Bsc(B) 6th Semester
Author: Aleksandar Marinov
Supervisor: Marcel Turkensteen
Bachelor Thesis
Formulation of a basic facility model,
based on the Danish Deposit Law, and the
challenges in doing so
Aarhus BSS, University of Aarhus
4th of May, 2015
Abstract
This bachelor thesis tackles the topic of reverse logistics and the formulation of a network design
using a basic facility model. The reason for covering reverse logistics is that it has been shown in
case studies to be a factor in increasing the profitability of a company, while also having a positive
impact on their environmental footprint. Due to the limited amount of case studies available it is
difficult to find the right way to tackle the problem. Also reverse logistics do not appear in financial
statements so it is hard to obtain the right data about the profitability and the costs of running
such a network. The use of a basic facility model is one way to create a reverse logistics network.
To formulate the model, the working system by Dansk Retursystems A/S for glass containers has
been used as an inspiration. The approach was to do a theory review on the subject, covering
relevant information such as internal and external factors for implementing reverse logistics,
legislation and network design. Using that a basic facility model was formulated and the obstacles
in obtaining the data were touched upon. The end result is a potential framework for the
implementation of a reverse logistics network for beverage containers, a description of potential
extensions to the model and an explanation of what information is difficult to obtain.
Key words: Reverse logistics, network design, recycling, mixed integer linear programming, basic
facility model, data collection
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Table of Contents
1.
Introduction ............................................................................................................................. 4
1.1
Research statement ........................................................................................................... 6
Formulation of a basic facility model, based on the Danish Deposit Law, and the challenges in
doing so. ...................................................................................................................................... 6
1.2 Structure ................................................................................................................................ 6
1.3 Methodology ......................................................................................................................... 7
1.4 Delimitations ......................................................................................................................... 7
2. Reverse logistics ......................................................................................................................... 8
2.1 What is Reverse Logistics? ................................................................................................... 8
2.2 The importance of reverse logistics ...................................................................................... 9
2.3 Terminology........................................................................................................................ 10
2.4 European Legislation concerning reverse logistics............................................................. 11
2.5 The value of reverse logistics ............................................................................................. 13
2.6 Reverse channel choice ....................................................................................................... 15
2.7 The returned products ......................................................................................................... 16
2.7.1 Product composition ........................................................................................................ 16
2.7.2 The product use pattern .................................................................................................... 17
2.7.3 Deterioration .................................................................................................................... 17
2.8 Types of recovery ............................................................................................................... 18
2.9 Obstacles with remanufacturing and recycling ................................................................... 20
3. Network design ........................................................................................................................ 21
3.1 Product recovery network design........................................................................................ 22
3.2 Design of the collection system .......................................................................................... 23
3.2.1 Collection system design considerations ......................................................................... 23
3.2.2 Collection design aspects ................................................................................................. 25
3.2.3 Features of vehicle routing models for product recovery ................................................ 26
3.3 The environmental perspective ........................................................................................... 27
4. Danish Deposit law ................................................................................................................... 28
4.1 History................................................................................................................................. 29
4.2 How it works ....................................................................................................................... 29
5. Basic facility model .................................................................................................................. 31
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5.1 Structure of the reverse logistics network ........................................................................... 32
5.2 Characteristics of a network for refillable containers ......................................................... 33
5.3 Mixed integer linear programming (MILP) ........................................................................ 34
5.4 Mathematical formulation of a basic facility location model ............................................. 34
5.5 Explanation of the model .................................................................................................... 37
5.6 Extensions to the model ...................................................................................................... 38
5.7 Relevant data for the model ................................................................................................ 39
5.8 Uncertainty with data collection ......................................................................................... 39
6. Conclusion ................................................................................................................................ 40
List of references: ..................................................................................................................... 43
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1. Introduction
The 20th century has presented great leaps in the level of prosperity, quality of life and
technological development. This has been supported by governments, because the economic model
of choice has been one that emphasizes growth. For this sustained growth to happen, there has to
be an equal increase in the levels of the resources used and products created on a yearly basis. The
situation is further complicated, because a lot of the goods come from around the world and that
puts even more strain on finite resources. Industrial hubs, such as China, Malaysia and Indonesia,
have made it possible to increase production, keep the costs and allow for mass produced products
at an affordable price for the end user. In order to accommodate all this movement of goods
companies had to develop intricate supply chains and logistics infrastructure. This has worked
exceedingly well for a lot of companies and the benefactors have been the industry and consumers.
However all of this consumption leads to a similarly high amount of products and materials, some
of them useful and reusable, that often would be disposed of incorrectly and end up in a landfill.
Some companies have seen the value of these disposed of goods and have created reverse logistics
networks in order to implement those products into their existing logistics network. Such a market
driven approach has not shown to be very popular, because a lot of these products would present
low profit margins and companies would label them as waste (Rogers and Tibben-Lembke (2001)).
The economic benefits would be the driver for manufacturers, but the environmental benefits are
the reasons for the push of governmental organs to make use of these disposed of products. The
European Union has been, and still is, very proactive in setting up legislation to enforce rules on
recycling and remanufacturing. This has resulted in companies being forced by law to take
responsibility about their production. A working example of this is that car manufacturers have to
take back their vehicles after their useful life has finished. This made manufacturers, wanting to
sell cars in the European Union, to favor design decisions increasing the recyclability of their
vehicles.
This combination of a market driven approach and legislation has created the need for efficient
and effective reverse logistics flows. By implementing reverse flows, companies can manage the
collection, inspection and reuse of their products. This field of research has become a popular
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subject in the nineties, where the most widely used definition for reverse logistics was created by
Rogers and Tibben-Lembke (1999).
Most of the papers have focused on the economic benefits and network design, but there has been
some papers on the environmental benefits- Jayaraman et al. (2007). This aspect is important,
because legislation has been pushing reverse product flows for that very reason. These laws have
been put into place to try and combat the adverse effects on the environment which are an effect
of the huge needs for new raw materials and production. Senge et al. (2007) shows that climate
change, soil erosion, pollution and waste, water overuse, and resource depletion are all part of the
unsustainable ways of the industry. With the implementation of reverse logistics, the impact on
the latter three would be lowered, thanks to the lower demands for new raw materials. That would
indirectly influence the first two and help create a more sustainable and environmentally friendly
production.
The Danish Deposit law presents an example of how reverse flows can be implemented to have
both an economic and environmental benefit. This law deals with the recycling and reusing of
glass bottles that have been used as beverage containers. A paper by Birgitte Kjær (2013) written
for the European Environment Agency has used a life-cycle approach to evaluate the
environmental benefits of better municipal waste management seen in Figure 1.
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Figure 1. GHG emission from Municipal Waste Management in Denmark, source: Birgitte Kjær
(2013) EEA
The avoided Greenhouse gases from recycling are quite striking and also more than those created
during the process itself. Another way to calculate the avoided GHG emissions is to use the
recycled content tool, made by the US environmental agency. By inputting the tons of recycled
glass from 2009, from the above mentioned paper, the avoided GHG emissions amount to
59,210.50 Million tons of CO2 equivalence for 98,000 tons of glass. The recycling of glass has
proved itself to be also be profitable, where Dansk Retursystem A/S (the sole entity dealing with
recycling and reusing of glass in Denmark) is reporting a turnover of DKK 1.56 billion for 2013
(http://www.dansk-retursystem.dk/)
1.1 Research statement
The aim of this bachelor thesis is to formulate a basic facility model for a reverse logistics network
and to present the challenges in doing so. The basic facility model has been taken from the research
of Fleischmann et al. (2001) The data used for the formulation would be based on the publicly
available articles for the Danish Deposit Law. Thus the research statement would be as follows:
Formulation of a basic facility model, based on the Danish Deposit Law, and the challenges in
doing so.
1.2 Structure
The topic of reverse logistics is a broad one and also one where some of the terminology might
make it confusing to understand. To handle this the paper is divided into four parts, each presenting
as clear a picture of the topic as possible. The first part would cover the basics of reverse logistics.
The chapter would begin with giving the most widely accepted definition and explain the
importance of the topic at hand. Before anything else some of the terminology would be explained,
because as noted there are competing terms in the literature. Following that would be a review on
the European legislation. The rest of the chapter would present the motivators, obstacles and more
in-depths aspects of reverse logistics.
