Reverse Logistics: Important or Irritant?

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Reverse Logistics Important or Irritant?
Estimated 100 billion industry in 2006
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In an ideal world, reverse logistics would not
exist.
Jim Whalen, In Through the Out
Door, Warehousing Management, March 2001
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Reverse Logistics - What is it?The Armys
Definition

• The return of serviceable supplies that are
  surplus to the needs of the unit or are
  unserviceable and in need of rebuild or
  remanufacturing to return the item to a
  serviceable status

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Reverse Logistics - What is it?The Commercial
Perspective

• Reverse Logistics is the process of moving
  products from their typical final destination to
  another point, for the purpose of capturing value
  otherwise unavailable, or for the proper disposal
  of the products.

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Typical Reverse Logistics Activities

• Processing returned merchandise - damaged,
  seasonal, restock, salvage, recall, or excess
  inventory
• Recycling packaging materials/containers
• Reconditioning, refurbishing, remanufacturing
• Disposition of obsolete stuff
• Hazmat recovery

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Why Reverse Logistics?

• Competitive advantage
• Customer service
• - Very Important 57
• - Important 18
• - Somewhat/unimportant23
• Bottom line profits

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Reverse Logistics - New Problem?

• Sherman
• Montgomery Wards - 1894
• Recycling/remanufacturing in 1940s
• World War II - 77,000,000 square feet of storage
  across Europe with over 6.3 billion in excess
  stuff
• Salvage and reuse of clothing and shoes in the
  Pacific Theater World War II

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Key Dates in Reverse Logistics

• World War II the advent of refurbished
  automobile parts due to shortages
• 1984 - Tylenol Scare - Johnson and Johnson
• 1991 - German ordinance that put teeth in
  environmental reverse pipeline
• Summer 1996 UK Packaging and Packaging Waste
  Legislation
• 1998 - first real study of reverse logistics in
  the US - University of Nevada, Reno
• 2001 EU goal of 50-65 recovering or recycling
  of packaging waste

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Reverse Logistics

• A US Army Perspective

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Operation Iraqi Freedom

• The US Army moved the equivalent of 150
  Wal-Mart Supercenters to Kuwait in a matter of a
  few months

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Military Operations and Excess

• In battle, troops get temperamental and ask
  for things which they really do not need.
  However, where humanly possible, their requests,
  no matter how unreasonable, should be answered.
  George S. Patton, Jr.

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Janes Defence Weekly
Recent report (Aug 2003) There is a 40 hectare
(100 acres) area in Kuwait with items waiting
to be retrograded back to the US.
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Does this create a problem?
From GAO Audit Report
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From GAO Audit Report
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Reverse Logistics

• The Commercial Perspective

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Reverse Logistics

• Rate of returns?
• Cost to process a return?
• Time to get the item back on the shelf if
  resaleable?

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Costs - above the cost of the item

• Merchandise credits to the customers.
• The transportation costs of moving the items from
  the retail stores to the central returns
  distribution center.
• The repackaging of the serviceable items for
  resale.
• The cost of warehousing the items awaiting
  disposition.
• The cost of disposing of items that are
  unserviceable, damaged, or obsolete.

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Costs

• Process inbound shipment at a major distribution
  center 1.1 days
• Process inbound return shipment 8.5 days
• Cost of lost sales
• Wal-Mart Christmas 2003 - returns 4 Days of
  Supply for all of Wal-Mart 2000 Containers
• PalmOne - 25 return rate on PDAs

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More Costs

• Hoover - 40 Million per year
• Cost of processing 85 per item
• Unnamed Distribution Company - 700K items on
  reverse auction
• 2001 - over 60 billion in returns 52 billion
  excess to systems 40 billion to process

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Is it a problem?

• Estimate of 2004 holiday returns 13.2 billion
• of estimated 2004/2005 holiday returns 25
• Wal-Mart 6 Billion in annual returns 17,000
  truck loads (gt46 trucks a day)
• Electronics 10 Billion annually in returns
• Personal Computers 1.5 Billion annually
  approximately 95 per PC sold
• 79 of returned PCs have no defects
• Home Depot 10 million in returns in the stores
  alone
• Local Wal-Mart 1 million a month in returns

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Is it a Problem?

• European influence spread to US - Green Laws
• Estee Lauder - 60 million a year into land fills
• FORTUNE 500 Company - 200 million over their
  300 million budget for returns
• Same Provider - 40,000 products returned per
  month 55 no faults noted
• K-Mart - 980 million in returns 1999
• Warranty vice paid repairs

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More consequences

• Increased Customer Wait Times
• Loss of Confidence in the Supply System
• Multiple orders for the same items
• Excess supplies in the forward pipeline
• Increase in stuff in the reverse pipeline
• Constipated supply chain

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Impact?

• Every resaleable item that is in the reverse
  supply chain results in a potential stock out or
  zero balance at the next level of supply.
• Creates a stockout do-loop

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Results?

• This potential for a stock out results in
  additional parts on the shelves at each location
  to prevent a stock out from occurring.
• More stocks larger logistics footprint the
  need for larger distribution centers and returns
  centers.

