Reverse Logistics

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  • (Definition) Reverse Logistics is a complete supply chain dedicated to the reverse flow of products and materials for the purpose of returns, repair, remanufacture, and/or recycling.
  • (Definition) Reverse Supply Chain is moving items from the consumer back to the producer for repair or disposal.

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Motivating Factors

Following are some motivating factors for upsurge of organizations’ interest in reverse logistics:

  1. Saving in the aftermarket
    Sometimes there is literally gold in the reverse supply chain, not to mention silver, platinum, copper, zinc, mercury, lead and the whole range of commercial metals. Returned products can be mined for these materials – many of which should definitely be kept out of landfills.
  2. Competitive edge
    Consumers can be wooed and won with products that promise good service. Ease of return, repair and recycling may add to a products value in consumer’s mind.
  3. Consumer and shareholder pressure
    Consumer groups have learned to make themselves heard through direct action and lobbying.
  4. Growing market for environmentally safe products
    The desire for access to products that are simple, clean, and less threatening to the health of the environment can be a legitimate source of ideas for innovative approaches to product design.
  5. Environmental awareness and regulations
    Environmental regulations provide an immediate reason for logistics managers to pay more attention to the defective or obsolete products that return and move back up the supply chain. But awareness and conscience also play a part.

Reverse Logistics Hierarchy

  • The reverse logistics hierarchy is sometimes called the four “R”.
  • In order of importance, thy are as follows: Reduce, Reuse, recycle and Recover [energy].

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Reduce Resource Use

Reducing the use of resources in the first place is considered the most responsible option in the reverse logistics hierarchy. You can incorporate this principle into your business in the following ways:

  • Reduce costs by designing products and packaging that make the most efficient use of physical resources.
  • Design products with an eye to reducing the consumption of energy in the manufacture and use of the product.
  • Design the logistics network for efficient use of resources and energy in warehousing and transportation. (This is straightforward matter of cost containment.)

Reuse Products or Components

Potential reuse of products or parts of products is considered second in importance to resource conservation. The payoff is a reduction of the costs involved in purchasing, transportation, and disposal. This can be done in couple of ways:

  • Products can be designed so materials and components can be more easily separated for reuse.
  • Intelligently designed product upgrades can extend the life of durable components if they are easy to install.

Recycle Materials

After resource conservation and reuse, recycling is the third most important aftermarket principle. The concept of recycling isn’t easily separable from the concept of reuse, and in fact the two can be combined.

  • When containers are reprocessed into other products such as landscaping materials, they have been recycled.
  • When containers (bottles, barrels, totes, drums, etc.) are cleaned, sterilized and filled again, they are reused.
  • Recycling reduces disposal costs, whereas reuse can reduce purchasing and transportation costs as well.

Recover Energy

Disposal with energy recovery doesn’t put a product’s physical materials or components back into service, but it can still provide benefits. “Trash to energy” facilities essentially harvest the energy contained in products that are no longer usable in their physical form and that results in saving for the community.

Dispose in Responsible Landfill

Finally, some physical products must go to the incinerator or the landfill, but this is the least desirable option. Incineration is generally considered the preferable alternative. Its important to choose the best available landfill. Choose a responsible landfill that prevents degrading items from leaching into a water source or polluting air.

Supply Chain Design for Reverse Logistics

When designing the reverse logistics network, one should keep the following factors in mind:

  • Cash and information flow backward as well as forward –  but not in the same way.
  • Reverse supply chain revenues and expenses can be managed to yield profit.
  • Reverse logistics affects all stages of a product’s life cycle, not just the last stage.

Benefits

The benefits of a carefully designed reverse logistics chain that maximizes resource conservation, reuse of components, and recycling of materials include the following:

  • Potential for highly lucrative customer service contracts and extended warranties (especially if the products are well designed and reliable).
  • Mitigation or elimination of the unprofitable effects of high-volume returns.
  • Enhanced customer loyalty and corporate reputation.
  • Return of valuable raw materials for other industrial uses.
  • Development of more efficient products and logistical tactics.
  • Profits from resale of refurbished products and parts that would otherwise go into landfills at a cost to the company.
  • Creation of new types of jobs.
  • More efficient use of energy.
  • Conservation of resources for future generations.
  • Reduced emission of many greenhouse gases and water pollutants.
  • Development of “greener” technology.
  • reduced need for new landfills and incinerators.

Logistics Service Providers – 3PL & 4PL

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  • Third Party Logistics (3PL) and Fourth Party Logistics (4PL) refer to the outsourcing of some or all logistics operations.
  • The most compelling reason to let another party take over logistics functions is the decision to focus on core competencies – a common supply chain strategy.
  • The recent trend in 3PL arrangements is toward long term contractual relationships with providers of integrated services, such as transportation plus storage.
  • The 4PL setup extends that trend by removing all logistics functions from the client firm and putting them under integrated management by a general contractor.
  • Logistics outsourcing may put the contractor into direct communication with the firm’s customers, and that entails definite risks. The 3PL employee (or 4PL subcontractor) becomes a representative of the client firm, which may be judged by the contractors behavior. The 3PL may also contract with a client’s competitors, with the risk that confidential information may pass through the contractor to the competitor.

