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Excuse Me, Your Reverse Logistics Is Starting to Smell

Irv Grossman, VP of Supply Chain Operations in Chainalytics, wrote a very interesting article regarding the similarities between fishing and Reverse Logistics.  If you haven’t had a chance to read it, go ahead and take the time to read it first (here) and then come back.

What I’ve seen, as has much of the industry, is a growing focus on the Reverse Logistics side of the supply chain.  Reverse Logistics (RL) is the inverse of Forward Logistics (FL) where RL encompasses products from the consumer back upstream.  In contrast to FL, RL can embody much more complexity as it’s dependent on potential failures (think: general buyer’s remorse, warranty, insurance, etc.) in addition to the lead time associated after new product launches.  (FYI, there’s more reason it’s very complex — I’m being kind and simplifying to a couple main points.)

As Mr. Grossman points out, cycle times from receipt to disposition of assets once the assets have re-entered the supply chain are extremely critical.  In fishing, the longer you hold onto fish, the less valuable and stronger the scent.  Similarly, especially in high tech industries, product sitting in inventories start to lose value — and fast.  (In all my experience, I haven’t noticed these products starting to smell, yet.)  

Consider this: in the fast-paced world of cell phones, devices can lose at least 1% per week.  Let’s do some back-of-the-napkin math and extrapolate what this may mean… You accept 20,000 devices per week through your returns process.  The blended cost of a phone is roughly $350 (Nielsen estimates 2/3 of sales are smartphones with average smartphone COGS of $550, feature phones representing 1/3 of sales at $250 COGS) (see source 2).  Extrapolating, you can be losing $70K per week!  Aghast!  What can you do?!

Fear not!  There are ways to maximize value and create a leaner RL supply chain!

One of the most crucial areas companies are targeting is “simply” stopping returns from even occurring.  In the consumer electronics world, the key area of opportunity is tackling No Trouble Found (NTF), No Fault Found (NFF) or Cannot-Duplicate (CND) devices (NTF, NFF, and CND are by and large synonymous).  Accenture estimates 68% of returns are NTF (see source 3).  Indeed in my own experience, I’ve seen NTF rates reach as high as 60-65% including 30-35% purely software-related.  Addressing NTF devices not only reduces costs from the point-of-return and further up the supply chain, but it also increases customer satisfaction as he/ she is able to keep the device.  Happy customers make loyal customers, right?  Just watch the Genius Bar at any Apple store…

Once the product has entered the supply chain, however, companies are tackling the dispositioning problem. That is, how can we, the company, now maximize value recovery?  I know several companies (carrier, OEMs, retailers) are choosing one or a combination of the below solutions:

  • Speed up cycle times from receipt to disposition.  Depending on how many touchpoints of companies’ RL supply chain, companies can significantly inventory and maximize recovery by consolidating touch-points.
  • Maximize value recovery through optimal liquidation channels.  That sounds good, right?  What does that mean?  Optimal channel management is being able to select the RIGHT secondary channels to disposition through bulk sales, auctions, or otherwise.  Maximization of value includes the balance of capturing the most value per device while also clearing inventory of more obsolete products.  This may include the use of auctions and bulk sales.
  • Maximize value recovery through redeployment through channel/ program management.  Different from the preceding bullet as I wanted to highlight the liquidation aspect of cell phones above.  This solution is more related to redeploying returned assets into the company’s other programs (i.e. insurance, warranty, loaner phone, etc. programs).  If you’ve ever returned your computer for a warranty claim with an OEM, for example, you most likely received a refurbished unit back.  The key for the OEMs and companies performing the returns is, again, maximization of value.  Companies must understand the back-end value and determine necessary refurbishment costs to bring a returned asset to a quality level acceptable for redeployment.
This is not an exhaustive set of solutions.  However, these are a few prominent methods companies are employing to address their RL processes.  The Reverse Logistics supply chain can be one of the toughest areas of operations to tackle and a key cost-driver.  However, it can also by a key operational competitive advantage.  Luckily, there’s an evolution of technologies and solutions in today’s high-tech world, especially, to maximize value for not just the companies, but to end-consumers as well.  Triaging devices before returns and dispositioning those devices that do enter the RL supply chain with a sense of urgency and a bit of intelligence will ensure maximum value recovery and keep those returns from smelling fishy.

Sources and Research:
1. Grossman, Irv. (2012,  June 5). What Fishing Teaches Us about Reverse Logistics.  [Blog]  Retrieved from http://www.chainalytics.com/blog/service-supply-chain/what-fishing-teaches-us-about-reverse-logistics/
2. Two Thirds of New Mobile Buyers Now Opting For Smartphones. (2012, July). Retrieved from http://blog.nielsen.com/nielsenwire/online_mobile/two-thirds-of-new-mobile-buyers-now-opting-for-smartphones/
3. King, Joe. Carving Out a Path to Aftermarket Service Profitability Starts with the Basics. [PDF] Retrieved from  http://www.cscmpsfrt.org/resources/Documents/Value%20Recovery.pdf
4. AberdeenGroup. Industry Best Practices in Reverse Logistics. [PDF] Retrieved from http://www.ismsv.org/library/RevLogistics.pdf

3 replies
  1. Daryl Lu
    Daryl Lu says:

    Thanks, Rojer. Always good to hear from fellow professionals and practitioners. I was considering writing another blog post in regards to phone repair as one of my friends outside the SCM/ RL world just repaired her iPhone. She and her friends were surprised at the high level of quality and perceived cheap cost of the repair (replacement of the back casing).

    We'll see what I churn out next. Again, thanks for reading!

  2. Daryl Lu
    Daryl Lu says:

    Ah, yes and no. There's a delicate balance here for returns. For simplicity's sake, the Carriers own the customer experience, and thus, must provide exchange devices to customers in the event of warranty claims. Additionally, Carriers sell insurance plans which are highly lucrative for Carriers. The refurb units are a way of mitigating costs for these exchanges (primarily insurance claims). On average, insurance attach rates run at 25-30% for the Carriers with roughly 25% of claim rates. Refurb units, by and large, are written down from full cost of COGS at roughly 60%. Considering the full cost of a smartphone then at an average $550, a refurb unit has been written down by as much as $220. There are many reasons including government regulations which prohibit Carriers from selling these "used" devices at like-new condition (prices).

    So the business case for the use of refurb units is the that $220 savings to the Carrier. Again, these refurb units are returned through the various RL channels (i.e. warranty, insurance, trade-in, etc.). And in fact, many of the returned devices are actually in good shape and can be simply screened and cleaned before being put into the refurb pool.

    Carriers and OEMs have strict policies on refurbs with stringent Cosmetics Specifications. Further, bounce rates for repaired units through some of the major repair providers (contracted by the Carriers and OEMs) are low (we're talking below 5%). A bounce is when a device is returned again for the same reason (i.e. a device is returned for a broken LCD, fixed, redeployed as refurb, and then returned again for the same reason).

    And additionally, refurbs are used because just as you said, Carriers, too, have contracts with the customers to provide warranty on devices for the period of one year, or longer through an extended warranty or insurance program. It's much more cost effective for carriers to utilize devices returned through the various RL channels than to provide a customer with a new state-of-the-art device that just came out.

    Does this make sense?

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