road to recovery

Some retailers got a pleasant surprise at the end of the 2003 holiday selling season—and it wasn't just fat wads of cash register receipts or shelves stripped bare. What they found was that when it came to handling the inevitable returns, the process wasn't quite so painful as in the past. Gone were the phone confrontations with snarling customer service reps; gone were the piles of goods gathering dust in the corner of the stockroom until someone could get around to it. Instead, they discovered that many of their suppliers had adopted a sophisticated reverse logistics strategy that made the returns process smoother, cheaper and relatively hassle free.

What's changed is that manufacturers are no longer treating returns as exceptions. They're planning in advance—often as far back as the design process—to take back what they sell at the end of its life cycle. They're developing effective methods for reclaiming returned products and refurbishing, reselling or recycling them (or at least their component parts). Everybody in the supply chain benefits.

Known as closed-loop logistics, the strategy typically works like this: The original equipment manufacturer (OEM) sets up a channel for recovering its returns either using its own service force or by hiring a third party. These may be units in the field that have failed or need to be repaired; parts and subassemblies that can be re-used; products that have been recalled or have become obsolete; and even products at the end of their lease or end of their useful life. Once recovered, the products, along with subassemblies, parts and components that are in the field after delivery, are channeled either back into inventory for resupply to the field, or into a qualification and reconfiguration process, which leads to either re-use at the manufacturing level or full field disposal.

As it turns out, there's often gold in those piles of obsolete computers and DVD players. "Companies have discovered that if they introduce a function into their supply chains to take material as it's returned and make use of it, they can actually make money," says Don Blumberg, president of Fort Washington, Pa.-based D.F. Blumberg Associates Inc.

In some parts of the world, accepting returns is no longer optional. In Europe, for instance, so-called "green laws" require that manufacturers take ultimate responsibility for the disposal of certain products. So if an end user decides to replace his computer, rather than ditch the old one in the trash, he simply contacts the manufacturer to arrange for its return. The manufacturer then recycles or refurbishes the computer, keeping it out of a landfill. If the manufacturer fails to control and manage the full return process and the product becomes a hazard, the manufacturer is held responsible.

"This makes manufacturers very concerned with getting their materials back," says Blumberg. "These laws will eventually make their way to the United States because they're becoming increasingly accepted throughout the EU. It's important, because if no one worries about what happens after disposal, all this stuff piles up."

Today, a wide variety of industries are embracing closedloop logistics, with the predictable result that a wide variety of companies are springing up to help them carry out their programs. In fact, the total market for closed-loop service logistics in North America in 2002 was estimated at better than $35 million for transportation, warehousing and repair services, according to Blumberg. From high-end electronics to health-care products to books and consumerpackaged goods—where there's a need, there's a way to turn a return into a profit.

Staying in the loop
Despite the sometimes considerable startup costs, companies that have put a formal closed-loop system into place find that it offers them an edge over the competition. "So many competitive factors are a given," says James Stock, professor of marketing and logistics at the University of South Florida in Tampa. "Things like on-time delivery and good product quality are the price of admittance today—a closedloop system gives a company a competitive advantage."

One of the more aggressive companies when it comes to cashing in on its returns is computer giant Hewlett-Packard. "As long as we've been getting products back,we've been working on how to get something out of them," says Mark Colaluca, director of HP Services Americas' customer support logistics operations in Palo Alto, Calif. "But over the last three to four years, we've really increased our focus on a closed-loop system."

Today, almost every service part has a closed-loop expectation for repair, refurbishing or recycling at HP. Not surprisingly, given the scope of its program, HP has sought outside help. In North America, for example, the company partners with UPS Supply Chain Solutions (UPS SCS) for its warehousing, distribution and transportation. "We manage our closed-loop system together," says Colaluca. "It starts with the order and goes on through to the end with returns to their facilities." He credits technology with making these partnerships possible. HP's SAP enterprise resource planning system is able to talk to the warehouse management systems used by its third-party logistics service (3PL) partners, which enables all parties to exchange information throughout the process.

When HP takes a customer order and it's picked, packed and shipped, DC employees attach return labels to each item. "This makes it easy for the end users," explains Colaluca. "They simply have to add the return label and drop it off at a convenient location."

As soon as the product comes back to a distribution center operated by one of HP's 3PL partners, an employee scans that label, which automatically enters the information into both parties' systems. Customers have the option of buying a new part or accepting a refurbished part, both providing the same warranty.

The returned parts are then processed to determine how they should be treated—either refurbished or recycled, if possible. Items slated for refurbishment are sent directly out to repair locations. The speed at which the parts are returned from customers can be adjusted based on the demand for the item—those with higher demand are usually whisked through the process, while others follow shortly behind.

Colaluca says that HP benefits from its closed-loop system in several ways, including a big reduction in touch points. "Traditionally, returns went back to a central point for sorting before they were finally handled," he says. "Now, items go directly from customers to repair or recycling. The system reduces cycle time, labor and storage costs."

Seeking professional help
What makes all this possible, of course, is sophisticated technology. "The movement of information is just as important as the physical movement," says Buzzy Wyland, president of manufacturing services at Pittsburgh-based GENCO Distribution. "Web-enabled technology gives the visibility that's needed to close the loop."

Any company considering a closed-loop system will need to have a robust execution software package in place, preferably one that includes warehouse and transportation management systems, a reverse logistics component and even a component that focuses on providing value-adds. All of them must be integrated and Web-enabled. "You need a computer infrastructure that allows you to track product out into the field and back," says Blumberg.

Most large manufacturers already have such systems in place, while smaller and mid-sized companies typically still work with home-grown systems. "The interfaces exist, so integration is possible in both scenarios," Wyland says. "But if you don't have an enterprise system, a 3PL can be valuable because most have the systems savvy to get you where you need to be. Doing it internally is a daunting task."

In addition to acquiring robust technology, Stock says, companies have to make sure that their closed-loop programs are adequately staffed. "Too often you see a part-time effort by management and staff," he says. "You have to have a manager dedicated to it full time, and employees who are trained and compensated accordingly."

Technology and staffing aren't the whole story, however. Someone within your company must also have a good handle on forecasting. "Parts will change and demand will ebb and flow," says Blumberg. "You need someone who can stay on top of that because it has a big impact on closed-loop practices." In addition, someone in the company must identify and develop secondary markets for those items that aren't going back to the customer.

Not every company can do all this alone. If you can't dedicate enough resources to the effort, hire a 3PL, says Blumberg. "This is a specialization that not everyone can handle," he says. "3PLs can do it cheaper and faster—this is an emerging field and they're working hard to specialize in it."

HP, for one, has no regrets about its decision to outsource. "We've leveraged the industry experts so that we can focus on our core competency," says Colaluca.

And for now, Colaluca says a closed-loop system provides the company with an advantage over the competition. "Others will catch up, though," he says. "That's why we'll continue to look for ways to differentiate ourselves."