Reverse Logistics: Reverse Logistics: Important or Irritant?Important or Irritant?

Estimated $100 billion industry in 2006

“In an ideal world, reverse logistics would not exist.”

Jim Whalen, “In Through the Out Door,”Warehousing Management, March 2001

“Now, more than ever, reverse logistics is seen

as being important.”

Dale Rogers, Going Backwards, 1999

Reverse Logistics - What is it?Reverse Logistics - What is it?The Army’s Definition The Army’s 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

Reverse Logistics - What is it?Reverse Logistics - What is it?The Commercial PerspectiveThe 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.

Typical Reverse Logistics Typical Reverse Logistics ActivitiesActivities

• Processing returned merchandise - damaged, seasonal, restock, salvage, recall, or excess inventory

• Recycling packaging materials/containers• Reconditioning, refurbishing,

remanufacturing• Disposition of obsolete stuff• Hazmat recovery

Why Reverse Logistics?Why Reverse Logistics?

• Competitive advantage

• Customer service

- Very Important: 57%

- Important: 18%

- Somewhat/unimportant:23%

• Bottom line profits

Reverse Logistics - New Reverse Logistics - New Problem?Problem?

• Sherman• Montgomery Ward’s - 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

Key Dates in Reverse LogisticsKey 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

Reverse Logistics Reverse Logistics

A US Army Perspective

Operation Iraqi FreedomOperation Iraqi Freedom

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

Military Operations and Military Operations and ExcessExcess

“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.

Jane’s Defence WeeklyJane’s 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.”

From GAO Audit Report

Does this create a problem?

From GAO Audit Report

Reverse LogisticsReverse Logistics

• Rate of returns?

• Cost to process a return?

• Time to get the item back on the shelf if resaleable?

Costs - above the cost of Costs - above the cost of the itemthe 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.

CostsCosts• 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

More CostsMore 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

Is it a problem?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 (>46 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

Is it a Problem?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

More consequencesMore 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

Impact?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

Results?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.

Reverse LogisticsReverse Logistics

reverse logistics is: 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 value or proper disposal. More precisely, reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Remanufacturing and refurbishing activities also may be included in the definition of reverse logistics. Reverse logistics is more than reusing containers and recycling packaging materials. It includes redesigning packaging to use less material, or reducing the energy and pollution from transportation are important activities.

Reverse LogisticsReverse 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

“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”

Impacts of Reverse LogisticsImpacts of Reverse Logistics

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

Chapter 3Chapter 3

Quality Quality ManagementManagement

Quality is a measure of goodness that is inherent to a product or service.

Bottom line: perspective has to be from theCustomer – fitness for use

““The degree of excellence of a The degree of excellence of a thing” (Webster’s Dictionary)thing” (Webster’s Dictionary)

““The totality of features and The totality of features and characteristics that satisfy needs” characteristics that satisfy needs” (ASQ)(ASQ)

Fitness for useFitness for use

Quality of designQuality of design

What Is Quality?What Is Quality?

QualityQuality

• Quality Management – not owned by any functional area – cross functional

• Measure of goodness that is inherent to a product or service

FedEx and QualityFedEx 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

Product Quality Product Quality DimensionsDimensions

• 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

Dimensions of Quality (Garvin)Dimensions of Quality (Garvin)

1.1. Performance Performance Basic operating characteristicsBasic operating characteristics

2.2. Features Features ““Extra” items added to basic featuresExtra” items added to basic features

3.3. Reliability Reliability Probability product will operate over Probability product will operate over

timetime

Dimensions of Quality (Garvin)Dimensions of Quality (Garvin)

4.4. Conformance Conformance Meeting pre-established standardsMeeting pre-established standards

5.5. Durability Durability Life span before replacement Life span before replacement

6.6. Serviceability Serviceability Ease of getting repairs, speed & Ease of getting repairs, speed &

competence of repairscompetence of repairs

Dimensions of Quality (Garvin)Dimensions of Quality (Garvin)

