Study of existing Reverse Logistics framework Retail industry

Abstract:

Reverse Logistics is a very complex and specialized area of any supply chain and it involves handling individual incoming parcels, opening and inspecting products, communicating with internal departments, customers and vendors and then directing products into disposition channels which will provide the highest value. Efficient Reverse Logistics system can transform an increasingly costly and complex returns management process into a competitive advantage. Integration of reverse logistics in specific retail sectors is critical for sustainability. The aim of this project work is to identify and examine the reverse logistics management in the retail industry in order to understand the existing application of reverse logistics and then propose relevant recommendations to improve efficiency in reverse logistics management. After critical analysis of the existing reverse logistics management in the selected retail sectors, potential ways to improve the efficiency of reverse logistics activities would be recommended in the selected retail sectors.

Chapter 1: Introduction

Twenty-years ago, supply chains were busy fine-tuning the logistics of products from raw material to the end customer. Products are obviously still streaming in the direction of the end customer but an increasing flow of products is coming back. This is happening for a whole range of industries, covering electronic goods, pharmaceuticals, beverages and so on. For instance distant sellers like e-tailers have to handle high return rates and many times at no cost for the customer. It is not surprising that the Reverse Logistics Executive Council has announced that US firms have been losing billions of dollars on account of being ill-prepared to deal with reverse flows (Rogers and Tibben-Lembke, 1999). While some actors in the chain have been forced to take products back, others have pro-actively done so, attracted by the value in used products. One way or the other, Reverse Logistics has become a key competence in modern supply chains. Many companies that, previously, did not devote much time or energy to the management and understanding of reverse logistics have begun to pay attention.

Definition of reverse logistics

In 1998 Stock defined reverse logistics as “the role of logistics in product returns, source reduction, recycling, materials substitution, reuse of materials, waste disposal and refurbishing, repair, and remanufacturing” (1998, p. 20). In a 1998 paper in the Journal of Business Logistics Carter and Ellram adopted a similar definition, calling it “the process whereby companies can become more environmentally efficient through recycling, reusing, and reducing the amount of materials used” (p. 85). If the focus of logistics is the movement of material from the point of origin toward the point of consumption (Council of Logistics Management 1999), then the focus of reverse logistics should be the movement of material from the point of consumption toward the point of origin. Rogers and Tibben-Lembke in their 1999 article emphasized a clear definition of reverse logistics drawn in essence from the Council of Logistics Management’s definition given as follows,

” 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 or creating value or proper disposal ” (Rogers and Tibben-Lembke 1999, p. 2)

This dissertation focuses on the reverse logistics activities in the retail industry with an analysis framework concerning the cost-benefit, visibility-information flow and efficiency. A reverse logistics flow is more reactive with much less visibility. The figure 1 depicts a typical reverse logistics information flow for the retail channel. For instance, when a consumer returns an item to a retail store, the store collects he items to be sent to a centralized sorting facility. At the time, information about the item and its condition may be entered into retailer’s information system and forwarded to the processing centre.

Figure Reverse logistics in Retail: an epitome of information flow

Delineation of reverse logistics definition

Since Reverse Logistics is a relatively new research and empirical area, there are other literature terms, like reversed logistics, return logistics and retro logistics or reverse distribution, sometimes referring roughly to the same. In fact, the diversity of definitions with respect to recovery practices is a well-recognized source of misunderstandings both in research as in practice (Melissen and De Ron, 1999)

In this dissertation I would like to remark that Reverse Logistics is different from waste management as the latter mainly refers to collecting and processing waste (products for which there is no new use) efficiently and effectively. The crux in this matter is the definition of waste. This is a major issue, as the term has severe legal consequences, for instance, it is often forbidden to import waste. Reverse Logistics concentrates on those streams where there is some value to be recovered and the outcome enters a (new) supply chain. Reverse Logistics also differs from green logistics as that considers environmental aspects to all logistics activities and it has been focused specifically on forward logistic, i.e. from producer to customer (Rodrigue et al., 2001). The prominent environmental issues in logistics are consumption of non-renewable natural resources, air emissions, congestion and road usage, noise pollution, and both hazardous and non-hazardous waste disposal (see Camm, 2001). Finally, reverse logistics can be seen as part of sustainable development. The latter has been defined by Brundland (1998) in a report to the European Union as “to meet the needs of the present without compromising the ability of future generations to meet their own needs.” In fact one could regard reverse logistics as the implementation at the company level by making sure that society uses and re-uses both efficiently and effectively all the value which has been put into the products.

