Omega 30 (2002) 325 333

www.elsevier.com/locate/dsw

A model for reverse logistics entry by third-party providers

Dennis W. Krumwiedea; , Chwen Sheub
b College a College of Business, Idaho State University, Pocatello, ID 83209-8020, USA of Business, Department of Management, Calvin Hall Room 101, Kansas State University, Manhattan, KS 66506, USA

Received 20 June 2001; accepted 31 August 2002

Abstract Reverse logistics has become an important entity in the US economy. Nonetheless, many companies are not capable of or are unwilling to enter the reverse logistics market. Such reluctance appears to be attributed to lack of knowledge of reverse logistics. This paper reviews current industry practices in reverse logistics. Specically, we examine the issues and processes that an organization has to address to engage in the reverse logistics business. A reverse logistics decision-making model is developed to guide the process of examining the feasibility of implementing reverse logistics in third-party providers such as transportation companies. The purpose of this model is to help those companies who would like to pursue reverse logistics as a new market. A eld study was conducted with a larger US transportation company to validate the proposed model. ? 2002 Elsevier Science Ltd. All rights reserved.
Keywords: Supply chain management; Logistics; Reverse logistics; Disposition; Retrieval; Transportation

1. Introduction The goal of manufacturing companies is to ship goods through their plants to their customers. This movement of goods most often means a prot to all involved. These same companies, however, do not want products to be returned for any reason. They do not plan for the backward movement or return of goods, known as reverse logistics, as these returns represent a substantial cost rather than a prot. Some CEOs even perceive returned goods as a failure of their system [1,2]. Sometimes reverse logistics is regarded as a recycling process involving aluminum cans, papers, plastic and glass. Reverse logistics is actually very involved and can be extremely complex. Many companies with limited resources outsource their reverse logistics operation needs to third-party providers [3]. As an example, many companies use NetReturn, an Internet system that Federal Express has developed for reverse logistics management. NetReturn facilitates returns for merchants once a customer has requested
Corresponding author. Fax: +1-208-282-3506. E-mail addresses: krumdenn@isu.edu (D.W. Krumwiede), csheu@ksu.edu (C. Sheu).

a return and been provided authorization to return a product. These third-party companies such as FedEx, ASTRA and GENCO, not only aid the return process of goods by scheduling the pickup and transportation, they also collect customer information and track the status of returned items. Over the last decade, reverse logistics has had a signicant economic impact on industry as well as society. This impact can be seen either as detrimental to a company, and thus avoided, or as a competitive advantage with potential for capturing market share. Companies that receive items back from the customer who try to hide from the signicance of reverse logistics miss prot-making opportunities [4,5]. On the other hand, companies that use reverse logistics as an opportunity for enhanced business will prosper by maintaining customer support, the ultimate issue for protability. While recognizing the importance of reverse logistics, companies and especially e-businesses are increasingly outsourcing their reverse logistics e orts to third-party providers [3]. Even some major discount stores such as K-Mart are choosing to outsource their reverse logistics operations to third-party providers like GENCO Distribution System [6]. Gooley [7] has developed a process for companies considering the creation of their own reverse logistics

0305-0483/02/$ - see front matter ? 2002 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 5 - 0 4 8 3 ( 0 2 ) 0 0 0 4 9 - X

