1. • Cognizant 20-20 Insights
Reverse Supply Chain: Completing
the Supply Chain Loop
Executive Summary Reverse Supply Chain
Traditionally, businesses have concentrated on Reverse supply chain refers to the movement of
improving the forward supply chain for their goods from customer to vendor. This is the reverse
products (e.g., manufacturer-wholesaler-retailer). of the traditional supply chain movement of goods
However, as the business environment becomes from vendor to customer. Reverse logistics is the
more competitive, it becomes increasingly impor- process of planning, implementing and controlling
tant for them to concentrate on optimizing the the efficient and effective inbound flow and storage
backward loop, as well. Reverse logistics practices of secondary goods and related information for the
have been in existence for a long time, especially in purpose of recovering value or proper disposal.
the automotive industry, where manufacturers try
to recover value from recycling car parts. Typical examples of reverse supply chain include:
In this whitepaper, we’ve defined the reverse • Product returns and management of their
supply chain process, the steps involved and how deposition.
it can be used as a strategic business weapon.
Examples of how the consumer electronics,
• Remanufacturing and refurbishing activities.
automotive and retail industries handle reverse • Management and sale of surplus, as well as
logistics are offered. We also provide an overview returned equipment and machines from the
of key trends and best practices that will power hardware leasing business.
the reverse logistics process going forward. Also
In these cases, the resource goes at least one step
covered are reverse supply chain models such as
back in the supply chain. For instance, products
centralized postponement of returns, decentral-
move from customer to distributor or manu-
ized preponement of returns, use of information
facturer. Other instances of products reversing
technology in enabling supply chains and the zero
direction in the supply chain are manufactur-
returns policy adopted by some consumer elec-
ing returns, commercial returns (B2B and B2C),
tronics players. In the end, we briefly look at the
product recalls, warranty returns, service returns,
inherent challenges that a reverse supply chain
end-of-use returns and end-of-life returns.
faces, such as managing customer expectations
on returns policies, partnering with other players There are various types of reverse supply chains,
in the supply chain and handling the mounting and they arise at different stages of the product
pressure from regulatory authorities. cycle; however, most return supply chains are
organized to carry out five key processes:
cognizant 20-20 insights | january 2011

2. • Productacquisition:Obtainingtheusedproduct revenue, often to a market segment unwilling
from the user by the reseller or manufacturer. or unable to purchase a new product (e.g., used
cars). Another common use of returns is as spare
• Reverse logistics: Transporting products to a
parts for warranty claims to reduce the cost of
facility for inspecting, sorting and disposition.
providing these services to customers.
• Inspection and disposition: Assessing the
condition of the return and making the most In certain cases, legal requirements make it
profitable decision for reuse. mandatory for product companies to take back
• Remanufacturing or refurbishing: Returning their old and used products (e.g., in the case of
the product to its original specifications. refrigerators in the U.S., companies are mandated
to take back old products because of hazardous
• Marketing: Creating secondary markets for
materials used in their manufacture). In such a
the recovered products.
case, the reverse supply chain needs to be not
Figure 1 demonstrates a simplified schematic of only well managed, but also tightly integrated
a generic reverse supply chain for commercial into the delivery mechanism.
product returns. The customer returns the
productstothereseller(productacquisition),from Another example comes from Europe, where tire
where they are shipped to the returns evaluation manufacturersneedtorecycleatleastoneoldtire
location (reverse logistics) for issuing credit and for every new tire they sell. In India, a common
product disposition (inspection and disposition). use of reverse supply chains is for promoting
Diagnostic tests are performed to determine sales of new consumer products. Older products
the commercially optimal disposal action for the are collected, reconditioned and resold at prices
returned product. lower than the fresh products but much higher
than “scrap” or salvage value.
There are various types of disposition actions,
including remanufacturing if this is considered The importance of reverse supply chain is dem-
to be cost effective. Some organizations simply onstrated through a statistic originating in the
treat all product returns as defective. There are U.S. that suggests nearly 20% of everything
returnedproductsthatmaybenewandneverused, that is sold is returned. This number obviously
and these are returned to the forward distribution varies by product and channel type; nevertheless,
channel. Other products may be sold for scrap or with the high ratio and challenging economic
recycling, usually after physically destroying the conditions, addressing returns within the reverse
identity of the product. Remanufactured products supply chain can help cut costs, increase profit
are sold in secondary markets for additional margins or both.
