International Journal of Operations System and Human Resource Management Vol. 1, Nos. 1-2, January-December 2011, pp. 77 84 International Science Press ROLE OF THIRD PARTY LOGISTICS PROVIDERS IN REVERSE LOGISTICS S. Murali 1, S. Pugazhendhi 2 and K. Ganesh 3 Abstract: Management of logistics functions in modern organization involves decision making for the complete distribution of goods and services in the marketing function with a view to maximize value and minimize cost. Reverse logistics plays an important role in achieving green supply chains by providing customers with the opportunity to return the warranted and/or defective products to the manufacturer. With the development of reverse logistics, its operation process is getting more and more complex. Many companies don t possess enough resource or competence to manage their reverse logistics activities, thus they have to choose the third party logistics provider to those activities. This paper focuses on issues related to employing a third party logistics (3PL) provider to perform reverse logistics related activities and also presents a briefing about the evaluation of 3PL reverse logistics provider. Keywords: Reverse Logistics, Third Party Logistics, 3PL selection. 1. INTRODUCTION Over the last decade, reverse logistics has a significant economic impact on industry as well as society. Reverse logistics is a process whereby a manufacturer accepts products from consumers for possible remanufacturing, recycling, reuse or disposal. Recovery of used products is receiving increased attention due to growing environmental concerns. Reverse logistics mainly focuses on how to take back the returns and recover them efficiently and economically. It is favorable to save natural resource, protect environment, enhance enterprises competition, and increase economic benefits for enterprises to implement reverse logistics. The increasing interest in product reuse originates not only from the reinforcement of environmental awareness and legislation but, also from the fact that the engagement in reuse activities has been proven profitable in many industries. Reverse logistics is rapidly becoming an integral component of retailers' and manufacturers' profitability and competitive position. In order to handle the reverse logistics activities effectively and efficiently, a company may have the options like that either it can provide the function in-house 1 Department of Mechanical Engineering, AVC College of Engineering, Mayiladuthurai-609305, India. E-mail: s.murale@rediffmail.com 2 Department of Manufacturing Engineering, Annamalai University, Annamalainagar-608002, India. E-mail: pugazhs12@yahoo.co.in 3 Global Business Services-global Delivery, IBM India Private Limited, Mumbai-400051, India. E-mail: koganesh@yahoo.com.
78 International Journal of Operations System and Human Resource Management by making the service or it can own logistics subsidiaries through setting up or buying a logistics firm or it can outsource the function and buy the service. Outsourcing, third-party logistics and contract logistics generally mean the same thing [1]. Traditionally handled by the firms internally as support functions, logistics activities such as transportation, distribution, warehousing, inventory management, order processing, and material handling have been given low priority compared with the other business functions. However, the need for developing sustainable competitive advantage, the growing emphasis on providing good customer service effectively and efficiently, and the strategic value of focusing on core businesses and re-engineering resulted in the evolution of contract logistics which is very different from traditional logistics. The purpose of this paper is to describe and analyze the issues related with employing a third party logistics (3PL) provider to perform reverse logistics related activities and also to present a brief survey of methods employed for selecting a suitable 3PL provider. 2. REVERSE LOGISTICS Reverse logistics is defined as the process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. It includes returns of damaged goods, product recalls and warranty returns, inventory returns, reusable containers, reusable goods, seasonal items and hazardous materials. Reverse logistics generally involves events necessary to retrieve, transport and dispose of goods. As it is very difficult to predict when and where returns happen, what quality goods are, and how many they are, there is great uncertainty for reverse logistics. A number of forces seem to be influencing the increase in need for reverse logistics activities [2]. These include: The concept of green forces such as legislation and consumer awareness and concern. Frequently, due to legislation, the original manufacturer is now responsible for final disposal of the product. The increasing value of return products increases the need for safe return from the field. Increased number of customer goods returned for credit as a result of increased demand for customer service and satisfaction. Large retail chains usually have an agreement with suppliers allowing them to return goods. While originally intended to cover failed products, it has expanded to cover perfect goods that simply have not sold. From the consumer perspective, the buyer may return a good simply because they have decided not to keep it. Shortened product life cycles. As products become obsolete more quickly the possibility of and potential for returns increases. The drive to reduce costs. Firms are striving to reuse potentially good items through reuse, recycling or secondary usage. For example, Ford Motor Company has a program for recycling plastic bumpers into tail light housings. Increase in e-commerce sales. The massive increase of sales made via the Internet is conducive to increased returns as consumers buy merchandise sight unseen only to be disillusioned or dissatisfied with their purchase.
