Closed-Loop Supply Chains: Practice and Potential

Closed-Loop Supply Chains: Practice and Potential V. Daniel R. Guide, Jr. Luk N. Van Wassenhove Pennsylvania State University INSEAD 2005 Guide & Van Wassenhove 1

Migrant child from Hunan province sits atop one of countless piles of unrecyclable computer waste imported from around the world. Guiyu, China. December 2001. Copyright Basel Action Network. 2005 Guide & Van Wassenhove 2

Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign 2005 Guide & Van Wassenhove 3

Definition Closed-loop supply chains: are designed and managed to explicitly consider the reverse and forward supply chain activities over the entire life cycle of the product. 2005 Guide & Van Wassenhove 4

A closed-loop supply chain Raw Matls Manufacturing Distribution Reseller or Customer Sales Overstocks Spares Recovery Return Stream Returns Evaluation Spare Components Refurbished product (Secondary Market) Scrap 2005 Guide & Van Wassenhove 5

Types of returns Commercial returns 30 to 90 day free returns policy in US HP: total costs: 2% of gross $ sales annually Repair / warranty returns Leasing End-of-use returns Cell phones: 80% replaced after first year of use End-of-life returns Mandatory take-back in EU (WEEE) 2005 Guide & Van Wassenhove 6

Closed-loop supply chains for containers Cartridge reuse Supplier Forward Flows Reverse Flows Single-use cameras Supplier Manufacturer Manufacturer Retailers Retailers Cash for return Customers Pre-paid mailers Customers Characteristics: commodity goods, simple products, high volumes, low variance, non-distinguishable products, OEM controlled, short lead times 2005 Guide & Van Wassenhove 7

Forward Flows A closed-loop supply chain for photocopiers Supplier Reverse Flows Remanufactured Flows Manufacturer Spare Parts Retailer Remanufacturer Deposits, leasing, and financial incentives OEM Customers (new technology) Deposits, leasing, and financial incentives Remanufactured Customers (older technology) Characteristics: high variances, stable production technology, limited volumes, modular design, imbalances in supply and demand, cannibalization 2005 Guide & Van Wassenhove 8

A closed-loop supply chain for commercial tire retreading Forward Flows Supplier Reverse Flows Remanufactured Flows Manufacturer Retailers Customers Trucking Fleets Retreader Characteristics: low variance in returns timing, low variance in quality, easy to sell, intermediate logistics costs 2005 Guide & Van Wassenhove 9

Key activities Product returns management Product acquisition Reverse logistics Test, sort, grade, and disposition Remanufacturing/reconditioning operational issues Repair Remanufacture Recycle Remarketing Distribution Sales Reuse 2005 Guide & Van Wassenhove 10

How hard are these key activities? Product Acquisition Reverse Logistics Test Sort Grade Remanufacture/ refurbish Remarketing Product Life Extension Easy Easy Hard Hard Easy Jet engines Refillable Containers Easy Easy Easy Easy Easy Toner cartridges Tire Retreading Commercial Easy Intermediate Intermediate Intermediate Easy Consumer Electronics Reuse Hard Easy Easy Easy Intermediate Cellular Phones Industrial Remanufacturing Intermediate Intermediate Hard Hard Hard Copiers Tire Retreading Passenger Easy Hard Intermediate Intermediate Hard 2005 Guide & Van Wassenhove 11

OR research on closed loop supply chains focus on single cells of the matrix, optimising only part of the process a cost minimisation perspective intricate models for a given sector e.g.: minimum cost disassembly scheduling algorithms for car engines 2005 Guide & Van Wassenhove 12

Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign 2005 Guide & Van Wassenhove 13

A business process approach Need to remove bottlenecks (acquisition, remanufacturing, remarketing) Need to optimise as a global process with a view on maximising value recovery (as opposed to cost minimisation) Need to consider time value of the product over its lifecycle 2005 Guide & Van Wassenhove 14

