What do you do with a single shoe, an old television, or a paddling pool that leaks? Until recently, the answer was simple – find the cheapest way to dispose of it.
Now, innovative companies are increasingly looking to find value in things people throw away. Not because the Wombles have been appointed to the board, but because a combination of technology, European legislation and competitive pressure has pushed the issue of reverse supply chain (RSC) to the top of the corporate agenda.
The scale of the RSC issue is becoming harder to overlook. Returns can be up to 35% in some sectors, particularly for catalogue retailers. With many of them competing on extended warranties and no-quibble returns policies, the sheer volume of waste and returns has made reverse logistics an increasingly tough area for businesses.
“It is now becoming a board-level issue,” says Jonathan Wright, senior manager in the global supply chain practice at consultancy firm Accenture. “Five years ago, it was something even the supply chain director would struggle to get onto his agenda.”
But a particular piece of legislation – the Waste Electrical and Electronic Equipment (WEEE) directive – which addresses the disposal of electrical goods, has made businesses really sit up and take notice. The WEEE gives electronics manufacturers and retailers responsibility for disposing of electronic goods, and the main provisions are due to take effect in the UK on 13 August 2005.
The WEEE is an attempt to tackle the growing problem of hazardous chemical waste. According to the Environment Agency, householders and businesses in the UK throw at least one million tonnes of electronic equipment away each year, a figure which grows by about 80,000 tonnes each year.
Peter Owen, business unit director at supply chain company Wincanton, says that WEEE has been the event that pushed many companies into finally taking RSC seriously. “The turning point for Wincanton, when we started to become aware of this, was the WEEE directive. We saw that as making a massive step change in the importance of reverse logistics.” From 13 August, stores are obliged to have an in-store returns or alternative collection system in place.
Manufacturers of electronic goods sold after that date will become responsible for their disposal. As importers from outside the EU, many retailers incur the same responsibilities as manufacturers within the EU – to dispose of a tonnage equal to what they produce.
Despite the costs involved, reverse logistics has historically been something of a lonely activity. It doesn’t really fit into any one department of the business. Supply chain managers are more interested in getting product from the supplier to the customer than in taking back unwanted stock. On the other hand, some businesses are making real savings from managing their RSC more effectively, reusing or recycling returned product more efficiently and improving the service to customers.
For those that aren’t, often it’s because no one has taken responsibility for it. “Decision processes are slow. It affects every department. It is affecting the buying department. It affects the shop floor, and it massively affects the IT and all the ERP systems,” says Richard Hannay, group IT director at third-party logistics operator Christian Salvesen.
In many companies, it falls to the finance department to get the different parts of the company working together to make it happen. “It’s the finance director who has the most ownership because it is a cost – and a cost that is out of control,” says Wright.
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The first step in the RSC is to get the systems working effectively. So, in the case of a bricks and mortar retailer, staff in stores have to be trained to check that goods are being returned complete, that the correct return codes are being entered, and that customers are happy with the services.
However, once that is in place customers have to work on ways to get the most out of the information in the systems record. “The most important bit is what the retailer does with the data,” says Owen. For example, if a product is generating excessive return rates, that information will be picked up first at the point of collection, and then at the processing centre. That information must go back to buyers or research and development as fast as possible so they can act on the problem.
Greater visibility in the RSC also brings cost savings. “The system reconciles what gets sent back to the supplier, and you have complete traceability to that supplier,” says Owen.
“One of our customers used to have a significant discrepancy between what stores sent back and what the suppliers were prepared to credit. That was leading to a breakdown of relationships with the supplier.” Now that the goods are fully traceable throughout the supply chain, the discrepancy disappears.
Given that a high degree of integration with ERP, supply chain and warehouse management software (WMS) is essential, it’s not surprising the big ERP and supply chain software vendors such as SAP and Oracle are entering this market too.
However, many of the companies with major operations in the RSC field operate with bespoke software. Asda, for example, uses Wal-Mart’s in-house system. Christian Salvesen has its own solution – BACTRAC. Likewise, Wincanton uses R-Log, a solution devised by US provider Genco. There are also specialist vendors in this area, such as US-based company Xelus.
Ed McRobbie, director of supply chain solutions at retail supply chain vendor Retek, argues that using software from the same vendor as the rest of the software solutions makes sense. “There is no integration work to do, and within your normal operating costs for your supply chain you can handle your reverse logistics internally.”
However, the software demands of the RSC are completely different from the primary supply chain world. Every pallet of baked beans is pretty much the same, but every television being returned to the store will be different. The packaging and documentation may or may not be complete, the products will have been used for a different number of hours, and some may be defective or damaged.
Getting WMS software to handle even the smallest of these complexities is no easy task. “A mobile phone has to be separated into a handset and a SIM card, and the two have to be tracked separately. It sounds simple, but it is actually very complex to do,” says Francois Lacombe, corporate business development director of ACR Logistics.
For Salvesen’s Hannay, the existing options on the market weren’t good enough. “Eighteen months ago, we did a bit of a review of the software market. There was nothing that was on the nail of what we thought we should do with the business,” he says.
“The reverse management systems seemed to have grown out of WMS and didn’t have the flexibility we needed. Some of the more specialist ones have deeper functionality in monitoring the track and trace-back through the supply chain,” says Wright. “Their life and times have been focused on the reverse area. This is core for them, and they have had much more ownership and much more focus on it.”
An increasingly popular option is to outsource the reverse logistics function altogether. Research company Datamonitor estimates that as much as 80% of retail returns in the US are outsourced to logistics functions. But in Europe, that figure is closer to 15%.
One of the advantages of the outsourced model is the superior rates a specialist can pay retailers for the goods they return. “It’s unbelievable, but Genco can find a market somewhere in the world for almost anything. I’m talking single shoes, or paddling pools with holes in them. Somewhere, they find a market,” says Owen.
Also, by building massive shared recycling facilities, outsourcers can drive economies of scale. Christian Salvesen is building a major shared reverse logistics centre in the West Midlands. It already handles the internet business of a large DIY retailer, and the company is currently in discussions with a number of other high street names.
The coming of WEEE has helped to push RSC to the top of many corporate agendas. But businesses which treat it as an opportunity to create more revenue and improve their customer services will leave many of them feeling that it has been a rewarding experience nonetheless.
ASDA’S LOGICAL APPROACH TO REVERSE LOGISTICS
In 2001, when Asda started to diversify into electricals, it found itself with a new set of challenges. Large numbers of items were being returned to the store, and Asda had to work out what to do with them.
Unlike its traditional food products, the returned items were of high value, so simply throwing them away wasn’t an option. And many weren’t being returned because they were faulty. Shoppers making their weekly rounds would buy them on impulse, change their minds and take them back.
Asda wasn’t used to the problems of having returned electrical goods waiting around to be disposed of. Their distribution centres also weren’t geared up to handle the incoming product.
In 2002, Asda appointed Christian Salvesen as its outsourced RSC provider at a national, consolidated returns processing centre at Magna Park. It handles 750 items of electrical goods, which are sorted and sold as scrap or redistributed through secondary channels.
By handling returns itself, rather than returning goods to suppliers, Asda is able to negotiate cheaper deals. In 14 months, the Magna Park facility is exceeding targets by 100%, handling returns twice as quickly and cutting costs by 50% per item.
The store is now looking to expand the scope of its operation to include other areas. The centre already handles 2.5 million books a year, with garden products cosmetics, bicycles and toys to be added soon.