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operations. What has not been dened in the literature, however, is a process or model for third-party providers who wish to enter the reverse logistics market. Third-party providers are recognizing the opportunities associated with reverse logistics, but do not understand the processes necessary to embark upon this business in a logical manner. The intent of this paper is to provide a set of steps or a decision-making model for potential implementation of reverse logistics by these third-party providers. The process of model development is multi-faceted. We begin by dening logistics and reverse logistics and discussing the signicance of reverse logistics in supply chain management. Next we conduct a comprehensive review of current industry practices in reverse logistics. Finally, we present and discuss the reverse logistics decision-making model followed by a eld study to validate the model. 2. Reverse logistics: denition and signicance Logistics involves the movement of physical goods from one location to another and third-party transportation companies (such as JB. Hunt) provide a substantial portion of this service. Some of the earliest documentation of the use of logistics can be traced to the military. Simpson and Weiner [8] referenced an article written in 1898 describing logistics as a strategy for handling troops during war, including the moving and quartering of troops. The military has since dened logistics as encompassing all activities and methods connected with supplying the military, including storage requirements, transport and distribution [9]. Several business groups have recently dened logistics for the private sector. American Production and Inventory Control Society (APICS) denes logistics: In an industrial context, the art and science of obtaining, producing, and distributing material and product in the proper place and in proper quantities [10]. The Council of Logistics Management (CLM) denes logistics as The process of planning, implementing, and controlling the e cient, cost e ective ow of raw materials, in-process inventory, nished goods and related information from the point of origin to the point of consumption for the purpose of conforming to customer requirements [11]. All of these denitions involve the movement of goods from one point to another. The business of goods movement or logistics has created the need for substantial infrastructures such as railroads, highways, river ports, seaports and airports. Cities and towns have emerged and grown along active logistics routes, demonstrating the importance and power of logistics. Reverse logistics can be dened as the reverse process of logistics [9]. Traditionally, reverse logistics has been viewed primarily as the process of recycling products. Today, definitions vary depending on what company or segment of industry is attempting to dene it. Retailers see reverse logistics as a way to get product that has been returned by a consumer back to the vendor [12]. Manufacturers tend to

view reverse logistics as the process of receiving defective products or reusable containers back from the user. CLM denes reverse logistics as The process of planning, implementing, and controlling the e cient, cost e ective ow of raw materials, in-process inventory, nished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal [13]. Fig. 1 illustrates the concept of forward and reverse logistics within the supply chain system. Reverse logistics generally involves events necessary to retrieve, transport and dispose of goods. These goods are moved backward from the consumer and the process includes the information ows associated with tracking and credit processes. A complete supply chain system includes both forward logistics and reverse logistics as shown in Fig. 1. Management traditionally concentrated on improving forward logistics operations to enhance a rms competitiveness. Forward logistics operations subsequently increase reverse logistics activities and thus its importance to an organizations success. US companies are spending in excess of $35 billion per year on handling, transportation, and processing of returned goods [2]. These estimated costs do not include the management of these processes as well as the transformation process of converting unusable goods into usable goods. On average reverse logistics activities make up approximately 4% of total logistics costs to a company [15]. Companies who purchase reverse logistics assistance from third-party providers could reduce up to 10% of their companys annual logistics costs [15]. High-tech companies have reduced inventories along with improving eld engineer productivity by as much as 40% through appropriate handling of reverse logistics [15]. Reverse logistics is obviously emerging as very important entity in the supply chain. Internet is credited for increasing the demand of reverse logistics services due to returns generated by the marketing strategies of Internet connected companies. Amazon.com has a marketing strategy that includes a liberal return policy, which allows its customers to return items for numerous reasons. Reverse logistics can be particularly crucial for e-commerce as the rate of returns from on-line purchases can be as much as 50% of goods shipped through normal logistics channels [16]. A major contributor to the growing need for e cient reverse logistics processes can be traced to liberal return policies of many retailers such as Wal-Mart, K-Mart, ShopKo, Fred Myers, etc. These companies have varied, but liberal, return policies giving customers some control of the product they purchase by allowing them to return items for a variety of reasons. Customers rightfully, and sometimes wrongfully, take advantage of this opportunity. The need for management of returned goods inventories has dramatically increased as customers take advantage of the various return policies. Because of this growth in reverse logistics, many companies like Xerox, Home Depot, Mobil and Eastman Kodak have tailored reverse logistics to their industry in an

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327

Supplier Manufacturer Suppliers Supplier

Wholesaler/ Distributor Retailer Legend Logistics (Transportation)* Reverse Logistics (Transportation)*

Consumer

Information Flow Supply Chain Nodes

* Company owned or third-party providers perform transportation needs.