The next part would take the knowledge that has been presented previously and then expand upon
it with the information about network design. With the use of different research papers a thorough
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explanation of the whole system will be given, with respect to product recovery, collection and
features of vehicle routing models.
The third part will present the important aspects of the Danish deposit law and how it works. It
will present a reverse logistics system in the real world and serve as part of the data for the
formulation of the model.
The last part will take the preceding three and formulate a basic facility model. While doing so the
challenges of creating such a model would be discussed.
1.3 Methodology
Reverse logistics is a relatively new field of study and it has not been utilized enough to warrant
full university books on the subject. This is why a selection of articles have been used on the topic
to get a complete understanding on the issues discussed. Papers by De Brito and Dekker (2002),
Beullens (2004), Fleischmann (2001) and Rogers and Tibben-Lembke (2001) have constituted the
majority of the information needed for constructing this thesis. Other authors and articles have
been used and cited, but they have had limited input into the creation of this paper.
1.4 Delimitations
While this paper is going to present the topic of reverse logistics, it is going to focus more upon a
certain theoretical model- Basic facility model. In this way more complicated models, such as
mixed integer modelling approaches will not be discussed. The scope of the paper is not to give
an answer to the model, but more to formulate and present the difficulties, and challenges, that are
present in doing so. When the model is done it is not going to be made as an alternative to already
existing models in Denmark, but use the information from Danish articles to formulate the above
mentioned model.
The audience for this paper is expected to be of academic background, thus general economic,
business and marketing terminology will not be explained. Also the notation and structure of the
mixed integer linear programming will not be explained, due to the scope of the paper not being
for statistical research.
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2. Reverse logistics
2.1 What is Reverse Logistics?
Reverse logistics is a topic that has been studied for far less time than forward logistics, with the
first papers coming up in the mid-70s with papers from Guiltinan and Nwokoye in 1974. However
that field of research didn’t have a big growth of popularity due to the focus on improving the
established logistics flows. This is evident by the time it took for the first official definition of
reverse logistics to be established by the Council of Logistics Management (Stock, 1992). This
definition lead the way for research in the next decade, but it was still a flawed term. The problems
that came with the definition was that it had a very general tone to it- the direction of the flow was
not mentioned which would lead to confusion. Over the next decade there have been various
developments in the field. Most notably would be the paper of Thierry et al. (1995) where the topic
of product recovery management is brought up as follows:
“… the management of all used and discarded products, components, and materials that fall under
the responsibility of a manufacturing company.”
This development is of particular interest due to the fine explanation of how product recovery
works and how it can be implemented in the already existing supply chain.
The most notable, and consequently most used, definition came from Rogers and Tibben-Lembke
(1999) and then was slightly revised by the European Working Group on Reverse logistics (
RevLog), formally presented in the paper of De Brito and Dekker (2002), which states the
following:
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“The process of planning, implementing and controlling flows of raw materials, in process
inventory, and finished goods, from a manufacturing, distribution or use point to a point of
recovery or point of proper disposal”
This proposed definition has given a good view over what reverse logistics currently entails. The
structure is being presented in the form of the activities that are needed- “planning, implementing
and controlling flows”- the flows that are being used- “raw materials… and finished goods”.
However the most important part of this definition is the idea that the product flows can end up in
“a point of recovery or point of proper disposal”, which means that they can end up in a different
supply chain than the one previous. This entails that there can be actors, different than the
manufacturer, that can make use of the reverse product flows.
The definition used above has been the most used, but that doesn’t mean that other researchers
have not come up with their own definitions. For the most part the terminology and definitions end
up mostly similar, but they do tend to offer their own unique spin on the formulations. On the one
hand this is good, because it shows that different research ends up coming up with similar results,
though on the other hand there has been some confusion over some of the terms used in the
literature.
2.2 The importance of reverse logistics
With the explanation of what reverse logistics is, the importance of the subject has to be
determined. The main issue with finding the economic impact that reverse logistics has is that most
companies would either not track these flows separately from the forward flows, or they wouldn’t
present it separately in their annual reports. To get a sense of the economic value the paper by
Rogers and Tibben-Lembke (2001) will be be used. The investigation produced by the authors
shows that reverse logistics was only a small part of the logistics costs of the companies, amounting
to around 4% or around $37 billion in 1999. These estimations have to be taken with a bit of
skepticism due to the amount of companies answering their interviews and the size of the
respondents. This is an important observation, because Beullens et al. (2004) has presented
evidence that suggest that smaller firms might be more willing to have reverse logistics flows. This
could be the case due to the shareholder’s acceptance of smaller returns from small firms.
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The paper by Rogers and Tibben-Lembke (2001) has given an estimation of the size of reverse
logistics in the US, but there are also some other issues with their study, apart from the one
mentioned above. The biggest one is that in some industries the reverse logistics flows are much
higher, due to market driven demand or due to legislation. Such a market is the car market in the
US and Europe. In the US it is more market driven and in Europe it is forced by legislation. Due
to the above mentioned reasons the share of recycling and reusing of parts, in companies in those
sectors, are quite more significant than in others. Also industries which are experiencing a lot of
returns from their customers can also be benefiting a lot from having reverse flows, because in the
reverse logistics literature disposal is seen as the least efficient end result.
The last thing is that the interviews in the paper were conducted in the beginning of the century
and since then the legislation, especially in the European Union, has become more stringent about
recycling in some industries. This can be seen in the legislation part below. To conclude on this
part the paper by Rogers and Tibben-Lembke (2001) gives an economic value to reverse logistics
flows, but there are some factors that may make it outdated.
2.3 Terminology
As mentioned previously there is reason to believe that there is some confusion in the terms that
are being used in the literature, when it comes to reverse logistics. This part will consists firstly
with the terms that the paper is going use, and then some of the more popular, and sometimes
improperly used terms will be explained. This is done in order to give a clear understanding on the
topics that are going to be talked about and remove any confusion.
The terminology that this paper is going to use is as follows:
-
Forward logistics which will be the opposite to Reverse logistics, the following terms
would follow the same pattern
-
Outbound - Inbound
-
Delivery - Collection
-
Demand – Supply
-
Demand node – Supply nodes
Common misconceptions come with terms such as reverse logistics, green logistics, closed loop
supply chain, waste management and cradle-to-cradle/cradle-to-grave. Closed loop supply chain
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is the term that often has been the one mistaken for reverse logistics. This is because it puts reverse
logistics as an integral part of the forward supply chain management which should also be
integrated with the forward streams (De Brito and Dekker, 2002). In this case reverse logistics is
part of closed loop supply chains.
Another misconception is the use of the term green logistics, when it comes to reverse logistics.
The reasoning for that is the view that reverse logistics are done solely because they offer
environmental benefits, due to their reuse/recycling or waste disposal of products. However green
logistics refers more to the overall increase of efficiency and lowering of the impact of the whole
supply chain. In most cases the term is used for forward supply chains, thanks to their prevalence
in logistics.
Waste management is another term that can be closely related to reverse logistics, but there is a
key difference. That one being that waste is something to be disposed of and has no economic
value to anyone. However with reverse flows some of the products can be reused, recycled,
remanufactured or in the most undesirable case incinerated for energy. In this way there is some
value to be gathered from the materials which are collected. A big distinction is also made due to
the term waste. The reason for that is that in many countries it is forbidden by law to import waste
(De Brito and Dekker (2002). In this case if a product, such as a reused glass bottle from Denmark,
cannot be exported and no economic value can be collected, it can be deemed waste.
Lastly cradle-to-cradle is going to be explained. This term is used mostly as a vision of how the
product design of one product enables it to get reused again. If the properties of said product do
not allow for that then it can be made to be bio-degradable, which would allow it to decrease
landfilling, because it can be used to replenish soils or help nature in some form. In that way if a
product is following the cradle-to-cradle philosophy then it makes a reverse logistics system more
efficient, because more products can be brought back up the supply chain and more value can be
extracted.
