Module 2: Building Competite Operations, Plannung, and Logics In a wired world of networked supply chains, Auto ID promises enormoat benefits, including more efficient warehousing and much more. As the price of RFID technology comes down and as more supoly chains synchronize networkwide ERP software and powerful hardware, bencfits like the following will become commonplace: ‘© Automation will allow supply chain partners to check the items in a ‘shipment without opening a box or unbundling a pallct © Taventory tracking will be continuous, automated, and always current. # Tracking of inslividual iterns electronically will reduce—ifnot ae, a Wholesaler Retniet Customers ABC Company XV Company customers actor ‘outbound trangportaion Source: APICS Mustrated Dictionary Logistics outsourcing may put the contractor into direct communication with the firm's customers, andl that entails defiute risks, The 3PL employee (6F APL. subcontractor) becontes in effect a representative ofthe client fim which may be judged by the contractor's behavior. A 3PL may also contmct with 2 client's competitors, with the risk that privileged information may pass through the contractor to the competitor. References to logistics outsourcing mare commanty refer to 3PIL to cover all types. Technically, there is a distinction: © Ie SPE, the third party takes over some or all logistics functions and performs them itself, A 3PL muy be a specialized provider that focuses, for instance, om airmail or over-the-road transport ox warehousing. It may also be a multipurpose logistics provider capable of taking aver the entire logistics function. + In a4PL arrangement, » logistics specialist takes over the entire logistics operation and subcontracts sorne or all particular functions. Sometimes this is stil called third party logisties, but the presence of subcontractors makes this in reality « fowrth-party setup, 2.209‘Mode 2: Bailing Competitive Operations, Planning. and Logistics SPL benefits and tradeoffs © 2005 APiCs All nights reserved, ‘Using third-party contractors to- carry out some oF all logistics functions ‘can provide the following benefits: ‘+ Improved business focus ‘Outsourcing one or more logistics functions allows both the firm and its contractor to focus oa what they do best. This assumes, of course, that the client firm isn't outsourcing a function it performs especially ‘well. A company should not contract out a core competency unless retaining it causes serious problems elsewhere in the organization, * More current logistics technology (Contract logistics providers are generally better able wo stay current with technofoyy thar the fim that hirex them. Contractors may bbe quicker to incorporate new software and better able to upgrade to the hardware necessary to ran it well, ‘The client firm, om the ober hand, may have to spread its software and hardware budgets over several functional units in addition to logistics. It's quicker to tum 2 speedboat than.a steamship Greater technological flexibility ‘The third-party logistics provider is better positioned to adapt to different technologies used by the firm's clients. This potentially expands the firm’s castomer base at a reduced cost, + More efficient warchousing for rapid repleniyhment Rapid replenishment may require more warehouses in regions closer to clicnts, Using the 3PL’s warehouses is cheaper than building or acquiring the firm's own. The 3PL, if it uses warchouses for multiple clients, can hold down warehouse costs through offscale + Improved service ta customers ‘Third-party providers may be bener able to offer a variety of services to the firm's customers, + More workforce and resource Mexibility 10°s quicker and simpler to hire a contract specialist for a mew function —or to drop a contractor when business shifts 10 0 new market—than to hire and fire workers to reflect market changes,4PL issues and benefits © 20S APICS Alrighss reserved Section D- Logistics Realizing the benefits of third-party logistics may require the following tradeotis: © Loss of control ‘Contracting out logistics means giving up control over some or all aspects of that function. It may be more difficult to develop a comprehensive logistics strategy when the firm has given control of some aspect of the system to a contractor, This can be especially: Problematic ifthe contractor establishes direct connections with the firm's customers. + Potential for inefficiency If the 3PL takes over logistics functions in which the firm was doing a 200d job, it may actually perform with reduced efficiency in that arca—and charge for doing x0. Tn 8 4PL. setup, a logistics provider takes over the entire logistics process. Playing the role of gencral contractor, the fourthparty provider hires out the various logistics services and coordinates the efforts of the subcontractors on the client's behalf, Typically, the 4PL charges'a fee for its service, not a marin. Benefits of the 4PL arrangement include the following: + improved bussiness focws ‘As with a 3PL arrangement—only more so—contracting out the ceatire logistics function frees up the firm to focus oe its core business. ‘+ Higher-quality logistics operations (or reduced casts, or both) ‘The 4PL's special competence in managing logistics showld result in lower-cost, higher-quality service with less damage and fewer delays, As a logistics specialist, the 4PT. can find the best subcontractors for each function and can design an efficient overall process. (3PLs can excel only in their area or areas of competence without improving the overall process or frecing the client of responsibility ‘for logistics design and coordination.)