Communications of the ACM

Communications of the ACM

Supporting Return Flows in the Supply Chain

By Jos van Hillegersberg, Rob Zuidwijk, Jo van Nunen, Diana van Eijk
Communications of the ACM, June 2001, Vol. 44 No. 6, Pages 74-79
10.1145/376134.376172
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Return flows, which consist of products at the end of their economic life cycle, or that have become obsolete in the forward supply chain, are gaining importance. Due to shortening of economic life cycles for products like consumer electronics, the recovery of value from products after use is becoming a necessity. In addition, the shift from buying products to buying sets of services makes the reuse of recovered materials, parts, and products desirable. Besides such economic factors, the depletion of natural resources and environmental considerations also provide arguments to reuse materials, parts, and even complete products.

The logistics of return flows, called reverse logistics, aims at executing product recovery efficiently. One must design optimal take-back and collection strategies, as well as recovery processes, which may range between the reuse of the whole product (cleaning and repair) and the recovery of materials from products by reducing the products to small pieces.

The incorporation of return flows in supply chain management is easier said than done, as the behavior of consumers introduces uncertainties in the quality, quantity, and timing of product returns. Effective information and communication technology (ICT) support is needed to manage return flows, but surprisingly, the information systems field has paid little attention to reverse logistics. Enterprise resource planning (ERP) packages and advanced planning systems (APS) concerned with the forward flows in the supply chain have only addressed this topic incidentally. Here, we examine return flows in more detail and present required extensions to ERP and APS-based reverse logistics theory. We further explore e-commerce opportunities for managing return flows and present a case study of a company that has set up advanced ICT support for recovery processes.

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Return Flows in the Supply Chain

The management of return flows appears on the strategic agenda of a growing number of organizations. Several factors motivate this development. Governmental policy and legislation, especially in Europe, have recently forced manufacturers to take responsibility for the take-back of used goods from customer markets. These developments were preceded by environmental regulations restricting the disposal of (hazardous) product and packaging materials. Besides governmental constraints, customer awareness is creating opportunities for "green branding" and new markets for returned goods. Moreover, return flows can reduce production costs by replacing raw materials. For many companies, the recovery of value from used products may provide a good return on investments.

Another trend contributing to the growth of return flows is the growing perception of physical products as part of service package, which may include repair and maintenance contracts, as well as services enhancing the pleasure and comfort of using the product. If a customer is offered the comfortable use of a product with all the necessary guarantees and given the opportunity to benefit from new product releases, the actual possession of a new product may become less important. To some extent, this is already happening, in the form of maintenance contracts covering repairs and parts deliveries. Such contracts facilitate the take-back of end-of-life products, and future maintenance providers may assess the state of the product during usage by the customer through remote sensing, and may even use predictions of the end of the economic life of the product to offer timely service contracts for new products.

Recovery processes. The forward supply chain consists of flows from materials and parts to packaged and customized end products. After customer use, these products are generally disposed of in public landfills, with customers paying waste taxes to cover the costs. However, alternative channels, such as municipal collection of specific types of products or materials, secondhand shops, or take-back by retailers or providers, may result in the processing of returned goods to recover value. A number of recovery processes can be distinguished [8]:

• Cleaning and repair to restore a product to working order. This alternative is common in several industries, such as the automotive industry.
• Product remanufacturing to bring the product to an "as good as new" quality state. For example, telecommunication providers offer remanufactured cellular phones in their service packages.
• Refurbishing to upgrade a product to a specified but less-than-new quality. Many electronic marketplaces (such as www.tradeout.com) offer refurbished products.
• Cannibalization of returned products to extract parts for reuse. This is common practice at several manufacturers as an alternative to new parts.
• Recycling of packaging materials. A wide variety of industrial sectors, including the consumer electronics, automotive, and carpet sectors, as well as the metals, paper, and plastics industries, are involved in this process.
• Energy recovery by means of incineration, an alternative for disposal with its own environmental impact.

