System Design Considerations

In 1996, the auto giant General Motors had a problem handling 30,000 defective parts per month for replacement within the warranty period, which were returned by customers from various places to their plants at different locations. To overcome this problem they, along with UPS Worldwide Logistics, jointly developed a reverse logistics system using their 200 dealers as collection and dis­posal centres to initiate documentation and pre-checks for further dispatch and processing to GM’s Orion plant. The centralization simplified the process for GM engineers and suppliers wanting to examine the parts to understand what improvements are necessary. As all the parts are sent to one location and UPS tracks their shipment, online feedback to customers is feasible. The success of the reserve logistics system in achieving the desired objectives will depend on the efficiency and effectiveness of the following subsystems.

1. Product Location

The first step in the callback process is to identify the product location in the physical distribution system of the firm. The product may be lying in the company’s mother warehouse or distribution warehouse, dealer’s godown, or with the retailer or the customer. Locating the product becomes quicker and easier if it is in the company’s warehouse or depot, or with the distributor, where tracking can easily be done. But once it enters the retail network, the task becomes really difficult because of the large number of retailers, wide geographical spread and lack of proper documenta­tion. This is even more true in the case of FMCG or mass-consumed low unit price products.

The product location becomes more difficult after it is sold and handed over to the customer. Locating the product is a bit easier in the case of industrial or high-value products, owing to the limited number of customers and the personal touch with clients as a result of direct selling.

2. Product Collection System

Once the product location is identified, the collection mechanism gets into operation. Collection can either be done through the company’s field force, channel members or a third party. However, proper guidelines or instructions have to be given to motivate the customer to return the products. The customer is biggest hurdle in the retrieval of the product, as he does not want to part with something that he owns. The collection centres should be located at the proper location to ensure wider coverage and minimum collection cost. The company’s intermediaries are the most effective centres in product callback, as far as cost and coverage are concerned. With proper training, the intermediaries can carry out the preliminary inspection of the called back/returned products before inducting the same into the system for further processing.

3. Product Recycling/Disposal Centeres

These centres may be the company’s manufacturing plant or the mother warehouse from where the finished products were dispatched to the market or some other fixed location in the reverse logistics network. The called-back products are inspected before they are further processed for repair, refurbishing, remanufacturing or waste disposal. The investments facilities for these activi­ties depend on the objectives of the system, cost implication, complexity of the operations and the expected gains.

4. Documentation System

The tracing of the product location becomes easier, if the proper documentation is maintained at each channel level. However, at the time of handing over the product to the customer, the information on the user’s name, address, contact phone numbers, application, and other personal data, if collected through proper documentation, can form a good database that can be used in case of product callbacks. The product warranty card, with product and customer details duly filled in at the point of sale, is commonly issued for service-based products, such as consumer durables and industrial products. However, only the card remains with the customer as proof of purchase to be produced at the time of claims during the warranty period. No supporting record is usually maintained at the dealer’s end. Except for high-value industrial products, no records are kept by retailers for consumer durables or mass-consumed products. The documentation system in reverse logistics, however, ensures the maintenance of customer-product database at the point of sale. To ensure the smooth running of the system, a procedure has to be introduced for entry, exit and flow of the called-back products in the system for tracking and tracing.

5. Cost Implications

The reverse logistics system is a cost centre. However, these costs are incurred for achieving certain company objectives that can broadly be subdivided into the following activity heads:

  • Product location (by company staff, channel member, or third party)
  • Transportation
  • Product collection (Customers > retailers > plant)
  • Disposal (plant > suppliers > disposal)
  • Refilling, repairs, refurbishing, remanufacturing and waste generation
  • Documentation (for product tracking during entry, exit and flow in the system)
  • Communication

Due to the cost implication, manufacturers invariably integrate the reverse logistics into their forward logistics system with little modifications. The same network components are geared up to accommodate the reverse flow of the products with the same efficiency and effectiveness. The investment and operating costs involved in tuning the existing “forward” flow system to “reverse”
flow will be less than for a separate stand-alone system devoted only to reverse flow, unless it is designed on scale economies.

6. Legal Issues

Under the Indian regulations, excise-paid goods once sold by the manufacturer cannot be brought back to the plant without proper documentation and declaration made to the excise authority. This is a very cumbersome and time-consuming process and non-compliance may put manufacturer in the dock. For resale of repaired or refurbished goods, both the excise and sales tax authorities are involved and the clearing of such goods requires documentation, certifications and declarations. Hence, such activities are normally carried out at service centres or at the dealer’s premises.

In reverse logistics, the critical strategic points in network design are: acquisition/collection of returned/used products, testing and grading operations, reprocessing and redistribution/disposal. For reverse logistics to be successful, the collaboration of supply chain is very important. Technolo­gies such as bar coding or radio-frequency identification (RFID) help in making reverse logistics more effective and responsive.

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

One thought on “System Design Considerations

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