7.7. AestheticsAesthetics Look, feel, sound, smell or tasteLook, feel, sound, smell or taste

8.8. SafetySafety Freedom from injury or harmFreedom from injury or harm

9.9. Other perceptionsOther perceptions Subjective perceptions based on Subjective perceptions based on

brand name, advertising, etcbrand name, advertising, etc

1.1. Time & Timeliness Time & Timeliness Customer waiting time, completed Customer waiting time, completed

on timeon time

2.2. Completeness Completeness Customer gets all they asked forCustomer gets all they asked for

3.3. CourtesyCourtesy Treatment by employeesTreatment by employees

Service QualityService Quality

4.4. ConsistencyConsistency

Same level of service for all customers Same level of service for all customers

5.5. Accessibility & Convenience Accessibility & Convenience Ease of obtaining serviceEase of obtaining service

6.6. AccuracyAccuracy Performed right every timePerformed right every time

7.7. ResponsivenessResponsiveness Reactions to unusual situationsReactions to unusual situations

Service QualityService Quality

Quality of Quality of ConformanceConformance

Ensuring product or service Ensuring product or service produced according to designproduced according to design

Depends onDepends onDesign of production processDesign of production processPerformance of machineryPerformance of machineryMaterialsMaterialsTrainingTraining

Quality PhilosophersQuality Philosophers Walter Shewhart – Statistical Process Walter Shewhart – Statistical Process

ControlControl W. Edwards DemingW. Edwards Deming Joseph Juran – strategic and planning basedJoseph Juran – strategic and planning based Philip CrosbyPhilip Crosby Armand Fiegenbaum – total quality control Armand Fiegenbaum – total quality control

“entire business must be involved in quality “entire business must be involved in quality improvement”improvement”

Deming’s 14 PointsDeming’s 14 Points1.1. Create constancy of purposeCreate constancy of purpose

2.2. Adopt philosophy of preventionAdopt philosophy of prevention

3.3. Cease mass inspectionCease mass inspection

4.4. Select a few suppliers based on Select a few suppliers based on qualityquality

5.5. Constantly improve system and Constantly improve system and workersworkers

6.6. Institute worker trainingInstitute worker training

Deming’s 14 PointsDeming’s 14 Points

7.7. Instill leadership among Instill leadership among supervisorssupervisors

8.8. Eliminate fear among employeesEliminate fear among employees9.9. Eliminate barriers between Eliminate barriers between

departmentsdepartments10.10. Eliminate slogansEliminate slogans11.11. Remove numerical quotasRemove numerical quotas

Deming’s 14 PointsDeming’s 14 Points

12.12. Enhance worker prideEnhance worker pride

13.13. Institute vigorous training and Institute vigorous training and education programseducation programs

14.14. Develop a commitment from top Develop a commitment from top management to implement these management to implement these 13 points13 points

The Deming WheelThe Deming Wheel(or PDCA Cycle)(or PDCA Cycle)

1. PlanIdentify the problem and develop the plan for improvement.

2. DoImplement the plan on a test basis.

3. Study/CheckAssess the plan; is it working?

4. ActInstitutionalize improvement; continue the cycle.

Also known as the Shewart CycleAlso known as the Shewart Cycle

Six SigmaSix Sigma

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

Six SigmaSix SigmaStarted By MotorolaStarted By Motorola

• Define

• Measure

• Analyze

• Improve

• Control

Made Famous by Made Famous by General ElectricGeneral Electric40% of GE executives’40% of GE executives’bonuses tied to 6 sigmabonuses tied to 6 sigmaimplementation implementation

Malcolm Baldridge Malcolm Baldridge National Quality Award 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

Total Quality ManagementTotal Quality Management

1.1. Customer defined qualityCustomer defined quality2.2. Top management leadershipTop management leadership3.3. Quality as a strategic issueQuality as a strategic issue4.4. All employees responsible for qualityAll employees responsible for quality5.5. Continuous improvementContinuous improvement6.6. Shared problem solvingShared problem solving7.7. Statistical quality controlStatistical quality control8.8. Training & education for all employeesTraining & education for all employees