The border between forward logistics (from raw materials to end user) and reverse logistics (from end user to recovery or to a new user) is not strictly defined as one can wonder about what ‘raw materials’ are, or who the ‘end user’ is, in modern supply chains. For instance, used/recovered glass is a substantial input for new production of glass. A holistic view on supply chains combining both forward and reverse logistics is embraced by the closed-loop supply chain concept (Guide and van Wassenhove, 2003). Recovery practices are framed within the supply chain, and the encircling aspect of the process as a whole is therefore stressed: having either 1) a physical (closed-loop): to the original user (see Fleischmann et al., 1997); or 2) a functional (closed-loop): to the original functionality. Thinking in term of closed-loop supply chains emphasizes the importance of coordinating the forward with the reverse streams. Actually, whenever both forward and reverse flows are involved, co-ordination has to be minded (see Debo et al., 2003). This happens, either in closed- or open-loops (the latter refers to when neither the original user nor original functionality are in the reverse logistics process).

Aim and objectives of the project

The aim of this project work is to identify and examine the reverse logistics management in the retail industry in order to understand the existing application of reverse logistics and then propose relevant recommendations to improve efficiency in reverse logistics management. In order to achieve this objective the project work would involve

Identifying the key retail sectors in which reverse logistics has and will have potential importance

Examine the various reverse logistics activities in the selected retail sectors

Analyze the effectiveness of reverse logistics management from the perspective of efficiency, profitability and environmental aspects

Propose recommendations to improve the efficiency of reverse logistics management

Report organization

The dissertation consists of five main chapters which is organized as follows

Chapter 2: Literature review

Background

Retailers constantly focus on strategies to gain competitive advantage and to improve financial performance. In doing so, emphasis is more frequently being placed on logistics, including tactical initiatives such as automatic replenishment programs, real-time information sharing, and advanced demand management techniques designed to improve internal efficiencies (Li 2002; Daugherty, Myers, & Autry 1998; Seideman 2002).However, retailers also compete on the basis of effectiveness, striving for increased customer satisfaction. One competitive tactic used to enhance customer satisfaction includes the implementation of liberalized product returns policies. By taking a more “consumer friendly” approach in their return policies, retailers communicate a higher level of service to patrons, and thereby increase customer satisfaction with ultimate goals of higher sales and profitability (Coopersmith 1990; Krapfel 1988).

As a result of return policy liberalization, acceptance of product returns is now commonplace; returns are reported to be as high as 10-15 percent of sales in some retail industries (Rogers & Tibben-Lembke 1999), and are thought to be even higher in catalog and internet retailing, with typical return rates of up to 40 percent (Rogers, Lambert, Croxton,& Garcia-Dastague 2002). However, the acceptance of returns places stress on the retailer’s logistics function. Whereas typical logistics activities are engineered to optimize flows from producer to consumer, reverse logistics activities move product, information, and currency in the opposite direction. While significant efforts have been expended in streamlining and optimizing retail logistics activities, the accomplishments associated with these activities do not always directly apply to the reverse logistics process. The forward movement of goods through the supply chain generally results in large receipts of goods at clearly defined intervals (such as when inventory levels reach critical safety levels, or at pre-specified and scheduled times), with the ultimate sale executed in smaller quantities to end-users. On the other hand, reversed supply chain flows are less predictable, occurring at various times and for various reasons, and thus, the costs of returns handling can be high (Rogers et al. 2002; Stock 1998).

One area of concern related to reverse logistics that has been largely ignored by academic research and practicing retailers is the financial implications of reverse logistics activities, especially as related to firm liquidity. When products reverse directions in a supply chain, it can happen quickly and without notice. While effective reverse logistics activities generally result in value reclamation and increased cash inflows, there can be periods where significant unexpected cash outflows occur. This is often due to the time lag between the moment the firm recovers the value from the returned product and the assumption of costs incurred in the reverse logistics process. Therefore, financial management of the reverse logistics process becomes salient, and needs to be a retailer focus on an ongoing basis.

