IS Support Compatibility
World-class logistics organizations recognize the importance of information support and focus on both capability and compatibility. Capability, in this context information exchanged accurately and readily, is critical in a cross-organizational setting. However, effective, fast cross-organizational sharing of information is only possible if information systems are compatible. Whereas IS support capability indicates a practical ability, IS system compatibility refers to how easy it is to use.
A need to quickly respond to supply chain partners has influenced strategic decisions at many firms. In a reverse logistics context, this would mean that channel members' information systems must be compatible, i.e., in agreement. IS support compatibility implies the existence of congruent systems that facilitate exchange between separate organizations. Increased complexity and changing channel relationships have dramatically increased the need for information exchange compatibility across organizations. Given that most buying organizations have communication arrangements with multiple suppliers, systems compatibility between specific channel partners can be difficult to arrange. However, compatibility is necessary to increase the efficiency of reverse logistics efforts.
IS Support Technologies
Information and information technologies have been identified as potential "competitive weapons" that may prove critical to the support of overall strategic initiatives. The complexity and fast paced nature of logistics operations makes information support a top priority at all the topmost organizations. World-class firms have significantly increased the range of technologies employed within their operations.
Performance outcomes
Firms rely on several critical assumptions in their reverse logistics operations including: 1) Their costs will be contained and financial goals will be met
2) Customer relations will be maintained/improved and the firm will adhere to any regulatory mandates
3) Management will be satisfied with the overall operation of the system.
Thus, performance should be viewed in a multi-dimensional manner. This provides a better understanding of the value of IS support as well as a more detailed understanding of the outcomes of reverse logistics systems. Therefore, performance is defined as two distinct dimensions: operating/financial performance and satisfaction.
Operating/ Financial Performance
Monitoring the performance of any logistics system should include measures both internal and external to the firm. For the evaluation of reverse logistics operations, internal performance indicators include how effectively assets are recovered via the channel, as well as how effectively inventory investment has been reduced. While forecasting accurate demand levels for the sale of goods is often difficult, forecasting return levels can be even more difficult. Thus the achievement of efficiency goals is a key indicator of reverse logistics effectiveness. Similarly, any evaluation of a logistics system must include that system's ability to contain costs associated with transportation and inventory.
Satisfaction
While operating/financial performances indicators are a critical part of any logistics control system, they are not always focused on measuring and optimizing interfirm performance. For example, they do not provide answers to the critical question of whether management is satisfied with the logistics system in place. In reverse logistics efforts, many managers remain unconvinced as to the value of these efforts in reducing costs, increasing profitability, and enhancing relationships with other channel members. This can detrimentally affect the commitment of decision-makers to the reverse logistics effort that is a critical component of any new system. Thus, it is important to determine the satisfaction of management with the reverse logistics effort relative to the system's perceived ability to handle returns effectively, as well as the perceived quality of the relationship with the firm's supplying partners.
The case of Levi Strauss
Let us see how liberal return policies have made return rates rocket to 50% for Levi Strauss. The manufacturer of Levi's, Dockers and Slates dress pants, encourages licensed outlet stores to purchase returned merchandise by blending returns, seasonals and irregulars. This reduces the SKU base-a base that includes close to 50,000 SKUs per year that are returned as irregular, seasonal and 11 stressed" merchandise-and fashion sensitive goods with short life cycles, which get back into the marketplace while still fashionable. Working with GENCO, Levi Strauss has developed efficient return, sorting and disposition from its Atlanta return center. GENCO integrated Levi Strauss' reverse logistics program with a traditional warehouse management system (WMS), linking accounts and order entry to inventory management, and information flow upline to sales reporting, claims and credit reconciliation. Traditional electronic data interchange (EDI) transactions are used. Via online return authorizations, sales reps give advance notice of returns, and electronic forms match returns to what is expected. Results are sent back to a shared financial service center, assuring accurate credit and quickly adjudicated claims. Irregulars and returns are scanned-becoming the responsibility of Levi Strauss again when they cross one of 42 scan lines--and assigned a new product code. Scanned inbounds are put into totes earmarked for specific zones. Screens identify the zones, and the system prints a label with the end-state address of the outlet Zone labels describe level, tier and box.
The automated process can also earmark returns for special handling. For products with a high recovery value, an association is set up with a new product code that's specific to the return center. The center is notified of the return prior to landing. Likely outlet buyers are approached. Garments are then sorted, packed and set up under a new product code. This reverse logistic power of Levi Strauss has enabled it to tap into the $300 million returned garments business and provided it with a competitive advantage over its competitors.
Reactions of different Industry Segments
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.