How 3PL & 4PL are Related

3PL (Third-Party Logistics)

  • A 3PL is a buyer and supplier team with a third party that provides product delivery services.
  • This third party may provide added supply chain expertise.
  • In a 3PL arrangement, the third party takes over some or all logistics functions and performs them itself.
  • A 3PL may be a specialized provider that focuses, for instance, on airmail or over-the-road transport or warehousing.
  • It may also be a multipurpose logistics provider capable of taking over the entire logistics function.

4PL (Fourth-Party Logistics)

  • In a 4PL arrangement, logistics specialist takes over the entire logistics operation and subcontracts some or all specific functions.
  • Playing the role of general contractor, the fourth-party provider hires out the various logistics services and coordinates the efforts of the subcontractors on the client’s behalf.
  • Sometimes this is still called third-party logistics, but the presence of subcontractors makes this in reality a fourth-party setup.
  • Typically,the 4PL charges a fee for its service, not a markup.

Advantages / Disadvantages of 3PL and 4PL

Advantages


3PL

4PL

  • Improved business focus.
  • More current logistics technology.
  • Greater technological flexibility.
  • More efficient warehousing for rapid replenishment.
  • Improved service to customers.
  • More workforce and resource flexibility.
  • Improved business focus.
  • Higher-quality logistics operations (or reduced costs, or both).
  • Greater business flexibility.

Disadvantages

3PL

4PL

  • Loss of control.
  • Potential for inefficiency.
  • Loss of direct control over the logistics process and all specific functions.
  • Potential for less effective or more costly operations if the 4PL writes biased contracts with favorite suppliers rather than seeking out the most efficient partners.

Outsourcing Caveats

Before outsourcing logistics to a third or fourth-party provider, a firm should ask itself the following questions:

  • What are our current costs?
  • What customer skills does the contractor possess?
  • What are the contractor’s special strengths?
  • Will the contractor hire the most-qualified partners (if necessary)?

Role of Logistics in Supply Chain

Logistics

  • (Definition) Logistics is the art and science of obtaining, producing and distributing material and product in the proper place and in proper quantities.
  • This involves management of:
    • Order processing
    • Warehousing
    • Transportation
    • Materials handling
    • Packaging

All of this should be integrated through a network of facilities.

  • Logistics adds value to the supply chain process if inventory is strategically positioned to achieve sales. But the cost of creating this value is high.
  • The largest contributor to logistics cost is transportation: the movement of raw materials to a processing plant, parts to a manufacturer , and finished goods to wholesalers, retailers and customers.
  • “Supply chain management is logistics taken to a higher level of sophistication. – Douglas Long.
  • Inventory and Forecasting must be considered when designing and managing an effective, efficient system for moving goods quickly from place to place.

Logistics Functions

  • The supply chain is about moving or transforming raw materials and ideas into products or services and getting them to customers.
  • Logistics is about moving materials or goods from one place to another. Thus, logistics is the servant of design, production and marketing.
  • The following areas of logistics management contribute to an integrated approach to logistics within supply chain management:
    • Transportation
      • Many modes of transportation play a role in the movement of goods through supply chains: air, rail, road, water, and pipeline.
    • Warehousing
      • (Definition) Warehousing is the activities related to receiving, storing and shipping materials to and from production or distribution locations.
    • Third-and fourth-party logistics
      • The various logistics functions can be outsourced to firms that specialize in some or all of these services.
      • (Definition) A third-party logistics provider (3PL) is an entity that provides product delivery services for a buyer and supplier team. Third-part logistics providers actually perform or manage one or more logistics services.
      • (Definition) A fourth-party logistics provider (4PL) is a logistics specialist that plays the role of general contractor by taking over the entire logistics function for an organization and coordinating the combination of divisions or subcontractors necessary to perform the specific tasks involved.
    • Reverse logistics (or reverse supply chain)
      • This is the area which determines how best to handle the return, reuse, recycling, or disposal of products that make the reverse journey from customer to the supplier.

Logistics Value Proposition

  • Being able to match key customer expectations and requirements to your firm’s operating competency level and customer commitment is the essential ingredient in optimizing the value of logistics.
  • The value stems from your ability to know exactly how to balance logistics costs against the appropriate level of customer services for each of your key customers.
  • If you keep in mind that logistics must be managed as an integrated effort to achieve customer satisfaction at the lowest total cost, then it makes sense that the following are the key elements in this proposition:
    • Service
      • Technology isn’t the limiting factor for logistics for most companies – it’s the economics.
      • The key is to determine how to outperform competitors in a cost-effective manner.
    • Cost Minimization
      • The second element of the value proposition, cost minimization, should be interpreted as the total cost of logistics in order to be accurate.
      • (Definition) Total cost concept of logistics is the idea that all logistical decisions that provide equal service levels should favor the option that minimizes the total of all logistical costs and not be used on cost reductions in one area alone, such as lower transportation charges.
      • Today’s leading supply chain companies develop functional cost analysis and activity-based costing activities that accurately measure the total cost of logistics. The goal now is for logistics to be cost-effective as determined by a cost-benefit analysis, taking into account how logistical service failure would impact a customer’s business.