‘Modeie 2: Building Competitive Operations, Planning. and Logistics Outsourcing © 2005 APICS All sighs reserved © Greater business flexibility Having a highly competent provider in charge of logistics gives a firm the ability t0 adapt its warehousing, transportation, and packaging needs ‘more rapidly to new market strategies or new products. The provider can renegotiate with current subcontractors or replace them with Providers that have the capacities, skills, locations, or other features appropriate for the new venture Tuming over logistics to 4PI. involves the following tradeoffs: ‘© Loss of direct control aver the logistics process and all specific functions Potential for less effective or more costly operations if the 4PL writes swectheart contracts with favorite suppliers rather than seeking out the: most efficient partners Before outsourcing logistics to a thid- oF fourth-pacty provides, a firma ‘should ask itself the following questions © What are eur curreat costs? ‘When evaluating bids from potential third- oF fourth-pesty logistics providers, 2 firm needs w know whet the functions in question currently ‘cost. It also needs to tke into account potential savings in time pos improved quality of service to customers. There's no point in paying ‘more than current costs uness the arrangement will provide other Ienefits, And there'sino point in saving money on logistics if the ‘contractor increases delivery errors or otherwise alienates your customers, ‘* What customer skills does the contractor possess? Has the bidder researched your needs and company culture? If mot, how likely is itto do the background work necessary to provide high-quality Service to you and to your customers” Is the fim reliable? What do its ‘other customers have to say about it? (Bee sure to use credible references.) © What are the contractor's special strengths? ‘Many contractors began as providers in one area, such as tracking, cauil Aclivery, of warehousing, and added other logistics competencies as they grew. UPS, for instance, is now a fully integrated transporation firm and a logistics consultant, but in the beginning it was a single- purpose firm in the business of moving local retail products by track. 2.212‘Section D: Logistics The shipper needs to evaluate the maich between its needs and the contractor's strong suits, * Will the contractor hire the most-qualified partners (If'mecessary)? Especially when considering.» 4PL, 2 firm should evaluate the contractor's ability to subcontract effectively. Some contractors are biased toward their own divisions (or toward favored subcontractors), even if these divisions or subcontractors aren't the best qualified to ‘perform the required functions Jn surm, a firm may be able to improve logistics performance by hiring out specific services to thinparty providers. or by putting a 4PL. in charge of the eatire logistics flnction. Using 3PL or 4PL providers allows the fem to focus of itsown core business while tuming over some ot all logistics ‘operations to firms for which tase operstions are 2 core business. Ifthe contract providers are well chosen, they can improve the costeffectiveness Cf the logistics process, provide a wider range of services, bring the latest technology to bear on all parts of the processor on the entire proces, in the case of a 4PI.—and increase the client firm's logistics flexibility, * Reverse Logistics ‘What happens when you thtow the supply chain into reverse? You have reverse logistice—she flow of purchased products back up the supply chain for repair, refurbishing, recycling, replacement, or disposal. This relatively fecent strategic concem is ulso called by other names such as aftermarket logistics, retrogisties, and the aftermarket suppty chain. ‘Whatever one calls it, the reverse supply chain is a complete chain, a mirror image of the forward chin that carried the product to the customer in the first place. As such, it gives rise (o mirror images of operations in the forward chain—customer service (marketing in reverse), warchousing and ‘transportation going in the opposite direction, unpackaging, disassembly. ‘remanufacturing or recycling (a recamn to raw-material). The products in the: reverse chain won't necessarily move through the sare nodes as products in the forward chain, Fewer warehouses, and different warehouses, may be required, for example. Exhibit 2-51 shows the direction of material and cash flows in the reverse supply clin and liss some reverse logistics activities. © 2008 APICS Al right reserved, 2213.