Let us see how some industries are strategically allocating resources to respond to the reuse and recycling imperative. The companies can broadly be classified in 6 categories based on how they are reacting to the waste management and reverse logistics requirements.
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 aftermarket 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 aftermarket. 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, pack-aging, 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 reuse materials in the production process.
Ecommerce and Reverse Logistics
E-commerce is defined as sharing business information, maintaining business relationships, operating business negotiations, settling and executing agreements by means of telecommunication networks, often the Internet, in order to achieve business transactions. The general aspects of E-commerce for Reverse Logistics are summarized in Table
Ecommerce relation to reverse Logistics can be shown in the following manner:
There are three prominent e-commerce models for the support of reverse logistics activities. At present, the most popular model for E-commerce for reverse logistics is Electronic Marketplaces, which are used for both new and used products. A common feature of electronic marketplaces is the fact that they are product-centered. Various used products are for sale in these sites and potential customers have a chance to get relevant information on them, declare their interest and possibly buy them. A wide variety of products that have entered the reverse logistics chain are traded, but some sectors like computer, electronics and hi-tech equipment are particularly popular. Nonetheless, some electronic marketplaces are vertically structured, that is, they are dedicated to a specific product like used cars. Then, there are sites that use the Web to offer used parts or remanufactured equipment. Finally, there is also a Web based paradigm that incorporates collection, selection, reuse and redistribution.
Considerations of reverse logistics
Stock, who has been researching reverse logistics since the '70s confirms the fact that before we can manage the process of reverse logistics, we need to understand the pitfalls. Here is Stock's list of seven oversights committed by companies that underestimate the importance of returns:
1 Failing to recognize that reverse logistics can be a factor in creating competitive advantage
A successful reverse logistics strategy starts with the right mindset, if we don't think reverse logistics is important, it's not going to be, and if we think reverse logistics is a necessary evil, we shall never view it as a potential profit center or a source of competitive advantage. Since the 1980s, as the differences between the quality and price of competing products narrowed, a few industry leaders realized that the ability to deliver the right product in the right configuration and at the right time could set them apart from their competitors. This has led to a change in the way the business is conducted. Today, providing excellent forward logistics is just the price of admission. Other operations, like reverse logistics, are emerging as today's competitive differentiators.
2 Believing that once products are delivered, our responsibilities have ended
Creating a system to handle returns efficiently is important. But a better strategy is to reduce the number of returns in the first place. Stock says manufacturers can help reduce returns by taking a proactive stance toward customer service. He also urges manufacturers to work more closely with their retailers to accept back product earlier in the sales cycle.
3 Failing to match internal and external systems and processes
Most logistics systems are geared toward getting product to the customer, while returns are handled on an ad hoc basis after the product shows up at the dock. That's a mistake. To do reverse logistics well, we need quality information and processes so that we can track product and processes at all times. For this purpose we need to start with knowing how to create a reverse logistics flow, following this up with implementing information systems designed to handle returns and developing benchmarking systems to measure the returns process.
4 Assuming that a part-time effort is sufficient to deal with reverse logistics
Reverse logistics is a full-- time job whether we are handling returns with a dedicated team in-house or working with a third-party logistics provider (3PL). Companies that don't have sufficient volumes, or the willingness to make returns a core competency, should outsource to a third party logistics provider specializing in reverse logistics.
5 Believing that order cycle times for returns can be longer than those for new items
Reverse Logistics is also a customer service and a financial issue. Customers don't want to wait weeks before charges are removed from their credit cards, and returned goods stored in a warehouse for a long period of time run the risk of both higher carrying costs and obsolescence.
6 Assuming that product returns will take care of themselves if given enough time
Reverse logistics involves many touch points in an organization, including marketing and customer service, we need systems in place to address the problems that lead to returns at the first point of contact, because returns get costly when the customer service is unsatisfactory and it takes multiple points of contact to resolve an issue. A successful program includes processes to determine why returned goods are coming back, to work with customers to create a solution, and then to measure the results of those solutions.
7 Thinking that returns are relatively unimportant in terms of their cost, asset valuation and potential revenues
The easiest way to deal with returns is the path of least resistance: Send them back to their point of origin and let the manufacturer or distribution center deal with the problem. But that is a very expensive procedure and might result in lost sales and increased transportation and handling costs.