2.4 European Legislation concerning reverse logistics
In the paper by Tibben-Lembke (2001), as shown in 2.2, the importance of reverse logistics
activities, as opposed to other issues, has been shown as the biggest barrier for companies to start
implementing reverse flows into their forward supply chain. The assumption that can be made is
that a company that is not willing to invest into reverse logistics would not do so unless there are
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some exogenous factors. Such an exogenous factor could be legislation that is forcing a company
to take responsibility for the products that they are producing and their end-of-life disposal.
Following will be the important legislation in the European Union concerning reverse logistics, as
reviewed by Kumar and Putnam (2008). There are three prevailing directives that are making
manufacturers take responsibility for their production. Those would be the EU’s End-of-Life
directive, Waste Electrical and Electronic Equipment Directive(WEEE) and Restriction of Use Of
Hazardous Substances directive (ROHS) (EU Directive 2002/95/EC).
The first directive to be presented is the EU’s End-of-Life directive. This directive makes a car
manufacturer responsible for the cars that they sell within the Europe. The responsibility is that
they have to arrange for disposal and recycling of the vehicles sold in EU. There are also targets
that are being set by the directive about the levels at which a car has to be able to be
reused/recycled, the energy recovery percentage and the percentage of the vehicle that cannot be
used and has to be disposed of into landfills- respectively 95%,10% and 5 %. These targets have
been set for 2015.
The second directive is the Waste of Electrical and Electronic Equipment Directive (WEEE). This
EU directive has put its sights on the electronic equipment sold within the European Union
boundaries. There is a need for such a directly as the development of many electronic devices
makes use of hazardous or scarce materials. This makes it essential for the hazardous materials to
be disposed of correctly, and to limit their use in the future, and for the scarce materials to be
reused as much as possible. An accompanying directive to WEEE is the Restriction of Use of
Hazardous Substances directive (RoHS). The objective being to ban certain heavy metals in new
electrical and electronic equipment- mercury, cadmium, lead, chromium and brominated flame
retardants.
Other non-EU wide legislation that has helped with the specific increase of, in more specifically,
recycling can be seen in countries such as Germany and UK during the economic recession,
starting in 2008. At that point these countries would subsidize the recycling of a vehicle, which
would in turn be used to get a new car. This measure was aimed more at improving the level of
the economy, as it was aimed at the customer and not at the recyclers and manufacturers. However
it had the added benefit of increasing recycling of older cars and putting some of their materials
back in the supply chain. A note has to be made about governmental subsidies for the
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remanufacturing process. In a study by Debo et al. (2001) it was presented that a subsidy can be
seen as an exogenous decrease in remanufacturing costs. This has given the result that new
products might be more in demand, which has the contrary effect to the one expected.
These directives have definitely had an effect on the market of goods in the European Union,
because manufacturers have to comply with these regulations or they wouldn’t be able to sell goods
on the EU market. That is one of the benefits of EU law that it is more enforceable than other
international law systems, which leads to positive changes for the environment and people.
2.5 The value of reverse logistics
Up until now the topics have been about what reverse logistics is, why it is important, the
terminology that is and the external factors that may be influencing companies to engage in reverse
logistics. Now that all that has been covered, the topic to be discussed is the reason for a company
to want to engage in reverse logistics on their own accord. The next parts follow the structure
shown in the paper of De Brito and Dekker (2002).
2.5.1 External factors
Implementing reverse flows into the already existing forward flows is an expensive and time
consuming endeavor. For this reason it is important to see which are the external and internal
factors that would lead a company to implement this change.
The external factors have already been touched upon a little bit in the part about legislation. This
is a big motivator for some firms to create a reverse logistics network in order for them not to have
to pay fines for not complying with the law or, as it is with the car industry in Europe, to be banned
from selling unless you comply. Some companies can also expect that there is going to be incoming
legislation and in that way get ahead of the curve and implement changes before the others and get
a competitive advantage when the laws change.
A more marketing focused external factor is to engage in recycling/reusing of goods in order to
get an image of an environmentally responsible company. This could be a way to gain new
customers, because they like the idea of not damaging the environment when they use your
products. However very little research has been done on the topic, so this is mostly assumptions
based on the actual marketing of some companies.
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The last external reason is to keep away the competition. There are two ways that this can be done.
Both can be seen in the approach of Xerox when it came to their printer cartridges. They were
doing their own recycling and also at the same time made it illegal for third party disassemblers to
recycle their new cartridges. In that way the threat of third party disassembles to take part of their
reverse flows was mitigated. In doing so they also limited the access to their technology from other
companies that can potentially be their competitors in the printer business.
2.5.2 Internal factors
The internal factors present cases where companies could benefit from implementing reverse
logistics. Those have to do mostly with returns that are happening at different points in the process
of manufacturing, distributing and lastly on the consumer side, as outlined in De Brito and Dekker
(2002).
To start from the top is to go and analyze the reasons for returns at the production stages of a
product. At this point the most common occurrence of a return is when a product doesn’t pass
quality control. Then the product would most likely have to be remanufactured or repaired to be
able to be sold afterwards. In rare cases at this point a product would have to be recycled, but that
would be due to unforeseen circumstances in the manufacturing stage. The other two reasons are
production leftovers and raw material surplus.
The next place where returns occur would be at the distributional level of the supply chain where
products are already manufactured and ready to be sold to customers. The most common reverse
flow at this level is the functional returns, because those are items which have an intended use to
be shipped between manufacturer/warehouse to the distributor. These concern items like pallets,
metal/plastic boxes or other type of multiuse containers. The next three most common types of
reverse flows are product recalls, commercial returns and stock adjustments. All of them concern
the movement of products that for some reason have been returned from the distributor. At this
point having extensive reverse flows can lead to lower costs for the manufacturer. Such flows can
be recycling, when a product has been damaged in transportation or deemed unusable according
to a product recall. A better situation is when these returned products can be remanufactured or
repaired, at that point having the proper system to deal with returns is of great use.
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At the customer level most common reasons for returns are reimbursement guarantees, warranty
returns, end-of-use or end-of-life. Most of these returns would go through the distributor, so again
having effiicient reverse flows connecting the manufacturer with the distributor can lower costs
and add value to a company.
2.6 Reverse channel choice
After the last part a question that arises is who invests and operates the reverse channel and what
the benefits are for each party in the supply chain. This issue has been investigated in the paper by
Savaskan and Van Wassenhove (2000). The outcomes that are reached concern two different
market conditions- bilateral monopoly and competitive retailing.
When there is a bilateral monopoly the reverse channel has to be operated by the retailer, because
at this point everyone is better off. The manufacturer doesn’t have to invest in their own system
for collecting and infrastructure to accommodate for that. All of that is done by the retailer. In the
model this has also helped to increase the sales volume for the producer. On the other hand is the
retailer which does the collecting and needs to return the products to the manufacturer. In order to
do so the retailer gets buy-back payments which cover the expenses. The last benefactor ends up
being the consumer which would get lower prices, due to the increased efficiency in the other two
places, lower disposal costs, due to the usually close and convenient drop off sites, and a decrease
in the environmental costs.
In a competitive retailing situation the reverse channel has to be done by the manufacturer, as
dictated by the model that was used in the research. This leads to higher return rates for the
manufacturer, because the many different shops that they would be collecting products from would
usually not have the amount of products for them to have a steady stream to the manufacturer. It
would also lead to economies of scale in collection, because of the high amount of products
incoming. The many different, sometimes small, retailers would also benefit from not having to
invest into the whole process of collecting and sending the products to the manufacturer. Also an
additional benefit for the retailer would be potentially lower costs, due to the manufacturer
realizing economies of scale and having lower production costs. The benefit for the customer
would be the same as the ones in bilateral monopoly.
A note has to be made about this model and its validity. The problem with the model is that it
excludes the use of third parties, because they end up being inefficient. In the real world third party
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companies are used because they offer value adding services for the product recovery process.
Such services end up lowering the running and investment costs for manufacturers. Those can be
sorting, dismantling and quality control. These services can greatly affect the efficiency and value
coming from reverse logistics for the manufacturer. The most likely reason for the model to
exclude them would be the complexity of adding such details.