Reverse logistics process:

A typical reverse chain process is shown in Figure 2. But a distinction should be made between different categories of returns:

Commercial Returns

Returns for which there is an immediate demand at another market location or segment. Possible causes: customer dissatisfaction, catalogue sales, overstocks etc. Commercial returns occur in the sales phase or shortly after.

Repairable Returns

Defects and suspect components (modules/parts) from field (exchange) repair activities or products under warranty. Customer is entitled to a replacement product.

End-of-use Returns

Returned products/components which are not of longer use to the original owner, but for which new customers can be found. Reasons: end-of-season, end-of-lease, trade-in, product replacements etc.

End-of-life Returns

Items of no remaining use, which are processed due to contractual or legislative obligations. These returns are often collected and processed according to legislative obligations.

Recalls

Products recalled by the manufacturer due to a condition or defect that could affect its safe operation. Work on a recall is completed at no cost to the product owner. Other types of returns, such as refillable units and reusable carriers, are not included in this study.

Figure Reverse logistics process

Returned goods often go through the following activities depending on the return type:

Product Acquisition

Retrieval of the product back from the market. The timing, quantity, quality and composition of returned product need to be managed in close cooperation with other supply chain parties.

Collection

Logistical activities (such as transportation, consolidation, transhipment and storage) to obtain the products back from the market and transport them to facilities involved in the other stages.

Sorting, Testing & Disposition

The classification (according to quality and composition) of returns and determination stage of the route the product will take in the reverse chain. Market and strategic conditions are taken into account in the disposition decision.

Recovery

The process of recovering value from the returned product by re-use, repair, refurbishment, recycling or other types of recovery.

Redistribution & Sales

Basically, no value recovery has materialised until the recovered products, component or materials are brought back into a forward supply chain.

Review of Past research works:

Financial aspects of RL:

Raimer (1997) indicated that returns are, and always have been, a fundamental part of retailing. His estimate was that reverse logistics account for between 5 and 6% of total logistics costs in the retail and manufacturing sectors. Daugherty et al. (2001), in a survey of US catalogue companies, reported reverse logistics costs on average to be 9.49% of total logistics costs. Rogers and Tibben-Lembke (1998) identified returns for different industries, with figures being recorded of 50% (magazine publishing), 20-30% (book publishers), 18-35% (catalogue retailers) and 10-12% (electronic distributors). Returns of merchandise bought over the Internet are expected to escalate as online sales grow. Consequently, companies in many sectors are facing a change of customer interface possibilities and subsequent supply chain dynamics (Rowley 2000). Returns are high because customers purchase online items “on trial” until they can handle them physically. Moreover, in mail order, especially ladies fashion, return rates of 60% are common (Wheatley 2002).

Given this level of returns, it is important to recognise that reverse logistics can have a significant bottom line impact on a company, and the ability to address opportunities may depend ultimately on management perceptions of reverse logistics (Stock 1998, Mason 2002). Autry (2005) argued that managers need to realise that effective handling of reverse logistics transactions can result in economic and strategic benefits. In practice, some companies seem to ignore the significance of reverse logistics to their supply chain, some companies have gradually recognized its importance, whilst others review reverse logistics as a strategic variable. It has been suggested that “innovator firms” that develop an expertise in reverse logistics activities and recognize them as a set of business processes that add value can potentially generate revenue, improve customer satisfaction, achieve significant cost savings and deliver a competitive edge in their various markets (Stock 1998, Carter and Ellram 1998). Given such potential benefits from developing reverse logistics processes, it is important to recognize the existence of barriers that may hinder the implementation of reverse logistics processes. Ravi and Shankar (2005), in a study of the automobile industry, identified 11 barriers to the application of reverse logistics. These include resistance to change, lack of appropriate performance measures, lack of training related to reverse logistics, lack of commitment by top management and lack of strategic planning.

