Designing the Reverse Supply Chain APICS Nashville Chapter November 16, 2010 Joseph D. Blackburn James A. Speyer Professor of Management Owen Graduate School of Management Vanderbilt University Nashville, TN Joe Blackburn 2010

What is the reverse supply chain? All the activities required to recover a returned or used product from a customer and … Reuse it Recycle it Remanufacture it Dispose of it Joe Blackburn 2010

The Forward Supply Chain Customer Raw Materials Parts Fabrication Module Assembly Product Assembly Distribution Joe Blackburn 2010 Joe Blackburn 2010

The Forward & Reverse Supply Chain Customer Raw Materials Parts Fabrication Module Assembly Product Assembly Distribution Restock Product Remfg. Return Stream Component Reuse Product Collection & Inspection Material Recycling End-of-Life Disposal Scrap Joe Blackburn 2010

Why is the reverse supply chain important? Sustainability Joe Blackburn 2010

Migrant child from Hunan province sits atop one of countless piles of unrecyclable computer waste imported from around the world. Guiyu, China. December 2001. Copyright Basel Action Network. 6 Joe Blackburn 2010

Why is the reverse supply chain important? Sustainability Regulation Joe Blackburn 2010

Regulation: Extended Product Responsibility Europe: Producers are financially responsible for take-back and recycling of batteries, packaging, vehicles and all electrical consumer products Japan Producers are responsible for recycling cars and electronic products US 21 states have passed product take-back legislation Joe Blackburn 2010

Why is the reverse supply chain important? Sustainability Regulation Business Opportunity Joe Blackburn 2010

The On-line Apparel Sales Reverse Supply Chain ~ $22 billion Customer Raw Materials Parts Fabrication Module Assembly Product Assembly Distribution Restock $ 3-4 billion Return Stream Product Collection & Inspection Markdown

Value of Returned Product Flows Consumer Electronic Returns Exceed $2 billion annually Construction Equipment Co. has a $2 Billion $/year used parts business Joe Blackburn 2010

Why is the reverse supply chain important? Sustainability (It’s good for the planet) Regulation (It’s the law) Business Opportunity ($$$: It’s good for business) Joe Blackburn 2010

The Reverse Supply Chain Poster Child Joe Blackburn 2010

The ‘Single-Use Camera” Closed-Loop Supply Chain Customer Raw Materials Parts Fabrication Module Assembly Product Assembly Distribution Module Reuse Parts Reuse Developing Main unit, lens, flash Inspection/Test Disassembly Material Recycling (Rear & front body, switch) Joe Blackburn 2010 Joe Blackburn 2010

Two views on the RSC A waste stream approach: A value stream approach: Fundamental issue: minimize the amount of money the firm loses A value stream approach: Recovery and reuse can be profitable

Extracting Value from the RSC Joe Blackburn 2010

Activities in the Reverse Supply Chain Timing, quantity, quality of used products: Product acquisition mgmt Return rates Product Returns Management Remanufacturing Operational Issues Reverse logistics Test, sort, disposition Disassemble Repair, Remanufacture Remanufactured Products Market Development Develop channels, Remarket, Secondary markets, Cannibalization

A Process Perspective on the Reverse Supply Chain Front End Do I have access to used products? Product Returns Management Remanufacturing Operational Issues Engine Can I recover value at a reasonable price? Remanufactured Products Market Development This second slide moves us from an activity to a process perspective. From a process perspective, there is a front end (access to used products), an engine (doing something useful with the product) and a back end (selling the product again). This is more of a flow approach: do I have access to used products, can I recover value from them at a reasonable cost, and does anyone want to buy the remanufactured products? It is now obvious that all three constraints can be a bottleneck, a showstopper. And, indeed, very often it is not the technical constraints (the engine) that matter, but rather the front end and the back end. Back end Does anyone want to buy?

How hard are these key activities? Product Acquisition Reverse Logistics Test Sort Grade Remanufacture/ Refurbish Remarketing Product Life Extension Jet engines Easy Hard Refillable Containers Toner cartridges Tire Retreading Commercial Intermediate Consummer Electronic Reuse Cellular Phones Industrial Remanufacturing Copiers Passenger cars Going back to the removing bottlenecks idea in order to unleash the value from product returns, one can easily see from the table why some products are widely recovered and why for other products the challenges are still much greater. It is important to note in passing that most early research on CLSC has been in the area of operational issues in the typical IE/OR tradition.

Extracting Value from Product Returns Product returns represent a value stream not just a waste stream

The Growing Problem of Product Returns Value of Products returned to retailers > $120 billion (and growing) On-Line Sales produce higher return rates than Bricks-and-Mortar Sales For time-sensitive products, much of the returned product’s asset value is never recovered: lost in the reverse supply chain Joe Blackburn 2010

Types of returns Commercial returns 30 to 90 day free returns policy in US Consumer Electronics returns about 8% of sales; many not defective HP: return costs are > 2% of annual gross sales Repair / warranty returns Leasing End-of-use returns Cell phones: 80% replaced after first year of use End-of-life returns Mandatory take-back in EU (WEEE)

Time-Sensitive Product Return Streams Short life-cycles; high obsolescence risk Returned product loses value rapidly Time delays in returns process flow are costly & “Value of time” a key variable Examples: PCs, phones, fashion goods, telecom equip. Joe Blackburn 2010

The Shrinking Pipeline for a Printer Manufacturer 15% New & Warranty Pool Loss in Asset Value >$75 million $150 million 15% Scrap 5% Salvaged Components 15% “Low-touch” Refurbished 50% Repair & Refurb. Joe Blackburn 2010

