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September 1, 2003

Swimming Upstream

Your existing supply chain technology may not work well in reverse

by Ram Reddy

Continued from Page 1

To illustrate the difference, remember that the product lot sizes shipped from distribution to retail outlets are standardized for optimal efficiency and cost-effective performance as they move through the distribution functions. Extracting unsold products from the store shelves will rarely combine to form the standard lot size. When these irregular lot sizes are shipped from a retailer to a wholesaler, they create additional problems with the wholesaler's receiving, material handling, and stocking processes. In addition to encountering problems in these areas, you must also account for restocking the product: You must factor in the new costs, such as transportation and material handling costs.

The further upstream unsold products are pushed in a reverse supply chain situation, the more complex the material handling and accounting functions become. It is the equivalent of swimming upstream!

Reverse Supply Chain Metrics

Traditional supply chain metrics are focused on minimizing the time between cash from sales and cash paid to suppliers; ensuring that work in process idle time across the supply chain is as low as possible; and finally, freeing up cash from fixed assets to expand the business. On the other hand, no standard reverse supply chain metrics are available to guide system design and implementation and to measure performance. For the most part, traditional supply chain measures aren't meant to deal with finished products. Realized salvage value from the unsold inventory is a good starting point, but that isn't enough.

Unfortunately, in my experience, this lack of standard measures for reverse supply chain performance has led to disappointing results. Reverse supply chain implementation initiatives that promise great salvage value don't take into account the costs of handling unsold inventory as it flows back upstream into the forward-oriented supply chain. Because each node in the distribution chain is viewed as a cost center, the total cost of ownership (TCO) for reverse supply chain processes that span multiple organizations is rarely considered. TCO in this context involves the cost of extracting products from retail outlets, processing them in wholesale and distribution centers, and finally salvaging or redirecting them into standard SCM processes. Developing reverse supply chain performance metrics that look at the multicompany TCO of recycling or salvaging products from retail outlets is the first step to success. Firms that I worked with that started with a clear TCO model and metrics for reverse supply chains were able to design processes leveraging the functionality of the forward-oriented SCM technologies, while minimizing the logistical friction of swimming upstream at the distribution centers.

Keep It Simple!

The solution to the logistical problems of a reverse supply chain implementation is simple if you approach it from a multicompany TCO standpoint. To solve the material-handling problem, a third-party logistics (3PL) provider was contracted to retrieve the unsold inventory from various retail outlets and package the uneven quantities into standard lot sizes. The 3PL provider shipped standard lot sizes to the appropriate distribution center as an incoming order from another manufacturer. The forward-oriented SCM processes (and supporting technology) continued to function optimally without having to handle products going the wrong way.

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From an overall financial and accounting perspective, the process was simplified with an inventory write-off and restocking general ledger entry. The cost per unit of restocking the product using the 3PL provider was greater than the cost per unit for pushing the unsold product back up the forward-oriented supply chain. However, the per-unit TCO of using the forward-oriented supply chain was far greater than the per-unit cost using the 3PL provider. Even without factoring in qualitative factors such as reduced inconvenience in the materials handling processes, the overall quantitative TCO benefits from using the 3PL provider to simplify processes across multiple distribution points were obvious.

While great in theory, this type of approach is difficult to implement in the real world, as functions across the supply chain are often viewed as cost centers. Moreover, the prevailing trend is to look for technology silver bullets, which leads to reverse SCM technology implementations that may reduce the per-unit transaction cost between distribution and retail outlets without realizing the benefit of reducing the TCO. Simple solutions using business processes and technologies are feasible only when the overall supply chain is viewed as one entity as opposed to a collection of multiple cost centers. But even in this scenario, easier said than done! However, forward-thinking companies that take on the TCO approach will become the leaders for their industry segment.

Ram Reddy [ramreddy@tacticagroup.com] is the author of Supply Chains to Virtual Integration (McGraw-Hill, 2001). He is also the president of Tactica Consulting Group (www.tacticagroup.com), a technology and business strategy consulting company.