Dowlatshahi, S. (2008) in his cost-benefit analysis for reverse logistics management considered and analysed the relevant literature in RL and identified the present state of theory in RL regarding cost-benefit. The research methodology used is exploratory case study approach. The cost-benefit is analysed and evaluated in terms of specific sub-factors associated with it by use of two in-depth case studies. Two companies from different industries engaged in RL operations are considered. The analysis of these case studies resulted in propositions and insights regarding RL operations. Based on these insights, the cost-benefit sub-factors, propositions, and a framework for effective design and implementation of RL operations are provided. This framework determines the appropriate sub-factors and how the return process of products/parts with respect to cost-benefit works. In conclusion, the managerial implications and future research directions were provided.

There are several parties involved in the management of the reverse logistics process and the way in which such interfaces are managed is crucial in both environmental and economic terms. As returns management becomes increasingly recognised as an area of supply chain importance, retailers are either developing in-house capabilities or outsourcing the operation to third-party logistics (3PL) providers (Krumwiede and Sheu 2002, Meade and Sarkis 2002, Hughes 2003). These supply chain interfaces occur in a number of different ways. For example, interfaces occur between retailers and manufacturers, between retailers and 3PLs and between end customers and retailers. There are many tensions occurring between these different players in the process. Currently, some companies prefer to build a separate infrastructure in order to facilitate the operation of the reverse logistics process. Other companies want to optimize the utility of their physical network by combining the reverse operation with the forward operation. In addition, centralized returns are a related possibility when companies are considering the construction of their physical network.

Environmental aspects of RL:

Environmentally friendly practices and the need to maintain sustainable development are important aspects in the debate surrounding reverse logistics. By not embracing sustainability, organizations face consequences in terms of increased economic and social liability (Savits 2002). Sustainable development embraces the “triple bottom line” philosophy of not compromising the future needs of society, the economy and the environment. In many reports on corporate social responsibility, sustainable transport is a significant feature with attempts to cut harmful emissions whilst maintaining economic operations. A driving force behind the search for improvements in sustainable distribution was the document published by the Department of Transport (1998) entitled “A new deal for transport: better for everyone”. Efficient integration of forward and reverse logistics has a significant part to play in this process. In this drive for sustainable distribution, it is important to recognize that accounting has a role to play. Mention has already been made of Corporate Social Responsibility Reports. There is a danger that traditional models of accounting and finance are actively supporting and encouraging unsustainable organizations and institutions (Gray 2002). Accountants need to be engaged in debates about environmental strategy, the institutional framework (government incentives) needs to support environmentally sound behaviour, and the change agents (such as environmental accounting) need to be embedded within the organization (Larrinaga-Gonzalez and Bebbington 2001).

Reverse logistics management:

Many tools exist to support the management of the reverse logistics process. The literature identifies mathematical models to support supply and transportation decisions (Du and Hall 1997). Also, the management of inventory can be supported through a range of mathematical models and enterprise resource planning (ERP) information systems (Boykin 2001, Teunter 2002). Hu et al. (2002) put forward a cost-minimisation model for minimising the total operating costs of a multi-time-step, multi-type hazardous waste’ reverse logistics system. Keeping with the theme of green supply chain management, Sheu et al. (2005) presented an integrated logistics operational model to co-ordinate the cross-functional product logistic flows and used-product reverse logistics flows in a green supply chain. Information communication technology (ICT) plays a significantly growing role in supporting reverse logistics operations and Daugherty et al. (2005) called for resources to be focused on developing information technology. In recent years there have been a number of developments and improvements in dedicated reverse logistics software (De Brito et al. 2002). Developments in satellite tracking systems have also enabled vehicles to navigate better their way through congestion and to monitor and improve fuel consumption. The continuing development of ICT offers opportunities for significant economic and environmental benefits in the reverse logistics process.

Drivers of reverse logistics:

There are a number of drivers of reverse logistics and many of these actually occur as a result of product and service decisions taken at the design and planning stage of product and service provision. Interestingly, Sciarrotta (2003) illustrates how Philips Consumer Electronics place great emphasis on trying to prevent returns rather than dealing with them later. In the retail sector, however, strategic decisions concerning “on-shelf” availability together with a liberal returns policy amongst retailers are significant factors in the level of returns. Legislative factors (e.g. WEEE Directive to be implemented June 2006) are also becoming increasingly important, with new legislation focusing on the need to dispose of and recycle products in an environmentally friendly manner.

