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Recovering Lost Profits Through Reverse Logistics

The high-tech industry faces two divergent challenges in product lifecycle management. Consumer electronics are being upgraded and replaced more quickly than ever. In 2009, mobile phone makers introduced 900 more varieties of handsets than they did in 2000, according to McKinsey & Co. And high-end, high-value electronics equipment is being designed (and used) for the long haul. These dynamics put the electronics supply chain in a unique position to provide an expanded array of services to the high-tech ecosystem.

Consumer goods that are set aside due to an upgrade can be returned, refurbished, and redeployed, thereby retaining their value for the manufacturer. Heavy equipment that is otherwise operating efficiently often requires fast and dependable post-sales repair and support. Increasingly, electronics OEMs are relying on reverse logistics services to manage these complex transactions.

“Many manufacturers view return and repair activities as a cost center,” Scott Hertel, head of the North American high-tech customer solutions team for UPS Logistics and Distribution, told us. In reality, experts say, a solid reverse logistics program can help companies increase revenue by up to 5 percent of total sales.

Moreover, electronics OEMs aren't just responsible for developing new products. They now have to manage these products from cradle to grave. Electronic goods are right in the crosshairs of environmental mandates such as the EU's Restriction of Hazardous of Substances (RoHS) and Waste Electrical and Electronic Equipment (WEEE). OEMs — not their subcontractors — are responsible for compliance with such directives.

This has become a significant challenge for manufacturers of high-value equipment. Ken Stanvick, an environmental consultant, told us high-end medical equipment has an expected lifespan of 15 to 20 years. Under the EU's RoHS Recast, medical OEMs will face a quandary in a few short years. Beginning in 2019, medical equipment sold from the EU to secondary markets will have to comply with the EU's most recent environmental standards. It is highly likely the components used in much of this equipment will be out of compliance or obsolete by 2019, Stanvick said. “Sourcing these components and bringing this equipment up to spec is going to be a nightmare.”

Due in large part to outsourcing, electronics OEMs are no longer well prepared to handle returns, repairs, refurbishment, and redeployment of many electronics products. Logistics providers handle most of the administrative tasks of identifying, shipping, tracking, and managing product sales and returns. A wide variety of companies, ranging from retail outlets to full-fledged repair depots, provide technical services and product support. The disconnect between these two core competencies — logistics and technology — drew Jabil Circuit Inc. to UPS's logistics and distribution division.

“Companies are finding it hard to integrate these functions into a single service model,” Hertel said. “In 2010, we had an opportunity with an OEM in Europe that wanted to combine the process of logistics with technology support. That brought us to Jabil, and what started as an alliance has evolved into a more formal structure between the organizations.”

For example, a global PC manufacturer uses UPS and Jabil to manage several segments of its supply chain business, he said.

Segment 1 is what we call hub-based inventory, which includes activities such as ownership of spare parts, materials planning, warrantee management, managing component vendors, and the distribution of spare parts to repair sites. Segment 2 is what we describe as the field-stocking network that holds parts close to the site of consumption, managing two- to four-hour service agreements, transportation to and from customer sites, depot returns, and the deployment of spare parts out to technology centers and end users.

Jabil manages the first segment of this OEM's business. UPS manages the second. “It's all about the optimization of these resources and managing the cost structures most effectively,” Hertel said.

He and Chuck Henry, senior director of business development at Jabil Global Services, will be our guests at a Webinar, Reverse Logistics: Reclaiming Value in the High-Tech Supply Chain, on Tuesday, Oct. 9, at 2:00 p.m. EST. They will discuss the strategic advantages of their relationship and how OEMs are recapturing value in their consumer and industrial products.

2 comments on “Recovering Lost Profits Through Reverse Logistics

  1. SP
    October 5, 2012

    Segment 1 and Segment 2 definitions make sense. Its definitely not possible for one copmany to effectively manage everything. And it helps in tracking stuff too.

  2. Barbara Jorgensen
    October 8, 2012

    I have had several conversations with supply chain companies in the past week regarding the profitability from this segment and the data is consistent. The more a product is outsourced, the more difficult it is for an OEM to manage its aftermarket service and support. The fact that this PC OEM requires two partners to manage it (only two?) is one illustration of its complexity.

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