2.7 The returned products
An integral part of the reverse logistics are the products that have to be reused, remanufactured or
recycled. In other words, how much value do these products have and what are the characteristics
that would be ideally looked for. To find the answer to that De Brito and Dekker (2002) have
looked into three important aspects of a product- product composition, use pattern and
deterioration. This structure would also be used in the following paragraphs to look into the
products and the traits that can be of value.
2.7.1 Product composition
Economics often can be the main reason a company engages in reverse logistics and for them it
would be of high importance to look into the composition of the products that would end up in the
reverse streams. The composition is determined during the design stages of a product and during
that time the resources used are defined. Most products have a mix of valuable and non-valuable
resources in them. This is why parts recovery, material recycling and landfilling are all part of
reverse logistics. Following a strategy that would rely on reverse streams a product can be designed
using the philosophy of design for disassembly. The important facets of this philosophy are as
follows.
A significant part of the expenses imposed during disassembly come from the amount of time labor
workers have to inspect and remanufacture, or extract, valuable parts of a product. Thus if the
assembly is done easily and quickly, the costs can be kept down. A different kind of cost incurred
is when there are hazardous materials in a product, which in many countries have to be disposed
of in special ways. This is again time consuming and costly for a remanufacturer. The composition
of a product is important, because having homogeneous parts can help with them being used again
into new products. A good example would be glass where it can be cleaned and reused or melted.
A bad example would be plastics which come in many different chemical variations and that makes
them difficult to reuse. The last thing to consider is the transportation of a product, where the least
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amount of trips incurred equates to lower costs. In this way if a co-collection of old and new items
is possible then that should be the norm. This would be especially valid for products which do not
have very high value when put back into the reverse streams.
The conclusion for this part is that there are certain ways to increase the value or decrease the
costs of handling of the products in the reverse flows.
2.7.2 The product use pattern
Collection of the products is a major differentiation point of reverse logistics, when compared to
forward logistics. The reason for that is that collection for reverse flows often tend to come from
many different places and usually do not have a centralized hub. Having many locations of use
increases the costs because more vehicles have to be used, which might have a non-optimal
utilization. An example of this would be beverage containers which often times get thrown away
at either the point of use or specialized recycling bins in front of residential buildings. This
represents one part of the product use pattern because it deals with the location of use and
collection.
A different aspect of the product use pattern is the amount and intensity a product gets used.
Products that can be used multiple times are usually those that get used often but for a short time.
They do not tend to get damaged too much in their use and after inspection, and sometimes
cleaning, they are ready to be reused multiple times. Such products are glass beverage containers,
which get used up and then, hopefully, put into recycling bin. After cleaning they are ready to be
put to use again.
The conclusion for this part is that the location and intensity of use affect the difficulty of collection
and the amount a product can be reused.
2.7.3 Deterioration
Another big point of differentiation of reverse logistics is the quality of the returned objects and
also if they can be reused. The former has to do with the deterioration of a product, which is directly
related to the use patterns from the previous paragraph. The amount of deterioration has a big
effect on the possibility of recovery and the quality of the recovered items, which in turn
determines the economic benefit for the reverse flows. There are four points of note that are
explained below.
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To begin the intrinsic deterioration has an impact on the economic profitability of a product,
because it is showing how much of a product, or parts of, can be brought back into the reverse
flows. Having a product that can usually be reused very efficiently, but has been used extensively
can lower the recoverability. In that manner the intrinsic deterioration has a strong effect on the
efficiency of the reverse flows.
Having a product that has not deteriorated much and can be recovered to a large extent, doesn’t
mean that one can profit from it. This is the case of economic deterioration, because the product,
or parts, recovered have become obsolete and can’t be used in their intended purpose. This happens
in areas where there is a lot of development into new technology, such as computers and
smartphones, and each generation has components that are different from the year prior. In such a
case the product doesn’t get sent to a landfill, because it could be used as parts, for repair, or in the
case of smartphones sent to a secondary market.
A different aspect to this topic is the reparability of the products. Manual labor is a big part of the
expenses of reverse logistics and thus the amount of time a product has to be repaired is important.
In some cases products would require a big investment in time to be repaired and the economic
benefit is lost, so they get recycled instead. This is a common issue, because there are a lot of
companies that already have these kinds of flows, due to their returns and warranty policies.
Deterioration has been talked as a process that just happens to the whole product, but some parts
tend to get a higher use than others and they get worn out more. In a perfect situation all parts
would have a homogenous deterioration pattern and then everything can be reused in the same
manner. In another case only some parts get a lot of use and deteriorate, while others would be in
good condition.
The conclusion for this part is that product design that takes into consideration all of these assets
of deterioration would have a higher economic value when entering the reverse flows.
2.8 Types of recovery
The considerations about the products have been covered and now the types of recovery will be
discussed. An overview of the process can be seen in Figure 2. The figure below shows that in
order for a product to reach the recovery stages, it has to go through other flows. These flows will
be briefly touched upon before investigating the different recovery options.
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Figure 2. Reverse Logistics Processes, source: De Brito and Dekker (2002)
Forward logistics are becoming ever more efficient and flows within them have a strict schedule
at which they operate. Opposite to that are reverse logistics, because they usually don’t have such
timesheets that they have to follow. The reason for this is the variability of the returning process
which can make planning reverse flows difficult. The returns can be done by the general public,
municipal waste disposal and companies. The return flows would often get picked up from various
small collection sites, such as recycling bins in front of a building, and then end up in a centralized
collection site. Those sites can be municipal recycling plants, third party recyclers or the original
manufacturer of the product. The goods then have to go through a process to value their quality
and economic value. This process consists of inspecting the deterioration and shape of the product,
selection of the valuable ones and then a sorting process is done to prepare the goods for the
different types of recovery.
There are several types of recovery, which consist in part of the processes presented in the two
parts of the pyramid in Figure 2. The highest value can be obtained by engaging in product
recovery called direct recovery in the figure. At this point a product would need very little, to none,
maintenance to be put directly back into the market. Some countries have legislation which forces
the manufacturer to show that this good is not brand new, which would lower the price. In this
case a secondary market can be more desirable.
When a product has sustained damage, or deterioration, to some parts and cannot be reused in its
full capacity component recovery should be exercised. In this process the good gets dismantled
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and only the parts that can be reused, and have economic value, gets extracted. After that those
same parts can be used in remanufacturing or for the creation of a new product.
If none of the above processes can be done then material recovery would lead to the highest
economic value. At this point a product gets grinded down and the end product gets sorted. After
the sorting a treatment is being done in order to get the right quality/purity of a material, in order
to be sold or reused in the future products. In modern recycling plants this process can be done
automatically with many different materials, even the previously difficult plastics
(arstechnica.com, 2015).
There are products that cannot go through these stages and the only use that they have is for them
to get burned and to capture the released heat. This is called energy recovery and it is popular
option, especially in Scandinavia, because there is some benefit from the products. This popularity
has stemmed from the increase of prices for landfilling which makes it an undesirable action which
is preferred to be avoided.
The conclusion for this part is that there are different types of recovery covering the different
products and their varying levels of reuse.
2.9 Obstacles with remanufacturing and recycling
The paper so far has covered mostly the basics of reverse logistics, how it works and the value
associated with reverse flows. There has been very few mentioned problems which could be
encountered, except for some brief explanations when needed to explain the subject matter at hand.
This section will be divided into two parts. The first one will be presenting the obstacles that come
up during remanufacturing and the second in recycling.
The paper of Beullens (2004) has divided the obstacles into two parts- one is product
remanufacturing and the other is product recycling. This section will follow the same structure and
present the findings from the paper. A reoccurring theme when talking about reverse logistics is
the uncertainty of the characteristics of the products. Uncertainty can be attributed to various assets
of a product like the quality, quantity, timing and variety of a good. These can be said for both
product remanufacturing and recycling, but they have a different impact on the supply chain.
Remanufacturing needs products that are in good condition in order to be able to work. If there are
a lot of products of inferior quality then they would end up for component recovery. These two
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issues cover quantity and quality. Variety would not have such an impact if a company is
remanufacturing only one product, but if that is not the case then receiving only one product can
definitely be an issue. Timing also plays a crucial part for product remanufacturing, because the
uncertainty in delivery would most likely lead to high stock, so it can react to increased demand.