Strategic Use of Reverse Logistics
When companies think about strategic variables, they are contemplating business elements that have a long-term bottom line impact. Strategic variables must be managed for the viability of the firm. They are more than just tactical or operational responses to a problem or a situation. Previously, the only strategic variables a firm was likely to emphasize were business functions, such as finance or marketing. During the late 1970s and 1980s, some forward-thinking companies began to view their logistics capabilities as strategic. There is a wide spread agreement that the handling of reverse logistics challenges is an essential, strategic capability. Reverse logistics offers an opportunity for companies to differentiate or distinguish themselves with customers. The handling of the reverse movement becomes part of the corporate image and is often an important evaluative criterion used in vendor selection and subsequent purchase decisions. High quality reverse logistics can promote longer-term relationships; buyers are more likely to repurchase from vendors who do a good job at handling returns. Customer satisfaction ratings can soar with good reverse handling and corporate profitability can be directly impacted as well. It has been estimated that efficient management of the reverse process can cut as much as 10% from companies' total annual logistics costs.
Let us take a look at one of the most infamous cases in the history of business logistics. The McNeil Laboratories division of Johnson & Johnson experienced a very serious threat when someone poisoned several people by placing cyanide inside unopened bottles of Tylenol, a Johnson & Johnson flagship product. It happened twice in the space of a few years. The second time, Johnson & Johnson was prepared with a fine-tuned reverse logistics system and immediately cleansed the channel of any possibly tainted product. Because Johnson & Johnson acted so quickly and competently, a mere three days after the crisis, McNeil Laboratories experienced an all-time record sales day. Undoubtedly, the public would not have responded so positively had Johnson & Johnson not been able to quickly and efficiently handle its recalled product through its existing system in reverse. The Tylenol incident illustrates how reverse logistics capabilities can be strategic, and how they can dramatically impact the firm.
Another example of how reverse logistics can be used by retailers as a strategic variable is by keeping consumer product fresh and interesting. The most important asset a retail store has is its retail space. It has to make sure that it uses its retail store in the most effective manner so as to keep his customers happy and contented. An important service a supplier can offer to its customers is the ability to take back unsold or defective merchandise quickly, and credit the customers in a timely manner.
If retailers do not have a strategic vision of reverse logistics today, it is likely that they will be in trouble tomorrow. Retailers in high-return categories—such as catalog, toys, and electronics need to have a strong reverse logistics program. To maximize profit per square foot of selling space, stores have to keep the fresh goods visible. Supermarkets have to turn their inventories frequently to prevent spoilage loss, and to maximize the return on their space. Now, non-grocery retailers have begun to adapt supermarket ideas to their own businesses.
Reverse logistics is strategically used to allow forward channel participants—such as retailers and wholesalers—to reduce the risk of buying products that may not be “hot selling” items. For example, a record company developed a program to adjust return rates for various products depending on variables such as name recognition of the individual recording artist. This program produces a win-win environment for both the producer and the retailer, not to mention the consumer, who gets a broader selection. The program gives the company the ability to develop new artist franchises.
Future Trends
It is clear that in the future, more attention on reverse logistics will become the order of the day. Many firms have only become aware of the importance of reverse logistics relatively recently, and have yet to realize the strategic advantages that reverse logistics can provide their company with. To reduce the cost of reverse logistics, in the future, firms will need to focus on improving several aspects of their reverse logistics flows:
- Improved gatekeeping technology
- Partial returns credit
- Earlier disposition decisions
- Faster processing / shorter cycle times
- Better data management
In the years to come there shall be more and more efforts to reduce the cost of reverse logistics flow. One of the easiest ways to do it is to reduce the volume of products it is asked to carry. There are two aspects to this. First, products that do not belong in the flow should be prevented from entering. Secondly, once products have entered the flow, they should be disposed off as quickly as possible.
Also these are the main areas where the firms in future shall have to pay special attention:
- Product Life Cycle Management
The product life cycle management concept means that the firm provides the appropriate logistics and marketing support based, at least in part, on where the product is in its life cycle. The core of the product life cycle concept is that all products have a finite life and move through various stages. We know that a product life cycle curve is divided into four distinct phases. Those four phases are introduction, growth, maturity, and decline. Product volume increases through the introductory and growth phases. As a product moves through the life cycle to maturity, sales level off and begin to decrease. In the declining stage, sales drop and profits derived from the product diminish. In the future, it is likely that leading edge companies will begin to emphasize total product life cycle management.
To date, the focus for the marketing and logistics organizations at many firms is only on the early and middle portions of the product life cycle. It must be kept in mind that the same reverse logistic practices can’t be applied to the product during various stages in its life cycle. As the product approaches the end of its life, the cost of holding inventory increases. Inventory carrying costs consist of expenses such as the cost of money, insurance, taxes, shrinkage, warehousing, and obsolescence. As the product moves through the life cycle and reaches the end of its selling life, obsolescence costs increase from very low to100 percent. Warehousing costs associated with the product will also continue to accumulate. This means that a firm cannot correctly use only one inventory carrying cost across the total life of the product. At the end of a product’s life, it is likely that it will enter the reverse logistics flow. Good reverse logistics is a critical piece of product life cycle management. As the life cycle moves past volume sales, the firm needs to begin to clear the channel through the utilization of good reverse logistics practices. Plans must be made for the end of product life, as well as thinking about the other stages of the life cycle. If a firm can plan many of the management elements around the end of a product’s life, instead of merely reacting late to obsolete inventories, the total profit derived from a product will be greater.