In summary, the literature review has provided an overview of the issues that need to be considered when reflecting upon the management of reverse logistics processes. The significance of reverse logistics processes, in terms of both bottom line performance and environmental impact, has been highlighted in the literature. Also, the need to recognise the drivers of reverse logistics is highlighted together with the requirement to manage the interfaces between different members of the supply chain. Finally, the literature has identified numerous tools that can be used to support the reverse logistics process, and opened up the possibilities for using accounting information in this context to facilitate improved economic performance, supply chain efficiency and sustainability.

Determinants of reverse logistics (Ravi et.al, 2005)

Economic factors both directly and indirectly (de Brito & Dekker, 2003), legislation (de Brito & Dekker, 2003), corporate citizenship (de Brito & Dekker, 2003; Rogers & Tibben-Lembke, 1998) and environmental and green issues (Rogers & Tibben-Lembke, 1998) are the four determinants of reverse logistics taken into account in this research. These are briefly described below.

Economic factors

Economics is seen as the driving force to reverse logistics relating to all the recovery options, where the company receives both direct as well as indirect economic benefits. It is seen that companies continually strive for achieving cost savings in their production processes. If a firm does reverse logistics well, it will make money (Stock, 1998). The recovery of the products for remanufacturing, repair, reconfiguration, and recycling can lead to profitable business opportunities (Andel, 1997). Reverse logistics is now perceived by the organizations as an ‘investment recovery’ as opposed to simply minimizing the cost of waste management (Saccomano, 1997). A reverse logistics program can bring cost benefits to the companies by emphasizing on resource reduction, adding value from the recovery of products or from reducing the disposal costs. Guide and Wassenhove (2003) give an example of the US firm named ReCellular, which by refurbishing the cell phones, had gained economic advantage. Thus, the economic drivers of reverse logistics lead to direct gains in input materials, cost reduction, value added recovery and also in indirect gains by impeding legislation, market protection by companies, green image for companies and for improvement in customer/supplier relations.

Legislation

Another important driver for the reverse logistics is legislation. Legislation refers to any jurisdiction that makes it mandatory for the companies to recover its products or accept these back after the end of life of the product. These may include collection and reuse of products at the end of the product life cycle, shift waste management costs to producers, reduce volume of waste generated, and the use of increased recycled materials. For example, the Waste Electrical & Electronics Equipment directive encourages a set of criteria for collection, treatment and recovery of waste electrical and electronic equipment and makes producers responsible for financing these activities (WEEE, 2003). There has also been a restriction on the use of hazardous substances in the production processes, which facilitates the dismantling, and recycling of waste electronics. A reverse logistics decision for the EOL computers should ensure that the end-of-life products are retired in a way that is compliant with existing legislation.

Corporate citizenship

Another driver for the reverse logistics is the corporate citizenship that concerns a set of values or principles that impels a company or an organization to become responsibly engaged with reverse logistics activities. Reverse logistics activities can lead to increase of corporate image (Carter & Ellram, 1998). A good example in this context would be of Paul Farrow, the founder of Walden Paddlers, Inc., whose concern of ‘the velocity at which consumer products travel through the market to the landfill’, pushed him to an innovative project of a 100-percent-recyclable kayak (Farrow, Johnson, & Larson, 2000). In 1996, Hanna Andersson, a million direct retailer of infants and toddlers clothes developed a program called Hannadowns in which they distributed the children’s gently worn returned clothes to schools, homeless shelters, and other charities (Spence, 1998). Nike, the shoe manufacturer encourages consumers to bring their used shoes to the store where they had purchased them after their usage. They ship these back to Nike plant where these are shredded and made into basketball courts and running tracks. Nike also donates the material to the basketball courts and donates fund for building and maintaining these courts, thus enhancing the value of brand (Rogers & Tibben-Lembke, 1998). It is seen from the last two examples that few firms are acting as good corporate citizens by contributing to the good of the community and assisting the people who are probably less fortunate than their typical customers.

