The Multiple Levers of Reverse Logistics

Since its inception, the supply chain has flowed in one direction: downstream toward the end-customer/OEM. As the electronics industry matured, a number of dynamics changed the flow of product: Returns move back up the channel; outsourcing has added new efficiencies (or bottlenecks) and excess inventory; and most recently, there are global demands that electronics manufacturers be responsible for the environmental impact of their obsolete products.

That last matter has spawned mandates, such as Restrictions on Hazardous Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE), which have challenged the industry. This has opened opportunities for partners that are willing to collect, repair, recycle, or dispose of electronics products.

These back-end capabilities, called after-market and reverse-logistics services, until recently have existed outside the authorized electronics supply chain. Third-party organizations have traditionally collected and dealt with electronics waste; excess or returned products often flow through unauthorized channels. In an effort to increase their importance as a one-stop shop for suppliers and end-customers, the industry's largest global distributors have acquired after-market services operations, positioning them as leading reverse-logistics providers.

However, such one-stop shopping is still the exception, according to Frank Cavallaro, principal of Fronetics Strategic Advisors, a consulting firm that focuses on electronic asset disposal and integrated logistics. The electronic aftermarket is a highly fragmented business made up of small and midsized specialists, Cavallaro told me. Some provide repairs; others handle recycling, collection, and disposal. Yet another set of companies smelt and recover materials such as plastic, metal, and rubber. (See: More Companies Eyeing Electronics Aftermarket .)

Global distributor Avnet Inc. (NYSE: AVT) is one of the companies that are acting as consolidators of this market, acquiring companies that manage excess inventory, collect and repair electronics devices, collect obsolete products, and dispose of products as necessary.

Distributors are playing an increasing role in lifecycle management with their customers, acting as consultants in matching components to their end-products. By extending these services beyond components, distributors can increase their importance to the customers. Supply chain Website InboundLogistics.com reports:

As customers become increasingly sophisticated in their purchasing decisions and environmental laws take root, many retailers seek new ways to develop or enhance their return systems. Some companies have turned their networks into a competitive advantage by taking an active position that increases value for customers and builds loyalty.

Companies such as Eastman Kodak and Hewlett-Packard have implemented successful reuse and recycling programs. These initiatives reduce the amount of waste fed into the supply chain and the landfills, while lowering operating costs. The companies have been able to recover their costs from areas such as raw material and packaging procurement, manufacturing, waste disposal and regulatory compliance. Another reason consumers return items is because of faulty or difficult-to-read instruction manuals. Many companies realize the value in revising instructions to make them user friendly.

The system works best when retailers, vendors and logistics companies work together to reduce the percentage of returned merchandise and improve the return system flow.

The practice may benefit the supply chain in an indirect way by stemming the flow of potential counterfeit goods. According to market research firm IHS Corp., a high percentage of counterfeit components are obsolete parts or factory rejects. Many of these parts are slated for disposal but are diverted into counterfeiters' hands. Counterfeiters refurbish the parts and sell them as new. The authorized supply chain is damaged by counterfeit goods, and by ensuring the disposal of parts, distributors retain the value of the brand as well as providing a counterfeit-free channel.

There's little question that environmental services will increase in demand. According to a report last year from research company IDC:

The electronics recycling industry in the United States is beginning to make progress, but challenges remain. The electronics recycling is highly fragmented and lacks sufficient oversight. Not surprisingly, one of the biggest challenges centers on the slow rate of change of current recycling practices, though enterprises are definitely improving faster than home consumers and small businesses.

With our expectations at IDC that the recycling industry is likely to grow in importance and scope both as an economic activity and as a guarantor of proper environmental stewardship, it's worth thinking about this from a supply chain perspective.

Increasingly, reverse logistics are seen as a competitive advantage in the supply chain. "Individual firms and supply chains will continue to seek ways to achieve competitive advantage," writes James R. Stock, professor of marketing and logistics, at the University of South Florida, in a report:

Reverse logistics will be one way to reduce costs, increase revenues and customer service levels and help to obtain market advantage. In sum, for many reasons -- costs, customer service and revenue -- reverse logistics is an increasingly important part of current and future supply chain strategies. It behooves firms to be on the leading edge.