Fig. 1. Consumer supply chain. Source: Lummus et al. [14].

attempt to control the costs associated with it [7]. These companies have discovered that cost reductions in inventory carrying costs, transportation, and waste disposal can be substantial with an e cient reverse logistics program. The same companies have also recognized the importance of public image and how reverse logistic policies a ect that image. The public generally views companies who e ciently and e ectively handle reverse logistics of hazardous materials as good citizens. At the same time that the importance of reverse logistics is increasing, Meyer [2] and Rosen [17] indicate that the process of reverse logistics is also becoming increasingly complicated. Many companies are unable to handle the complex networking necessary to have an e cient reverse logistics process. These companies are therefore outsourcing all or part of the reverse logistics process to third-party providers. Outsourcing has provided many third-party providers with a unique opportunity to enter the reverse logistics market, since they have many of the necessary resources to facilitate reverse logistics. However, the president of manufacturing at GENCO Distribution System, a third-party provider of reverse logistics, says : : : We often have to convince companies they have a problem before we can tell them we have a solution. [2]. Frequently in many organizations, employees do not know who is in charge of the reverse logistics process. One upper level manager within the third-party provider industry commented: Many companies dont even come close to understanding how their existing returns process a ects

repeat business with their customers. The service aspect of the returns process can ultimately determine the loyalty of customers for additional business and referrals based on the handling of existing return goods accounts. Companies must rst accept that returns are a problem for the customer and that it will impact future sales. In summary, there seems to be a lack of understanding of reverse logistics in industry, which certainly could reduce the e ectiveness of supply chain management. The next section reviews the current practices of reverse logistics, prior to developing the reverse logistics decision-making model.

3. Current industry practices for reverse logistics A comprehensive review of reverse logistics practices was conducted through literature review, WEB searches and survey methodologies. The purpose was to determine the needs of third-party logistics company customers in reverse logistics as well as current strategies of their competitors and the needs of the competitors customers. In general, the practice of reverse logistics involves three distinct stages: retrieval, transportation, and disposition. Table 1 is a list of terms generally used in all stages. Each stage has a set of people or organizations involved with the reverse logistics process, each having their own special interests [7]. Each stage will be discussed in detail.

328 Table 1 Reverse logistics terms with denitions Term Product recalls Inventory returns Warranty returns Core returns Reusable containers Damaged goods Seasonal items Hazardous materials Stock adjustments Denition

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Goods the manufacturer has recalled and must be picked up for return. Goods returned to reduce inventory at an outlet other than the manufacturer. Goods a store/distributor/wholesaler knows are in need of warranty return. Reusable goods, those items that can be remanufactured. Shipping containers that product was shipped in and must be returned to the manufacturer. Goods damaged in shipment or damaged on site. Items returned due to the end of a season, which causes the item to have no retail value in the next season (s). Items considered hazardous and yet must be returned. Also known as HAZMAT. Goods transported to correct a situation where there is an abundance of items at one location and lacking in another location.

3.1. Stage 1Retrieval Retrieval can best be described as the process of collecting and removing goods from a customer. This stage is a ected by the type of product picked up and who does the retrieval from the customer. There are several di erent operations of the retrieval process. These operations include: (a) Store level returns retrievalsStore level returns are those returns that are retrieved from any type of store/outlet. This type of return is made up of product recalls, inventory returns, warranty returns, core returns, reusable containers, damaged goods, seasonal items, hazardous materials (HAZMAT) and stock adjustments. (b) Consumer returns retrievalsConsumer returns are collected from the ultimate consumer. These returns include product recalls, warranty returns and damaged goods. (c) Collection center retrievalsThese retrievals involve product recalls, warranty returns, inventory returns, core returns, reusable container returns, damaged goods, seasonal items and hazardous materials.

3.3. Stage 3Disposition The disposition process involves decisions and actions associated with the fate of a product once a customer demonstrates product dissatisfaction. There are two types of disposition, on-site and o -site. On-site disposition involves activities that take place at the customers facility to handle issues related to product concerns. The product may be repaired or replaced on-site. O -site disposition involves shipping the defective product to a di erent facility for repair, replacement, or disposal. A basic ow of the disposition process can be seen in Fig. 2. This gure illustrates the forward movement of goods, or forward logistics, in the supply chain by the use of narrow arrows. Bold arrows illustrate possible reverse logistics ow at all nodes in a products forward logistics path. At every node, there is potential need for on-site or o -site disposition. The forward movement of goods represents the normal ow of material from raw material to nished goods to the ultimate consumer. Corporate-owned transportation systems, such as Wal-Mart, or third-party logistics companies, such as Consolidated Freight Inc., perform this process. The reverse logistics ow is more complicated as the product being dispositioned can be handled in many di erent ways. As Fig. 2 illustrates, the returned product can be serviced at the customers facility (on-site disposition) or sent o -site for further considerations. The product would be shipped once again using either corporate-owned transportation systems or third-party providers to o -site facilities (o -site disposition). The o -site disposition can include product repair, replacement, disassembly, liquidation sales, or even landll disposal. Companies such as Wal-Mart use dedicated redistribution or processing centers for their o -site processing e orts. A processing center can be responsible for many aspects of the reverse logistics e ort which include: (a) RepairsGoods that have been returned and are in need of repair at a processing center.