High stocks are undesirable because they are costly for the manufacturer. Another big obstacle is
the need for a reverse supply chain that can take away the unnecessary items and only collect the
valuable items, which would be used for remanufacturing. This can be done during the inspection
phase by third parties. When that is the case the efficiency of the process increases and there is
less of a need for workers that inspect the items that are coming in.
As mentioned above, product recycling has the same uncertainties as remanufacturing, but the
implications are different. In this case the quality of the product doesn’t have such a big impact on
the process, because recycling is geared towards material recovery. For this case, the quality of the
product doesn’t have that much importance, what is more important are the impurity levels
achieved from the end materials. This is especially important because specialized processors have
allowances for the levels of impurity of a material, the less the impurities the higher the economic
return. Quantity is also important, because the processors have a level of material that the recycler
has to achieve in order for them to buy. One of the biggest problems for recyclers has to be the
price volatility of materials. A good example of that would be the price of copper, which in the
middle of 2000’s has had yearly fluctuations in the magnitude of a several times higher, or lower,
price than the year previous. This can easily increase or completely destroy the profit margins for
the recyclers. Price margins are often times small and for that reason transportation can also be a
big expense. This is especially the case when products have to be recycled due to legislation and
they have little to no value afterwards. The proper placement of recycling centers can help to keep
these costs low.
3. Network design
The previous parts have built up the knowledge about reverse logistics, with information about the
basics of reverse flows, the products, how they operate and the value/obstacles which are present.
This is going to be used as a stepping stone for the subsequent parts of the paper which will consist
of the network design, a formulation of a model and the obstacles in doing so. The following parts
will present the designing of the product recovery network and the collection system.
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3.1 Product recovery network design
The differentiating factor of reverse logistics is that there has to be a product recovery system in
order to be able to deal with the goods that are coming back at the end of their lifecycle. It is
essentially a bridge between the market for reused items and disposed ones. To connect them there
is a need for additional infrastructure that can deal with the recovered goods and the processes
leading after that, shown in Figure 2. This would require the construction of new buildings that
would have good transportation from the collection site, to the recovery points and then back to
the market again. Such activities require an investment from the companies wanting to engage in
reverse flows. The research done by Fleischmann et al.(2001) is showing that this can be done in
two ways. Their research would serve as the basis for the following presentation of the two
different ways in which reverse logistics can be set up and the characteristics of recovery networks.
Investing in a new supply chain dedicated to reverse flows can be expensive and time consuming.
Often times that would not be needed and a company can use the existing supply chain, where
reverse flows would be implemented. This would have a smaller economic impact, because there
is no need for big changes in the production- distribution network. For most companies this would
be the preferred way of doing things, because big investment can lower their returns to
shareholders. However exogenous factors, such as higher disposal costs or production costs saving,
can offer a big enough economic difference that implementing in the existing network wouldn’t
be as profitable.
When the above scenario isn’t profitable a company may choose to invest into a separate reverse
logistics network. The company wouldn’t have to redesign their existing forward network and thus
there would be lower coordination and restructuring costs. The case study done in Fleischmann et
al. (2001) shows that the use of a deterministic modelling approach can result in a good fit for
recovery network designs. Other findings were that supply uncertainty, which has been seen as a
big obstacle for reverse logistics, has a limited effect on the network design. This is an opposite
observation than the expected result, where uncertainty in quantity may lead to high stock, which
in turn might require bigger warehousing.
No matter the choice of a product recovery network, there are some characteristics that they have
to follow in order to work properly and be efficient. First of all it is important to get the
coordination of the goods coming in and the products coming out. When this happens on the same
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market that is considered a closed loop flow and when it doesn’t it is an open loop. In a closed
loop supply chain there would have to be coordination on both side for the amount coming in and
then coming out. In open loop supply chains the remanufacturer/recycler would have to coordinate
with one market for the goods coming in and another for the finished products. This can pose
problems when, for example, there isn’t enough products received, then the output would be lower.
That is why coordination has to play a big role in order for the reverse flows to work smoothly.
The second characteristic is highly connected with the first one and that is supply uncertainty. This
was mentioned in the section about obstacles for reverse logistics and here it is again stressed. Bad
quality items or a mismatch in supply and demand can cause significant problems for the output
of a remanufacturer or recycler.
The last characteristic is tied to supply uncertainty, which is inspection, separation and choice of
treatment. Having the proper system in place can help with increasing the yields of the products
and that can lead to more economic benefits. However if the goods supplied are of inferior quality
then the whole system becomes less efficient. At this point the economic returns on every product
is lower or non-existent.
The conclusion for this part is that a company can choose if they want to create separate reverse
logistics flows or implement them in the existing forward flows. This is all down to the economic
drivers in their situation, which is based on the assumption that companies are cost minimizers.
3.2 Design of the collection system
The collection system has up until now been only mentioned, but never expanded upon. Its design
plays an integral part in reverse logistics, because often times it can be the difference between
making a profit and not. A big part of this is that collection uses a lot of transport, which has been
mentioned to incur significant costs. The structure and basis for this part would follow the paper
of Beullens (2004).
3.2.1 Collection system design considerations
The collection system seems relatively simple for the uninitiated- there are the former users of a
product which has to be deposited in a collection site, from where it gets picked up and sent up the
supply chain. That is an accurate picture, but there are some consideration that have to be taken
into account for all of this to work. On the side of the former user, they have to be willing to do
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the effort of depositing their products and also to do it consistently with the right products. In order
for that to happen the process has to be convenient for people and there has to be good service. A
system that has proven to be accepted by former users is curbside collection, because of its
consistency and relative little effort required. This type of collection can also be the lowest cost
alternative when it comes to households and small businesses.
On the side of the collector there are more considerations. The collection system has to be both
effective at collecting the products, but also efficient at doing so. Transportation is a big part of
the collection process and this means that it has to be cost-efficient. There are several
considerations that have to be taken into account for transportation. First of all is balancing the
load in such a way that uses the least amount of vehicles, which for industrial firms means to create
different sectors and to minimize the variable routing costs. This is achieved by having days
assigned to different sectors to balance the workload and in that way the least amount trucks would
be needed. For household and small business, the considerations are if drop-off sites or curbside
collection should be used and if there is source separation. In the case of source separation, smaller
vehicles can be used to pick up certain products on different days, alternatively all is collected at
the same time and bigger vehicles are used, but in fewer days.
Another consideration is if there would be an integration of deliveries and collection. In forward
flows a truck would start from its location fully loaded and come back empty. When reverse
logistics is concerned, if there is any integration the truck might start getting filled after doing a
certain amount of deliveries. This can potentially lead to cost savings due to better utilization of
vehicles. This is not as straight forward as it sounds, because vehicle routing would have to take
into account the strict schedules of forward flows, but also allow some more time at the point
where collection is also happening. On top of that single compartment, back loaded, trucks are the
most used, which are not ideal when you have to deliver and collect at the same time. Also some
items might not be allowed to be collected together, because of dirt from collected items or them
being hazardous materials. Vehicle related problems will be expanded upon further on.
The conclusion for this part is that there are different vehicle routing considerations for different
types of customers. Also collection has to be done efficiently and effectively, with the least amount
of hassle and effort for the former users.
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3.2.2 Collection design aspects
The collection design has to take into consideration the following aspects which has followed the
structure of Beullens et al. (2004)
The first main aspect of any logistics system is the infrastructure, which for reverse flows has to
be set up in a different way. This has been touched upon in the previous part and it has to do with
the way the products are collected from their former users. There are three different collection
types, which will be presented in order of convenience for the customer. The first is on-site
collection, which offers to take the products directly from the user or from curbside collection. In
this way the former user has to do the least amount of effort, which leads to a higher capture rate.
Also when it is done efficiently it can be the lowest cost alternative. The second type is the use of
unmanned drop-off sites. These can be recycling bins in front of residential buildings or designated
places to recycle, usually placed outside the city. The products collected in such a way would be
usually glass, paper and textiles, but can also include bigger items for the latter case. The last type
of collection infrastructure are the staffed and smart drop-off sites. With the help of manual
laborers only the relevant products can be sent back up the reverse supply chain. This helps to
decrease the costs of separation upstream and increase the quality of products accepted. Smart
drop-off sites are most commonly used for collection of homogenous products like bottles, which
can also be programmed to accept only a certain type. This would decrease the collection of
unwanted materials. The bottom line is that if all of the above mentioned types of infrastructure
gets used simultaneously the capture rate increases, so do costs.
