional inter-company reverse business systems need to be in place. Note that "business" systems are stressed and not just reverse logistics activities. These reverse business systems must embrace such areas as remanufacturing operations, marketing and pricing, accounting and finance, and inventory management as well as the reverse transportation and logistics functions. (Exhibit 5 illustrates this notion within the context of the paint industry.) With robust reverse business systems in place, organizations can take full advantage of the reusability of their products while aggressively conserving resources.
If manufacturers do not take the lead in these efforts, then their big channel customers or government agencies may dictate the solutions. If they don't make the necessary changes, moreover, their customers may take their business elsewhere. A proactive approach to reverse logistics is better from every perspective—market, regulatory, and environmental.
Author's note: The author acknowledges the contributions of Frederick A. Ristow, a former vice president and director of logistics for Sherwin-Williams Co., and Michael Bartley, a graduate student at the University of Wisconsin-Madison in the Grainger Center for Distribution Management.
| Author Information |
| Edward J. Marien is professor and program director of logistics, transportation, and warehouse management programs for the Management Institute of the School of Business, University of Wisconsin-Madison. |
| Footnotes |
| 1Ronald Kopicki, et al., Reuse and Recycling—Reverse Logistics Opportunities. Oak Brook, Ill.: the Council of Logistics Management, 1993, p. 126. |
| 2Ibid., p. 132. |
| 3Ann Saccomano, "Many Happy Returns," Traffic World, Feb. 17, 1997, p. 22. |
| 4Jeremy Rifkin, The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era. New York: G. P. Putnam's Sons, 1995, p. 155. |
| 5 Reuse and Recycling, p. 132. |
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