3.2. Stage 2Transportation The transportation stage of the reverse logistics process is considered to be the actual movement of goods from one location back to another location. The transportation stage is extensively involved in all aspects of reverse logistics, since manufacturers are often unwilling to be the nal destination of their returned goods. Instead, they prefer to have an outside source or third-party logistics company dispose of these goods. As a result, transportation companies are often left holding the goods waiting for disposition information. These companies are recognizing the protable situation of handling otherwise unwanted returned goods.

D.W. Krumwiede, C. Sheu / Omega 30 (2002) 325 333

Consumer

329

Retailer

On Site Disposition
Distributor/ Wholesaler Liquidation Outlets (Secondary Market)
(Brick and / or Click)

Manufacturer

Off Site Disposition

Supplier

Processing Center

Disposal
Landfill

Raw Materials Reverse Logistics Forward Logistics

Fig. 2. On-site and o -site disposition processes.

(b) Replacement part return to customerItems that have been collected from the end user upon delivering the replacement part to the consumer. (c) InspectionReturned goods shipped to a processing center that require inspection, which may include visual, mechanical or electrical testing. (d) SalvageGoods that are either physically destroyed, disposed of (such as delivered to a landll), or dismantled. (e) ReworksGoods that need to be modied such as upgrades (putting a new module in a system per upgrade instructions), refurbishments and repackaging. In practice, the o -site disposition stage can also involve liquidation centers and secondary market outlets. Liquidation outlets resell returned goods either through a WEB site (click) consignment process or a brick and mortar (brick) consignment process. Returned goods processed in this manner are auctioned o to the highest bidder. This liquidation process is usually called the secondary market and is broken down into its own primary and secondary markets. Based on industry practice this primary market consists of major discount retail brick chains such as K-Mart, and the secondary market consists of second level discount stores such as Dollar General as well as Mom & Pop operations. In relation to click operations, online auctions like Ubid.com

and Ebay.com sell everything from computers to cameras to household products and appliances on the WEB. Ebay even goes further with the sales of automobiles, car parts, furniture, and other such diverse items. Some of these items are refurbished returns, others are overstocks and out of date products. Many of which are returned to a central point or consolidation points for resale. With the knowledge of current industry practices, we developed a model that would serve as a guideline for implementing reverse logistics. The model is discussed in detail in the following section. 4. Reverse logistics decision-making model We developed a reverse logistics decision-making model for strategic reverse logistics decision-making (Fig. 3). The model was based on literature review and interviews with ve logistics managers at prominent third-party logistics companies headquartered in the United States. The interviews were informal with conversation directed around their perceptions of issues that would a ect their desire to enter the reverse logistics market. A common pattern emerged that lead to the model. The purpose of this model is to help third-party logistics companies desiring to pursue reverse logistics as a potential new market. The model depicts several

330
(1a) Research existing reverse logistics issues

D.W. Krumwiede, C. Sheu / Omega 30 (2002) 325 333

(1b) Identify reverse logistics customers (Existing and potential)

(2) Survey existing repeat customer needs (Existing and potential)

(3a) Survey competitors reverse logistics practices

(3b) Survey competitors customer needs

(4) Conduct gap analysis

(5) Perform feasibility study

(6) Develop positioning strategy

Fig. 3. Reverse logistics strategic decision-making model.

