Reverse Logistics: Important or
Irritant?
Estimated $100 billion industry in 2006
“In an ideal world,
reverse logistics would not exist.”
Jim Whalen, “In Through the Out Door,”
Warehousing Management, March 2001
Reverse Logistics - What is it?
The Army’s Definition
The return of serviceable supplies that are surplus to
the needs of the unit or are unserviceable and in
need of rebuild or remanufacturing to return the
item to a serviceable status
Reverse Logistics - What is it?
The Commercial Perspective
 Reverse Logistics is the process of moving products
from their typical final destination to another point,
for the purpose of capturing value otherwise
unavailable, or for the proper disposal of the
products.
Typical Reverse Logistics Activities
 Processing returned merchandise - damaged,
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seasonal, restock, salvage, recall, or excess inventory
Recycling packaging materials/containers
Reconditioning, refurbishing, remanufacturing
Disposition of obsolete stuff
Hazmat recovery
Why Reverse Logistics?
 Competitive advantage
 Customer service
- Very Important: 57%
- Important: 18%
- Somewhat/unimportant:23%
 Bottom line profits
Reverse Logistics - New Problem?
 Sherman
 Montgomery Ward’s - 1894
 Recycling/remanufacturing in 1940s
 World War II - 77,000,000 square feet of storage
across Europe with over $6.3 billion in excess stuff
 Salvage and reuse of clothing and shoes in the
Pacific Theater World War II
Key Dates in Reverse Logistics
 World War II – the advent of refurbished
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automobile parts due to shortages
1984 - Tylenol Scare - Johnson and Johnson
1991 - German ordinance that put teeth in
environmental reverse pipeline
Summer 1996 – UK Packaging and Packaging Waste
Legislation
1998 - first real study of reverse logistics in the US University of Nevada, Reno
2001 – EU goal of 50-65% recovering or recycling of
packaging waste
Reverse Logistics
A US Army Perspective
Operation Iraqi Freedom
The US Army moved the equivalent of 150 Wal-Mart
Supercenters to Kuwait in a matter of a few months
Military Operations and Excess
“In battle, troops get temperamental and ask for
things which they really do not need. However,
where humanly possible, their requests, no matter
how unreasonable, should be answered.” George S.
Patton, Jr.
Jane’s Defence Weekly
“Recent report (Aug 2003):
There is a 40 hectare (~100 acres)
area in Kuwait with items waiting
to be retrograded back to the US.”
Does this create a problem?
From GAO Audit Report
From GAO Audit Report
Reverse Logistics
The Commercial Perspective
Reverse Logistics
 Rate of returns?
 Cost to process a return?
 Time to get the item back on the shelf if resaleable?
Costs - above the cost of the item
 Merchandise credits to the customers.
 The transportation costs of moving the items from the
retail stores to the central returns distribution center.
 The repackaging of the serviceable items for resale.
 The cost of warehousing the items awaiting
disposition.
 The cost of disposing of items that are unserviceable,
damaged, or obsolete.
Costs
 Process inbound shipment at a major
distribution center = 1.1 days
 Process inbound return shipment = 8.5
days
 Cost of lost sales
 Wal-Mart: Christmas 2003 - returns = 4
Days of Supply for all of Wal-Mart = 2000
Containers
 PalmOne - 25% return rate on PDAs
More Costs
 Hoover - $40 Million per year
 Cost of processing $85 per item
 Unnamed Distribution Company - $700K items on
reverse auction
 2001 - over $60 billion in returns; $52 billion excess
to systems; $40 billion to process
Is it a problem?
 Estimate of 2004 holiday returns: $13.2 billion
 % of estimated 2004/2005 holiday returns: 25%
 Wal-Mart: $6 Billion in annual returns = 17,000 truck
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loads (>46 trucks a day)
Electronics: $10 Billion annually in returns
Personal Computers: $1.5 Billion annually =
approximately $95 per PC sold
