A Decision-Making Tool for Designing Reverse Logistics Networks

16 Nov 16

The Malaysia Institute for Supply Chain Innovation (MISI) has initiated a research project to help enterprises design networks for reverse logistics operations that meet their organizational objectives.

The project has three main goals: to identify the main factors that influence reverse channel network design decisions, to propose a framework for making these decisions, and to apply the framework in different situations and industries.

The proposed framework is based on information derived from a literature review and secondary data from company websites. It involves four stages in selecting the mode of reverse logistics operations: (1) Collection, (2) Sorting and testing, (3) Processing and (4) Storing.

There are two dimensions to consider at each stage in designing the network: internal processing versus outsourcing, and centralizing versus decentralizing of operations. Companies can use MISI’s proposed framework in the following manner when designing their reverse logistics networks.

Stage 1: Collection

At stage one, which involves the collection of product returns, a company can decide whether to centralize or decentralize their operations. Centralized reverse logistics is a system where one organization is responsible for collection, sorting and redistribution of returned items. In decentralized systems, multiple organizations are involved. The enterprise also must decide whether to operate the collection system in-house or to outsource these activities to third party providers

Stage 2: Sorting and Testing

In stage two of the process, returned product is sorted and tested. This operation requires some gate keeping to be performed. Again, the company can decide to centralize or decentralize these operations, and choose if it wants to perform the sorting and testing in-house or outsource the work to third party providers.

Stage 3: Processing

Stage three involves processing product returns where the recovery operations (repair, remanufacturing, recycle) are either outsourced if the return volume is high and unpredictable, or performed internally if the operations require special skills to protect the enterprise’s intellectual property.

Stage 4: Storage

At the final stage of storing the product returns, the products are either sent back to the original source or stored centrally.

Many PC manufacturers, such as Dell and Hewlett-Packard, provide support for all their products right through to the returns stage. An example of how the framework can be applied in the computer industry is illustrated in Table 1.

Table 1. Proposed configuration for the computer industry

The rationale for this structure is as follows.

Stage 1: Collection

The computer company might decentralize the collection of all the defective parts in its own service center. This will give the company more control over returns policy, and ensure that the returns are managed within the warranty period. For example, Dell has organized special recovery teams through the Dell Asset Recovery Service program for collection. Dell outsources the collection process to a charity organization, a strategy that enables the company to both reduce the cost of product collection and enhance its corporate image.

Stage 2: Sort and test

Sorting and testing might be decentralized to ensure good parts are rejected immediately without incurring more costs. However, if the equipment used in testing the computer is complicated and needs special operating skills, this stage should be centralized. Parts that cannot be serviced are scrapped immediately instead of sending them to the processing center. This step will save transportation and administration costs.

Stage 3: Processing

Some companies have outsourced repair services to third-party providers if the return volume is low. If a company’s objective is to turn its service operations into a core competency, it should carry out this process in-house. Otherwise, the enterprise can outsource processing to achieve economies of scale.

Stage 4: Storage

Some computer companies have setup warehouses to store remanufactured parts and supply them to channel partners. Centralized storage operations are not as responsive to changes in customer demand, but are less costly than decentralized options. HP and Dell have centralized their storage in their regional DCs to take advantage of lower storage costs and inventory pooling.

As regulations pertaining to reverse logistics and shorter product life cycles become more stringent, companies need to pay more attention to the efficiency of their reverse channels. Choosing the best network configuration is key to achieving this goal, and the framework outlined in this article will help companies to design a network that is aligned with their organizations while meeting the requirements of government regulation.

This article was written by Dr. Albert Tan, who teaches in the MIT-Malaysia Master of Science in Supply Chain Management program at the MIT Global SCALE Institute in Malaysia. He can be reached at atan@misi.edu.my