Introduction:
Logistics is
defined by The Council of Logistics Management 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 origin to the point of consumption for
the purpose of conforming to customer requirements.
Reverse
logistics includes all of the activities that are mentioned in the definition
above. The difference is that reverse logistics encompasses all of these
activities as they operate in reverse. Therefore, reverse logistics is: 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.
Therefore, it
clearly follows from the above definition that reverse logistics essentially
start from the point of consumption, and the objective of the same is to
recapture the value of the product.
Rapid
advancement in the complexity of the technologies, and the increasingly growing
uncertainty on the business environments have forced the organizations to keep
changing rapidly in order to survive. What were order winning qualities
yesterday have become the bare minimum qualifying attributes for today.
Reverse
Logistics or the reverse supply chain (R-SCM), features greater uncertainty as
compared to forward supply chain flows or forward logistics. An easy way to
resolve the excessive uncertainty is to introduce greater level of flexibility
in reverse logistics (RL). Increased flexibility increases costs and
complexity. Information technology is a key enabler in improving the supply
chain; however most of the solutions today are designed keeping the forward
logistics (FL) in mind. The reverse flow is different in a number of ways.
First, product arrives whenever customers decide to return an unwanted item, or
a retailer decides to pull slow-moving product, or a manufacturer institutes a
packaging change, or any number of other possible causes. Second, the product
is not all in new condition. Third, much of the packaging is damaged or
shelf-worn.
Reverse
Logistics can therefore be considered to be the process of completing the
Supply Chain model which starts from the consumer/customer goes back to the
manufacturer or a reverse logistics partner.
Literature Review
Reverse
Logistics is a growing concern for almost all industries, primarily because of
the large number of options available; the buyers are becoming more and more
unwilling to buy something without the guarantee of return in case they do not
like the product post purchase.
“In recent years there has been an increasing
need for companies to manage the reverse flow of materials in their supply
chains. One reason is the increased frequency with which customers change their
minds and return goods shortly after purchases. Firms have dealt with such
returns for many years, but growth in mail-order and e-business traffic has
increased the volume of such returns—customers unable to see and touch the
items they are purchasing are more likely to return them.” (Gregory A. DeCroix and Paul H. Zipkin-Inventory
Management for an Assembly System with Product or Component Returns)
Reverse
Logistics, is not a new field, some of the products that we use have already
have a stable reverse logistics process, e.g. soft drink bottles, expired
medicines and drugs etc. a product recall, countries environmental norms that
dictate the recycle of environmentally hazardous waste and so on. However in
case of ecommerce the organization faces the following challenges that make the
reverse logistics process a little more difficult than others:
a. Inconsistency:
Unlike in case of a soft drink distribution it is difficult to come up with a
prediction model for the amount of Reverse Logistics that shall be generated in
ecommerce. Also the forward and backward channels for a soft drink industry or
a pharmaceutical industry are well defined, which is not the case in ecommerce.
b. Lack of
Standardization: The weight/ height/shape etc. vary
across a very wide range of values in case of products in ecommerce. It’s a
common phenomenon that the returned package in case of a sale made online may
be tampered or incorrectly packed, incorrectly packaged items may sometimes
lead to quality degradation in transit too.
c. Quality Check:
A Serious Quality check is required for the returned products in case of a
return. The point of sales and point of exchange are different in the case of
an online purchase, which adds further to the complications.
d. Dissatisfaction among
the customers: The returns if not handled properly
can lead to serious dissatisfaction among the customers deterring them from
making future purchases.
“The
lack of good return channels is the main reason for the customers to give up
on-line transactions. Many well-known foreign companies take reverse logistics
strategy as an important tool to reduce costs, increase customer satisfaction
and strengthen the competitive advantage. As a result, ecommerce development
cannot leave the support of reverse logistics and the efficient operation of
the reverse logistics also need e-commerce”.(Jian Xu - Study of Reverse Logistics in the E-commerce
Environment.)
e. Additional cost of
restoring the product to the customer in case of a return.