Role of Third Party Logistics Providers in Reverse Logistics 79 Increased demand for repairs, re-manufacturing, upgrades, or re-calibration. Potentially valuable products that are no longer viewed as such by the current user. Consumers may purchase a new TV or washer/dryer even though the one they own still has a useful life. Increased use of returnable or reusable containers. Warranty returns. For many items with warranties, the good is first returned and then its disposition determined. Rental returns. The proliferation of rental businesses ensures the return of used but still valuable furniture and appliances. Reverse logistics plays an important role in achieving green supply chains by providing customers with the opportunity to return the warranted and/or defective products to the manufacturer. Reverse logistics has the features of uncertainty on quantity, quality, time and place of returns. It is very difficult to reach economies of scale for any individual company. With the development of reverse logistics, its operation process is getting more and more complex. A complete reverse logistics process operational functions includes gatekeeping, collection, sortation, disposition, collection, separation, densification, transitional processing, delivery and integration, cost/benefit analysis, transportation, warehousing, supply chain management, remanufacturing / recycling, packaging, managing product returns, real time inventory, work flow, tracking warranties, ordering and exchanging parts, collaborating with suppliers, analyzing data, performing repairs, de-manufacturing, re-disposition and customer notification [3]-[5]. Reverse logistics has certain characteristics that create unique requirements. First of all, reverse process has the function of collection from many different sources and locations instead of a single or few suppliers of a homogeneous product. Second, there is a critical mass issue from an economic viewpoint, which is more evident in relatively sparse reverse logistics channels. If not regulatory driven, how much is considered enough volume to justify the expense of retrieving the item. Third, the variation in supply is typically greater in reverse logistics channels due to the many uncertainties associated with product and material life and return rates. Fourth, there is the issue of what to do with the items once they have been retrieved. Many manufacturers currently have a number of key issues they face with respect to reverse logistics [6] significant profit losses from current reverse processes forward logistics systems are not designed for reverse logistics systems OEMs have no visibility into reverse supply chain operations difficult returns processes decrease customer satisfaction and retention poor inventory utilization and rapid product depreciation slow repairs processing impacts ability to meet service level agreements inability to make rapid business decisions due to unreliable and disparate information.
80 International Journal of Operations System and Human Resource Management Many companies do not have an awareness of the current costs associated with reverse logistics. Reasons for this may include poorly defined processes and lack of system support. Due to the variable nature of returns, both processes and systems must maintain a degree of flexibility to manage the returns process. If they are not trained or encouraged to manage the reverse logistics of their customers, corporate representatives such as sales and customer service personnel can become impediments to the process. But, if properly motivated, they can become gatekeepers for the reverse logistics process. Reverse logistics programs are typically complicated by a number of factors. Paperwork and poor workflow processes tend to plague reverse logistics operations. This is exacerbated by the multiple entities - customer, manufacturer, reseller and disposer - that need to partner to develop a smooth reverse logistics program. After adopting reverse logistics strategy, a company might get benefits from it. The benefits include direct economic benefits and indirect benefits. The direct economic benefits include saving costs on raw materials due to reusing of materials and containers. The indirect benefits include improving customer service, corporate image and brand effectiveness etc. In order to ensure efficiency, many organizations outsource their reverse logistics activities by engaging third-party providers that implement reverse logistics programs designed to gain value from returned products. 3. ROLE OF THIRD PARTY LOGISTICS PROVIDER IN REVERSE LOGISTICS For industries, the management of return flow usually requires a specialized infrastructure with special information systems for tracking and dedicated equipment for the processing of returns. Therefore, industries are turning to third-party reverse logistics providers (3PRLP). 