Supply Chain Management is the backbone of any manufacturing, retail or distribution business. It involves the flow of goods from raw material sourcing, to production, storage, sale and distribution of finished products. As a result, companies understandably spend a lot of their valuable time and resources refining their supply chains.
However, the continued rise in demand for consumer goods has resulted in a significant and rapid reduction of finite resources and increase of landfill waste, demanding a shift of focus from businesses worldwide from a forward to a reverse supply chain.
What is a Reverse Supply Chain?
The reverse supply chain represents the series of activities involved in reclaiming a finished product and either disposing of it or reusing it. Moreover, it involves recovering value from items that aren’t resalable in their current state.
“The product recovery processes aim to minimize the amount of waste sent to landfill sites by recovering materials and parts from old or obsolete products” - Brennan et al.
There are five main components to the reverse supply chain:
Product acquisition: product acquisition consists of retrieving the used product from consumer.
Reverse logistics: this involves transporting used products to a facility for inspection, sorting, and disposition.
Inspection : returned products are tested, sorted, and graded. If a product is new it may be returned to the supply chain. Others may be eligible for repairing while others may be sold for scrap or recycling.
Repairing: some returned products may be refurbished or completely remanufactured.
Sales and distribution: repaired or remanufactured products are sold in secondary markets.
Returns: the elephant in the Supply Chain room
“Product returns and exchanges have been the nemesis of the direct-to-consumer industry going back to the mail-order catalog days. For products that are fit and/or fabrication sensitive (think fashion, intimate apparel, shoes) returns often exceed 30%, and rates north of 40% are not unheard of. Back in the good old days, while high return rates were definitely an area of concern, the fact that the customer often paid “shipping & handling” costs helped soften the damage to the bottom line. In fact, for some brands, shipping & handling was actually a profit center. Today? Well, not so much.” - Forbes
As e-commerce garners greater share, return rates grow at an alarming pace. The problem is that the very nature of online retail is conducive to the occurrence of returns: the ease of the shopping experience combined with buying without trying inevitably leads to consumers exchanging or returning products.
The impact of this phenomenon should not be underestimated: excessive returns dearly affect supply chain efficiency and productivity as well as profit margins.
"I think what organizations are recognizing now is that the reverse logistics supply chain is a significant market opportunity for them. It used to be just an aftermarket and a cost of doing business — now it’s a revenue source or a potential revenue source." – Supply Chain Dive
However, by analysing your reverse supply chain and establishing a good returns management strategy, your business could actually discover new revenue opportunities. Read more about driving profit from returned goods in this article.
Additionally, in order to establish an efficient and successful reverse logistics strategy, you will need to involve your customers (and suppliers!) by educating and encouraging them to take an active role in responsibly purchasing, returning and recycling.
The Closed Loop Supply Chain
(Source: Reference for Business encyclopaedia)
When a firm controls the full process of forward and backward shipment the result is called a closed loop supply chain.
Within the context of consumer market closed loop system, there are two reverse linkages: consumer to retailer and retailer to manufacturer.
Closed loop systems allow companies full control of a product journey from manufacturing, to warehousing, distributing and - where needed - recovery and refurbishment. The data gathered during this journey can be meaningful for materials purchasing and product design strategies as well as inventory management.
Environmental impact
As we previously discussed, sustainability is at the forefront of business discussions today as customers, investors and governments are increasing pressures towards environmental responsibility. As Environment + Energy Leader reported, “supply chains are responsible for up to four times the greenhouse gas emissions of a company’s direct operations”. Thus, to make a significant environmental impact, businesses must revisit their entire supply chain.
“Climate-related regulations, the cost and availability of materials and human resources are all supply chain risks. Working with suppliers to improve sustainability can help mitigate these, as well as reputational risks.” – Environment + Energy Leader
Consequently, businesses need to consider both flows of product movement. Investing in this reverse or closed loop supply chain can significantly reduce the negative financial and reputational impacts of spoilage. Moreover, remanufacturing returned items result in a decrease of raw materials purchases, which helps with reducing the total production cost.
Other ways to achieve an environmentally responsible operation include:
seeking ethically sourced raw materials
reducing production, storage and distribution by-product waste
finding creative and innovative ways to recycle and reuse assembly by-products, packaging scraps and returned or damaged goods
considering production and reproduction cycles when designing, redesigning and manufacturing products
“By managing and improving environmental, social and economic performance throughout supply chains, companies can conserve resources, optimize processes, uncover product innovations, save costs, increase productivity and promote corporate values. Research shows the business case for supply chain sustainability is growing.” – Green Biz