Environment and green issues

Concern for the environment and green issues is also one of the drivers of reverse logistics. The reverse logistics lead to benefits of environment (Byrne & Deeb, 1993; Carter & Ellram, 1998; Wu & Dunn, 1995). Hart (1997) proposes that the principle of the ecological footprint indicates the relevance of greening initiatives for countries. Reverse logistics has led to competitive advantage to companies which proactively incorporate environmental goals into their business practices and strategic plans (Newman & Hanna, 1996). Managers are giving increasing importance to the environmental issues (McIntyre, Smith, Henham, & Pretlove, 1998). The environmental management has gained increasing interest in the field of supply chain management. Handfield and Nichols (1999) mention greening as a critical future avenue in this area. Murphy, Poist, and Braunschweig (1995) have found that 60% in a group of 133 managers surveyed considered the issue of the environment to be a very important factor and 82% of them expected that the importance would increase in the years to come. A ‘green’ image of producing environmentally friendly products has become an important marketing element, which has stimulated a number of companies to explore options for take-back and recovery of their products (Thierry, 1997). A reverse logistics operations for EOL computers should ensure that the environmental and green issues are taken into account.

Summary of literature review:

This brief overview of the literature provides a framework for addressing the research questions identified in the study. The literature covers the definition of reverse logistics, the scale of the problem, the bottom line impact and potential barriers, the drivers of reverse logistics, supply chain interfaces, methods suggested in improving the reverse logistics process management and importance of sustainability issues.

Chapter 3 Methodology:

Research objective:

Identifying the key retail sectors in which reverse logistics has and will have potential importance

Examine the various reverse logistics activities in the specific retail sectors

Analyse the effectiveness of reverse logistics management from the perspective of efficiency and profitability

Research design:

Theory:

The good research design will have a proper strategy to analyze and interpret the collected information to provide findings and conclusions from the research. So proper analysis framework would lead to arrive at better conclusion and also provide platform for good recommendations or implications based on the investigation. The analysis design for this research has been formulated in coherence with research design and consistent with research aims & objectives. The theoretical research analysis framework used as guidance for the research design constructed in this dissertation.

Figure 1: Research Design Components Diagram

Problem

Questions

Aims

Literature

Conceptual framework

Theoretical framework

Ideas, examples, clues, models, etc. to use

Data collection

Data analysis

Interpretation

Conclusions

Results

Recommendations

Research plan:

The intended research plan for this dissertation could be classified into three phase as exhibited below.

Figure Research plan

** The interview could not be conducted due to limitation from the companies approached given the time frame

The key problem faced in conducting the research plan was low response from the companies approached for interviews or surveys. Given the time limitation and data confidentiality specifically data related financial aspects and key performance indicators, the research method had to be carried forward using case study approach and secondary data collection.

Research questions:

Reverse logistics trends:

The reverse logistics trends and the key aspects for the UK retail industry is the first research question in this dissertation. The secondary data collection method is employed to address this part of the research. The figure below indicates the key aspects of the industry trends that are included in this dissertation.

Figure Dissertation research design

Reverse logistics management integrated evaluation:

Research methods:

Exploratory case study:

The case methodology used in this dissertation is an exploratory case study in which a number of propositions are evaluated. McCutcheon and Meredith (1993) stated that although a case study may not be viewed as the most powerful theory testing method, it could accomplish this objective in several different ways. First, proposition testing may demonstrate the theory’s applicability or lack of applicability under conditions not previously investigated. Second, a single case study can be a powerful tool to establish limits on the theory’s generalisability or to totally refute it. Third, a single site provides a high degree of control for testing a new theory or comparing multiple competing theories.

Case study plan:

The plan for a case study experiment follows the suggested guidelines developed by Ellram (1996).The following is a summary of information regarding data collection and verification activities. The case data gathered about the companies were based on extensive observations of RL operations and activities by the authors, on-site interviews, archival records, and company documents. Some of the records accessed included customer service records, cost accountant records, various operational costs documents, inbound and outbound transportation cost figures, landfill cost reports, remanufacturing cost reports, etc.

Conceptual framework:

An integrated approach, as opposed to a piecemeal approach, to the design and implementation of RL is a necessity (Fleischmann et al. 2001). According to Stock (1998), this integrated approach should be mapped or flow-charted. This approach is also useful with the planning, designing, implementing, and controlling of all RL activities.

Case study:

The choice of the companies chosen for the case study is based on the reverse logistics trends summary. There are three case studies included in this dissertation which are listed as below,

Case study analysis and Discussion:

Empirical data:

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