Reverse mode for cost cutting

The sphere of reverse logistics is not limited to just bringing defective, overstocked, discontinued products back to the manufacturing unit. Today, it has become extremely important and relevant in the supply chain management, spanning across numerous industry sectors. Reverse logistics is increasingly being used to reduce supply chain cost and even more so to properly dispose of the returned products.

According to a report titled, ‘Global competitiveness of retail supply chain - Challenges, Strategies and Recommendations’ by  Confederation of Indian Industry (CII) and Amarthi Consulting, India is at 47th position on logistics and is behind countries such as Japan, the US, Germany and China. The report says supply chain costs in India accounts for about 12 per cent to 13 per cent of the gross domestic product (GDP) compared with 7 per cent to 8 per cent of GDP in developed countries. The country loses 3 per cent of its GDP (INR 1.5 trillion) to supply chain inefficiencies. Mr Hitendra Chaturvedi, Founder and CEO of Reverse Logistics Company (RLC) comments, “India witnesses a return rate between 3-5 per cent which means that anywhere between Rs 50,000 - 75,000 crore value of products traverse the journey back through a highly inefficient reverse supply chain process where we spend another Rs 30,000 crore to move, process or store it.”

Recycling & cost cutting practice

The process of reverse logistics follows collection, testing and grading, refurbishing and redistribution, as a result, companies are realising the value of reclaiming and recycling products which have the end of their usable life. For example, HP collects empty laser printer cartridges from the consumer for reuse or Nokia, under its ‘take back and recycle initiative’, recycles discarded mobile handsets.

Meanwhile, the impending stricter e-waste regulation is urging companies to think on how to treat the obsolete, surplus or defective products. The companies can no longer dispose of such products in the secondary markets or let it pollute the environment.

“Reverse logistics can save lots of cost by eliminating the cost of penalties if these environment protection laws are not met”, says Howard James-Scott, Chief of Supply Chain Management at Gati Limited.

“By anticipating the flow of materials in the reverse, from the end-users back to the manufacturer, the planning process can be improved. This can lead to cost savings due to better utilisation of resources. Proper reverse logistics can help extract value from refurbished and reusable materials which would have gone waste if not for recycling,” he further adds.

Mr L R Natarajan, Vice-President for Integrated Supply Chain Management at Titan Industries - Jewellery Division informs, “In jewellery retail, 20 per cent of the business is done through customers exchanging their old gold jewellery to new gold jewellery. By recycling the defective products or customer exchange products, we have managed to drastically reduce the cost of raw material/capital employed.”

Hence, reverse logistics helps in enhancing the value of the process of recycling by identifying the correct method and equipment for the process of recycling. “Normally the equipment used for recycling makes up the biggest part of the cost and hence choosing the right process and equipment is crucial for profitable recycling”, explains James-Scott of Gati.

Reverse logistics also helps in identifying the right distribution channel to take the recycled or refurbished material back to the market. According to Mr Chaturvedi of RLC, the reverse supply chain market in India exists in the form of small players selling ‘seconds’ but branding as new. These are recession proof markets where low cost is the game and after selling there is no guarantee of genuine parts, or after sales service.

The challenges

Reverse supply chain models are more complex than most forward supply chain models. Forward supply chain deals in bulk transfer, which is relatively easy when it comes to technology, process, and infrastructure, where as reverse supply chain deals with ‘each’ and it gets complicated with multiple SKUs and vendors.

Mr Chaturvedi explains, “Indian supply chain landscape is highly fragmented and replete with inefficiencies exacerbated by highly inefficient and bureaucratic government regulations.  Reverse supply chain performance is even worse.”

As stated by the market analyst, most logistic systems are not equipped to handle product movement in a reverse channel. One of the biggest challenges faced by reverse logistic system is the cost of moving product from the consumer back to the manufacturing location, which is generally higher than moving the product from the manufacturing site to the consumer and the transportation of such a large number of low volume flows tends to be an expensive operation. Above all, the returned goods cannot be transported, stored or handled in the same manner as in a regular channel.

It is obvious that in this day of hyper competition and looming regulation around waste disposal, the companies particularly the OEMs (Original Equipment Manufacturers) are seriously looking at their reverse supply chain - not only to gain competitive advantage and bottom line impact, but also for survival and good corporate governance.