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Executive Summary
ith reverse logistics accounting for nearly 1% of the total U.S. gross domestic product, it is not surprising that this process defined as the return/exchange, repair, refurbishment, remarketing, and disposition of products is quickly emerging as an integral component in leading service organizations competitive positions. Leading manufacturers in multiple industries are focusing on improving the reverse logistics process in order to recapture revenue, retain customers, comply with environmental regulations, reduce operating costs, and improve product uptime and quality. This study takes a vertical look at reverse logistics, examining the specific challenges each industry faces and the best-in-class strategies they are prioritizing for success. It offers industry best practices for companies in each of the following vertical sectors: Aerospace & defense, Consumer goods, High tech manufacturing, Industrial equipment manufacturing, Telecom/utilities, and Medical device manufacturing.
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High tech and telecom/utilities firms represent the highest proportion of respondents that are leveraging frequent measurement of their reverse logistics operation with nearly 60% of respondents reporting this level of measurement.
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Table of Contents
Executive Summary .............................................................................................. i Industry Maturity Assessment......................................................................... i Industry Best Practices ................................................................................... i Recommendations for Action..........................................................................ii Chapter One: Industry Maturity Assessment........................................................1 Why Prioritize Reverse Logistics? ................................................................. 1 Returns/Exchange Management Tops List of Challenges.............................. 2 Top Performers in Reverse Logistics ............................................................. 4 Tracking Tactical and Strategic KPIs.............................................................. 7 Chapter Two: Industry Best Practices .................................................................9 Aerospace and Defense ................................................................................ 9 Consumer Goods Manufacturers................................................................. 10 High-Tech Manufacturers............................................................................. 12 Industrial Equipment Manufacturers ............................................................ 14 Telecommunications Equipment .................................................................. 17 Medical Device Manufacturers .................................................................... 19 Chapter Three: Recommendations for Action .................................................... 21 Industry-Specific Recommendations ........................................................... 21 Aerospace & Defense ........................................................................... 21 Consumer Goods Manufacturers .......................................................... 21 High-Tech.............................................................................................. 22 Industrial Equipment Manufacturers...................................................... 22 Telecom / Utilities .................................................................................. 23 Medical Device Manufacturers .............................................................. 23 Featured Underwriters ....................................................................................... 24 Author Profiles.................................................................................................... 26 Appendix A: Research Methodology .................................................................. 27 Appendix B: Related Aberdeen Research & Tools ............................................. 29
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Figures
Figure 1: Strategic Actions for Reverse Logistics Improvement by Industry.........3 Figure 2: Percent of Firms that Consider Reverse Logistics Very or Extremely Important to Overall Company Performance........................................................6 Figure 3: Technology Solutions Currently in Use to Support Reverse Logistics ...7 Figure 4: A&D Firms Lead the Pack with Systematic Data Management ........... 10 Figure 5: Industrial Manufacturers Lead Service VP Push ................................. 15 Figure 6: Reverse Logistics Process Structure by Industry ................................ 16 Figure 7: Telecom/Utilities and High Tech Firms Lead the Pack with Frequent Measurement of Reverse Logistics .................................................................... 18 Figure 8: Top Benefits Realized from Reverse Logistics Improvement by Industry .............................................................................................................. 19
Tables
Table 1: Top Challenges to Effective Reverse Logistics Management by Industry ................................................................................................................2 Table 2: Companies with Top-Performing Scores Earn Best-in-Class Status.....4 Table 3: Average Industry Performance in Reverse Logistics ..............................5 Table 4: Top KPIs for Reverse Logistics by Industry.............................................8 Table 5: Process Structure Impacts Reclaimed Product Value and Product Returns .............................................................................................................. 16
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o longer existing on the periphery of the service supply chain, reverse logistics has risen in importance among leading product-driven firms in multiple industries. Companies that have typically prioritized outbound shipments and getting product out the door are now beginning to recognize the strategic importance returns management holds within their service operation and as such, have begun prioritizing reverse logistics improvements to generate revenue, profit, and competitive differentiation.
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Customer service: receiving in-bound customer calls and ensuring compliance with service contract commitments
Top Challenges
Returns / exchange management Supplier management Inventory management Returns / exchange management Logistics management (products and parts) Inventory management Returns / exchange management Repair / Refurbishment management Inventory management Returns / exchange management Warranty management Supplier management Returns / exchange management Logistics management (products and parts) Inventory management Asset recovery Returns / exchange management Logistics management (products and parts)
Source: Aberdeen Group, January 2007
As seen from Aberdeens recent research in Revisiting Reverse Logistics in the Customer-Centric Service Chain, best-in-class firms (those achieving the top 20% of performance scores) identified the following five strategies they are undertaking to combat these challenges and improve reverse logistics effectiveness: 1. Restructure service organization with higher-level oversight and accountability
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2. Upgrade technology solutions to automate portions of the process 3. Recover more costs from suppliers 4. Integrate service organization more closely with marketing and/or sales 5. Integrate service organization more closely with design and/or manufacturing As seen in the chart below, the strategies a company prioritizes for reverse logistics improvement are dependent on the industry they compete in. It should be noted, however, that nearly three-quarters of firms in the telecom and utilities sector are looking to restructure their service operation with higher-level oversight the top best-in-class strategy for reverse logistics improvement (Figure 1). Figure 1: Strategic Actions for Reverse Logistics Improvement by Industry
42%
17% 50%
Telecom/Utilities
30%
Industrial Mfg.