3PRLPs bring the expertise gained from managing supply chains of all shapes and sizes to the task of reverse logistics. By working with a company to build a successful reverse logistics supply chain, a 3PRLP can analyze a company s returns operation and immediately identify easily-realized cost savings and efficiencies. A 3PRLP can bring new perspective to this aspect of a company's operation that often does not receive the attention it requires. One of the most important reasons for outsourcing is that the capabilities of the providers to support their clients with the expertise and experience that otherwise would be difficult to acquire or costly to have in-house. According to a recent 3PL survey, the most common outsourced activities are warehousing, outbound transportation, customs brokerage, and inbound transportation. Outsourcing has given many third party providers with a unique opportunity to enter the reverse logistics market [7]. These outsource suppliers have become specialists in managing the reverse flow and performing key value-added services, such as remanufacturing and refurbishing. In addition, often the outsource suppliers perform reverse activities in an improved manner and their customers often find outsourcing as a way of reducing their administrative hassle. Kannan et al. [8] identified many reasons for companies to outsource reverse logistics activities, some of which are: 3PRLPs are expected to have sophisticated information system capabilities and state-ofthe-art transportation and material handling equipment and warehousing facilities to offer complete reverse supply chain solutions. Reverse logistics may not be the core activities of a company. So, inefficiency may creep in if it is looked upon as a secondary activity. By outsourcing reverse logistics, companies may focus on their core competencies.
Role of Third Party Logistics Providers in Reverse Logistics 81 Reverse logistics outsourcing may also reduce costs as the 3PRLP can get the advantage of the economies of scale, which is otherwise not available to the companies. By outsourcing reverse logistics, companies can reduce their asset base, and deploy the capital released for other productive usage. Reverse logistics outsourcing improves cycle time and delivery performance, thereby increasing customer satisfaction in after sales service. Faced with the mounting costs of managing product returns, many third-party logistics providers have begun to consider mapping the process of reverse logistics involving product returns and creating opportunities for cost savings and service improvements. Thus, 3PLs that offer value-added services such as repair, remanufacturing, repackaging, and relabeling were overwhelmed by the scope and complexity of repairing and sending returned products back to their distributors or end-customers. To be successful, 3PRLP need to satisfy their customers, maximize asset recovery, maximize returns processing speed, minimize processing costs, minimize inventory levels and monitor costs. 4. SELECTION OF THIRD PARTY REVERSE LOGISTICS PROVIDER (3PRLP) It is clear that the third party reverse logistics providers (3PRLP) play an important role in the entire reverse logistics system. After choosing the logistics functions to be outsourced, the firm is required to select from among the prospective service providers. The companies must compare different providers and then select the best of them. Comparison and selection of 3PRLP is a complex process. Selecting a set of 3PRLPs from a large number of possible service providers with varying levels of capabilities and potential is a complicated and a time consuming task requiring multiple criteria decision-making solution approaches. Many researchers have discussed, besides other issues, the criteria for the selection of a provider. However, the selection of a proper provider, which suits the needs of the outsourcing company, is not an easy task. The complexity of this task increases with an increase in the number of selection criteria. Research on evaluation and selection of third party logistics providers in the context of supply chain management are plenty; however in the case of third party reverse logistics providers it is not so. Yet few research works in this direction are available and some mathematical programming approaches used for 3PRLP selection are listed here. Meade and Sarkis [6] modeled new factors for including in 3PL provider selection problem within a decision making framework. To this end, they applied analytic network process (ANP). Sanjay Jharkharia et al. [9] developed the analytic network process (ANP) model for selecting the third party logistics provider with four major criteria as determinants and all these determinants are supported by four sub-criteria named as dimensions. Each dimension in this model is separately supported by some enablers and they also compiled and presented the relevant criteria for the selection of provider such as compatibility with the users, cost of service, quality of service, reputation of the company, long-term relationships, performance measurement, willingness to use logistics manpower, flexibility in billing and payment, quality of management, information sharing and mutual trust, operational performance, information technology capability, size and quality of fixed assets, experience in similar products, delivery performance, employee satisfaction level, financial performance, market share, geographical spread and range of services provided. To select 3PL vendors, Zhang et al. [10] applied an analytic hierarchy process (AHP) based model to a case study. Zhang et al. [11] used fuzzy AHP to discuss a selection approach of reverse logistics provider through a practical case. They established an evaluation system based on the