The second main aspect is the collection policy, which deals with the timing of collection. The
first type uses a static schedule, where the dates for the collectors are pre-determined. These are
called periodic schedules and they can be efficient when there is a similar output of products and
little uncertainty. A different approach is to use just-in-time collection, which is done by the
implementation of a computer logging system. When there is a certain amount of products
collection can come. This is also called a dynamic route-planning model. The next type is similar
to the previous one, but instead of using a computer system, a call by the personnel has to be done
when a certain quantity has been reached. The last type is a schedule that has implemented forward
and reverse flows. In this way when distribution takes place the collection also occurs. This leads
to the highest utilization rate for the vehicles, but some products might not be suitable to be
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collected in the same truck. The last point is that the standard practice is to take all products and
separation to be done later.
The third aspect to be looked at is the combination of products and materials in the truck, if any.
In times where there is either an abundance of one good or it requires special care, separate routing
can be used. This can be employed also with the just-in-time visits, from above, where the collector
knows that they can have good vehicle utilization. The opposite way of doing things is to collect
similar resources in the same vehicle, which can lead to better vehicle utilization, when the return
rates of a certain good are not high enough. The integration of forward and reverse flows can be
done in three ways. The first way is to get mixed flows, which is to do the deliveries and collection
at the same time. As mentioned previously, there may be laws that would stop the mixing of some
new and end-of-life products. At that point the forward flows take priority and collection is done
at a different time. However mixing is made difficult with the use of the one compartment and rear
loaded trucks. To try and offset that one can use partial mixing. The difference is that mixing starts
after a certain amount of the truck has been emptied, due to deliveries. On the other end of the
spectrum is backhauling, which does all the deliveries first and then starts collecting. The
integration of reverse and forward flows has been stated in the paper as reducing the total distance
travelled by half and routing costs by 10% in the best case scenario.
The last aspect is the vehicle types and how to combine them with the different collection types.
Most trucks in forward logistics have one compartment and are rear loaded. This would pose
problems when an integration between forward and reverse flows wants to be done. Then multi
compartment vehicles, which can offer side loading, should be prioritized in order to maximize
the amount of mixing done and lower the time needed to do so.
The conclusion for this part is that combination of products can be done, if that is necessary,
depends on the situation. Also traditional vehicles are presenting challenges when mixing has to
be done.
3.2.3 Features of vehicle routing models for product recovery
The implementation of vehicle routing models for product recovery has to take into account all the
aspects, problems and opportunities from the chapters above. After doing so a list of features are
presented, which would be needed for the formulation of the model. The following is based on
Beullens (2004).
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Forward and reverse logistics share quite a bit of similarities, but some of the aspects of reverse
flows have to be handled differently. One of the major differences that has to be implemented in a
routing model is that there are less strict time windows to work with and some collections may be
postponed. This is because of the low profit margins on some product flows and if a vehicles isn’t
utilized to its potential then there could be a loss. Another reason for that is the supply uncertainty,
which can make the prediction of the timing of products difficult. In order to accommodate that
multi-period vehicles routing problems get utilized. The goal of these models is to minimize the
fixed costs and since transportation is such a big expense, the models might be geared towards
minimizing the vehicles purchased and utilized. In that sense in times of high demand, renting
extra trucks would be considered a better investment than a purchase. This minimizing of costs
would also reflect on the vehicle routing model, in the sense that they would emphasize the
combination and mixing of products if that can lower the costs.
There are other differentiating factors for reverse and forward logistics, aside from costs. A big
differentiator is that when handling reverse flows, split collection is allowed. This means that a
collection can happen in two days, on the condition that the accumulation capacity of the
infrastructure has been taken into account. Also in order to keep the costs down, a higher freedom
in negotiations between generators and collectors is allowed. Lastly the vehicles routing model has
to take into account the vehicle to utilize in different situations. This is because in reverse logistics
there can be more than one type of vehicle, with different loading capabilities, compartment
numbers and capacity.
The conclusion is that there are several differences in the way vehicle routing models have to be
formulated, between product recover and regular distribution.
3.3 The environmental perspective
One of the main drivers for creating a reverse logistics network is to capture the value of the
products after their useful life for the consumer. However legislation is putting a bigger emphasis
on the environmental aspect of reverse flows, thus this section would cover that. This part uses
information from Daniel et al. (2004)
The impact on the environment is split all across the supply chain and capturing some of the
disposed items and reusing them can help lower the need for virgin materials. This is why the
design for disassembly strategy can help with producing a cleaner production, but also increase
27
the efficiency of the processes in reverse logistics. A production like this also has to take into
consideration all of the life-cycle stages of a product, in order to implement ideas which can end
up being more sustainable. There are two internationally accepted standards that can be used as a
template for environmental performance- ISO 14000 and EMAS. They can help with the
implementation of environmental protection measures. A tool, which can be used to evaluate the
environmental impact of a reverse logistics networks and then help keep track of their
performance, are environmental management systems (EMS). In order to use them one has to have
precise environmental impact data on their product and be able to continuously follow the changes,
or to do new studies when there is a significant change warranting another evaluation.
The most commonly used quantitative tool used for predicting environmental impacts is life-cycle
analysis (LCA). It provides a comprehensive overview of the life cycle of the product and the
impacts coming from the forward and reverse supply chain. However a complete LCA is time
consuming, because it has to look into data from raw materials, logistics processes and everything
in between.
The conclusion for this part is that companies can choose to investigate the impact of their products
and use environmental standards such as ISO 14000 and EMAS as a guideline.
4. Danish Deposit law
Reverse logistics can be used for various different industries with varying levels of complexity
and types of implementation. More complex reverse flows are needed when the products on offer
have many different parts and materials, such as the car and electronics industries. More straightforward systems are those that have specialized in dealing with one or few materials. Such reverse
networks can often be seen with municipal recycling schemes. Those would usually include glass,
paper, wood and metals. Constructing a reverse logistics network for the latter case is easier,
because it has to deal with fewer types of flows, which would often originate from a certain region.
Also there wouldn’t be a need to follow so many different kinds of legislation and less
infrastructure would be have to be taken into account. For these reasons the formulation of the
model, in the next chapter, is going to be based on the Danish system for recycling and reusing
beverage containers made of glass. From now on it would be referred to as the Danish deposit law.
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The data used has been taken from http://anker-andersen.dk/deposit-laws/denmark.aspx , unless
otherwise specified.
4.1 History
Denmark has had a system to reuse refillable bottles for decades and during that time the use of
aluminum cans was prohibited, while non-refillable bottles were not popular. The infrastructure
was already in place and working, with reverse vending machines in place. However the restriction
that were imposed were in violation of European Union legislation, so changes were made to make
it follow the new rules. In 2000 the Danish Deposit law was passed through parliament and that
lead to the creation of the Dansk Retursystem A/S (DR A/S) by the Ministry of the Environment.
The purpose behind this company was to operate the deposit and refund system that was put in
place by the new laws. The goals set by the legislation was to have recycling rates of glass at 95%
by the 1st of January 2008. The Danish Deposit law has been amended up until 2007 with changes
to targets and ways of implementation.
4.2 How it works
Dansk Retursystem A/S is the sole entity dealing with the recycling and reusing of glass in
Denmark. This makes it a centralized solution which should make it straight forward to implement
and easy for producers to deal with. When a producer or importer is planning on selling drinks that
are using glass containers they have to register with DR A/S. They have to pay a deposit tax
monthly and the price difference is already included in the price for the consumer. After the
intended use of the glass container has passed and it has been returned to one of the collection
sites, they get transported to one of the two counting centers of DR A/S. There are 28 high-speed
counting and sorting machines in total in these centers. The shipping and handling, up until the
counting centers, has been done by the collectors (shops and supermarkets) and after that they get
refunded for the amount of bottles that they have sent.