High Tech
35%
Consumer
33% 38%
21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
% of Respondents Restructure service organization with higher-level oversight Purchase technology solutions to automate the process Integrate service organization more closely with marketing and sales Integrate service organization more closely with design/manufacturing Actively recover costs from suppliers
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64.3%
Percentage of initial value reclaimed from returned products or parts = Overall reverse logistics costs as a percent of sales = 9% Percentage of new products returned for repairs within initial warranty period = 5.7%
Average:
Middle 50% of aggregate performance scorers
12.5%
Percentage of initial value reclaimed from returned products or parts = Overall reverse logistics costs as a percent of sales = 11.9% Percentage of new products returned for repairs within initial warranty period = 10.2%
12.1%
Percentage of initial value reclaimed from returned products or parts = Overall reverse logistics costs as a percent of sales = 93% of responPercentage of new products returned for repairs within initial warranty period = 11%
Source: Aberdeen Group, January 2007
However, when we take these same performance metrics and segment by industry sector, the results vary greatly. The table below shows average performance in each KPI by industry. Metrics bolded in blue reflect industry performance that is greater than best-inclass performance (Table 3).
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Table 3: Average Industry Performance in Reverse Logistics % of Products Returned w/in 1st Warranty Period % of Revenues Spent on Reverse Logistics Costs % of Initial Value Recaptured from Returned Products/Parts
Industry Sector
Best-in-Class Consumer Goods High-Tech. Telecom/Utilities Aerospace & Defense Medical Device Mfg. Industrial Mfg.
As seen in Table 3, aerospace and defense firms report an average of 5% of products returned for repairs within the first warranty period compared to 5.7% of products returned for best-in-class firms. One possible explanation for this high performance score is that A&D firms typically service high-value products such as jet engines under performance-based logistics (PBL) contracts. Under PBL contracts, A&D firms guarantee that parts will be available to keep the aircraft performing optimally. These contracts often require A&D manufacturers to deliver service parts to customers globally within as little as one to two weeks of lead time as well as guarantee service performance levels. With these contracts in place A&D firms must hold themselves to the highest levels of performance for service. Aerospace and defense firms also represent the highest proportion of respondents that consider reverse logistics very or extremely important to overall company performance, with 86% of respondents reporting this level of importance (Figure 2) By placing a significant focus on reverse logistics and prioritizing it as a contributor to successful financial performance, these firms are better positioned to secure executive buy-in for reverse logistics improvements and dedicate the necessary resources to the effort.
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Figure 2: Percent of Firms that Consider Reverse Logistics Very or Extremely Important to Overall Company Performance
Aerospace & Defense High Tech Medical Device Mfg. Industrial Mfg. Consumer Telecom/Utilities 0% 20% 40% 44% 60% 80% 100% 73% 67% 62% 59% 86%
% of Respondents
Source: Aberdeen Group, January 2007
In addition, both high-tech firms and telecom and utilities companies boast a mere 8% of revenues spent on reverse logistics a full percentage point less than best-in-class firms who spend 9% of revenues on reverse logistics costs, on average (Table 3). A possible explanation for this increased performance is that high tech and telecom/utilities firms were also more likely to utilize warranty claims processing systems within their reverse logistics operations than their peers in other industries. More than 50% of high tech and telecom/utilities firms currently utilize this technology (Figure 3). Warranty claims processing systems can help firms better manage costs associated with return/exchange, repair/refurbishment, remarketing and disposition activities by validating warranty claims and ensuring that each channel is billed for services correctly. This can go a long way in minimizing claims processing time and reject rates, and help firms better manage the costs associated with returns.
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Telecom/Utilities
6%
Industrial Mfg.
25%
40%
% of Respondents CRM system SMS Transportation mgmt. system Warranty claims processing system
Source: Aberdeen Group, January 2007
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Top KPIs
Total repair/refurbishment costs Time from defect detection to correction Total return/exchange costs Logistics costs per return or exchange Product returns/exchanges as a % of sales Logistics costs per return or exchange Total repair/refurbishment costs Total repair/refurbishment costs Product return /exchanges as a % of sales No fault found rate Logistics costs per return or exchange Number of defects per new product Logistics costs per return or exchange Time from defect detection to correction Total repair/refurbishment costs Warranty claims processing costs Total repair/refurbishment costs Time from defect detection to correction Number of defects per new product Total repair/refurbishment costs Number of defects per new product Total return/exchange costs
Source: Aberdeen Group, January 2007
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s shown in both Table 1 and Figure 1 in the first chapter, for each industry sector Aberdeen surveyed, differences emerged in both the top reverse logistics challenges they face as well as the strategic actions they prioritize to improve the process. This chapter benchmarks the strategies and business processes successful companies in each industry have employed to improve their reverse logistics operations and provides best practices for firms in similar industries to consider.
