InformationWeek

April 12, 1999

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Reverse Logistics

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Today, all returned parts--about 30,000 a month--come to the Orion facility. GM's corporate parts-return system matches requests for parts to be examined with warranty claims for those parts, sending E-mail notices to the dealerships to send the parts to the Orion facility. Dealerships are provided prepaid UPS shipping labels to further simplify the process.

The centralization also simplified the process for GM engineers and suppliers who want to examine the parts to understand what improvements are necessary. Because all parts are sent to one location and their shipment is tracked by UPS, GM engineers and suppliers always know when and where the parts they're interested in are available.

At 3M, reverse-logistics outsourcing contracts were awarded in 1996 to two service providers, Genco and GATX Logistics, to streamline the handling of returns involved with some 50,000 products that 3M makes for retail and industrial customers. "Handling returned goods was not a core competency of 3M," says Scott Kiner, manager of distribution operations at the company.

Taking the flow of returned goods out of 3M's seven distribution centers and into the operations of the two outsourcers made it easier to manage returned goods because of the outsourcers' economies of scale, Kiner says. Genco also customized its systems to use 3M's business rules for determining what goods should be destroyed, sent back to 3M for refurbishing, or donated, he adds.

The manufacturer disposes of most of its returned goods by giving them to schools or charities. But for some industries, returned goods are integral to inventory and production planning. Mexico City's Coca-Cola Femsa S.A., the world's fourth-largest bottler, implemented Numetrix/3, supply-chain planning and scheduling systems from Numetrix Ltd. last fall to improve coordination of its production schedule with returns of bottles that are reusable, says Bob Mayen, director of professional services at Numetrix.

The tactical planning tool in Numetrix/3 also made it possible to improve scheduling of special promotions so that spikes in demand would coincide with peak levels of returned bottle inventories, reducing the need to make more bottles in response to new demand. Finally, because the availability of returned bottles was better understood, production of nonreturnable plastic bottles was reduced. That, Mayen says, reduces Femsa's capital tied up in inventory, since the returned bottles have already been paid for.

Like Numetrix, Great Plains Software is also concentrating on reverse logistics. According to Holly Holt, global marketing manager at the ERP vendor, about 75% of its Dynamics C/S+ Service Management Series customers have bought the Returns Management module, first made available about 15 months ago. About half of the Service Management Series customers, she adds, are in high-technology industries such as medical electronics and systems integration. The Returns Management module uses serial numbers to track returned parts throughout the repair process and interfaces with other modules to update inventories, issue credits, generate purchase orders, and handle other functions associated with customer service.

Little Integration Available
Most of the reverse-logistics systems available now, however, are all-or-nothing propositions, offering little opportunity for integration with other enterprise applications. Integration will be important soon, if not immediately. 3M, for example, sees the logic of integrating its internal systems for inbound and outbound logistics with reverse logistics to optimize transportation costs, Kiner says.

But most analysts say it will be some time before the process evolves into a market with easily integrated solutions. More research is needed to demonstrate the opportunities to business executives, and more time is needed before IS organizations, currently burdened with higher-priority projects such as year 2000 issues, ERP implementations, data warehouse projects, and Internet developments, will be able to devote substantial resources to reverse-logistics projects.

Still, enormous opportunities await companies that optimize reverse logistics. The $35 billion in annual reverse-logistics costs, for example, is offset by the $36 billion market for remanufactured auto parts. Profit margins on refurbished items are often much higher than on new items, and prompt, efficient handling of returns can be a significant factor in customer satisfaction and loyalty.

No business wants to see its reverse-logistics pipeline grow, but it's unlikely that the flow of returned goods will shrink--or be put to better use--without bringing better IT systems and processes to reverse logistics. It's all part of thinking through the full cycle of a product's life. And that's not just environmentally responsible, it's smart business.