Scope of Reverse Logistics

Reverse logistics, though considered a drain on the company’s profits, can be leveraged as a tool for customer satisfaction in today’s competitive markets. More and more manufacturing firms are thinking of incorporating the revere logistics system in their supply chain process. The reasons for this are:

  • Growing public concern about environment pollution
  • Government regulations on product recycling and waste disposal
  • Growing consumerism
  • Stiff competition

The reverse logistics network can be used for various purposes such as refilling, repairs, refur­bishing, remanufacturing, and so on. Depending on the nature of the product, unit value, sales volume and distribution channel, reverse logistics can be organized and designed into a system for the following activities.

1. Refilling

In industries such as soft drinks, wine, oil and LPG distribution, reverse logistics is integrated to their regular supply chain because of the reusable nature of the packages, such as glass bottles, tin containers and metal cylinders. In the case of soft drinks industry, the delivery van enroute to retailers a, b, c (see Figure 15.1) delivers the filled bottles and collects the same number of empty bottles from them for delivery to the factory. No extra transportation costs are involved in the pro­cess, as the delivery van originates and terminates its journey at the factory, where these reusable bottles are refilled for redelivery to the customers. Such an arrangement is called a “hub and spoke distribution system.”

A similar arrangement is in use by the petroleum companies (Hindustan Petroleum, Bharat Petroleum and others) for refilling of LPG cylinders. Truckloads of filled LPG cylinders are dis­patched from the bottling plant for delivery to the dealer’s godown. On return trip, the same truck carries the empty cylinders from the dealers for depositing at the bottling plant. With metal cylin­ders such as these, the recovery rate (due to less damage and prolonged life of the cylinders) is to the extent of 99.9 per cent.

The UB Group, at one of their plants, fills 3 lakhs beer bottles of London Pilsner (a leading beer brand in Maharashtra) every day. The recovery rate of empty glass bottles from the market is 92 per cent, as 3 per cent of the bottles are broken and 5 per cent of them are lost or put to other usages. Due to the cost difference of 20-25 per cent between new and old glass bottles, which con­tributes to the extent of 12-15 per cent in the total manufacturing cost of the product, the firm saves a lot by using the used bottles. They have developed a stand-alone reverse logistics system for recovery of the empty bottles through scrap vendors, who collect these bottles at a throwaway price from such places as hotels, clubs, pubs and bars.

Logistics service suppliers, who lease pallets to their various clients for packing and moving goods, keep a pool of pallets at fixed locations. Customers draw the pallets for use and deposit them at the assigned centre after usage. The damaged pallets are repaired or replaced regularly, keeping the required quantity in circulation. The return of the pallets is on an exchange basis. The pallet supplier is the common link between the buyer and the seller, with whom he co-ordinates the reverse logistics operation. This system is quite common in developed countries.

In India, box containers used in the multimodal transportation system are leased by the Con­tainer Lease Corporation Ltd. (CLCL), which keeps an inventory of empty box containers at Inland Container Depots (ICDs) operated by the Container Corporation of India (CCI) or private agen­cies. Customer requirements of containers for packaging and movement of goods in the domestic or foreign markets are drawn from these depots. The containers are loaded at container freight stations operated by the CCI or others. The empty containers, after de-stuffing of materials, are deposited at the container depot nearest to the place of delivery for further reuse and reverse flow to the place of origin. Thus, the entire movement of containers in forward and reverse logistics is controlled by CLCL.

Shaw Wallace has integrated the reverse flow of empty bottles with their regular forward dis­tribution system. The empty bottles are collected at the area distribution warehouse with the help of their dealers, who are in touch with hotels and scrap dealers. The latter have their own network to collect empty wine bottles from households, hotels, clubs and pubs. The bottles thus collected at field warehouses are sent back to the factory for refilling. The recovery of empty bottles is to the extent of 85-88 per cent of the supply.

2. Repairs and Refurbishing

This is a regular feature for service-based products under warranty, which manufacturers have to incorporate in their product offerings. Almost all consumer durables such as television sets, audio systems, washing machines, fans, and refrigerators, as well as all industrial products need repairs on a regular basis. Refurbishing is done for the goods returned by customers during the warranty period because of damage, defects or their performance being below the promised level. Manufacturers establish the reverse logistics system not only for offering free service during the warranty period of the product, but also for extending services beyond the warranty period on a chargeable basis. In addition to extending value-added services to customers, the system is a major revenue earner for the company. The reverse logistics system operates through the com­pany’s service centres, where the repair and refurbishing take place. The collection of products is done through the dealer network. The collected products are dispatched to the nearest service centre for overhaul, repair or refurbishing. The documentation and payment collection is the responsibility of the concerned dealer. For a large-value industrial product, coordinating with and locating the customer does not pose any problem, as the number of customers is small, and besides, they are personally known.

3. Product Recall

This is an emergency situation wherein the products distributed in the markets are called back to the factory because of any of the following:

  • Product not giving the guaranteed performance
  • Quality complaints from many customers
  • Defective product causing harm to human life
  • Products beyond the expiry date
  • Products with defective design
  • Incomplete product
  • Violation of government regulations
  • Ethical consideration
  • To save the company’s image

The above situations may arise very rarely. The likely reasons may be production shortcuts, bypassing stage inspections, employee negligence, human error or management negligence. Prod­uct recall in these situations puts a huge financial burden on the company. No organization designs in advance a reverse product flow system for deployment in anticipation of such eventualities. How­ever, many firms, on such occasions, have shown a great deal of organizing ability in mobilizing the company’s resources to achieve this time-bound objective.