‘Mociule 2- Building Comperitice Operations. Planning and Logisties ‘Exhibit 2-51; Reverse Supply Chain © 2005 APICS ‘All nigh reserved, Longa ‘The retara fener she purpone of pric eno, repair. emma, eyeing Source: APICS irstrated Dictionary As a relatively new concern, reverse logistics does not yet have the same level of support by strategists and software engincers as forwerd logistics, but it isn't a ‘small phenomenon. In some goline businesses, returns can be as high as 50 Peroent. At one time, Estée Lauder was dumping about $60 million worth of its Products into landfills every yrar—more than one-thard of the name-brand cosmetics retumed by retailers. Sonte estimates put the total spent on reverse logistics in the United States as high as $35 billion. Strategic solutions are om the way, though. One can visit the Web sites of member organizations devoted to managing the reverse logistics chain—onyanizations sach as the Reverse Logistics Executive Council (www.ries.org) and the European Woeking Group on Reverse Logistics (www fbk eur nOZ/REVLOG), to name just two, Many ‘major companies have taken up the challenge of improving their management of the reverse flow of products. among them Kmart, 3M, Dell, GM...and Estée Lauder, which bas reduced bry almost'50 percent the fraction of return products. that go into the landfill. Since at this point reverse logistics is unlikely to be a core business for many firms, 3PLs and 4PLs are adding reverse logistics to their portfolios. UPS, for instance, features its expertise in this area on its Web site. ‘The EU has made a strong commitment to waste reduction, and Germany ‘requires that all businesses must accept retums of their packsging (this includes only German fires). In this section we'll look at the phenomenon of reverse logistics and explore some of the strategic approaches that, in some cases, are not only mitigating the negative impact of product retums but are ways to make a profit on the back side of the supply chnin 224Module 2: Building Competitive Operations, Planning, and Logistics Reverse logistics hierarchy © 2005 APICS Al sights reserved. ‘Sometimes consumer pressures result in the adaption of new government regulations at the local, national, of regional level. © Growing market for environmentally safe products ‘The development ofa macket for food, cleaning ageats, clothing, and other products that promise to go easy on the environment or have “organic” content grows in part out of a long tradition of respect for nature. Though this has its mystical side (and can sometimes be exploited by cynical marketers), this desire for access to products that are simpie, clean, and less ‘hrcatening (0 the health of the environment can be & legitimate source of ideas for innovative approaches to product design. Some customers will pay 8 premium for products that peoouise to protect their health and their woeld Some corporations provide incentives for product ideas that incorporate reverse logistics thinking. «Environmental awareness and regulations Love of nature und a desire to preserve the health of the nonhuman world has Jong been an undercurrent in many national traditions, as a ierary, Philosophical, ancl sometimes political concern. In 1962, with the publication of Silent Spring by oceanographer Rachel Carson, that usually quiet undercurrent of coucer for the health of tse natural world cupted into public consefousness and merged with concem for buman well-being Carson's subjeet, of course, was the unacknowledged side effects of the use of the pesticide DBT on all living beings, ourselves included. The world has never again heen able ta view the impact of our activities om the environment with cavalier disregard for unintended consequences. That concem is one root cause of the growing attention to the afterlife of commercial productt—especinlly hazardous materials wach as pesticides anc industrial chemicals. We know now that discarded items, unless they are quickly biodegradable, don’t harmlessly fake away. Environmental regulations, which were given a huge boost by ‘Carson's book, provide an immediate ressoa for logistics managers to Pay more attention (o the defective or obsolete products that retum and, ‘move back up the supply chain. But awareness—conscience, in other ‘words—also plays 4 part ‘The reverse logistics hierarchy is sometimes called the theee Rs or the four Rs. In order of importance, the Re are roduce (usc of resources), reuse, recycle, and recover (energy). Exhibit 2-2 shows the relationship of the three Rs , udds.a version of the fourth below them, and places the least desirable optioa—disposal in a Jandfili—at the bottom. We'll look briefly at 2216Reduce resource Reuse products or ‘components © 2008 AICS ‘Altrighes reserved. Section D: Logistics cach af the five options in the hierarchy to vee why they arc considered beneficial to business, society, and the environment. Exhibit 2-52: Revorse Logistics Hierarchy. Reducing the use of resources in the first place is considered the most respomsible