82 International Journal of Operations System and Human Resource Management factors such as strength, union, services, experience and price with the approach of fuzzy analytic hierarchy process (AHP) and also they suggested that linear weight method, analytic hierarchy process, multi-objective mathematical induction, procurement cost method and date envelopment analysis are the main solution of selection of 3PRLP which is a complex multi-objective decision problem. However, AHP and ANP have two main weaknesses. First, subjectivity of AHP and ANP is a weakness. The decision maker provides the values for the pairwise comparisons and therefore, the model is very dependent on the weightings provided by the decision maker. Second, the time necessary for completion of such a model is a weakness. The number of pair wise comparisons required could become cumbersome. Meanwhile, when the number of alternatives and criteria grows, the pair wise comparison process becomes difficult, and the risk of generating inconsistencies grows, hence jeopardizing the practical applicability of AHP and ANP. To assist decision makers in determining the most appropriate 3PL providers in the presence of vagueness, Efendigil et al. [12] developed a two-phase model based on artificial neural networks and fuzzy AHP in a holistic manner with a numerical example. Bottani et al. [13] presented a multiattribute approach for the selection and ranking of the most suitable 3PL provider. Their approach is based on the Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) and the fuzzy set theory. Cao et al. [14] proposed a two stage method based on the social welfare function and TOPSIS. In the first stage, they used the social welfare function theory for selecting potential providers from too many 3PL providers. Then, TOPSIS was utilized for final selection, avoiding the subjective estimation of experts. Experiments were conducted to evaluate the quality of the proposed approach by using a case study. Qureshi et al. [15] presented the methodology to earmark potential 3PL services providers using TOPSIS with interval data. Criteria importance weights have been derived using AHP in order to judge 3PL services providers. As well, they illustrated the extended TOPSIS methodology, by a case problem. Kannan [16] framed a model to determine the best 3PRLP under fuzzy environment through AHP and fuzzy AHP for the battery industry and considering seven attributes, namely 3PL services, reverse logistics functions, organizational role, consumer satisfaction, impact of use of 3PL, organizational performance criteria and IT applications, and a total of 34 subattributes. Kannan et al. [8] proposed a hybrid approach using interpretive structural modelling (ISM) and fuzzy TOPSIS for the selection of reverse logistics provider and developed multi-criteria decision making model in fuzzy environment to guide the selection process and identified seven criteria such as quality, delivery, reverse logistics cost, rejection rate, technical/engineering capability, inability to meet future requirement and willingness and attitude. The interactions among the criteria have been analysed through ISM and selection of service provider done by fuzzy TOPSIS. Haas et al. [17] applied data envelopment analysis (DEA) to help logistics managers for evaluating reverse logistics channels. Their approach provides logistics managers with an understanding of the cost interactions and efficiencies of the channel members in reverse logistics channels. Ravi et al. [18] proposed ANP and balanced scorecard approach in multi-criteria decision making by linking the various issues of reverse logistics for the selection of reverse logistics options such as determinants, dimensions, and enablers of the reverse logistics and the alternatives available to the decision maker. In an effort to help 3PL providers enhance productivity and price leverage in the increasingly competitive 3PL market, Min and Joo [19] developed a meaningful set of financial benchmarks that dictate best practices. They proposed a DEA model that is proven to be useful for measuring the operational efficiency of various profit or non-profit organizations. Saen [20] proposed a mathematical
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