September 1, 2003

Swimming Upstream

Your existing supply chain technology may not work well in reverse

by Ram Reddy

A common myth about application software is that you can easily modify it to support different business processes. As most IT professionals can attest, this is far from the truth. In the area of supply chain management (SCM) application software, this myth can cause problems — from a process and IT standpoint. The typical integrated SCM application package is designed for procuring raw materials, supporting the manufacture of products, and distributing finished goods in the most efficient and cost-effective manner.

A common mistake corporations make is using the same distribution organization and SCM technologies to support reverse supply chain functions. This is going against the natural process flow of SCM activities. (Please see "Shift Into Reverse," May 9, 2002 on why reverse supply chains provide compelling business value to a corporation.)

Reverse Supply Chains are Different

The reverse supply chain's purpose is to recover unsold products from retail and distribution outlets or used products from consumers for recycling and disposal. Inventory pulled from retail or distribution outlets can follow two general paths: The reverse supply chain can either restock the unsold inventory in upstream distribution centers or send the inventory to a liquidation center for disposal. The problem arises when the reverse supply chain attempts to restock upstream warehouses or distribution centers using forward-oriented SCM technologies and processes.

In order to show why this creates a problem, let me first explain standard SCM distribution functions, which are optimized to move products from manufacturing plants through various distribution outlets to the consumer. When products make their way from the plants to a retail store, they go through multiple distribution centers in a process that includes concentration, allocation, customization, and dispersion:

1. Concentration occurs when a manufacturer's consolidation warehouse aggregates products from different factories. Shipping the small quantity of product a retail outlet needs directly from multiple producers is costly. Look around your local supermarket — the number of product categories and choices within each category is enormous. If each product were shipped individually to the supermarket, the transportation costs would make most products unaffordable.
2. Allocation occurs when these concentrated product loads are broken down into smaller lot sizes to match regional requirements. This process breaks down the bulk shipments from factories into case quantities that are optimized to reduce shipping costs.
3. Customization (generally performed by wholesalers) sorts different products from multiple categories to put together truckloads that match a particular retail outlet's requirements.
4. Dispersion involves shipping the customized product sets to different retail outlets.

These forward-oriented SCM practices are aimed at reducing overall transactions and transportation costs between retail outlets and manufacturing outlets. Imagine the number of transactions that would be needed without these SCM functions. The number of products displayed in one retail outlet runs into thousands. Retail outlets would have to individually place and manage thousands of orders to adequately stock their shelves. Through concentration, allocation, customization, and dispersion, the retail outlet has to place and manage at most a handful of transactions. This principle of reducing the total number of transactions drives the logistics functions supporting standard SCM functions and technologies.

The features necessary to support reverse supply chain functions can have the effect of throwing a spanner into the works of these complex and intricate forward-oriented functions.

• Privacy
• Your California Privacy Rights
• Copyright © 2008 United Business Media LLC