opting in the reverse logistics hierarchy. Companies can incorporate this principle into their business in the following ways: Reduce costs by designing products and packaging that take the most efficient use of physical resources. Design products with an eye to reducing the consumption of energy in the mmanufycture and use of the product, Design the logistics network for efficient use of resources and energy in ‘warehousing and transportation. (This is a straightforward matter of cost ‘containment.) Potential rouse of products or parts of products is considered second in importance to resource conservation. The payoff is a reduction of casts involved in purchasing, transportation, and disposal, This can be accomplished in 3 couple of ways: © Products can be designed so materials and components can be morc eas separated for reuse. 2217\Mocite 2: Builching Competitive Operations, Planing, amd Logistics Recycle materials Recover energy Dispose in responsi landfiit Design for reverse logistics © 2005 APICS Allsghna reserved, © Intelligently designed product upgrades can extend the life of durable ‘components by the original user if they are eusy to install. Software upgrades delivered ontibe, for example, extend the life of programs without requiring delivery of new CDs. Suck upgrades result im savings in the logistics nctwork and for the consumer. Hardware upgrades used to replace obsolete components can extend the life of other components that wear out ‘or become obsolete on a longer timetable, such as the case. Rechargeable batteries make possible reuse of @ battery that would otherwise be dead and ready for reeyeling, After resource conservation and reuse, recyeling is the third most important aflermarket principle. The concept of rocycing isn't easily separable from the ‘concept of reuse, and in fact the two can be combined. When plastic containers are reprocessed into other products, such as landscaping materials, they have been recycled, When bottles are cleaned, sterilized, and filled again, they are reused. When a product is broken down into components, some may be used, some recycled, and some sent to-the Landfill. Recycling reduccs disposal costs, whereas reuse can reduce purchasing and transportation costs as well. Disposal with energy recovery doesnt put a product's physical materials or -Componeats back into service, bul it can still provide benefits. “Trash to energy” facilities essentially harvest the energy contained in products that are ne longer usable in their physical form. And that results in savings for the community. Finally, some physical products have no better place to go to than the incinerator ‘or the landfill. Incineration is generally consicered the preferable altemative. If the landfill is the only possible way to dispose of a preeluct, it's still important to ‘choose the best availuble one, Not all landfills are equal, so the final leg.of a [product's reverse journey should end in responsible landfill that takes care not to letdegrading items leach into a water source or pollute the ait. Anheuser-Busch powers its St. Louis brewery with gas gencratcd from its plant's wastewater ‘When designing the reverse logistics network, one should keep the following factors in mind: ‘© Cash and information flow backward as well as forward—but notin the same way. Reverse supply chain revenues and expenses can be managed to yield a prtie Reverse logistics affects all stages ofa products life cycle, not just the last 28Reverse information, cash, and product flow and expenses © 2008 APICS [Al rights rouerved. Section D: Logistics Cash and information flow through the reverse logistics chain just as in the forward chain. However, since reverse logisties isa relatively new concern, software for managing the process hasn't caught up with forward logistics applications. Let”s look at each component of the Qow for its impact on network design: Reverse information flaws Legacy systems can't be used for tracking returns. It's going to take anew, worldwide data warchouse to da this jab effectively. Reverse cash flows Cash flows through the reverse supply chain in the form of credits and discounts. ‘This all needs to be done as simply as possible from the perspective of the -customer (who is often not happy while these transactions are taking place) as well as customer service, No-questions-asked return policies should be put in place as offen as possible, Reverse product flows Product retums require reverse forecasting and establishmert of locations for collecting, reprocessing, ar disposing of the goods on their return trips. Attention to the financial aspects of reverse logistics ean pay off. The reverse supply chain is not necessanly a cost. center. [t cam be run at.a profit if revenues fare managed to overbulince expenses. Revenues on the return shde af the ctain Revenues in the reverse chain come fom several sources: + Service contracts and extended warranties bring in substantial cash flows and ‘provide peace of mind for customers. © Remanufactured products and recovered materials ure