Strategic Implications of Strategic Implications of TQMTQM

Quality is key to effective strategyQuality is key to effective strategyClear strategic goal, vision, missionClear strategic goal, vision, missionHigh quality goalsHigh quality goalsOperational plans & policiesOperational plans & policiesFeedback mechanismFeedback mechanismStrong leadershipStrong leadership

TQM in Service CompaniesTQM in Service Companies

Inputs similar to manufacturingInputs similar to manufacturingProcesses & outputs are differentProcesses & outputs are differentServices tend to be labor intensiveServices tend to be labor intensiveQuality measurement is harderQuality measurement is harderTimeliness is important measureTimeliness is important measureTQM principles apply to servicesTQM principles apply to services

Cost of QualityCost of Quality

Cost of achieving good qualityCost of achieving good qualityPreventionPrevention

Planning, Product design, Planning, Product design, Process, Training, InformationProcess, Training, Information

AppraisalAppraisal Inspection and testing, Inspection and testing,

Test equipment, Test equipment, OperatorOperator

Cost of QualityCost of QualityCost of poor qualityCost of poor quality

Internal failure costsInternal failure costs Scrap, Rework, Process failure, Scrap, Rework, Process failure,

Process downtime, Price-Process downtime, Price-downgradingdowngrading

External failure costsExternal failure costs Customer complaints, Customer complaints,

Product return, Product return, Warranty, Product Warranty, Product liability, Lost salesliability, Lost sales

Employees and Employees and Quality ImprovementQuality Improvement

Employee involvementEmployee involvementQuality circlesQuality circlesProcess improvement teamsProcess improvement teamsEmployee suggestionsEmployee suggestions

Cause-and-Effect Diagram Cause-and-Effect Diagram

QualityProblemQuality

Problem

Out of adjustmentOut of adjustment

Tooling problemsTooling problems

Old / wornOld / worn

MachinesMachinesFaultyFaulty testing equipmenttesting equipment

Incorrect specificationsIncorrect specifications

Improper methodsImproper methods

MeasurementMeasurement

Poor supervisionPoor supervision

Lack of concentrationLack of concentration

Inadequate trainingInadequate training

HumanHuman

DeficienciesDeficienciesin product designin product design

Ineffective qualityIneffective qualitymanagementmanagement

Poor process designPoor process design

ProcessProcess

InaccurateInaccuratetemperature temperature controlcontrol

Dust and DirtDust and Dirt

EnvironmentEnvironment

Defective from vendorDefective from vendor

Not to specificationsNot to specifications

Material-Material-handling problemshandling problems

MaterialsMaterials

Also known as Ishikawa Diagram or Fish BoneAlso known as Ishikawa Diagram or Fish Bone

Hot House QualityHot House Quality

Lots of Hoopla and no follow through

ISO 9000:2000ISO 9000:2000• 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

Implications Of ISO 9000Implications Of ISO 9000

Truly international in scopeTruly international in scopeCertification required by many foreign Certification required by many foreign

firmsfirmsU.S. firms export more than U.S. firms export more than

$150 billion annually to Europe$150 billion annually to EuropeAdopted by U.S. Navy, Adopted by U.S. Navy,

DuPont, 3M, AT&T, and othersDuPont, 3M, AT&T, and others

ISO AccreditationISO Accreditation

European registrationEuropean registration 3rd party registrar assesses quality program3rd party registrar assesses quality program European Conformity (CE) mark authorizedEuropean Conformity (CE) mark authorized

United States 3rd party registrarsUnited States 3rd party registrars American National Standards Institute (ANSI)American National Standards Institute (ANSI) American Society for Quality (ASQ)American Society for Quality (ASQ) Registrar Accreditation Board (RAB)Registrar Accreditation Board (RAB)