Dell finds gold in parts returns

When companies significantly alter their sales strategy, it's clear they also have to rethink how they deliver their products to market. What may not be as obvious is that the shift in strategy could affect their reverse logistics operations as well.

Consider Dell Inc., the country's second-largest PC maker and the company that made supply chain management an art form in the personal computing world. In the mid-1990s, Dell abandoned retail stores as a sales channel and focused exclusively on selling its products direct to customers. The remarkable results that ensued are the stuff of business legend.

Two years ago, however, Dell resumed selling into the retail channel in an effort to beef up sales and fend off arch-rival Hewlett-Packard Co., which has since surpassed Dell as the leading PC maker. Dell's return to the retail space changed how it managed its supply chain. The change was most keenly felt in its reverse logistics operations.

Under the direct-to-customer model, managing reverse logistics was a relatively straightforward process. Because all of Dell's computers were built to order, there was little excess inventory in the supply chain. When a customer returned a product, Dell's policy was to refurbish and sell the unit.

The return to the retail channel introduced some complications. For one thing, Dell soon found itself saddled with excess inventory. The company quickly discovered that, in some cases, the parts were more valuable than the assembled unit itself. "In reality, a good portion of [those refurbished units] were not economically valuable," Matt Snyder, senior manager of reverse logistics for Dell, said at the annual conference of the Council of Supply Chain Management Professionals in September.

Recognizing this, Dell created a parts channel. Now, when a computer is returned, the company must decide whether to refurbish it or break it down for parts. Refurbished computers are sold either through a Dell outlet or through a broker. Parts are either sold externally or transferred internally.

Refurbished parts have created a new profit source for the company, and reverse logistics is no longer considered a cost center at Dell, Snyder said. Today, the company's reverse logistics mission is to "increase revenue-generating opportunities while decreasing operating expenses," he said.