A business process approach Product acquisition is a major driver of success Creating effective remarketing channels is another major driver Research emphasis has largely been on reverse logistics, disassembly and remanufacturing operations 2005 Guide & Van Wassenhove 15

A business process approach Product Returns Management Remanufacturing Operational Issues Remanufactured Products Market Development 2005 Guide & Van Wassenhove 16

Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign 2005 Guide & Van Wassenhove 17

Product returns represent a value stream, not just a waste stream 2005 Guide & Van Wassenhove 18

A simple view on the impact of acquisition price A given acquisition price Quality distribution Expected quantity to be acquired Average inventory Replacement materials Labor costs Machines & buildings Total acquisition cost Disposal cost OPERATING COSTS OPERATING COSTS CURRENT ASSETS OPERATING COSTS FIXED ASSETS 2005 Guide & Van Wassenhove 19

EVA calculation Revenue Fixed SP Volume PBIT Revenue - Costs x Oper Costs Materials, Labor, Acquisition Price, Disposal Cash taxes Fixed NOPAT PBIT - Cash taxes Capital Charge Average assets WACC EVA Current assets Inventory, Prepaid Rent and Insurance Fixed assets Machines & Bldg Capital employed Fixed assets + Working capital x WACC Fixed + Current liabilities Trade Payables, Accrued Expenses (e.g. unpaid salaries) Working capital requirement PBIT = Profit before income taxes NOPAT = Net operating profit after taxes WACC = Weighted average cost of capital 2005 Guide & Van Wassenhove 20

Example of a simple acquisition model Determine quantities to be acquired of different quality classes of used phones Within a given quality class prices increase with quantity Lower quality phones require higher refurbishment costs The quantity of refurbished phones sold decreases with the sales price 2005 Guide & Van Wassenhove 21

Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign 2005 Guide & Van Wassenhove 22

Time-sensitive product return streams Short life-cycles; high obsolescence risk Returned products losing value rapidly Value of time a key parameter Examples: PCs Printers and Computer Peripherals Mobile Phones Telecommunications Equipment 2005 Guide & Van Wassenhove 23

How to maximize value recovery? The longer it takes to put a returned product back on the market, the lower the likelihood that there are economically viable reuse options. Cost minimisation typically leads to slow and centralized returns handling and high product value erosion. 2005 Guide & Van Wassenhove 24

Two types of optimisation model opportunities Optimise across the key activities for a given type of returns Optimise across types of returns over the lifecycle of the product The latter is more important for short life cycle products 2005 Guide & Van Wassenhove 25

Example: operational management for rapid response Notebooks returns management at HP Europe Returned notebooks refurbished by ODM Fragmented process designed to minimise refurbishment costs Management did not take into account time value 2005 Guide & Van Wassenhove 26

Example: price erosion notebooks Average price erosion laptops all channels Average price Quality 1 Quality 2 0 10 20 30 40 Age (months) Price erosion: quality 1: $25 per month quality 2: $40 per month 2005 Guide & Van Wassenhove 27

Cumulative shipments to and from the ODM over a 10 month period 10000 8000 Volume (cumul.) 6000 4000 2000 THROUGHPUT LEAD TIME INVENTORY 0 Apr-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Sent Received 2005 Guide & Van Wassenhove 28

Flow diagram for notebook computers 2005 Guide & Van Wassenhove 29

High-touch refurbishment by the ODM, assuming the ODM lead time is two months 2005 Guide & Van Wassenhove 30

The effect of better disposition POLICY TEST TEST α INPUT (used products) 1 α Low touch refurbishment SALES ODM refurbishment Price erosion 1 (same price) profit ` ODM LT = 3 m ODM LT = 2 m ODM LT = 1 m 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 alpha 2005 Guide & Van Wassenhove 31

Example: design for rapid response When should one design product return processes for minimum cost as opposed to minimum time value decay? What are the major drivers? Queuing model to maximise profit over the lifecycle of the product 2005 Guide & Van Wassenhove 32

