5 Principles for a Better Reverse Logistics Operation

Plus, learn how one company's high-velocity reverse logistics operation put its ERP system to the test by making pre-owned network equipment available globally

Reverse logistics manages inventory that flows upstream — back toward a source — to capture value otherwise lost or under-realized. Often considered the forgotten stepchild of supply chain planners (who typically design supply chains for forward deployment), poorly managed reverse logistics can be costly, and those costs can be extremely hard to discover. However, it's common that even those enterprise resource planning (ERP) systems capable of reverse logistics aren't properly set up. As a result, mislabeled, unacceptable or non-labeled inventory is often lost to possible resale, refurbishment or other positive disposition because the ERP is simply unaware that it exists.

Before looking at a case study of an exemplary reverse logistics operation, here are five principles to consider when designing a reverse logistics process:

First, avoid creating inventory that is highly likely to be returned. This resource planning approach is called avoidance management, and it aims to prevent you from flooding your market with overages that are bound to come back. While this may seem obvious, it is important for planners to remember that no amount of reverse logistics optimization can take the place of eliminating the root causes of excess inventory.

Second, establish gate-keeper rules in your ERP that automate the registry of returned inventory. With automated gate keeping, even low-skilled workers can accept, sort and properly re-label (or discard) items without having to examine each one. Barcode- or radio frequency identification (RFID)-based returns gate-keeper systems are affordable to implement, and inventory can immediately be labeled as available for forward supply chain operations or appropriately relegated for repair, recall processing, refurbishing or the trash.

Third, establish a complete set of code categories within an ERP — right down to the radio frequency (RF) gun level — to accommodate the full range of possible returned inventory. A dock worker who cannot find a valid entry code for an item is likely to store it without checking it into the ERP, making it lost inventory that can never be monetized.

Fourth, availability is what drives any inventory-based business. Since an ERP system makes an essentially binary distinction about inventory (it is or isn't available for fulfillment), the rules driving reverse logistics should absorb and label inbound inventory with the determination of availability as their goal. Items that float in a grey area between unacceptable and almost available are likely never to move. Available inventory will be promised and fulfilled before items languishing in limbo.

Fifth, dock personnel should aim for immediate inventory turns, and they should have the authority to request or directly edit reverse logistics rules, as the nature of the inbound inventory changes. Labeling a recently recalled product with a refurbish code — for lack of a better code or because the IT systems administrator was distracted — can be costly and expose companies to liability.

Let's take a look at a complicated reverse logistics operation that has been successfully integrated with a forward logistics operation through adherence to these principles. Telmar Network Technology is a provider of pre-owned voice, data and optical equipment for both wireless and wireline networks. (By purchasing pre-owned, customers can realize 30 percent to 70 percent savings over new equipment, but they must source the equipment in the secondary market in which Telmar operates.) Telmar's inventory is accumulated through a reverse logistics operation and immediately re-deployed in a traditional forward-logistics operations, all run from an ERP that has been accessorized by a supply chain execution solution for functionality the ERP doesn't otherwise offer.

Telmar's operations have to be extremely responsive because its inventory is highly fluid, with rapid turnover, as quality-certified equipment from over 100 of the industry's leading manufacturers moves through Telmar's global warehouses every day. Since network equipment prices decline on a daily basis, immediate visibility to on-hand inventory avoids costly delays that impact the value of Telmar's inventory.

Availability is what drives our business, so our growth depends on our ability to source, screen and test inventory and quickly post it for sale, said Telmar's Andy Guarnera, E-Business Architect. Many truckloads of salvaged and exchanged, and pre-owned network equipment comes into Telmar's warehouses each week.

As a result of these demands in an idiosyncratic market, Telmar's has a number of unique inventory challenges. On a daily basis Telmar must be able to sort through the truckloads of inbound product, pull out the valuable items, process them as available inventory, put them away, post them for sale, and prepare to send them out anywhere in the world within 24 hours.

To increase the operational efficiency of its ERP and customer relationship management (CRM), Telmar runs the supply chain execution solution for shipping, receiving, label printing and inventory movement. Through the application of business rules driven by the supply chain execution software, Telmar pre-assigns voice, data and optical network products with a keep level rating based on marketability and availability.