key steps necessary for a company to take in determining its current and future potential in the reverse logistics market. The steps of this process of evaluation are discussed below. (1) Research existing reverse logistics issues and identify customers. A third-party logistics company that is considering entering the reverse logistics market must rst research current issues pertaining to reverse logistics. The company should conduct market research involving literature review of current academic ndings in reverse logistics in conjunction with WEB-based research. The knowledge gained will provide the company with current best practices allowing for educated decisions to be made in their reverse logistics endeavor. This step is especially important as the reverse logistics market is expanding and changing so rapidly that even a month of lapsed time can make a substantial di erence in the needs of the reverse logistics customer base. In parallel to literature review, the third-party logistics company should identify and study existing customers who have had the company return goods for them. If for some reason their existing customer base has not utilized the third-party logistics company for reverse logistics e orts, these potential customer needs should be investigated. If the company currently has reverse logistics customers, it should

investigate frequency of use and protability from each customer. All knowledge gained in this stage is used later to develop the survey for collecting more information from potential customers. (2) Survey existing repeat customer needs. Once potential customers are identied, the third-party logistics company should survey their existing and potential needs for reverse logistics service. Table 2 provides a sample set of questions for this survey. The sample survey mentioned in this paper is to be conducted via telephone interview with appropriate logistics personnel on both ends. With the understanding of current reverse logistics issues, this survey would obtain information related to existing or potential reverse logistics needs that their customers may have. This information is invaluable when determining the companys current position regarding reverse logistics and establishing direction for the future of the companys reverse logistics involvement. The company can also use this information to design a survey for understanding competitors and their customers in the reverse logistics business, discussed in Step (3). Refer to Table 2 for survey questions asked of competitors and competitors customers. (3) Survey competitors and competitors customers. Viable competitors of the third-party logistics company should be identied to assess their capabilities in reverse logistics capabilities. WEB usage and other research prove to be very e ective in this step. A survey developed to understand competitors should be conducted to further understand the strength of competitors. Another source of information that must be studied is the competitors customers. The same process that is used to understand competitors is applied. A customer survey derived from knowledge gained in Step 1 can assess the needs of the competitors customers and their perception of the service. Table 2 provides a list of sample survey questions for this survey. (4) Conduct gap analysis. Based on the needs of existing customers and competitors customers, the third-party logistics company can then perform a gap analysis. The gap analysis evaluates and compares the company and its competitors current reverse logistics position in the market with the needs of current and future customers. The analysis will provide the company with necessary information to make decisions on its strategic positioning in the reverse logistics market. (5) Perform feasibility study. In this stage the third-party logistics company should utilize all information gained from previous e orts to conduct a feasibility study, which involves analysis of its current nancial position and the feasibility of entering the reverse logistics market. The company should compute the costs of obtaining the necessary additional resources to provide the extended service identied through the gap analysis. The company must also revisit its existing customers to determine if reverse logistics would benet these customers using existing resources. These benets could be realized through a more planned and e ective

D.W. Krumwiede, C. Sheu / Omega 30 (2002) 325 333 Table 2 Sample survey questions for a third-party logistics analysis Topic Sample question Type of survey Customer Product recall Are you using our company for third-party logistics service for product recall? Do you provide third-party logistics service for product recall? Do you receive third-party logistics services from a vendor for product recall? Are you using our company for third-party logistics service for reusable containers? Do you provide third-party logistics service for reusable containers? Do you receive third-party logistics services from a vendor for reusable containers? Are you using our company for third-party logistics service for on-site disposition? Do you provide third-party logistics service for on-site disposition? Do you receive third-party logistics services from a vendor for on-site disposition? Are you using our company for third-party logistics service for on-site disposition? Do you provide third-party logistics service for on-site disposition? Do you receive third-party logistics services from a vendor for on-site disposition? Are you using our company for third-party logistics service for liquidation? Do you provide third-party logistics service for liquidation? Do you receive third-party logistics services from a vendor for liquidation? X X X Competitor

331

Competitors customer

Reusable containers

X X X

On-site disposition

X X X

Reworks

X X X

Liquidation

return operation gained from a fuller implementation of reverse logistics. To fully implement a reverse logistics operation, legacy systems within the company have to be scrutinized. A decision to enter the reverse logistics market would probably result either in a substantial programming e ort within legacy systems or the desire to purchase a canned system from a reputable vendor. Such a decision would be costly, since it would require pilot runs to ensure the system is functionally capable of meeting the needs of the reverse logistics operation. (6) Develop a positioning strategy. All of the previous steps of the model were developed to aid in making the third-party logistics companys nal decision, What will their position in the reverse logistics market consist of? If the feasibility study indicated the company could enter the reverse logistics market with reasonable expectation of making a prot and if the resources are available, the company should decide to proceed. With this information, management could then strategically position reverse logistics in the companys long-term plans. For instance, the company may decide that it will o er a full reverse logistics service.

