Sunday, September 14, 2014

Cradle to Cradle: The Reverse Supply Chain

Inventory serves a variety of functional categories which help companies address mismatches between supply and demand, to improve operations performance and ultimately maximize profitability by moving resources where they’re needed (Hammond). Although inventory is frequently used to smooth production one way along the supply chain from raw material to finished product, the integration of a reverse supply chain (RSC) in inventory management can help smooth bumps in the supply chain while minimizing waste. 

Per the Harvard Business Review, there are several reasons why companies implement reverse supply chain management. Some companies are forced to do so though recent tax legislation, such as those companies operating in the European Union. Others are taking the initiative to implement RSCs because they see an opportunity to lower operating costs by reusing products or parts of products, and some companies using RSC to make up part of a new business that serves the larger company. 

Those investing in RSCs and reverse logistics systems have good reason to do so. RSCs provide an opportunity for companies selling non-perishable goods to recapture value from a product by taking back and reusing/ repurposing inventory from the customer—whether that’s a “customer” in the supply chain or the end-user. Because of the rising costs of some inputs, namely water and other natural resources, many industries are looking for ways to minimize resource use while still creating an attractive, salable product. The diagram below shows one of the ways this is done through customer returns, something which has a huge potential for value recapture as 6-7% of sales in the US per year, costing the industry $40Bn.[i]

Despite the fact that there’s a lot of opportunity  for companies to benefit from RSCs,  they can be very difficult to implement and are dependent on several factors, such as how the product is obtained (return or other?), reverse logistics around the RSC, quality, and marketing (who will want a the resulting product?).[ii]  Still, reuse and recapture along the supply chain has been demonstrated successfully by some companies, such as Dell Computers, and H&M, which has implemented a clothing recycling program (partly for PR reasons, partly because of fluctuations in cotton prices) where customers return old clothes to the company for eventual reuse or recycling. 

What these success cases have in common is the fact that they’ve created their RSCs in lockstep with forward supply chains by integrating things like product design and, very importantly, logistics. More specifically, to reuse/recapture value from used or returned inventories, companies need to include eventual recycling and reconditioning of the product in design and manufacturing decisions. Instead of designing a product to go from cradle to grave (where the product is ultimately trashed), products go in a closed loop—from cradle to cradle. 

What variables are most important in determining the value of a RSC to a given company?  Are there any particular industries where RSCs would make the most sense?

[i] Reseller Sees Many Happy Returns. Tom Van Riper. Forbes Magazine December 2005. Retrieved on September 14, 2014 at .
[ii]  Reverse Supply Chains for Commercial Returns, Blackburn, Guide, Souza and Van Wassenhove, California Management Review, Vol. 46, No.2. Winter 2004. Retrieved on September 13, 2014 at

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