With this pre-determination, receiving dock personnel scan the items on the incoming trucks with bar code scanners. By simply electronically reading the barcodes, Telmar's software system alerts the operator whether to accept or reject the networking components. Through this business-rules approach, products that do not have a current market worth never even enter Telmar's inventory. If products are accepted, they are immediately and automatically entered into Telmar's catalog of available inventory. Then, their precise put-away location is logged, and they are instantly put on the global market.

The alternative to this business-rules approach is labor-intensive and costly. Without bar code scanning devices linked to a database, products would have to be physically examined by skilled personnel. Today, Telmar avoids having to manually enter data into an ERP system. The lag time could easily cost Telmar sales in this global commodity market or, worse, give Telmar customers the impression that the company does not move as fast as its competitors.

By using supply chain execution to enhance its shipping, receiving, label printing and inventory movement, Telmar is able to obtain the reverse logistics capabilities its business requires while maintaining the integrity of its ERP data model (a single database, as opposed to a best-of-breed approach). With this approach Telmar gets the best of both worlds: real-time ERP transactions and a rich feature set.

It is very important for us to have real-time access to accurate inventory information at all times so our employees can make informed decisions and continue to provide our customers with excellent service. Our combination of the software solutions has allowed us to optimize operations across all our distribution centers, said Jonathan Hahn, chief information officer of Telmar.

The results of implementing a rules-based reverse logistics operation have been:

  • Reduction of Human Error. Telmar electronically determines if inbound network equipment has commercial value.

  • Cost Avoidance. Telmar avoids the cost of taking in, housing and later purging worthless or un-sellable inventory.

  • Reduced Labor Costs. Telmar is able to streamline the management of receiving dock personnel by using easily edited business rules.

  • Accelerated Inventory Turns. Telmar can put inventory up for sale immediately upon taking ownership, with no data re-entry.

Sidebar: Beyond Reverse Logistics to Collaborative Reverse Logistics

Return of products used to be simple. A customer packed up the unwanted or damaged inventory in its original box and sent it back to the manufacturer. Credit was then issued, new products were sent out, and old products were discarded or repaired onsite. But today, the supply chain is much more complex: It involves contract manufacturers, multi-tiered suppliers, third-party warehouses and off-site repair depots, some in far-away countries.

The corporate (or host) ERP that accounts for the inventory must receive notification that a new product has been returned to a third party and that a new one has been sent out (possibly from a different third party), as it tracks the disposition of the returned item (e.g. refurbish, discard, restock). The brand owner must coordinate these activities even if it never physically takes possession of the item. So, tracking and controlling the returned material and replacement to the customer is now both a logistics and a data-management challenge, to say nothing of the challenges surrounding warranty management, material packaging and labels for the return.

The core problem with increasingly complicated supply chains is that there is no guarantee that the customer or third party has a way to traffic data with the host ERP — a tall task when you add in the fact that third parties are reluctant to install client-side hardware and software to accommodate the host's ERP.

A solution to this problem is a new approach to reverse logistics called Web-based collaborative return authorization. Web-based collaborative return authorization consolidates visibility to suppliers, manufacturers, 3PLs, repair depots and customers while controlling the flow of material from point to point. Web-based collaborative return authorization is now possible through secure portals that allow third parties — either supply chain service providers or consumers — to log in, and interact with a form that uploads information to the host ERP (entered manually or obtained through barcode or RFID), as it sends back authorization and item-specific labels that move the product appropriately from point to point.

The host ERP is deployed securely over the Web — and therefore globally, to anyplace there is Internet access — while the costly proliferation of databases is entirely contained. Business rules drive the process, so a third party or customer cannot return a product without an appropriate label, which then directs routing of that package to the proper facility. The data generated by that transaction is captured centrally. Depending on security levels set by the host, all parties involved in the repair/replenishment can view and manage the repair and replacement efforts.

Though Web-based collaborative return authorization has been the vision driving development of innovative software in the reverse logistics sector, the trick has always been to allow the host ERP to set the rules and secure the access, while simultaneously controlling authorization of users and requiring little or no IT infrastructure, except access to the Web.

About the Author: John Reece is president of ClearOrbit, which provides real-time supply chain execution (SCE) software solutions. ClearOrbit was founded in 1994 and currently serves more than 250 leading manufacturing and distribution companies including Cisco Systems, Texas Instruments and Applied Materials. www.ClearOrbit.com.

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