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Figure 4: A&D Firms Lead the Pack with Systematic Data Management
Medical Device Mfg. 17% Telecom/Utilities 17% 26% Industrial Mfg. 15% High Tech 37% 37% 27% 33% 39% 28% 43% 50% 7% 0% 10% 20% 30% 40% 50% 60% 37% 48% 57% 26% 57%
Consumer
% of Respondents
Customer- and product-specific returns data is analyzed and systematically shared with value-chain counterparts Aggregated returns data is captured over time, and periodically shared with value-chain counterparts Limited to no historical or trend data is captured on returns and repairs
Source: Aberdeen Group, January 2007
Case-in-point: For one provider of aviation electronic solutions, reverse logistics is a revenue generating operation that relies on strict quality procedures for refurbishment as well as accurate data capture from both customers and field engineers on top-level assets. The companys service operation encompassing 300,000 parts numbers and growing captures reliability data on service parts and feeds this information back into its database to help the company make informed decisions regarding the service of its equipment and parts. This information is updated constantly and used to determine the economic feasibility of refurbishing parts, monitor mean-time between failures to assess the length of warranty periods, and ensure the company is stocking the appropriate number of assets to provide the highest levels of service to its customers. This information is also used to pinpoint failure rates and reliability issues and is then systematically shared with design and manufacturing teams to impact future iterations of equipment.
and their channel partners is reconciling returns that come in through multiple channels, in various conditions, and must be processed accordingly. Case in Point Retail For the Home Shopping Network (HSN) a TV- and electronic-based retailer that ships 33 million packages a year direct to customers 12% to 14% of the companys shipments get sent back as returns. Returns that arrive at HSNs warehouses are handled in one of the following ways: returned to stock, returned to original vendor or manufacturer, refused, refurbished, sent to retail or other outlets for liquidation, or destroyed. In addition, for certain products, such as computers or other electronics, customers will ship the returns directly back to the manufacturer without going through HSNs returns facility. Because the company processes returns in a multitude of ways, it required a streamlined approach to reverse logistics that was clearly communicated to all involved personnel and automated wherever possible. To drive improvements to the process, HSN implemented a reverse logistics add-on to its WMS application. The reverse logistics component provides real-time visibility into returns from receipt to final disposition, provides fulfillment personnel with guidelines for processing returns, and tracks refurbished inventories throughout each stage of the process. In addition, the system integrates with HSNs order management application, allowing the company to immediately glean the status of returns as they are received. As a result of the deployment, HSN is processing returns faster and more accurately than it had previously. The company has also improved its inventory management and reduced fraud as a result of the implementation. Additionally, the process improvements afforded by the solution have contributed to a 20% labor savings in the companys returns processing operation. Case in Point Manufacturing From a manufacturing perspective, receiving returns from retailers like HSN, distributors, suppliers, field technicians, and direct from customers also introduces complexities into the reverse logistics loop. Without an automated and streamlined approach to tracking returns, consumer goods manufacturers are often forced to hold excess repair inventory to combat in-transit returns, thereby elevating carrying costs. Take Eastman Kodak for example. The multi-billion dollar provider of imaging technology products and services to the photographic, graphic communications and healthcare markets manages more than 70,000 active part numbers for its service parts across all business units. One of the biggest obstacles in Eastman Kodaks reverse logistics operation was ensuring that field technicians and authorized dealers sent back all defective parts that were valuable enough to be remanufactured and placed back into inventory. In order to combat this challenge, Eastman Kodak leveraged its 3PL to implement an automated repair system within its forward stocking locations which tracks service parts as they are pulled from the distribution center and sent out for repairs. The system also registers when replace-
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ment parts have been returned to the 3PLs facility and issues notification on parts that have not been returned within three days. In addition, the system automatically prints a return shipping label for parts that must be sent back, allowing Eastman Kodak to ship parts directly back to the supplier if desired rather than first receive and sort them in its headquarters in Rochester, NY. As a result of implementing this automated system and subsequent process improvements, Eastman Kodak has reduced its inventory in the Rochester facility, improved cycle times, and increased its return rate for parts that can be remanufactured, thus helping to keep acquisition costs down. We dont charge technicians for parts they dont send back, like some companies do, says the worldwide director of service parts supply chain at Eastman Kodak. So, any parts that are not returned within 90 days, we write off against the business. By tightening up the reverse logistics process we have been able to chase down parts quicker and have seen fewer write-offs. Case in Point Manufacturing For Olympus Imaging America Inc., having visibility throughout the entire returns and repair operation is critical to the companys success. The company uses a web-based service management system to issue return material authorizations (RMA) to customers for damaged or defective products and tracks these items as they are received and processed through the repair operation. The system also helps Olympus track all parts and labor used to complete the repair as well as invoice the customer for the service. According to the companys director of systems development, the application has been instrumental in providing Olympus with the ability to do margin analysis of its repair costs vs. revenue gap and alter its pricing structure accordingly for maximum profitability. Olympus also works with a variety of third-party repair shops that all use the same webbased application to issue RMAs, track parts and labor, and invoice customers. This gives Olympus added control of its spare parts inventory as well as increased visibility into the complete returns management process. Being able to know where a customers camera is at all times is critical, says the companys director of systems development. With this system in place we now have complete visibility into the process. We can tell the customer we received the product on Monday, it is in the repair shop, and it is scheduled to ship out on Friday.