A Printer can lose 20% of its value waiting for disposition Replacement Stock Sequencing Decision Product Returns In Field & Return Pipeline l Queue for Insp.&Testing Inspection & Testing Repair or Refurbish Salvage Components Scrap ~2 months ~40 days Joe Blackburn 2010

Marginal Value of Time T0 T1 Time Start Begin Shipping Phase-out Value of Returned Product ($) Marginal Value of Time Processing Delay (Dt) $ Cost of Delay Product Return (New) Return To Stock T0 T1 Time Start Shipping Begin Phase-out Joe Blackburn 2010

Example: price erosion notebooks Price erosion: quality 1: $25 per month quality 2: $40 per month

How does the Marginal Value of Time (MVT) influence Reverse Supply Chain Strategy? Retained Time-Insensitive (Low MVT) e.g. Power Tools (Bosch) Time-Sensitive (High MVT) e.g. Printers (HP) Time Joe Blackburn 2010

The value of lead time reduction HP inkjet printers (US): One day reduction between evaluation and remanufacturing  $72k One day reduction between remanufacturing and the secondary market  $79k Bosch Power Tools: One day reduction between evaluation and remanufacturing  $11k One day reduction between remanufacturing and the secondary market  $12k

How Should Your (Reverse) Supply Chain be Designed? (Fisher’s Model) Functional Product Innovative Product Yes No Efficient Chain (Cost-based) Responsive Chain (Time-based) Joe Blackburn 2010

Centralized, “Efficient” RSC Design Re-stock Remanufacture Parts Recovery Scrap Product Returns Retailers & Resellers Centralized Evaluation & Test Facility Joe Blackburn 2010

Decentralized, Responsive Returns Network Evaluation of Product * Re-stock Refurbish Test & Repair Facility Product Returns * Parts Recovery ** * Scrap Retailers & Resellers Joe Blackburn 2010

How to maximize value recovery? The longer it takes to put a returned product back on the market, the lower the likelihood that there are economically viable reuse options. Cost minimization typically leads to slow and centralized returns handling and high product value erosion. What are the design implications?

Proposed Design Strategy Matrix for Reverse Supply Chains Product Low “time value” High “time value” Centralized, Efficient X Match Supply Chain X Match Decentralized, Responsive Joe Blackburn 2010

C = Salvageable Components S = Scrap C C D&T S Reverse Supply Chain: Can Early Product Differentiation (“Preponement”) improve profitability? Delayed Product Differentiation: N Restock R Refurb R N C Recover Components C S Disposition & Testing Center S Scrap Field Early Product Differentiation: Restock N R R N = New or Restock R = Refurbishable Unit C = Salvageable Components S = Scrap C C D&T S Scrap Joe Blackburn 2010

Under what conditions would the preferred RSC design be Centralized & (Cost) Efficient? Decentralized & Responsive (“preponement model”) ? Joe Blackburn 2010

Implications for Network Design Efficient, Centralized Value Responsive, Decentralized low Restock fraction high Dt (time value) Economic advantage of decentralized, responsive chain increases with the time value of product and restock fraction Design for “preponement” can make the decentralized model more attractive by reducing cost of field evaluation. [Example: H-P Galileo– meters the # of pages printed by a printer] Joe Blackburn 2010

Examples Benefits of “preponement” in a decentralized, Hewlett-Packard Printers Dt ~ 1% per week p = 33% Bosch Power Tools Dt ~ 1% per month p < 1% Benefits of “preponement” in a decentralized, responsive supply chain are greater for H-P than Bosch. Joe Blackburn 2010

Design Strategies: H-P & Bosch Product Low MVT High MVT Centralized, Efficient X Bosch Reverse Supply Chain X H-P Decentralized, Responsive Joe Blackburn 2010

How to maximize value recovery? Better disposition/market allocation decisions Remove system bottlenecks Rapid response to minimize value erosion Quant. models can help (provided the right data are available)

Designing the Reverse Supply Chain for Fashion Apparel ~ $22 billion Customer Raw Materials Parts Fabrication Module Assembly Product Assembly Distribution Restock $ 3-4 billion Return Stream Should you encourage on-line customers to return product to a store? Should you make it easy to return the product? Product Collection & Inspection Markdown Joe Blackburn 2010

Example: operational management for rapid response Notebooks returns management at HP Europe Returned notebooks refurbished by ODM Fragmented process designed to minimize refurbishment costs Management did not take into account time value

Cumulative shipments to and from the ODM over a 10 month period

Process Map: flows, lead times, inventory levels Bottlenecks: ODM & Warehouse (re-sale) Value lost due to erosion: average inventory level × erosion rate 6,400 units × $25 per unit per month = $160k per month

Flow diagram for notebook computers

The effect of better disposition

Roadmap for reverse supply chain redesign Treat returns as a value stream, as opposed to a waste stream. (Most companies focus on cost minimization…) Consider the reverse supply chain from end-to-end. Any sub-process (acquisition, reverse logistics, disposition, refurbishment and marketing) can become a system bottleneck. Identify and develop the right performance metrics and track them systematically. Start by constructing simple models; pay particular attention to the economic impact of time. Use the insights obtained from the models to understand the economic impact of alternative designs and policies. Align the organizational structure and the incentives/reward systems to unleash the potential economic profit from the reverse supply chain.

Summary Product returns represent a value stream, not just a waste stream. Product’s time-value is key design variable for reverse supply chain. “Preponement”, rather than postponement, increases asset recovery in the reverse supply chain. Joe Blackburn 2010

Thank you… Contact information: Joe.Blackburn@owen.vanderbilt.edu Joe Blackburn 2010