Difficulties in
Inventory mapping: returned goods are
basically inventory in transit, provided they are in good re-sellable
condition, but the uncertainty about the quality of the product returned to be
resold makes the process of inventory mapping and valuation all the more
complicated. “The insights and solution methods for traditional inventory
systems (without returns) may no longer apply.” (Gregory A. DeCroix and Paul H. Zipkin-Inventory Management for an
Assembly System with Product or Component Returns)
Outsourcing and
development a Reverse Logistics ecosystem
There
are many firms that have ventured into the business with a core competency of
providing Reverse Logistics solution; some examples in India include GreenDust,
MasterWorks etc. In some develop countries like United States there are firms
like Seneca, WiseTek (Ireland, Finalist of E&Y Entrepreneur of the year
2013) etc that aim at creating a secondary market for the returned goods that
are not in re-sellable condition.
These
ecosystems consist of pooled resource which provide for a common return/exchange
platform for more than one ecommerce companies. They have successfully made use
of many statistical tools like control charts etc, for determining the amount
of reverse logistics that are generated due to incorrect sales and have helped
the companies to develop a FTR (First time right) sales model by continuous
reduction of variance and increased conformance to the customer requirements.
For
the goods that are broken beyond repair or are spoilt beyond the Minimum
Acceptable Repair Quality (MARQ) they propose breaking down of the electronic
goods received from the Reverse Logistics to extract the valuable metals like
gold, silver copper etc that are use up in the manufacturing.
As per a research from United Postal service
(UPS)-Recovering Lost Profits by Improving Reverse Logistics: “One of the
starkest examples of secondary market opportunities lies in the mobile phone
industry. Every year, there are about 1.2 billion cell phones sold worldwide.
The return rate for mobile phones in 2010 was 8% or 96 million phones that
weigh about 16,000 tons. The average secondary market value for refurbished
mobile phones ranges between 35% and 75% of the original value. The average
retail value per phone is approximately $150. If liquidated on the secondary
market, the manufacturer would recover on average $82.50 per phone. If a single
manufacturer were able to resell only 250,000 of the phones returned to them,
it could equal over $20M in additional revenue.” (Curtic Greve and Jerry Davis- Recovering Lost profits by Improving
Reverse Logistics)
However
the problem of reverse logistics in India is a lot different than those in the
developed countries, we propose to identify the constraints in the existing
system of Reverse logistics in the ecommerce industry of India. We therefore
propose a model which may help reduce the (Cost of Quality Failure)
CQF-External failures, without affecting the CTQ parameters for the reverse
logistics of unaccepted goods sold through an ecommerce website. The model
involves not only a slight cultural change to ensure its effectiveness but also
requires IT support to understand and forecast the amount of reverse logistics
that shall be generated at the point of exchange for the goods.
Growing importance of
reverse logistics
Reverse
Logistics is a least used differentiator for companies, when it can serve as a
strong instrument for building customer loyalty. Companies can no longer afford
to treat reverse logistics as an afterthought.
Ecommerce
is growing at a remarkable pace in developing countries particularly India (due
to high youth population and increased consistently growing IT sector). The
paper aims at analyzing the use of statistical processes like Lean or Six Sigma
can be used to improve and reduce the costs due to Reverse Logistics.
The size of
reverse logistics markets in various countries is as shown in the Appendix-1.
Re-engineering of the existing business process for
reverse logistics in India:
Diagram
below shows the existing process (As-Is) of a reverse logistics in India.
The flow chart
(Figure 1) above shows the regular process of reverse logistics.
Bold arrows show
the forward logistics for the product and information flow, and thin line
arrows show the various steps involved in the process of returning the goods
back in case the customer dislikes the delivered products.
The return
process consists of minimum 8 steps numbered 1 to 8 (as compared to a simple
forward logistics that completes in 3 steps only) in the diagram above, for the
sake of simplicity we have not included the other major stake holders like
suppliers etc, who shall play a vital role in case of defected products, also
we have included a warehousing model and not a trading model, which is very
common in ecommerce these days.
The major issues
that can be seen in the model that exists include:-
a. Excessive
material movement for the purpose of quality verification.
b. Correctness
of the returns, (i.e. if the return is a valid return or not) is realized much
later in the process.
c. Quality
of the product entering the reverse logistics chain is determined after the
product has already entered the chain thus the decision of re-routing these
products to the correct point of operations is delayed.
Proposed re-engineered process (To-Be)
The proposed
model for handling the returns is as shown in the diagram below:
The model includes
a step of Customer Quality Verification, in the forward logistics directly, thus
making provisions for reverse logistics in the forward supply chain. It stands
with a philosophy proposed by many researchers that forward and backward supply
chain should not operate in sedition.