High-Tech Manufacturers
High tech manufacturers face the challenge of continuing to satisfy customers in a constantly changing and sometimes vacillating market. In this industry, inventory obsolescence increases the likelihood of product returns, making it imperative for high tech firms to speed return cycle times in order to capture the maximum value from returned products and parts. Polled high tech firms (such as computer hardware and software manufacturers, and network infrastructure providers) reported an average of 8% of revenues spent on reverse logistics costs as seen in Table 3 a full percentage point lower than best-in-class firms. With nearly 60% of high tech firms reporting that they frequently measure KPIs relating
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to service productivity, profitability, and customer value, it follows that these firms would also lead other industries in containing costs for reverse logistics operations. In fact, the top KPIs measured by high tech firms to track reverse logistics performance include: Total repair/refurbishment costs, Product returns/exchanges as a percent of sales, No fault found rate, and Logistics costs per return or exchange.
Case in Point 1 Blue Coat Systems a $200M provider in the secure content and application delivery market manufactures both hardware and software intended to help IT organizations optimize security and accelerate performance. The company primarily ships service parts directly to customers who do their own repairs, but was having difficulty ensuring that customers ship back defective parts in a timely fashion for repair, remanufacture, and disposition. The company made a concerted effort to focus on reverse logistics about a year ago by putting systematical processes in place and removing all manual and paper-based tracking of its reverse logistics data. Blue Coat Systems began by first appointing a director of service parts operations to oversee the service division (including reverse logistics) and separate this group from within the manufacturing division. The company also leveraged a 3PL to assist with service parts and reverse logistics activities, and began tracking such metrics as overall repair cycle time, asset recovery, and reverse logistics costs as a percent of sales, among other KPIs. To assist with asset recovery of defective parts from its customers, Blue Coat also enlisted the help of a dedicated outsourced service provider. The provider monitors asset retrieval for Blue Coat and follows up with customers directly if parts have not been returned within a certain timeframe. When you dont have field technicians doing the repairs, you need that extra help in recovering assets from the end-user customer, said the companys director of service parts operations. Incorporating this service into our reverse logistics operation has been a huge advantage, yielding positive results. As a result of the process improvements and automation put in place by Blue Coats 3PL and internal team, the company has been able to reduce its overall repair cycle time from 90 days to 50 days. In addition, Blue Coat has reduced the average time its takes customers to ship parts back from 45 days to 29 days and is looking to eventually bring this metric down to 10 days. The company has also seen an increase in asset recovery from 70% to 92% with the remaining 8% of assets still in some stage of the return cycle an improvement which Blue Coat attributes in large part to the efforts of its outsourced service provider. In addition, Blue Coat has been able to substantially reduce its annual parts spend which in turn has decreased the total inventory repair float required to service its customers.
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Case in Point 2 A multi-billion dollar provider of computer hardware, software, and services Aberdeen spoke with is also focused on streamlining and automating the reverse logistics operation. The companys service supply chain team manages the warranty management, service parts planning, and reverse logistics for the company. In order to help the organization better manage returns coming back from the field as well as procure new parts and materials accurately to support these repairs, the company implemented a service parts management and reverse logistics solution to automate the process. The solution has helped the service supply chain team achieve a 99.96% part availability rate for its customers and in turn, better track and manage its parts spend for repaired goods internally as well as with its channel partners. The company has also seen a decline in its days of service inventory (DSI) levels, which has enabled it to support higher volumes while spending less. In addition, the high-tech manufacturer is rolling out solutions for its customers to make the process of returning or disposing defective parts expeditious and economical. The company provides customers with information on recycling solutions in their area via its web site and is working with its carriers to make it easier for customers to leave parts at drop sites or get pick-ups at their homes or offices. Were taking the onus off the customer and predetermining where the part needs to go up front, so that the customer can just send it on its way, says the companys service supply chain manager.