Centralized, Efficient Returns Process Design Re-stock Remanufacture Product Returns Centralized Evaluation & Test Facility Parts Recovery Scrap Retailers & Resellers 2005 Guide & Van Wassenhove 33

Differences in Marginal Value of Time for Returns % Loss in Value Time-insensitive Product (Low MVT) e.g. Power Tools Time-sensitive Product (High MVT) e.g. Printers & mobile phones Time 2005 Guide & Van Wassenhove 34

The value of lead time reduction HP printers (US): One day reduction between evaluation and remanufacturing $72k One day reduction between remanufacturing and the secondary market $79k Bosch Power Tools: One day reduction between evaluation and remanufacturing $11k One day reduction between remanufacturing and the secondary market $12k 2005 Guide & Van Wassenhove 35

Value ($) of One Day Reduction Between Evaluating Facility and Remanufacturing Completion as a Function of Value Decay Parameter, Return Rate (left), and Product Value (right) Value 300000 200000 100000 0 15 600000 Value 10 400000 200000 return_rate 0.001 5 0 150000 0.002 P0 value_decay 0.003 0.001 100000 0.004 0 0.002 value_decay 0.003 50000 0.004 250000 200000 2005 Guide & Van Wassenhove 36

Decentralized reverse supply chain with pre-ponement for fast clock speed industries Reseller Restock Returns Reseller Reseller Test & Repair Facility Parts Recovery Reseller Refurbish Reseller Evaluation of product at retailer or reseller Scrap 2005 Guide & Van Wassenhove 37

Process Flow: Decentralized Network with Preponement As p increases Factory Distributor Retailer μ f μ μ r λ+(1-p)λ d r λ+(1-p)λ r Sales λ+λr Increased value of preponement pλ r Decreased congestion, lower delay cost Preponement Eval. Remanufacturing μ m (1-p-s)λ r μ e λr μ c Customer (1-p-s)λ r sλ r Returns λ μ 2 μ s Sales: secondary market Scrap Consumption 2005 Guide & Van Wassenhove 38

Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign 2005 Guide & Van Wassenhove 39

Roadmap for reverse supply chain redesign 1. Treat returns as a value stream, as opposed to a waste stream. 2. Consider the reverse supply chain from end-to-end. Any sub-process can become a system bottleneck. 3. Identify and develop the right performance metrics and track them systematically. 2005 Guide & Van Wassenhove 40

Roadmap for reverse supply chain redesign 4. Start by constructing simple models based on the right information. Pay particular attention to the economic impact of time. 5. Use the insights obtained from the models to fully understand the economic impact of alternative designs and operational policies. 6. Align the organizational structure and the incentives/reward systems. 2005 Guide & Van Wassenhove 41

Where do we go from here? Additional empirical research Case studies Laboratory and field experiments Commercial product returns projects Models that take into account the time-value of product returns (e.g.: demo reuse) Product acquisition models Marketing models (e.g.: cannibalisation) Installed base management 2005 Guide & Van Wassenhove 42

For further reading Guide & Van Wassenhove (Eds.), 2003. Business Aspects of Closed-Loop Supply Chains. Carnegie Mellon University Press Dekker, Fleischmann, Inderfurth & Van Wassenhove (Eds.), 2004. Reverse Logistics: Quantitative Models for Closed-Loop Supply Chains. Springer-Verlag Flapper, van Nunen & Van Wassenhove (Eds.), 2005. Managing Closed-Loop Supply Chains. Springer-Verlag Guide & Van Wassenhove (Eds.), California Management Review Vol. 46 Nr. 2, Winter 2004 Guide & Van Wassenhove (Eds.), Interfaces Vol. 33 Nr. 6, Nov.- Dec. 2003 Guide & Van Wassenhove (Eds.), Production and Operations Management, in-progress. 2005 Guide & Van Wassenhove 43