The Hidden Value in Reverse Logistics (page 3)
-- Supply Chain Management Review, 7/1/2005
Page 3 of 6
The Computer Specialist. This company—let's call it Computer Atlantic Corp.—deals in office computer products, many of which are leased. With this focus on end-of-lease asset recovery, Computer Atlantic has been involved in all five of the reverse logistics activities for years. Because its leased assets are returned, the company highlights the importance of quickly assessing the value of the product in its entirety and deciding on the resale potential of the whole product as distinct from the potential value of individual modules, components, or materials. Given the short product lifecycles in its industry, Computer Atlantic concentrates on reducing processing time for the assessment and reconfiguration of returned products. Products that can be readily refurbished or remanufactured are quickly identified and converted to resalable goods. The company has identified and established a range of secondary markets so the remanufactured machines do not compete directly with the factory-new products. By turning the remanufactured products around and moving them into the secondary markets as quickly as possible, Computer Atlantic keeps inventory low and maximizes revenue—after already realizing substantial revenues from the lease of the product in its first life. In short, Computer Atlantic fully recognizes the products' full lifecycle value in terms of revenues, costs, and asset utilization. For products that cannot be remanufactured, Computer Atlantic removes usable components before disassembling the rest of the product to recover precious metals and separate the plastic into appropriate recycling bins. By recapturing componentry, the company has found it can significantly reduce the volumes of new components it must purchase. (In the electronics sector, many used parts are considered of equal value to new parts for replacement purposes.) Additionally, some components are designated for future re-use by the company's service division because Computer Atlantic services its products for many years after the last production date. Having a ready supply of components for older equipment has enabled the company to keep satisfying customers with minimal investments in new parts inventory. Finally, with less than two percent of its returns volume now sent to landfills, Computer Atlantic can promote its environmental responsiveness. Management believes that effective returns management has increased the company's brand equity, accruing long-term benefits in terms of future revenues. These days, Computer Atlantic's returns division has become profitable in its own right. The Engine Rebuilder. This company—we'll name it Motormaster Inc.—has developed a strong capability to rebuild engines and modules as replacement parts on its equipment. Because its heavy-equipment product lifecycles may be years or even decades long, Motormaster must provide replacement-parts service long after its initial unit sales. To do so, the company has formed a joint venture with a remanufacturer to manage returns and rebuild its components and engines. Remanufacturing components has enabled the company to cut its procurement and inventory costs to less than half of what it would take to acquire new components. This approach also helps build strong customer loyalty by ensuring high levels of customer service over many years. Motormaster manages the returns process profitably. While engine and component rebuilding is not particularly new in the automotive, agricultural-machinery, or heavy-equipment sectors, there are many lessons that can be applied in consumer durables. For instance, as electronic durables become increasingly modularized, there are more opportunities for remanufacturing and reselling—and greater need for effective logistics.The Consumer-Goods Marketer. "Household Supreme Corp." (HSC) operates in a very different environment. Its consumer packaged goods are generally of much lower value than Computer Atlantic's and Motormaster's products, and its approach to reverse logistics has been very different. HSC's products are generally consumables, so there is limited need to return the product at the end of its life. However, as a catalog and mail-order company, HSC is faced with a substantial number of returns when products are not acceptable to consumers. HSC has come to realize that not all products should be returned. When customers call with a complaint about a particular product, the customer service representatives use detailed guidelines to determine which products should be returned and which should not. The decision to accept a return is based on an explicit cost analysis, comparing the cost of product return and reprocessing with the cost of making that item again. A product that meets predefined cost criteria is not taken back; consumers are told to keep the product, and they receive immediate credit for it. This proactive policy has already saved the company a significant amount in processing labor and transportation. The trade-off is often the $2–3 contribution on the product vs. the $4–5 to return, sort, and refurbish it. To succeed with this plan, the company has had to create higher visibility for returns. It has built a return merchandise authorization (RMA) process in which customers must contact the company to receive returns authorization. The customer benefit is receipt of immediate credit for the returns. HSC's customers, who are mainly independent business people, have found that the practice greatly enhances their own cash flow, so they have happily bought into the RMA process. It may seem counterintuitive, but HSC has positively affected its bottom line by deciding which products should be returned and by issuing faster credit to customers. That's because processing labor has been greatly reduced, as have return transportation expenses. Because fewer products are being returned, products that do come back can be processed much more quickly because there's less volume and because of the visibility created through the RMAs. Shorter cycle times on returns processing has enabled the company to return the products to the forward supply chain more quickly, thus enhancing revenues. Additionally, the company now experiences more positive relationships with its customers, thus enhancing the longevity and value of each customer relationship. Continued...
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