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Vice president or higherlevel executive oversees profit-and-loss (P&L) for service operations Director-level executive oversees cost-cutting and productivity targets for service operations Service is viewed purely as cost, and there is no discrete management or P&L for service operations
20%
40%
60%
80%
% of Respondents
Source: Aberdeen Group, January 2007
As seen from Aberdeens research in Revisiting Reverse Logistics in the CustomerCentric Service Chain, in order for reverse logistics improvement initiatives to be successful senior management must recognize and support the effort. At 92% of best-in-class companies Aberdeen surveyed, a senior service director or executive oversees all aspects of product/part return, exchange, repair and refurbishment. From a process perspective, industrial equipment manufacturers were also most likely to leverage standardized and automated reverse logistics processes within their service operations with more than one-third reporting this level of process efficiency (Figure 6).
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31%
52%
Aberdeen research shows us that those companies with a systematic reverse logistics process that begins with standardized definition of service commitments in the service contract, followed by automated returns processing, financial reconciliation and performance analytics, reported a higher performance in both reclaimed product value and product quality (Table 5). Table 5: Process Structure Impacts Reclaimed Product Value and Product Returns Reverse Logistics Management Process Profile Standardized definition of service commitments in service contract, followed by automated returns processing, financial reconciliation, and performance analytics. Standardized definition of service commitments in service contract, followed by manual returns processing, financial reconciliation, and performance analytics. % of Initial Value Reclaimed from Returned Products/Parts % of Products Returned within 1st Warranty Period
27.8%
8.9%
23.8%
9.1%
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Reverse Logistics Management Process Profile Non-standard or no definition of service commitments in service contract, followed by manual returns processing, financial reconciliation, and performance analytics.
22.8%
For ASM International a leading manufacturer of multi-million dollar semiconductor process equipment and systems employing standardized processes enterprise-wide is critical to the companys service operation and successful reverse logistics strategy. ASM sells and services its equipment to global semiconductor chip manufacturers, and uses a technology solution to capture historical data on failure issues for its equipment. Every stakeholder in the company has access to this system and on a scheduled basis the service team meets with the design and engineering teams to go over data captured on equipment failures. From these meetings, the engineering team harnesses this data to minimize the top failing issues for customers. This systematic analysis and feedback loop is a critical piece in a companys reverse logistics operation to ensure the quality of products continually improves and return rates decline.
Telecommunications Equipment
As the telecommunications and wireless landscape constantly evolves and new technologies rapidly emerge, companies in this industry are challenged with declining customer retention rates, falling asset recovery rates, and increasing inventory carrying costs. In this industry (as well as in high tech, consumer goods, and medical device manufacturing) an 80% to 85% asset recovery rate is common. Manufacturers that fail to recover valuable products and parts from the field must write off the value of these assets against the business. And assets that do not get recovered cannot be refurbished and placed back into inventory thereby impacting the amount of value that manufacturers are able to reclaim from damaged products and parts. In fact, nearly one-third of polled companies reported that asset recovery was a top challenge for their firms and nearly 30% of telecom and utilities firms are currently outsourcing this aspect of reverse logistics. Case in Point For one of the largest wireless companies in the U.S., with more than 58 million subscribers who use the nations digital voice and data network keeping customers satisfied and connected involves replacing damaged mobile devices with replacement hardware rapidly and with minimal effort on the part of the customer. However, the company was experiencing difficulty ensuring that customers return their damaged phones upon receipt of a replacement. The wireless company contracted an outsourced provider to help manage the asset retrieval process and follow up with customers to ensure they return their phones in a timely manner. After making three attempts to retrieve assets from customers, the outsourced provider gives the company the green light to bill customers for the phones.
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As a result of this process improvement, the company has minimized the amount of times customers get billed for phones erroneously and thus increased customer satisfaction. In addition, the initiative has helped the company increase its asset recovery rate to nearly 98%, which amounts to an annual cost savings of as much as $35 million. In addition to focusing on asset recovery, wireless service providers, mobile device manufacturers, utilities companies, and others are tracking and measuring reverse logistics performance regularly to drive continuous improvements. According to companies polled for this study, 57% of telecom and utilities firms frequently measure service productivity, profitability, and customer value one of the highest response rates of any industry, usurped only by high-tech firms (Figure 7). By tracking and measuring the performance of their service operation and reverse logistics process, telecom and utilities firms are alerted to potential problems before they become significant issues, and are better positioned to address these issues as they arise. Figure 7: Telecom/Utilities and High Tech Firms Lead the Pack with Frequent Measurement of Reverse Logistics
Medical Device Mfg. 17% Telecom/Utilities 22% 22% 22% High Tech 17% Consumer 16% Aerospace & Defense 7% 0% 10% 20% 30% 40% 25% 40% 44% 50% 43% 50% 60% 70% 33% 44% 46% 38% 57%
Industrial Mfg.
58%
% of Respondents Frequent measurement of service productivity, profitability, and customer value Ad hoc measurement of service productivity, profitability, and customer value Limited or no measurement of service productivity, profitability, and customer value
Source: Aberdeen Group, January 2007
This frequent measurement of service performance is paying off for telecom and utilities firms. Nearly 75% of polled companies in this industry reported that they have increased service profitability as a result of their reverse logistics initiatives more so than any other vertical sector (Figure 8).