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Reverse Logistics

• According to the Reverse Logistics Executive
  Council, the percent increase in costs for
  processing a return, as compared to a forward
  sale, is an astounding 200-300.
• In the U.S. alone, the cost is an annual 100
  billion. Forbes, March 2005
• Typically, as many as 8-12 more steps per item in
  the reverse pipeline than items in the forward
  pipeline

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The truth is, for one reason or another,
materials do come back and it is up to those
involved in the warehouse to effectively recover
as much of the cost for these items as possible.
- Whalen, In Through the Out Door
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RFID and Returns

• Visibility Tracking
• Component tracking
• Data Warehouse on what, why, when
• Altered products
• Not for every product

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Impacts of Reverse Logistics

• Forecasting
• Carrying costs
• Processing costs
• Warehousing
• Distribution
• Transportation
• Personnel
• Marketing

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Chapter 4

• Quality Management

Quality is a measure of goodness that is
inherent to a product or service. Bottom line
perspective has to be from the Customer fitness
for use
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Out of the Crisis

• Failure of management to plan for the future and
  to foresee problems has brought about waste of
  manpower, of materials, and of machine-time, all
  of which raise the manufacturers cost and price
  that the purchaser must pay.

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More Deming

• The consumer is not always willing to subsidize
  this waste. The inevitable result is loss of
  market. Loss of market begets unemployment.
  Performance of management should be measured by
  potential to stay in business, to protect
  investment, to ensure future dividends and jobs
  through improvement of product and service for
  the future, not by the quarterly dividend.

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Demings solution

• The basic cause of sickness in American industry
  and resulting unemployment is failure to top
  management to manage. He that sells not can buy
  not.
• The job of management is inseparable from the
  welfare of the company.

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What Is Quality?

• The degree of excellence of a thing (Websters
  Dictionary)
• The totality of features and characteristics
  that satisfy needs (ASQ)
• Fitness for use
• Quality of design

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Quality

• Quality Management not owned by any functional
  area cross functional
• Measure of goodness that is inherent to a product
  or service

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FedEx and Quality

• Digitally Assisted Dispatch System communicate
  with 30K couriers
• 1-10-100 rule ? 1 if caught and fixed as
  soon as it occurs, it costs a certain amount of
  time and money to fix ? 10 if caught
  later in different department or location as
  much as 10X cost ? 100 if mistake is
  caught by the customer as much as 100X to fix

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Product Quality Dimensions

• Product Based found in the product attributes
• User Based if customer satisfied
• Manufacturing Based conform to specs
• Value Based perceived as providing good value
  for the price

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Dimensions of Quality (Garvin)

• Performance
• Basic operating characteristics
• Features
• Extra items added to basic features
• Reliability
• Probability product will operate over time

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Dimensions of Quality (Garvin)

• Conformance
• Meeting pre-established standards
• Durability
• Life span before replacement
• Serviceability
• Ease of getting repairs, speed competence of
  repairs

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Dimensions of Quality (Garvin)

• Aesthetics
• Look, feel, sound, smell or taste
• Safety
• Freedom from injury or harm
• Other perceptions
• Subjective perceptions based on brand name,
  advertising, etc

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Service Quality

• Time Timeliness
• Customer waiting time, completed on time
• Completeness
• Customer gets all they asked for
• Courtesy
• Treatment by employees

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Service Quality

• Consistency
• Same level of service for all customers
• Accessibility Convenience
• Ease of obtaining service
• Accuracy
• Performed right every time
• Responsiveness
• Reactions to unusual situations

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Quality of Conformance

• Ensuring product or service produced according to
  design
• Depends on
• Design of production process
• Performance of machinery
• Materials
• Training

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Demings 14 Points

1. Create constancy of purpose
2. Adopt philosophy of prevention
3. Cease mass inspection
4. Select a few suppliers based on quality
5. Constantly improve system and workers
6. Institute worker training

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Demings 14 Points

1. Instill leadership among supervisors
2. Eliminate fear among employees
3. Eliminate barriers between departments
4. Eliminate slogans
5. Remove numerical quotas

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Demings 14 Points

1. Enhance worker pride
2. Institute vigorous training and education
   programs
3. Develop a commitment from top management to
   implement these 13 points

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The Deming Wheel(or PDCA Cycle)
Also known as the Shewart Cycle
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Six Sigma

• Quality management program that measures and
  improves the operational performance of a company
  by identifying and correcting defects in the
  companys processes and products

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Six SigmaStarted By Motorola

• Define
• Measure
• Analyze
• Improve
• Control

Made Famous by General Electric 40 of GE
executives bonuses tied to 6 sigma implementation

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Malcolm Baldrige National Quality Award

• Category 3 determine requirements,
  expectations, preferences of customers and
  markets
• Category 4 what is important to the customer
  and the company how does company improve

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Cost of Quality

• Cost of achieving good quality
• Prevention
• Planning, Product design, Process, Training,
  Information
• Appraisal
• Inspection and testing, Test equipment, Operator

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Cost of Quality

• Cost of poor quality
• Internal failure costs
• Scrap, Rework, Process failure, Process downtime,
  Price-downgrading
• External failure costs
• Customer complaints, Product return, Warranty,
  Product liability, Lost sales

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Employees and Quality Improvement

• Employee involvement
• Quality circles
• Process improvement teams
• Employee suggestions

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Cause-and-Effect Diagram
Also known as Ishikawa Diagram or Fish Bone
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Hot House Quality

• Lots of Hoopla and no follow through

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ISO 90002000

• Customer focus
• Leadership
• Involvement of the people
• Process approach
• Systems approach to management
• Continual process improvement GAO
• Factual approach to decision making
• Mutually beneficial supplier relationships

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Implications Of ISO 9000

• Truly international in scope
• Certification required by many foreign firms
• U.S. firms export more than 150 billion
  annually to Europe
• Adopted by U.S. Navy, DuPont, 3M, ATT, and
  others

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ISO Accreditation

• European registration
• 3rd party registrar assesses quality program
• European Conformity (CE) mark authorized
• United States 3rd party registrars
• American National Standards Institute (ANSI)
• American Society for Quality (ASQ)
• Registrar Accreditation Board (RAB)

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Upcoming Events

• Final Exam due by Saturday
• Harley Papers by Saturday