In Figure 1, the recovery processes are positioned schematically in the supply chain. The schema describes at which phase the distinct recovery processes enter the forward supply chain. The optional test phase should help determine which recovery processes are appropriate for the products at hand. The recovered products, parts, or materials need not enter the same forward supply chain from which they originate. In order to facilitate the recovery of value from products, companies must incorporate product recovery as part of their overall product strategy.

Reverse logistics. In Europe, the responsibility for collecting products, such as consumer electronics, automobiles, and domestic appliances, has shifted to the manufacturers. In collaboration with or under pressure from national governments, national collection and recovery systems have been set up. The car sector in The Netherlands has set up a successful national system that presently processes more than 90% of all car wrecks there. In most product sectors, manufacturers have outsourced the recovery processes sector-wide to specialized recovery organizations, although certain companies, including several copier manufacturers, have incorporated product returns in their own logistics system. In short, the collection and recovery system of products may vary from bulk and low value-adding processes (material recycling) organized at a national level to specialized low-volume but high value-adding processes (refurbishing or remanufacturing) within a company. Several operations research groups address the logistics management of return flows [3–5, 7].

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ICT Support for Managing Return Flows

In order to structure this discussion of the information systems requirements for reverse logistics, we review required and available ICT support for each process area (vertical lines in Figure 2) and planning level (horizontal lines in Figure 2).

Manufacturing and recovery processes. For the forward supply chain, ERP systems support manufacturing at the execution and operational processes, while APS support the tactical and strategic processes. The recovery process has not received much attention from the large ERP and APS vendors, but for firms implementing recovery processes, the ERP system should be able to include return flows; for example, ERP calculations should take into account parts that can be retrieved and reused from the cannibalization process. Similar to the ERP world, APS have not focused on remanufacturing. For manufacturing, APS can aid in determining the optimal production plan in relation to customer service and total cost and in designing an optimal production sequence. However, the algorithms included in APS for calculating these decisions do not address recovery issues. Consider the use of cannibalized parts and recycled materials in the production process. The processes for recovery, including disassembly, quality testing, and recycling, may be subject to legal penalties (for waste) or rewards (for recycling). An APS system must include these cost factors to compare scenarios for using recycled versus ordering new materials. Strategic use of APS may address decisions, such as outsourcing recovery processes to specialized companies. In general, for a firm that has implemented remanufacturing, the ERP and APS systems need to be extended with the ability to handle recovery processes, and capture often uncertain reverse flows. The table presents an overview of extensions to both ERP and APS required to support recovery.

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The uncertainties introduced by return flows require more coordination and collaboration in the supply chain.

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Distribution and collection. Current ERP systems are designed to support the manufacturing and distribution of products up until the point of delivery to the customer. The rise of recovery changes this fundamental assumption of ERP and requires ERP systems to automate the entire product life cycle. As more manufacturers are responsible for service and maintenance, as well as collection of products at the end of their life cycles, an ERP system should register the location of sold products, the parts operation, and the maintenance and replace history. To provide optimal service throughout the life cycle, products can be equipped with monitoring devices. Product service centers can use data from these devices to get more insight into the life cycle of individual product parts, and thus aid in improving estimates of quantity and quality of returned parts.

Transportation planning is also influenced by return flows. Cannibalized parts may require a different mode of transportation back to the manufacturing plant from end products in the forward flow. APS should apply estimates of both forward and return flows to help plan transport for the reversed supply chain. At the strategic level, APS can be used to support network design decisions, including location and capacity decisions of plants, warehouses, and distribution or collection centers. The transportation network must also be designed. Some APS include support for these high-level decisions, but the reversed supply chain introduces new complexity to network design. The location decisions of distribution centers must take reverse flows of returned goods into account. Various trade-offs to network design are introduced; for example, locating test units for returned goods close to the market can save transportation costs of returned goods, as goods that have insufficient quality for remanufacturing can be disposed immediately. On the other hand, set-up and operation of such test units can be costly. An early prototype system that interactively supports the design of distribution and collection networks is described in [8]; a recent discussion is given in [3]; and an example of a system to support planning of reverse supply networks has been created in the European community-funded RELOOP project [6]. Future APS systems should be able to combine data on forward and return flows, including expected return volume and quality, and use this data to support logistic network design decisions.

