1. 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

2. 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

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

4. 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

5. Why is the reverse supply chain important?
Sustainability
Joe Blackburn

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

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

8. 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

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

10. 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

11. 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

12. 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

13. The Reverse Supply Chain Poster Child
Joe Blackburn

14. 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
Joe Blackburn

15. 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

16. Extracting Value from the RSC
Joe Blackburn

17. 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

18. 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?

19. 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.

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

21. 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

22. 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)

23. 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

24. 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

25. 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

26. 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

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

28. 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

29. 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

30. 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

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

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

33. 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?

34. 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

35. 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

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

37. 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

38. 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

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

40. 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)

41. 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

42. 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

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

44. 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

45. Flow diagram for notebook computers

46. The effect of better disposition

47. 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.

48. 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

49. Thank you… Contact information:
Joe Blackburn