Logistics Goals & Strategies

  • At the highest level, logistics shares the goal of supply chain management: “to meet customer requirements.”
  • There are a number of logistics goals that most experts agree upon:
    • Respond rapidly to changes in the market or customer orders.
    • Minimize variances in logistics service.
    • Minimize inventory to reduce costs.
    • Consolidate product movement by grouping shipments.
    • Maintain high quality and engage in continuous improvement.
    • Support the entire product life cycle and the reverse logistics supply chain.
  • An effective logistics strategy depends upon the following tactics:
    • Coordinating functions (transportation management, warehousing, packaging, etc.) to create maximum value for the customer.
    • Integrating the supply chain.
    • Substituting information for inventory.
    • Reducing supply chain partners to an effective minimum number.
    • Pooling risks.
Coordinating Functions
  • Logistics can be viewed as a system made up of interlocking, independent parts. From this perspective, improving any part of the system must be done with full awareness of the effects on other parts of the system.
  • You need a cross-functional approach in logistics, just as you do in supply chain management as a whole. Teams that cross functions are also very likely to cross company boundaries in a world of international supply chains with different firms focused on different functions.
  • The overall goal of logistics management is not better shipping or more efficient location of warehouses but more value in the supply network as measured by customer satisfaction, return to shareholders, etc.
Integrating the Supply Chain
  • Integrating the supply chain requires taking a series of steps when constructing the logistics network. In a dynamic system, steps may be taken out of order and retaken continuously in pursuit of quality improvements:
    • Locate in the right countries
    • Develop an effective export-import strategy
    • Select warehouse locations
    • Select transportation modes and carriers
    • Select the right number of partners
    • Develop state of the art information systems
Substituting Information for Inventory
  • Physical inventory can be replaced by better information in the following ways:
    • Improve communications
      Talk with suppliers regularly and discuss plans with them.
    • Collaborate with suppliers
      Use JIT to coordinate deliveries from suppliers. Remove obsolete inventory. Use continuous improvement tools and share observations about trends.
    • Track inventory precisely
      Track the exact location of inventory using bar codes and/or RFID (Radio Frequency Identification) with GPS (Global Positioning Systems).
    • Keep inventory in transit
      – It’s possible to reduce system wide inventory costs by keeping inventory in transit.
      – One method of keeping inventory in motion the maximum amount of time is a distribution strategy called cross-docking.
      (Definition) Cross-docking is the process of packing products on incoming shipments so they can be easily sorted at intermediate warehouses or for outgoing shipments based on final destination. The items are carried from the incoming vehicle docking point to the outgoing vehicle docking point without being stored in inventory at the warehouse.
    • Use postponement centers
      Avoid filling warehouses with the wrong mix of finished goods by setting up postponement centers to delay products assembly until an actual order has been received.
    • Mix shipments to match customer needs
      Match deliveries more precisely to customer needs by mixing different SKUs on the same pallet and by mixing pallets from different suppliers.
    • Don’t wait in line at customs
      Reduce the time spent in customs by clearing freight while still on the water or in the air.
Reducing Supply Chain Partners to an Effective Number
  • You have to watch out for tradeoffs in effectiveness when reducing the number of logistics partners, you can generally increase efficiency by doing so.
  • If possible, look for an entire echelon you can do without.

  • The more partners there are in the chain, the more difficult and expensive the chain is to manage.
  • Handoffs among partners cost money and eat up time.
  • Having many partners means carrying more inventory.
  • Reducing the number of partners can reduce operating costs, cycle time, and inventory holding costs.
  • There is however some lower limit below which you create more problems than you solve.
Pooling Risks
  • (Definition) Risk pooling is a method often associated with the management of inventory risk. Manufacturers and retailers that experience high variability in demand for their products can pool together common inventory components associated with a broad family of products to buffer the overall burden of having to deploy inventory for each discrete product.
  • By using a central warehouse to hold parts common to many products, a supply network can reduce storage costs and the risk of stock outs that would be experienced in smaller, decentralized warehouses.
  • There are tradeoffs to consider. The central warehouse may be further away from some production facilities than the smaller warehouses would be, lead times and transportation costs are likely to go up in that case.
  • Logistics has to be managed from the point of view of improving the value of the overall system, not just one part of the system.

Flow of Goods and Information

  • The enterprise must have internal process integration and collaboration between functions as well as alignment and integration across the supply chain.