This decision would probably involve the construction of redistribution centers strategically located in its customer network, the purchase of an extensive software management system, training of personnel, rescheduling of transportation resources and other pertinent reverse logistics issues. 5. Field study We performed a eld study with a larger US third-party transportation rm to validate this decision-making model. The transportation company chosen was very interested in entering the reverse logistics market. The companys primary service was the movement of goods between facilities for other companies in the United States. Similar to many such companies in the US, this transportation rm provided a limited level of reverse logistics services for its customers. The company recognized opportunities associated with more aggressively entering the reverse logistics market as a competitive advantage and chose to perform a feasibility study. This study was performed following the reverse logistics decision-making model. Based on this model, the

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transportation company researched current reverse logistics issues. The company then identied their existing reverse logistics customers. Over 50 existing customers were then contacted by telephone. Thirty-six customers were willing to respond to survey questions over the telephone. Table 2 depicts sample questions that were asked of these customers. Next, 15 leading potential competitors were identied to determine their reverse logistics services. Seven companies were willing to respond to survey questions such as those in Table 2. The competitors customers were found by searching the web sites of the competitors. Over 35 customers were contacted using the telephone with 15 responding, see Table 2 once again for sample questions. The surveys provided the transportation company with information that helped determine a gap in their service compared to their competitors service. This gap was based on the needs of the competitors customers as well as the transportation companys customers needs. The company conducted a feasibility study based on the gap analysis. This analysis revealed the need for processing centers, which were not in existence. The feasibility study indicated that such an expense could not be justied based on the companys existing customer base. If they chose to become involved in all reverse logistics stages, they would have to signicantly expand their customer base and move into market segments that would require substantial investment. The company considered their situation and decided that their best strategic position was to stay in their current position while attempting to develop a richer reverse logistics customer base. 6. Conclusions Reverse logistics has become an important segment in the US economy. Increasingly, customers are demanding resolution for products that are considered to be defective. They are returning items more frequently as companies are driven to loosen return policies due to competition. Many of these companies having items returned to them will not be able to a ord the resources necessary to e ectively handle the processes required for appropriately handling increasing volumes of returned goods. The need for third-party companies providing partial or full reverse logistics services for companies receiving returned goods will increase as policies a ecting returned products continues to favor the customer. Unfortunately, many third-party companies desiring to enter the reverse logistics service market are not prepared to e ectively address these service needs due to the lack of knowledge of reverse logistics [1]. They are either not capable or unsure of the process of entering the reverse logistics market. All of these third-party companies would benet from a framework for decision making to determine if entry into this market is feasible for them. In this study we investigated and summarized the current status of reverse logistics. We then developed a reverse

logistics decision-making model. We also conducted a eld study using the reverse logistics decision-making model to evaluate its use by a third-party logistics company considering expanding its reverse logistics business. The model helped the third-party logistics company in making the decision to more aggressively enter the reverse logistics business or to decline. The model provided structure to the decision and gave the company the guidance needed for such a decision. Based on the results of the eld study conducted, the model proposed will guide third-party providers through the process of deciding if they should enter the logistics market. If they decide to enter, they should gain enough pertinent information to provide a sound basis for decisions related to the depth of their involvement. Those companies who decide not to enter after following the model should also have gained enough information to help them decide to take a do nothing stance. Naturally, these third-party logistics companies should continue to evaluate the market, their customers, and the competitors and their customers to determine if their status has changed. Future research should be performed to further validate the reverse logistics decision-making model. A eld study using the model provided invaluable information for the company involved. However, additional eld studies would provide further evidence of the models value.

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