- Information Systems
In order to handle reverse logistics better, firms will need to improve their reverse logistics information systems. Most return processes are paper-intensive. Automation of those processes is difficult because reverse logistics processes have so many exceptions. To work well, a reverse logistics information system has to be flexible. Information systems should include detailed information programs about important reverse logistics measurements, such as store compliance, return rates, recovery rates, and returns inventory turnover. Some of the systems for controlling returns will require significantly expanded and improved information systems.
Even if such systems do not materialize, firms will have to develop better reverse logistics information systems in the future. Additionally, useful tools such as radio frequency (RF) are helpful. New innovations such as two-dimensional bar codes and radio frequency identification license plates (RFID) may soon be commonplace.
- Electronic Data Interchange
Another important technology is Electronic Data Interchange (EDI). Electronic Data Interchange (EDI) allows companies to exchange information electronically in a very compact, concise, and precise way. Because the transactions are compact and must follow strict standards, attempting to understand the language of these transactions a pretty complex procedure. An EDI “exchange” is essentially the computer at one company making a phone call to the computer at another company. To allow everyone to speak the same language, these messages are sent in a standardized form, called “transaction sets.” Messages about a request for quotation follow the 840 transaction set; messages about purchase orders follow the 850 transaction set. All in all, there are hundreds of transaction sets for different types of business situations. While this technology is not new, most of the firms included in the research had not yet fully adopted EDI. While many processes within an organization may be automated, it hard to marshal the resources to implement all of the EDI transaction sets that a firm might wish to have.
- POS Registration
In some cases, manufacturers are willing to accept customer returns for a limited period of time after the initial purchase. If a retailer attempts to return a product to the manufacturer after this period has expired, the manufacturer will not give the retailer credit. In this type of situation, the retailer needs to know exactly when the product was purchased. A technology that can provide this information is point of sale (POS) registration. In a POS registration system, the retailer scans the product’s serial number at the time of sale. The retailer electronically sends the serial number and the sale date to the manufacturer. The manufacturer keeps on file the serial number, the sale date, and the name of the store that sold the product. When a customer tries to return a product at a later date, the retailer phones the manufacturer to learn if the product is within the warranty period. After the employee scans the product UPC, a web page appears that instructs the employee to scan in the product’s serial number. The web page accesses the database, and tells the employee whether the product was purchased at the retailer’s store, and if it is possible to return the product. Such a system nearly eliminates products being improperly returned. A possible drawback of this system is the cost to the manufacturer. In addition to the cost of registering the products, the manufacturer must also bear the considerable cost of developing and implementing such a system. Despite the cost of such a system, the benefits received from it will be too high to neglect it.
- Two Dimensional Bar Coding
Two-dimensional bar coding is another technology that holds promise for reverse logistics operations. Two-dimensional bar coding schemes, such as PDF417 or Maxi-Trac, allow the user to embed much more information in a bar code than one-dimensional systems such as UPC. One-dimensional systems contain a number or code that must be translated by the computer and matched with information already had inside the machine. With two dimensional bar code systems, the bar code can contain not only a code, but also a description and other text. Because reverse logistics transactions and processes are often exception-driven, information required to update the computer may not be able to fit within the limitations of one-dimensional bar codes. This limitation of one-dimensional bar code schemes could mean that for reverse logistics applications, new technologies—such as RFID or two- dimensional bar codes—will become the rule rather than the exception.
Conclusions
While much of the world does not yet care much about the reverse flow of product, many firms have begun to realize that reverse logistics is an important and often strategic part of their business mission. Reverse logistics practices vary based on industry and channel position. Industries where returns are a larger portion of operational cost tend to have better reverse logistics systems and processes in place. Reverse logistics practices vary based on industry and channel position. Industries where returns are a larger portion of operational cost tend to have better reverse logistics systems and processes in place. Quick handling and disposition of returns is now recognized as a critical strategic variable. Successful retailers understand that managing reverse logistics effectively will have a positive impact on their bottom line. Industries that have not had to spend much time and energy addressing return issues are now trying to make major improvements. Now, more than ever, reverse logistics is seen as being important.
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