Supplier and customer collaboration. The uncertainties introduced by return flows require more coordination and collaboration in the supply chain. Where traditional forward supply can be reasonably planned, the quantity, quality, location, and timing of returned goods is difficult to predict. At the execution level, handling these uncertainties requires extensive information exchange between suppliers, manufacturers, and customers in the network. For example, a large user of PCs may have a system that registers use, upgrades, and problems with its PC equipment. When it wishes to replace a set of PCs, this information is valuable to the manufacturer, and ideally should be automatically fed into the manufacturer's ERP system at the time of collection. Based on the quality of the returned PCs, the manufacturer adapts its materials requirements plan. Such frequent adaptations of required materials make long-term planning agreements with suppliers less workable. Manufacturers seek to have more flexible and short-term contracts with suppliers. Also, when uncertain return flows create a surplus of recycled materials, parts, or end products, manufacturers benefit from having flexibility in selling these items.

The flexible collaboration required in the reversed supply chain is best facilitated by electronic marketplaces. Electronic marketplaces improve information sharing between buyers and sellers, helping lower the cost of logistics and promoting quick, just-in-time deliveries and reduced inventories [1]. Several business models of electronic marketplaces exist, such as e-shops, e-auctions, and third-party e-marketplaces (see [9] for an overview). Some early examples of how they facilitate reversed logistics include:

• FastParts (www.fastparts.com) is a third-party marketplace for the electronics industry, facilitating the trade of electronic components and equipment. FastParts acts as a trusted third party and assures that buyers receive new parts with full warranty and sellers receive full payment.
• Tradeout (www.tradeout.com) is an e-auction intermediary for surplus inventory connecting buyers and sellers of used machines. Tradeout attempts to formalize communication of features relating to trade of the machine, such as payment, location, and warranty, and offers facilities to define the quality and reliability of the machines. However, suppliers are not forced to provide all information.

For large manufacturers, electronic marketplaces can also help improve intraorganizational coordination. The case study we conducted in fall 2000 (described in the sidebar) demonstrates the use of intraorganizational marketplaces to support remanufacturing and cannibalization.

Although several e-marketplaces that support reversed supply chains already exist, they usually rely on ERP systems that are Web-enabled but not integrated with the systems of other parties in the network. Handling transactions through the marketplace typically includes reentry of data and transmission of documents via email or fax. To really benefit from the flexibility that can be offered by electronic marketplaces, integration of ERP and APS systems of the various parties in the reversed supply chain is essential. A single company may participate in several such marketplaces simultaneously. The ICT systems thus must be able to exchange transactions and management information with the ICT systems of a varying set of trade partners. Current ERP systems have not been designed to handle dynamic interenterprise relationships. Furthermore, complex issues arise while integrating data and process models of different ERPs. Finally, ERPs do not all provide fully open and documented interfaces. Some recent developments in the area of enterprise application integration have started to address these issues [2, 10].

On the planning level, a more dynamic landscape also creates new challenges. APS need to take e-marketplace developments into account to get recent price information or to analyze the demand for remanufactured products. Integration of multiple-party APSs in the network can create further efficiency gains. Some so-called collaborative supply chain software packages facilitate joint business planning and real-time updates of these plans.

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Conclusion

The emerging importance of reverse logistics requires the execution and management of new inter- and intraorganizational processes. Given the complexity and uncertainty of these processes, ICT support is necessary, even more than in traditional (forward) supply chain management. Moreover, the handling of reusable materials requires the involvement of new chain partners, such as material recovery organizations and e-marketplace intermediaries. This implies the need for further coordination along the supply chain.

ICT vendors have not yet given high priority to incorporate reverse logistics functionality in their systems. Recent research efforts recognize the importance of managing reversed flows in the supply chain, and Internet-based technologies have also created new opportunities. Besides the development of new design, planning, and control components in existing ERP and APS systems, electronic marketplaces can be developed to effectively manage return flows in the supply chain.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2001 ACM, Inc.

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