Not all beverage containers end up in the vending machines and reused, some of them get disposed
of in the trash. At that point Dansk Retursystem A/S does not get to recycle or use them and they
get a “lost sale”. Instead of them getting the loss in profit, the deposit tax that was collected doesn’t
get returned. This money gets used up in two ways- one is to pay for the maintenance and
improving of efficiency of the reverse vending machines at the shops. The other is to spend the
money in promoting environmental behavior or on various different social programs.
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When a company wants to produce or import beverage containers in Denmark they are forced by
law to register with Dansk Retursystem A/S. There are 4 different types of fees that have to be
paid to register. First one is a once per product signing up fee, unless the container gets changed
and then a new fee should be paid. The next two fees deal with the transportation and collection,
in other words the logistics costs. There is one more fee, which is not regulated by DR A/S, and
that is a packaging fee, which serves the purpose of an environmental tax.
After the counting and sorting of the glass, the beverage containers either get cleaned and reused
or they get crushed and melted into new glass canisters. At that point a smaller part of the bottles
stay in Denmark and then the rest get exported to other countries. This and other statistics about
glass consumption can be seen in figure 3.
Figure 3. Consumption of glass packaging, ‘000 tons, source: Statistik for genanvendelse af
emballageaffald 2004
This figure above shows a 70% recycling rate, but that is including the tins and jars from food
products. The actual rate for beverage containers was 84% for 2005.
Dansk Retursystem A/S is an economically profitable organization, as mentioned in the
introduction, but there still are faults with the system. First of all is that the target of 95% by 2008
was not going to be met and there was a revision of the target in 2006. The relevant data if it has
30
been met could not be found. Also importers have stated that these taxes are infringing on EU law,
because they are adding an import barrier, which is in turn limiting the amount of foreign beer in
Denmark. However the results are different as stated by http://anker-andersen.dk/depositlaws/denmark.aspx:
“• The amount of imported beer increased from 4 million litres to 13 million litres.
• The number of producers and importers increased from 269 to 343.
• The total number of products (different EAN numbers) increased from 2050 to 4918.”
To conclude, the reverse logistics network created by Dansk Retursystem A/S has shown to be
profitable and having a high capture rate.
5. Basic facility model
Logistics networks of forward supply chains are presented as an asset of very high importance in
companies (Chopra and Meindl (2001)). One might say that they have an even bigger importance
in reverse logistics, because the efficiency, or lack thereof, can help with becoming profitable or
lose money. Reverse flows have to be implemented in a good logistics infrastructure, in order to
have the transformation of an unwanted product to one that can be resold, in a way that value is
created for the actors in the supply chain. Additionally facilities have to be built in such a way that
the transportation between former users to recovery to the reuse market has to be minimized. There
are different processes that have to be implemented in the reverse supply chain which have to all
work together. On top of that the collection and inspection has to be implemented in such a way
that the unnecessary scrap gets disposed of. These are some of the considerations for a reverse
logistics network, which would be used for formulating the basic facility model. The following
information, before the model and for it, is based on the work of Fleischmann (2001). Some of
the information would coincide with the general information under 3. Network Design, and
especially 3.1 Product recovery network design, but the following considerations are specifically
for creating a reverse logistics network, with the help of a basic facility model, for beverage
containers collection.
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5.1 Structure of the reverse logistics network
The logistics network for beverage containers is connecting two markets- the first one produces
the supply of used refillable containers and the other one demanding them. In doing so the logistics
infrastructure has to collect and transport the goods to the counting and sorting locations, after
which they end up in the recovery facilities. There the beverage containers get cleaned and some
small repairs may be done to them. After that the goods go to where the demand is, which would
be the local producers, or foreign markets. The last part doesn’t fall into the scope of the paper.
The interactions from above can be seen in Figure 4.
Figure 4. Adaptation of Reverse logistics network structure from Fleischmann (2003)
The network presented above can handle more than one company, which can manage and
implement all the interactions from Figure 4. Different flows can be done by third party companies
and in that way the responsibilities can be split to more than one entity. Also the implementation
of the network structure following this model has shown deviations concerning the involvement
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of the entities, the centralization of the network structure and the number of levels of recovery.
However in this context the most appropriate structure would be that of a closed loop supply chain.
Different network structures presented by Fleischmann et al. (2004) are: 1. Networks for mandated
take-back, 2. OEM networks for value added recovery, 3. Dedicated remanufacturing networks, 4.
Recycling networks for material recovery and 5. Networks for refillable containers. The chosen
structure that this paper is going to follow is the last one – networks for refillable containers.
5.2 Characteristics of a network for refillable containers
The network structure for refillable containers has a special aspect, which is that the products in
the supply chain can be reused without much recovery. This means that they can be in and out of
the reverse flows quite fast. After collection the glass containers would go to counting and sorting,
this is done usually by an automated system. This process is done at the remanufacturing plant,
because it is more efficient than having specialized workers or machines in all of the collection
sites. During that phase the broken or unusable containers would be cleared out of the system and
sent for melting or other type of reuse of the material. In the next stage mostly cleaning is done
and possibly small repairs, if applicable. With such relative ease of reusability of the products a
company’s pool of containers may be characterized as an asset (Fleischmann (2001)).
With this in mind, a top priority for the logistics network is to work in such a way that it would
have an effective acquisition process. One part of that is to promote the return of the beverage
containers by the use of promotional programs and the deposit system that people have gotten used
to in Denmark. This should increase the capture rate and to deal with this the network has to be
able to deal with the containers efficiently. The process has to collect as many containers that are
ready for reuse, limit the breakage and leakage due to competitors or inefficiency in the supply
chain. Having this scope of one type of product is potentially allowing mixing of forward and
reverse flows. Best case scenario is using a dual compartment vehicle, which would limit the
amount of transportation, but also help with organizing and planning routing, due to the lower
amount of vehicles deployed. Also there would be better vehicle utilization, which would increase
the value gathered per trip. In this structure forward and reverse flows are going to have the same
importance. The reason for this is that the output is so dependent on the inputs that putting higher
priority on one over the other would lead to a bottleneck on the other end, thus making the network
inefficient.
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The conclusion for this part is that the logistics network has to get the highest capture rates possible
while still being efficient and effective. Also there shouldn’t be any prioritization for either forward
or reverse flows, because that would lead to a bottleneck on the other side of the network.
5.3 Mixed integer linear programming (MILP)
The importance of logistics networks for forward supply chains has already been stressed, because
they can add a lot of value for a company. Thus there has been a lot of research done on the topic
and certain trends have appeared. When it comes to facility locations models, in logistics network
design, the most used one is mixed integer linear programming (MILP). The research for reverse
logistics networks has not come up with a better model for the same problem. There has only been
additions that deal with flow constraints and also implementing the supply restrictions, coming
from the supply uncertainties. Other diverging points are the potential interactions between
different products form the forward and reverse supply chains. For this reason a lot of the models
are using multi-commodity flow formulations (Dekker et al. 2004). Aside from that the
mathematical formulation between the MILP for forward and reverse logistics are quite similar.
5.4 Mathematical formulation of a basic facility location model
The model in Figure 4, from 5.1, shows the whole logistics structure with the forward and reverse
flows. Figure 5 shows a structure only for the reverse flows. The model is tailored for a use of a
certain type of product and presents the different stages this good has to go through. It takes into
consideration the three different levels of facilities and also the types of recovery, which are
bundled up into the term recovery, the rest is disposal. An important point to make is that this
model puts a maximum yield on the facilities, after which a new facility has to be made. This
model is made in Fleischmann et al.(2001).
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Figure 5. Reverse logistics network structure, Source: Fleischmann et al.(2001)
The mathematical formulation is as follows:
Figure 6. Mathematical formulation, Source: Fleischmann et al.(2001)
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Figure 7. Mathematical formulation, Source: Fleischmann et al.(2001)
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Figure 8. Mathematical formulation, Source: Fleischmann et al.(2001)
5.5 Explanation of the model
The mathematical formulation of the MILP is presented in Figures 6-8. As mentioned in the
delimitations the structure of the model would not be expanded upon. What is going to be
explained are the parts which are number from 4.1-11. These are most interesting, because they
are the basis for the formulation of the model and are showing the interactions needed in a reverse
logistics network design model.