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22%
Telecom/Utilities
26%
Reduced service costs Reduced new part procurement costs Increased service profitability
79%
Industrial Mfg.
65%
High Tech
47% 47% 38% 46% 40% 60% 77% 80% 100% 67%
Consumer
8%
20%
% of Respondents
Source: Aberdeen Group, January 2007
For the wireless company mentioned previously, continuously improving the reverse logistics operation has led to measurable results. The company found it could significantly impact the bottom-line and automate its returns management process by utilizing a smart label that is prepaid, preaddressed, and printed with barcode information. The labels barcode houses vital information about the shipments contents and provides the company with visibility into all returns coming back to the firms distribution center. According to the companys director of supply chain management, this visibility has helped the company ensure it has the right headcount on hand to process the amount of returns coming in, as well as more accurately identify which returns will be billed to the customer and which costs the wireless manufacturers must cover. As a result of this process improvement, the company has been able save significantly on shipping and logistics costs. In addition, it has vastly reduced the time it takes to get products from the customer to the returns center for processing from a week or more to todays average of 2.5 days.
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One manufacturer of diagnostic medical imaging equipment and solutions Aberdeen spoke with ships about 4,000 parts per month and receives 3,000 parts per month in reverse shipments. In order to improve the return, triage, and repair of parts sent back through the supply chain, the company began making improvements both to its technology systems as well as its operational processes for handling returns. The company now uses a service parts management system to automate the planning of inventory levels and forecast repair volumes. The solution helps the medical device manufacturer forecast demand for repairs so that it is not allocating valuable resources to repair parts that are not needed. In addition, the company implemented a shop floor control system, which it uses to help track parts consumed in the repair process, plan labor and costs for reverse logistics activities, and monitor workflow through the operation. As a result, it has realized a 10% reduction in repair costs, which it attributes in large part to the implementation of this system. The company also uses a warranty claims processing system to manage inwarranty returns both in the U.S. and in its facility in Japan. The companys director of service logistics management is quick to note that a successful reverse logistics operation requires more that just technology deployments, however. Over the last two years the company has worked to put in place a dedicated group of front-line inventory specialists, each tasked with managing 100 field engineers. This group ensures that the engineers have the parts they need and are returning both good and defective parts on a timely basis. As a result of implementing this dedicated task force, the medical device provider has seen a decrease in the average number of days outstanding for parts in the field, and inventory levels in the field have dropped by more than 50%. According to the director of service logistics management, part of the reason the company has been successful in improving its reverse logistics operation has been its commitment to its people. The company changed its incentive plans for its field engineers and managers to include improvement metrics for reverse logistics. Field engineers and managers receive bonuses for managing their inventory to one month on hand and maintaining an average of 15 days outstanding for parts in the reverse logistics loop. Because of this initiative, the company has realized a 50% reduction in pipeline time.
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everse logistics offers companies in multiple industries the opportunity to generate revenues, increase customer retention rates, improve product quality, and differentiate competitive position. Manufacturers looking to make strides in streamlining reverse logistics management should prioritize the following industry recommendations as a first step toward improvement.
Industry-Specific Recommendations
Aerospace & Defense Utilize reporting and analytics tools to monitor and track performance of the reverse logistics operation, sharing insights gleaned from the repair process with value chain counterparts in sales, marketing, design, and manufacturing divisions. As seen earlier in the aviation electronic solution provider example, the ability to capture and analyze return and repair data and share this information with value-chain counterparts is integral to running a successful reverse logistics operation. Detailed analysis of such metrics as mean time between failures, economic feasibility of repairs, industry market growth, SLA compliance, and obsolescence and supersession of service parts can provide valuable insights into business performance and help firms proactively manage the service operation for cost efficiencies and top-line growth. Consumer Goods Manufacturers Begin by automating front-end returns management approval processes and incent field technicians and customers to send parts back in a timely manner. For many consumer goods manufacturers, recapturing maximum value from returns entails speeding repair cycle time. As such, one of the challenges firms in this industry face is incenting field engineers and customers to send parts back to the manufacturer in a timely manner. By sending new parts out to technicians and customers with a prepaid, preaddressed return label, companies can minimize the effort required to ship defective parts back to the manufacturer for repair/refurbishment. In addition, shipments that include a bar-coded