79% of returned PCs have no defects
Home Depot ~ $10 million in returns in the stores alone
Local Wal-Mart ~ $1 million a month in returns
Is it a Problem?
 European influence – spread to US - Green Laws
 Estee Lauder - $60 million a year into land fills
 FORTUNE 500 Company - $200 million over their $300
million budget for returns
 Same Provider - 40,000 products returned per month;
55% no faults noted
 K-Mart - $980 million in returns 1999
 Warranty vice paid repairs
More consequences
 Increased Customer Wait Times
 Loss of Confidence in the Supply System
 Multiple orders for the same items
 Excess supplies in the forward pipeline
 Increase in “stuff ” in the reverse pipeline
 Constipated supply chain
Impact?
 Every resaleable item that is in the reverse supply
chain results in a potential stock out or “zero
balance” at the next level of supply.
 Creates a “stockout” do-loop
Results?
 This potential for a stock out results in additional
parts on the shelves at each location to prevent a
stock out from occurring.
 More stocks = “larger logistics footprint” = the
need for larger distribution centers and returns
centers.
Reverse Logistics
 According to the Reverse Logistics Executive Council,
the percent increase in costs for processing a return, as
compared to a forward sale, is an astounding 200-300%.
 “In the U.S. alone, the cost is an annual $100 billion.”
Forbes, March 2005
 Typically, as many as 8-12 more steps per item in the
reverse pipeline than items in the forward pipeline
“The truth is, for one reason or another,
materials do come back and it is up to
those involved in the warehouse to
effectively recover as much of the cost for
these items as possible.”
- Whalen, “In Through the Out Door”
RFID and Returns
 Visibility Tracking
 Component tracking
 Data Warehouse on what, why, when
 Altered products
 Not for every product
Impacts of Reverse Logistics
 Forecasting
 Carrying costs
 Processing costs
 Warehousing
 Distribution
 Transportation
 Personnel
 Marketing
Chapter 4
Quality
Management
Quality is a measure of goodness that is
inherent to a product or service.
Bottom line: perspective has to be from the
Customer – fitness for use
Out of the Crisis
 “Failure of management to plan for the future and
to foresee problems has brought about waste of
manpower, of materials, and of machine-time, all of
which raise the manufacturer’s cost and price that
the purchaser must pay.
More Deming
 The consumer is not always willing to subsidize this
waste. The inevitable result is loss of market. Loss of
market begets unemployment. Performance of
management should be measured by potential to
stay in business, to protect investment, to ensure
future dividends and jobs through improvement of
product and service for the future, not by the
quarterly dividend….
Deming’s solution
 The basic cause of sickness in American industry
and resulting unemployment is failure to top
management to manage. He that sells not can buy
not.”
 The job of management is inseparable from the
welfare of the company.
What Is Quality?
 “The degree of excellence of a thing”
(Webster’s Dictionary)
 “The totality of features and characteristics
that satisfy needs” (ASQ)
 Fitness for use
 Quality of design
Quality
 Quality Management – not owned by any functional
area – cross functional
 Measure of goodness that is inherent to a product
or service
FedEx and Quality
 Digitally Assisted Dispatch System – communicate
with 30K couriers
 1-10-100 rule
 1 – if caught and fixed as soon as it occurs, it
costs a certain amount of time and money to fix
 10 – if
caught later in different department or location =
as much as 10X cost
 100 – if mistake is caught by the
customer = as much as 100X to fix
Product Quality Dimensions
 Product Based – found in the product attributes
 User Based – if customer satisfied
 Manufacturing Based – conform to specs
 Value Based – perceived as providing good value for
the price
Dimensions of Quality (Garvin)
1. Performance