finding profitable markets, © Recycling fees can offset any costs involved in taking back products. Charges for recycling motor oil after an oil change, for example, are mow taken for ‘granted in some markets. Reverse logistics expenses Costs from several sources have to he considered when determining profitable foes und prices. Expenses affect the chain in the following ways: © Warranty repairs have to be charged of f. ‘Freight costs can be high for sporadic, low-volume shipment, and extra transportation logs may have to be added to the network to accommodate destinations specific to retums and recycling. * There may be special handling costs involved in retumed materials._Modinle 2: Building Competitive Operations, Plonming. ond Logistics Life cycle design Reverse logistics considerations bear upon the entire product life cycle, not © B08 APICS ‘All rights reserved, just the last phase. Design and development ‘There are several aspects of reverse logistics that should be built into product design and ramp-up: © Plans need to be made daring product design for potential reuse of the Product or its components, © How to muke wise use of resources, including energy, should be incorporated into design decisions, © Consideration ofhow to package and ship the product most efficiently shouldn't be pul off until the new product hits the shipping dock. * Network design—where to pul warchouses and bow io transport products—neads to take into account the backward as well as the forward ow af the product, Forecasts should be done for the products coming back ms well as going out. Customer service needs to be trained to handle the procedures and paperwork involved in returns, refunds, and repairs. As supply chains going forward and backward extend across oceans and national boupdanes, network design becomes increasingly important for both the reverse and forward logistics chains Product introductions © Customer servive has to be prepared for ently retums of the new product, since defects and disappointments are more likely during ramp-up than during later stages of a product's life. High-quality customer service can head off the worst effects of early product failures, (There"s a role for sales and marketing here, 100.) A flood of early retums can cause serious logistical problemms—not to mention the negative impact on reputation, and customer boyalty—if the reverse chain hasn't Deen set up to handle such an unpleasant surprise. ‘© Iearly product returns are heavy, design engincers need to be prepared to rmiake rapid improvements in the product. ‘Maturity ‘Reverse logistics events continue into product maturity: + Retums are a high-volume operation in some industries—up to 10 percent for computers ‘+ Receiving areas need to be designed to accommedate operations required in handling returns, such as repackaging and inspections. 2320Payoff © 2008 APICS ‘AI Hghts reserved ‘Section D: Logistics * Packaging for retums needs to be considered along with packaging for forward shipping As mentioned earlier, HP laser cartridges are delivered. to consumers in » box with simple instructions for how to repackage the spent cartridge in the same box and hand it over, free, to any UPS drives or facility for shipping back to the manufacturer. This reverse network, complete with training for LIPS, had to be in place and ready to receive cartridges when the first products were shipped fo retailers. Decline and return ‘The reverse chain should be designed in the beginning to anticipate problems that arise ufter a product ceases to-be useful. Product continues to-be shipped— in both directions because of returns, recalls, and so fom, The following are significant concems relevant to product decline and return: «Preparation sbould be made for any environmental and legal exposures This is especially ue with hazardous materials—such as lead used in Jewelry —that are subject 1 extra regulations locally, nationally, and internationally. * Final disposal has (o be documented and the records kept for a period of years. + Packaging, as well as products, should he designed for reuse o¢ made biodegradable. “The benefits of a carefully designed reverse logistics chain that maximizes resource conservation, reuse of components, and recycling of materials include the following: © Potential for highly lucrative customer service contracts und extended warranties (especially ifthe products are well designed and reliable) + Mitigation or elimination of the unprofitable effects of high-volunse returns + Enhanced customer loyalty and corparnte reputation © = Return of waluable taw materials for other industrial uses Development of more efficient products and logistical tactics * Profits from resale of refurbished products and parts that would otherwise go into landfills at a cost to the company © Crestion of new types of jobs + More efficient use of energy © Conservation of resources for future generutions ‘+ Reduced emission of many greethouse gases and water pollutants + Development of greener technologies = Reduced nced for new landfills and incinerstors