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label reveal important information to the manufacturer about the shipments contents, allowing companies track and manage the process more effectively. For Olympus Imaging, whose products evolve with the changing technological landscape, speeding the reverse logistics process is of strategic importance: We lose value every hour, everyday on these products, said the companys vice president of operations and administration, so the quicker we can get it and turn it around, the more we can recover on it. High-Tech Minimize manual and paper-based reconciliation efforts for reverse logistics wherever possible and implement automation tools such as enterprise returns management systems, warranty claims processing systems, and service management systems that can integrate effectively with existing CRM and ERP systems. Ensuring inventory accuracy of repair depots can be extremely challenging for firms that employ manual and paper-based processes for managing reverse logistics. In the case of Hitachi Data Systems the company leveraged the returns management application provided by its 3PL to automate and streamline its data management for reverse logistics. Under this system, field engineers log repair data and order service parts through the application, ensuring a single data entry point. The system ships spares out to the field, and tracks parts as they come back through the reverse logistics process. Reminders are then issued automatically to field engineers that have not sent defective parts back within a certain timeframe. As a result of deploying this solution, Hitachi has seen an increase in its return rate for service parts from around 80% previously to currently in the high 90s. In addition, field engineers that used to take an average of 30 days to send parts back, and are now returning parts within 5 to 7 days. Hitachi has also seen a 15% to 20% reduction in inventory due to the improved return rates and turnaround times which amounts to a significant cost savings. Industrial Equipment Manufacturers Approach the reverse logistics function as a business. Establish goals and objectives for each initiative and ensure the operation has adequate resources and management to support the effort. In the industrial equipment sector, industry estimates place return rates at 4% to 8%, making the total revenue impacted by returns $50 to $100 billion in the U.S. alone. In order to be successful, the reverse logistics operation should function as a business with both short- and long-term goals and performance targets. Take BioTek Instruments, Inc. for example. The manufacturer of microplate instrumentation and software is putting a strong emphasis on improving its service parts and returns operation to prepare the company for future growth. We are manufacturing more complex products, which will require more service parts, so we will eventually need more people and inventory to support the equipment, says the companys service manager. We are looking at the entire service process from service orders to returns management authorization to customer contact and focusing on driving efficiencies into the operation. BioTek Instruments plans to implement the lean processes it leverages in its
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manufacturing operation into its service division in order to streamline the operation and increase productivity of its employees without increasing headcount. Telecom / Utilities Consider outsourcing some or all reverse logistics functions to third parties. Reverse logistics processes are typically complicated by multiple channels sending products back. For telecom firms, such as the one mentioned previously, defective mobile devices are often sent back to the provider from suppliers, resellers, and direct from customers, introducing further complexities into an already complicated and disparate process. As seen from some of the companies Aberdeen interviewed for this study, 3PLs, contract manufacturers, and other service network partners can provide a cost-effective approach to managing the reverse logistics operation without drawing from the companys own internal resources. In addition, many third-party providers have experience managing the reverse supply chain for clients and the expertise to tailor solutions and resources to the manufacturers specific needs. Medical Device Manufacturers Ensure processes and responsibilities for reverse logistics are clearly defined, have executive-level support and oversight, and are automated wherever possible. It can be said that the more complex a product, the higher the percentage of returns the manufacturer can expect to incur. This is due in part to the greater number of complex parts within the equipment that have the opportunity to fail, as well as the greater number of potentially unqualified personnel working on the equipment. The criticality of medical devices, combined with their increased propensity for failure, makes establishing automated and streamlined processes for service parts and reverse logistics operations of key importance to both manufacturers and their customers. At the manufacturer of diagnostic medical imaging equipment and solutions mentioned earlier, returns are treated in a variety of ways depending on their condition upon arrival. Therefore, the triage process the company employs when returned parts come back to the facility is a critical success factor for the firm. By establishing clear-cut processes for separating good parts from defective parts, the medical equipment provider is able to quickly and efficiently determine what action to take with each part as soon as it flows in from the receiving dock. This includes putting good parts back into inventory, repairing proprietary parts internally, sending damaged parts back to the OEM for repairs, or disposing of parts in compliance with environmental regulations. In this way the company ensures that each part is treated in the most cost-effective way possible.
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Featured Underwriters
This research report was made possible, in part, with the financial support of our underwriters. These individuals and organizations share Aberdeens vision of bringing fact based research to corporations worldwide at little or no cost. Underwriters have no editorial or research rights and the facts and analysis of this report remain an exclusive production and product of Aberdeen Group.