Basic operating characteristics
2. Features

“Extra” items added to basic features
3. Reliability

Probability product will operate over time
Dimensions of Quality (Garvin)
4. Conformance

Meeting pre-established standards
5. Durability

Life span before replacement
6. Serviceability

Ease of getting repairs, speed & competence of repairs
Dimensions of Quality (Garvin)
7. Aesthetics

Look, feel, sound, smell or taste
8. Safety

Freedom from injury or harm
9. Other perceptions

Subjective perceptions based on brand name, advertising, etc
Service Quality
1. Time & Timeliness

Customer waiting time, completed on time
2. Completeness

Customer gets all they asked for
3. Courtesy

Treatment by employees
Service Quality
4. Consistency

Same level of service for all customers
5. Accessibility & Convenience

Ease of obtaining service
6. Accuracy

Performed right every time
7. Responsiveness

Reactions to unusual situations
Quality of Conformance
 Ensuring product or service
produced according to design
 Depends on




Design of production process
Performance of machinery
Materials
Training
Deming’s 14 Points
1.
2.
3.
4.
Create constancy of purpose
Adopt philosophy of prevention
Cease mass inspection
Select a few suppliers based on
quality
5. Constantly improve system and
workers
6. Institute worker training
Deming’s 14 Points
7. Instill leadership among supervisors
8. Eliminate fear among employees
9. Eliminate barriers between
departments
10. Eliminate slogans
11. Remove numerical quotas
Deming’s 14 Points
12. Enhance worker pride
13. Institute vigorous training and
education programs
14. Develop a commitment from top
management to implement these 13
points
The Deming Wheel
(or PDCA Cycle)
4. Act
Institutionalize
improvement;
continue the cycle.
1. Plan
Identify the
problem and
develop the plan
for improvement.
3. Study/Check
2. Do
Assess the plan; is it
working?
Implement the
plan on a test basis.
Also known as the Shewart Cycle
Six Sigma
 Quality management program that measures and
improves the operational performance of a
company by identifying and correcting defects in
the company’s processes and products
Six Sigma
Started By Motorola
 Define
 Measure
 Analyze
 Improve
 Control
Made Famous by
General Electric
40% of GE executives’
bonuses tied to 6 sigma
implementation
Malcolm Baldrige National
Quality Award
 Category 3 – determine requirements, expectations,
preferences of customers and markets
 Category 4 – what is important to the customer and
the company; how does company improve
Cost of Quality
Cost of achieving good quality
Prevention
 Planning, Product design, Process, Training, Information
Appraisal
 Inspection and testing,
Test equipment,
Operator
Cost of Quality
Cost of poor quality
Internal failure costs
 Scrap, Rework, Process failure, Process downtime, Pricedowngrading
External failure costs
 Customer complaints,
Product return,
Warranty, Product
liability, Lost sales
Employees and Quality
Improvement
 Employee involvement
 Quality circles
 Process improvement teams
 Employee suggestions
Cause-and-Effect Diagram
Measurement
Faulty
testing equipment
Environment
Old / worn
Inadequate training
Quality
Problem
Defective from vendor
Not to specifications
Dust and Dirt
Tooling problems
Lack of concentration
Improper methods
Machines
Out of adjustment
Poor supervision
Incorrect specifications
Inaccurate
temperature
control
Human
Materialhandling problems
Materials
Also known as Ishikawa Diagram or Fish Bone
Poor process design
Ineffective quality
management
Deficiencies
in product design
Process
Hot House Quality
Lots of Hoopla and no follow
through
ISO 9000:2000
 Customer focus
 Leadership
 Involvement of the people
 Process approach
 Systems approach to management
 Continual process improvement – GAO
 Factual approach to decision making
 Mutually beneficial supplier relationships
Implications Of ISO 9000
 Truly international in scope
 Certification required by many foreign firms
 U.S. firms export more than
$150 billion annually to Europe
 Adopted by U.S. Navy,
DuPont, 3M, AT&T, and others
ISO Accreditation
 European registration
 3rd party registrar assesses quality program
 European Conformity (CE) mark authorized
 United States 3rd party registrars
 American National Standards Institute (ANSI)
 American Society for Quality (ASQ)
 Registrar Accreditation Board (RAB)
Upcoming Events
 Final Exam due by Saturday
 Harley Papers by Saturday