Reverse Supply Chain
Supply Original Supply Chain
Production waste by-products
Manufacturing
Commercial returns
Distribution
End of use returns
OriginalUse
OrderUse
Trade End of use returns
Collection
Reuse
Redistribution
Remanufacturing Selection
Recycling
Reverse Logistics Disposal
Figure 1
cognizant 20-20 insights 2

3. Rrse Logistics as a 15 million secondary PCs had to be discarded in
Strategic Weapon 2007. Gartner estimates that by 2012, emerging
countries will need to dispose of a total of 30
For any company, strategic variables are those
million secondary PCs annually. The need and
that have a long-term bottom-line impact. These
opportunities for reuse of obsolete products
variables must be managed effectively, efficiently
cannot be over emphasized.
and proactively — not tactically or reactively —
for the viability of the compny. Until recently, Building to order is an effective way to minimize
most companies concentrated only on business the return chain, as it allows manufacturers to
functions such as finance or marketing as postpone final transformation of the product
strategic variables. Logistics capabilities were until the end of the channel and configure the
looked at as a strategic variable during the late exact computer that the customer wants. The
1970s and 1980s. Most companies now look at inventory holding period decreases sharply with
reverse logistics as holding an important strategic this approach. This is in sharp contrast with the
role, but this function has yet to gain the status rest of this industry, which typically will have 30
of a strategic variable. The importance of reverse to 60 days of inventory pre-sold into the channel.
logistics is increasing for a number of reasons: Manufacturers/retailers that sell directly to the
customer and build to order have significantly
• Companies are seeing tangible benefits from
lower return rates than the rest of the industry.
the value that can be recaptured from unpro-
Statistics indicate that return rates for these
ductive assets resulting from returned mer-
companies are around 5%, about half of what the
chandise, such as significant reductions in
rest of the industry experiences. In the words of
inventories, improvement in cash flow, reduced
one executive interviewed, “We send out a million
labor and improved customer satisfaction.
computers. Pretty soon, most of them come
• There is an increase in competitive pressure to back.” The build-to-order model, combined with
provide an effective, efficient returned goods direct sales, eliminates this problem.
process.Theincreaseincatalogande-business
shopping has resulted in a liberalization of Manufacturers also contract with remanufac-
return policies in order to gain customer trust turing specialists to develop solutions to this
and reduce risk. problem. These specialists work with manufactur-
ers to evaluate the root cause of returns, excess
• Productlifecyclecompressionandanincreased
and obsolete machines, and develop methods to
emphasis on introducing new products and
control cost and return rates. These companies
product “freshness” has created a need to
test, recondition, repair, repack and then resell the
clear the distribution channel more frequently,
machines.Thefunctionsofservicecenter,warranty
requiring an efficient means to bring back
repair and other servicing are often outsourced to
obsolete, outdated or clearance items.
athirdpartythatspecializesinthisbusiness.These
• Increased regulatory requirements regarding programs have led to lower returns.
recycling and product disposition — especially
aroundproductshavingenvironmentalhazards Automotive Industry
— has increased the need for precision record The automobile industry is one of the largest
keeping and tracking. industries in the world and deals with the most
expensive of consumer goods. Therefore, it is not
Examples of Reverse Logistics surprising that reverse logistics is an important
Across Industries subject for this industry. The three primary areas in
Computer/Electronics Industry which reverse logistics plays a significant role are:
The computer and electronics industry is known
for short product lifecycles. A big market has • Salvage of parts and materials from end-of-life
vehicles.
emerged for used PCs — both in developing and
developed countries. According to Gartner, 37 • Remanufacturing of used parts.
million secondary PCs were refurbished and
• Stock-balancing returns of new parts from
exported to emerging markets in 2008, and the dealers.
market research firm predicts that this number
will rise to 69 million by 2012.1 In 2007, nearly
68 million secondary PCs had to be discarded
worldwide. In emerging countries, approximately
cognizant 20-20 insights 3