The equation in 4.1 is following the assumption that was made earlier, that companies are cost
minimizers. In this context the model can be divided into 3 parts- 1st is the top level of the equation,
which is the sum of the different costs for opening a plant, warehouse and test center, which are
multiplied by their respective handling costs. The second is the multiplications outside the bracket,
which deal with the sum of transportation and handling costs from one place to another. The third
part is the equations in the brackets, which deal with the penalty for not serving a customer and
storage costs. Thus the equation minimizes the costs connected to the facilities, transportation,
handling and penalties for missed demand.
The minimization equation is the one that would present an answer to the model. To have accurate
results there have to be constraints, to guide the answer of the minimization problem. Those
constraints are presented below, the notation from 4.2-11.
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Equations 4.2 and 4.3 is making the model take into consideration the customer demand and
returns.
Equations 4.4-4.6 present a loop of constraints that are all dealing with balancing out the flows
going from the warehouses, plants and test centers. This way there wouldn’t be a bottleneck
somewhere in the system and an overproduction somewhere else, which would lead to inefficiency
in the supply chain. An example for this is if the plant produces more than the warehouse can store.
Equations 4.7-4.9 are dealing with the problem of when there is a need for a new plant, warehouse
and test center to be opened, respectively. If the product flow overwhelms the capacity of one of
the facilities, then a new facility has to be made.
Equations 4.10 makes the indicator, for a new facility, to be binary. If there is no need it is 0, if
there is a need the indicator is 1.
Equation 4.11 is a typical non-negativity constraint for the flows.
5.6 Extensions to the model
The model presented can be implemented in various different situations and that makes it a good
fit for this logistics network structure. In order to do so some extensions can be added to make it a
better fit for the needed conditions. The currently needed structure is one that covers a closed-loop
supply chain, to have that implemented the annual demand and the annual return of a certain
customer has to be above 0. This would be presented by dk*uk>0.
The model above can be extended in two ways to follow the reverse network structure design,
which have been mentioned above. First one is the need to allow multiple recovery options. It was
stated above that the model uses only disposal and recovery as the two available actions. If there
is availability for allowing a differentiation between reuse and material recovery, the model can
evaluate which is the lower cost alternative. This would require the formulation of a multicommodity problem. Another missing aspect of the model is that it does not allow for mixing in
transport. If that is implemented, the theoretical benefits from mixing, mentioned in the text above
can be seen in the model.
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The conclusion for this part is that there are ways to improve upon the model from above to make
it more precise in the answers that it gives. Having that would increase the usability of the model
in a real life situation, but it would also be time consuming and quite ambitious.
5.7 Relevant data for the model
The mixed integer linear programming models are designed by teams in a company with the
purpose of solving a complex problem. The answer that the model provides them with can then be
used to improve, or create, systems and processes. However the accuracy and usefulness depend
on two basic assumptions- the model used is the right one and the data that has been used is relevant
and accurate. For the latter case an overabundance of data can make the linear equation harder to
calculate, but it can also make the answers invalid. The other major problem is to get the
information that you need, because there could be restrictions or the data that is needed is not
publicly available. The following part would deal with the obstacles in data collection.
5.8 Uncertainty with data collection
The problem that affects reverse logistics the most is uncertainty in demand, quality, timing and
quantity. The same trend can be seen during the formulation of the basic facility model and the
data related to it. The following part would follow the structure of Kokkinaki et al. (2004) and
would relate it to the model at hand.
The above mentioned paper presents three sources of uncertainty for reverse logistics and those
are product data, processes facilitation and market place consolidation. First to be presented is the
product data, because it can have the biggest effect on the profitability of a company. The biggest
obstacle to gathering accurate data about the costs related to the products, and inputting them in
the model, is that the quality of the beverage containers would vary. A glass container which is
ready to be reused adds more value and has less costs than the one that has to be sent for materials
recovery. Also having different sizes may reduce the overall profits, because bigger containers
might have higher profit margins. They can also require more vehicles to transport them which
would in turn increase the transportation costs. This is how uncertainty in product data is making
gathering and inputting data about costs into a model for reverse logistics more difficult than its
forward counterpart.
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The next source of uncertainty are the logistics processes, which are influencing the product flows
from the customer to the internal processes and then the reuse market. The biggest problem is that
consumers have to be willing to return the beverage containers and that means that the timing and
the quantity of the returns can be sporadic. This can make it difficult to input data into the model,
because times, or places, of high return rates might show that there is a need for a new plant. But
in times of low returns the model can underestimate the demand. Then there would be penalties
for unmet demand and that could potentially lower the margins. Also the quality of the beverage
containers can influence the product flows between the different facilities, because a product that
can be immediately shipped for reuse wouldn’t require the transport to a material recovery plant.
These two main issues in this part add more uncertainty to the return volumes that have to be put
into the model.
Marketplace consolidation has a significant effect on the annual demand and prices for the reused
beverage containers. First off all the prices for reusable materials have shown to be very volatile,
with prices going up and down all the time. An increase in the price of glass can make the current
reverse logistics network more profitable and maybe lead to an investment in a new plant. However
these high prices may lead to a drop in consumption of beverages from glass canisters, because
their price would be higher. In the long-term this could be a problem. This shows the integral part
of the consumer in reverse logistics and how their behavior can lead to uncertainty.
This uncertainty in prices, costs and demand shows that there are obstacles, which make it difficult
to collect up-to date data and use it in a model. This makes the job of making these models time
consuming and costly.
6. Conclusion
Logistics networks are a very important asset for many companies and they keep on increasing
their reach and scope. The increased public awareness of the environment has paved the way for a
creation of reverse logistics networks, which have the purpose of taking some of the products from
the former user and recover them. This is a further increase in scope and it has mandated a change
in view of the previously landfilled goods and a creation of reverse flows to handle them. This
market driven approach has been successful for the companies implementing reverse networks,
but the implementation has not been very popular. Legislation was created to force the increase of
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reuse of some products and begin the reusing others. This with the help of more literature on the
subject has increased the number of industries implementing reverse logistics flows.
In the introduction a problem statement was created, which goes as follows: “Formulation of a
basic facility model, based on the Danish Deposit Law, and the challenges in doing so” In order to
investigate that an extensive review of the literature was presented. The knowledge gained from
the presented papers has helped create a solid framework for the basics of reverse logistics, the
factors for creating such a network, the value and the obstacles present. With this information at
hand a review of the returned products and the types of recovery was made. The theory review
continued with a presentation of the network design for reverse logistics and all the relevant
aspects. Following that an overview of a working system was presented in the form of the recycling
network of Dansk Retursystem A/S.
With all that information the basic facility model could be formulated, in order to work on the
problem statement. Before reaching that point a structure for the refillable containers in Denmark
was presented, which showed that a closed-loop supply chain can work in that situation. Also the
system should be efficient and effective, while achieving high capture rates. The formulation of
the basic facility model was done, using the theoretic structure by Fleischmann et al. (2001). An
explanation was then made of the model, which had a general structure resembling that of forward
logistics cost minimization models. What sets it apart was the implementation of variables and
parameters dealing with the recovery yield, demand for used products and penalties for not
collecting and not delivering to customers. The following paragraph presented that this particular
model can have certain extensions, which can make the model fit even better to the current
situation, but that would require a big increase in workload and complexity of the model. Lastly a
presentation was made for the uncertainty in the data and how that can affect the process of
formulating a basic facility model for a reverse logistics network design. That part concluded that
price and demand changes in reverse logistics make creating an accurate model difficult and for it
to have accurate results, these models have to be kept up to date.
A general conclusion for this paper is that there is an increasing amount of literature concerning
reverse logistics and that should affect the implementation rate in companies. Legislation also
helps in this regard, but there is a potential for the law makers to work with companies to create
laws that can have a broader scope and increase profitability. Also reverse logistics has a big
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potential, but the working cases are few and far between which makes generalization hard. Having
a more market driven system can help with increasing the popularity, due to the attractiveness of
the higher profitability. To conclude one can be cautiously optimistic about reverse logistics, but
the general industry is still hesitant about the implementation.
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