The purpose of
including a Customer Quality Verification step, is to ensure that the quality
of the product is not determined after the product has already entered into the
reverse supply chain. The person who makes the delivery of the product shall
help the consumer to immediately verify the product quality at the point of
exchange and in case if the consumer is dissatisfied with the offering s/he can
immediately call for a return. Since the product has not been with the consumer
for much time before s/he asks for a return the Quality check stage as used in
the As-Is model becomes redundant.
Other benefits
that the proposed system has includes
a. reduced
movement of goods from the consumer to the quality centre etc,
b. Since
the repackaging of the product is being done by the delivery staff(in case of
immediate returns), the probability of goods being spoilt on transit due to
incorrect packaging is also reduced to a very large extent.
c. Also,
since all the stake holders involved in the process of forward and reverse
logistics involved are connected via an ERP system the inventory mapping
becomes easy (See Inventory disadvantages of the As-Is process).
d. Customer
satisfaction shall improve as the process aims at providing speedy returns to
the consumer, the time to pick up the product from the consumer and perform the
quality check on the same before moving the replaced goods (in case if the
returned product has passed the quality test) is reduced to almost 0.
e. The
process efficiency shall improve, and the delighted customers shall make more
and more repeat purchases thus helping the firm to improve their sales.
Limitations of the proposed Process
The process has
certain obvious problems, the Customer Quality Verification stage, shall to
some extent have a bearing on the speediness of the forward logistics,
(Consider a single distribution van who could have covered say x distribution
points can now cover, say (x – δ), distribution points only). Calculations
below try to estimate the cost benefit analysis for implementation of the
model.
Training Costs
of the people delivering the products at the distribution point cannot be
neglected. These professionals need to be trained in packaging the product back
correctly and making the decision whether the return is a valid return or not.
The degree of leniency to classify a return as a valid return may vary from a
company to company and even from a product to product. However, for the sake of
simplicity we can say a valid return is a return that is made for a genuine
reason like:
a. Product
does not meeting the promised standards
b. All
components/items promised on the portal are not available
c. Product
is spoilt in transit
d. Incorrect
product etc.
The proposed
model shall stand beneficial if:-
Total Cost of implementation of the proposed model < Losses due to Reverse Logistics
Total Cost of
implementation of the proposed model is the sum of the incremental cost that
the firm shall have to bear if it plans to implement the process and the
Opportunity cost that shall arise if the company discards the existing process.
Consider a
single distribution van that could have covered say x distribution points can
now cover, say (x – δ), distribution points only, thus there shall be a loss of
covering δdistribution points.
We consider this
as a simple queuing model with one server to understand the process further,
the arrival of the products to be delivered is say λ (at the start of the day
when the van leaves for making the delivery) and µ is the average rate at which
the delivery van can make the delivery to the consumer.
Now, the reduced
rate of delivery due to implementation of process is say µnew will
be
(x – δ ) / x * µ = µnew
The average
number of orders that the van can now process can be given by:
Lq(new) = λ2/[µnew(µnew
- l)]
As compared to
the existing process where the average numbers of orders that the van can
process are:
Lq = λ2/[µ(µ
- l)]
Therefore the
average number of orders that the new process will fall short of is: Lq-Lq(new)
Say cost of
falling short of one order is Rs. S thus the Overall incremental cost that the
company shall have to incur is = (Lq-Lq(new))*S
If the training
costs are Rs. T, and the say the losses that the company is facing due to Reverse
Logistics is Rs L.
The suggested
model shall prove to be effective if:
(Lq-Lq(new))*S
+ T < L
Concluding Remarks:
The
proposed process can serve useful only if the costs for implementing the
process are justified also one important consideration that the model strongly
advocates is provisioning reverse logistics in the forward logistics process,
the two processes cannot exist separately, and planning for reverse logistics
should be done at the same time when the supply chain strategies are made.
Reverse logistics requires the companies to delve much deeper and understand
the reasons of returns and predict the acceptability of the products to the
consumers who are making online purchases. Reverse logistics is a by-product of
the sales made electronically that shall continue to exist as long as the
business of selling goods on internet exists thus the companies must include
reverse logistics as a part of corporate strategy, rather than considering it
as an afterthought of sales. It’s said strength of the process is how it
performs during adversities, and reverse logistics bear tremendous potential to
help companies get new customers or lose the old ones.