In the 1980s, a leading Indian auto manufacturer launched a multi-utility vehicle in the Indian market. Soon after the launch, there were large-scale complaints from customers due to the defective gearbox design. All the vehicles dispatched to the customers were called back within a short time by deploying their dealer network and the company’s sales force, so they could be refitted with the gear­box of improved design. In the meantime, redesigning of the gearbox was competed on a war footing.

Johnson & Johnson Health Care, a U.S. multinational company, introduced milk powder in the South African markets as a substitute for breastfed milk for newborn babies. However, due to large- scale deaths of babies who consumed the powdered milk, Johnson & Johnson Health Care called back the entire unsold powdered milk stocks in the market under a time-bound program and gave compensations to the victims on ethical grounds. The cause of the deaths was contaminated milk prepared under unhygienic conditions and not the milk powder. The company failed to educate the mothers on a hygienic process for milk preparation during its sales campaign.

The scope and effectiveness of the recall process is dependent on the type of the product, its distribution network, consumption pattern and unit value. The recall process is very effective in the case of industrial products of high unit value, dispatched directly to a small number of customers. The customer being knowledgeable, extends his/her cooperation in the process. However, in the case of mass-consumed products distributed through a multi-level channel structure, identifying the product location becomes problematic. It is easier to trace the product location within the bound­aries of the channel network. Once the product is sold and handed over to the user, the degree of effectiveness of the product recall process reduces drastically because of the following reasons:

  • Lack of customer database
  • No motivation on the part of the customer to return the product
  • Product not meant for critical use

In the case of service-based products, such as consumer durables, which are accompanied with warranty cards, the product can be located, provided the documentation is maintained at the point of sale. This makes the recall process easy.

In the wake of stiff competition and growing consumerism, many manufacturers have put in place a product recall system as a value-added service to build competitiveness. The recall of defec­tive products during warranty period is now the most common feature of customer service offers. In fact, it is cost burden on the part of manufacturers. However, many companies now consider product recall as an opportunity to increase customer satisfaction and an asset recovery operation as well. Nestle India, for example, take back the yogurt every day from their distributors after the expiry of its 24-hour shelf life. Similarly, Monginis, a Mumbai-based leading bakery products producer, collect the cakes from their distributors when the product’s shelf life is over. The van delivering fresh prod­ucts to the distributors collects by default the products that are not sold and their shelf life is over.

4. Recycling and Waste Disposal

The left out materials, used products and wrapper wastes cause environmental pollution and cre­ate problems of disposal. Hence, in developed countries, governments are devising regulations to make manufacturers responsible for minimizing the waste by way of recycling the products. Germany is the first country in the world to implement such regulations. According to the law,
the manufacturer is responsible for taking back pallets, cardboard boxes, wrappers, strapping and such other things that are used for protecting the products during transit. They have implemented a three-stage packaging ordinance. In the first stage, wrappers or packaging wastes are collected from households by retailers. In the second stage, these waste items go from the retailers to the manufacturers who, in the third stage, send them across to the packaging manufacturer for recy­cling or disposal. The levy for recycling is indicated on the product by green dots. In Germany, the FMCG manufacturers have jointly promoted Dealers System Deutschland (DSD) with common funding for collection of packaging waste of FMCG products. They have reduced cost of retriev­ing and recycling the packing waste through economies of scale by joining hands together. In the United States there is a law to take back from customers car batteries, soda bottles and so on.

In Europe, Volkswagon (a leading auto manufacturer) is the first company that has effectively developed a car recycling (Figure 15.2) supply chain system. The car is mostly an assembly of com­ponents made out of metal that can be easily recycled.

For product refurbishing, for example, Sony USA, a consumer electronic giant operating in the United States, uses its regular dealer network for reverse flow of video or audio systems returned by the customers within the warranty period.

In India, the Supreme Court is in the process of imposing a ban on charging and discharging of automotive batteries on the grounds of pollution, and the union government is coming out with a new legislation making it mandatory to return used batteries to manufacturers for recycling and disposal.

5. Remanufacturing

Manufacturers in the developed countries are putting into practice a new concept of “remanufactur­ing” that emerged in the late 1990s. During usage the product undergoes wear and tear. The worn parts are replaced with the new ones and the performance of the product is upgraded to the level of the new one. The practice is more prevalent in the defence establishments where fighter planes are checked after each flight for their performance level, which is every time brought to the level of new one without any compromise on the quality front. Similarly, equipments sold in the markets can be checked after use to qualify for the remanufacturing process and brought to the remanufactur­ing unit. A leading cell phone company in Europe has outsourced its remanufacturing activities to a few vendors in Europe and developed a separate network for reverse flow of the used or discarded products held by the customer for only short periods before switching over to the latest models. The company has identified a huge market for remanufactured products in the developing countries. The investment in remanufacturing and related reverse logistics supply chain can be justified on the basis of economies of scale. A critic, however, says that the remanufacturing will solve the problem of waste disposal in developed countries, but create new dumping grounds in the developing countries.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.

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