Click Commerce
Click Commerce offers innovative service supply chain, warehouse management, and supply chain management solutions designed to drive competitive advantage and profitable revenue creation within the four walls and across an extended network. Click Commerce is the only company to offer an end-to-end service supply solution that spans both forward and reverse logistics, from facility execution to network execution to planning and optimization. Click Commerces unique combination of domain expertise, business process intelligence, and sophisticated software let companies manage all the processes necessary to plan and deliver superior service. For additional information on Click Commerce: 233 N. Michigan Avenue, 22nd Floor, Chicago, IL 60601 (312) 482-9006 or click.sales@clickcommerce.com www.clickcommerce.com
Metrix
At Metrix, our promise is to Advance Your Service. We do this through our industryleading service management and mobile field service solutions. We use knowledge accumulated from building functionally rich, service-specific software since 1982 and combine it with the most experienced, well-trained, and consistent professional services team in the industry to ensure 100% of our customers successfully implement our software. To learn how Metrix can Advance Your Service, visit us online at www.metrix.com. For additional information on Metrix: 20975 Swenson Drive, Waukesha, WI 53186 (800) 543-2130 or info@metrix.com www.metrix.com
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ATCLE specializes in serving the wireless, broadband, and hi-tech industries with intelligent highly customizable turnkey solutions, meeting the most complex logistics challenges. Our high quality service levels and customized solutions improve our customers supply chain efficiency leading to enhanced growth and profits. For additional information on ATC Logistics & Electronics: 13500 Independence Parkway, Fort Worth, TX 76177 (817) 491-7727; toll free: (800) 466-4202; or info@atcle.com www.atcle.com
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Author Profiles
Rachel Gecker, Research Analyst Service Chain Management Research Aberdeen Group, Inc.
(617) 854-5213 rachel.gecker@aberdeen.com As a research analyst in the service chain management practice, Rachel Gecker researches and analyzes how service executives are utilizing technology and streamlining business practices to improve post-sales service and support processes. Through benchmarking and analysis of Aberdeens fact-based research, Gecker examines how best-inclass service organizations are reengineering their service chains for optimum performance and increased profitability. Prior to joining Aberdeen Group, Gecker wrote and edited for a variety of business trade publications, including Inbound Logistics. She brings a wealth of editorial and industry experience to her role as research analyst, having researched and reported on technologydriven business value for enterprises in the manufacturing, distribution, transportation, and logistics industries.
Mark W. Vigoroso, Chief Research Officer & SVP Service Chain Management Research Aberdeen Group, Inc.
(617) 854-5278 mark.vigoroso@aberdeen.com Mark Vigoroso spearheads primary market research in service management and assesses software and services that automate and streamline these and other value chain processes. Vigorosos current efforts include quantifying Global 5000 executives strategies, experiences, and deployment plans in the area of field service optimization. He has published research in the areas of strategic sourcing, supplier performance measurement, enterprise spending analysis, total cost management, global trade management, and product management. Vigoroso has spent years covering electronic procurement, supply chain, and logistics management trends as a journalist, editor, speaker, and columnist for various industry publications. Specializing in e-business applications and strategies, he was an editor at Purchasing magazine and Manufacturing Marketplace. He has also been a columnist and feature writer for The E-Commerce Times, ZDNet TechUpdate, and Workz.com.
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Aberdeen supplemented this survey effort with interviews with select survey respondents, gathering additional information on reverse logistics management strategies, experiences and results. The study aimed to identify emerging industry best practices for reverse logistics management and provide a framework by which readers could assess their own reverse logistics management capabilities and opportunities. Responding companies included the following: Job function: The research sample included respondents with the following job functions: logistics/supply chain (34%); field service/operations (15%); customer service (10%); sales (7%); IT (7%); procurement (7%); manufacturing (5%); finance (5%); marketing (5%); and quality (5%). Industry: The research sample included respondents from the following industries: Consumer-facing industries (24%); High-tech manufacturing (23%); Industrial manufacturing (13%); Medical equipment manufacturing (11%); Telecom/utilities (10%); Aerospace/defense (6%); Automotive (4%); Transportation/distribution (2%). Geography: Survey respondents from North America represented 56% of the survey sample; from Europe, 21%; from Asia-Pacific, 14%; from the Middle East, 6%; and from South/Central America and Caribbean, 3%.
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Company size: About 32% of respondents were from large enterprises (annual revenues above US $1 billion); 35% were from mid-size enterprises (between $50 million and $1 billion); and 33% of respondents were from small businesses ($50 million or less).
Solution providers recognized as sponsors of this report were solicited after the fact and had no substantive influence on the direction of Industry Best Practices in Reverse Logistics. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge.
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Information on these and any other Aberdeen publications can be found at www.chiefserviceofficer.com, or inquire by e-mail at memberservices@aberdeen.com.
Aberdeen Group, Inc. 260 Franklin Street Boston, Massachusetts 02110-3112 USA Telephone: 617 723 7890 Fax: 617 723 7897 www.aberdeen.com 2006 Aberdeen Group, Inc. All rights reserved January 2006
Founded in 1988, Aberdeen Group is the technologydriven research destination of choice for the global business executive. Aberdeen Group has over 100,000 research members in over 36 countries around the world that both participate in and direct the most comprehensive technology-driven value chain research in the market. Through its continued fact-based research, benchmarking, and actionable analysis, Aberdeen Group offers global business and technology executives a unique mix of actionable research, KPIs, tools, and services.
The information contained in this publication has been obtained from sources Aberdeen believes to be reliable, but is not guaranteed by Aberdeen. Aberdeen publications reflect the analysts judgment at the time and are subject to change without notice. The trademarks and registered trademarks of the corporations mentioned in this publication are the property of their respective holders.
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