Reverse logistics impact the supply chain, says Arrow

The management of products beyond manufacturing and into the final sale can bring cost and efficiency benefits of reverse logistics to the supply chain, writes Mike Heljula

Electronics ODMs, OEMs and EMS providers know that a robust supply chain is important for their business. One approach which is growing in importance is implementing forward supply chain processes in areas such as forecast management, replenishment strategies, warehousing and logistics and electronic data interchange (EDI).

But this is not the whole story. For a manufacturer to have a fully integrated approach they must also consider another element of the supply chain – ‘reverse logistics’.

Reverse logistics or the reverse supply chain refers to the processes associated with managing products beyond manufacturing and the final sale.

Typically this includes repair, warranty recovery, redistribution, value recovery, end-of-life recycling or any combination of these activities. Historically, for many organisations in the electronics industry, reverse logistics has been an afterthought, often overlooked in favour of strategic investments in more traditional forward supply chain processes.

But this will change as companies realise that effective management of the reverse supply chain offers opportunities to reduce costs and/or create previously untapped revenue streams by improving efficiency, minimising waste and recovering the underlying value of returned goods and materials.

Reverse supply chain – common issues

As with the forward supply chain, the first step in optimising the reverse supply chain and, ultimately, reducing the cost of (or generating revenue from) reverse logistics is to identify and address process inefficiencies.

Common inefficiencies may include the scrapping of returned materials because a company has neither the time nor the resources to properly test or repurpose them.

Data, for example, has shown that up to 85% of certain types of returned electronic components had ‘no fault found’ (NFF), meaning they could be reused for service parts or, even, resale.

The problem of scrapping reusable parts may be further exacerbated in companies that have one department handling product returns and another handling spare parts procurement for repair, but no formal communication between the two departments.

The handling of warranty claims may also be inherently inefficient. In a typical reverse supply chain, for instance, returned materials that still fall under manufacturer warranty are submitted back to the ODM for credit recovery in a process often referred to as return material authorisation or RMA.

However, the fact that a component is under warranty does not mean that RMA is the most efficient way to handle it. It may, for example, be possible to recover more value by reusing NFF-tested parts for spares, or even by remarketing them – especially as average RMA turnaround time can take three to six months.

PRM and SPM

The two main opportunities within any reverse logistics operation come under the areas of products return management (PRM) and service parts management (SPM). The former deals with the receipt, processing, and disposition of materials that come back from the field or the end user, while the latter focuses on having the right inventory at the proper location to support service repair operations with spare parts. PRM and SPM can be viewed as ‘partnering solutions’ – with one almost always leading to the other.

An effective PRM programme offers the opportunity for value recovery and cost reduction. It can even streamline procurement decision-making when the returned materials can be identified as NFF and then used in the repairs stream.

When this is not an option, it may be possible to remarket NFF product returns. For optimum efficiency, returned materials need to be sorted, inspected, and tested to manufacturer specifications immediately in order to quickly identify if value can be recovered and, if so, which recovery solution will work best. The receipt element of the process is of particular importance as material coming back from the field arrives in unknown condition – proper identification and grading ensures a more successful reverse logistics process.

While traditionally viewed as a fixed cost, an efficient SPM programme will treat service parts inventory as a variable cost that can be managed, mitigated, and reduced over time. The key is to find the balance between ordering too few spare parts to satisfy customer requirements and having an aging inventory of unnecessary components taking up valuable warehouse space.

By using methods such as lean planning, inventory optimisation, and vendor-managed inventory partnerships, a good reverse logistics strategy can optimise this trade-off and ensure that the right parts are in the right place at the right time.

While the reverse supply chain is an appraoch that is yet to be addressed by many manufacturers, a growing number of companies are looking for external support to help them implement reverse logistics processes. And, as with the conventional forward supply chain, the distribution channel has the opportunity to provide this support.

Mike Heljula is European director for services and supply chain at Arrow Electronics

Tags: Arrow, logistics

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