© 2005 guide & van wassenhove1 closed-loop supply chains: practice and potential v. daniel r....

© 2005 Guide & Van Wassenhove 1

Closed-Loop Supply Chains: Practice and Potential

V. Daniel R. Guide, Jr. Luk N. Van WassenhovePennsylvania State University INSEAD


Migrant child from Hunan province sits atop one of countless piles of unrecyclable computer waste imported from around the world. Guiyu, China. December 2001. Copyright Basel Action Network.


Presentation outline Definition and examples

Business process approach

Economic attractiveness

Time value

Roadmap for reverse supply chain

redesign


Definition

Closed-loop supply chains: are designed and managed to

explicitly consider the reverse and forward supply chain activities over the entire life cycle of the product.


A closed-loop supply chain

Distribution Reseller orCustomer

Sales

ManufacturingRawMatls

Overstocks

Refurbished product (Secondary Market)

Return Stream

ReturnsEvaluation

SpareComponents

Spares Recovery

Scrap


Types of returns

Commercial returns 30 to 90 day free returns policy in US HP: total costs: 2% of gross $ sales annually

Repair / warranty returns Leasing End-of-use returns

Cell phones: 80% replaced after first year of use End-of-life returns

Mandatory take-back in EU (WEEE)


Closed-loop supply chains for containers

Supplier

Manufacturer

Retailers

CustomersPre-paid mailers

Supplier

Manufacturer

Retailers

Customers

Cash for return

Cartridge reuse Single-use cameras

Characteristics: commodity goods, simple products, high volumes, low variance, non-distinguishable products, OEM controlled, short lead times

Forward Flows

Reverse Flows


A closed-loop supply chain for photocopiers

Forward Flows

Reverse Flows

Remanufactured Flows

Supplier

Manufacturer

Retailer

OEM Customers(new technology)

RemanufacturerSpareParts

Remanufactured Customers

(older technology)

Deposits, leasing,and financial incentives

Deposits, leasing, and financial incentives

Characteristics: high variances, stable production technology, limited volumes, modular design, imbalances in supply and demand, cannibalization


A closed-loop supply chain for commercial tire retreading

Forward Flows

Reverse Flows

Remanufactured Flows

Characteristics: low variance in returns timing, low variance in quality, easy to sell, intermediate logistics costs

Supplier

Manufacturer

Retailers

RetreaderCustomers

Trucking Fleets


Key activities Product returns management

Product acquisition Reverse logistics Test, sort, grade, and disposition

Remanufacturing/reconditioning operational issues Repair Remanufacture Recycle

Remarketing Distribution Sales Reuse


How hard are these key activities? Product

Acquisition Reverse Logistics

Test Sort

Grade

Remanufacture/ refurbish

Remarketing

Product Life Extension Jet engines

Easy Easy Hard Hard

Easy

Refillable Containers Toner cartridges

Easy Easy Easy Easy

Easy

Tire Retreading Commercial

Easy Intermediate Intermediate Intermediate

Easy

Consumer Electronics Reuse Cellular Phones

Hard Easy Easy Easy

Intermediate

Industrial Remanufacturing Copiers

Intermediate Intermediate Hard Hard

Hard

Tire Retreading Passenger

Easy Hard Intermediate Intermediate

Hard


OR research on closed loop supply chains focus on single cells of the matrix, optimising

only part of the process a cost minimisation perspective intricate models for a given sector

e.g.: minimum cost disassembly scheduling algorithms for car engines


Presentation outline

Definition and examples



Time value


redesign


A business process approach

Need to remove bottlenecks (acquisition, remanufacturing, remarketing)

Need to optimise as a global process with a view on maximising value recovery (as opposed to cost minimisation)

Need to consider time value of the product over its lifecycle



Product acquisition is a major driver of success

Creating effective remarketing channels is another major driver

Research emphasis has largely been on reverse logistics, disassembly and remanufacturing operations



Product Returns

Management

RemanufacturingOperational

Issues

Remanufactured Products MarketDevelopment






Time value


redesign


Product returns represent a value stream, not just a waste stream


A simple view on the impact of acquisition price

Quality distribution

Expected quantity to be acquired

Total acquisition cost

Disposalcost

OPERATINGCOSTS

OPERATINGCOSTS

Average inventory

Replacementmaterials

Laborcosts

Machines& buildings

CURRENTASSETS

FIXED ASSETS

OPERATINGCOSTS

A given acquisition price


EVA calculation

Fixed SP ·Volume

Revenue

Materials, Labor, Acquisition Price ,

Disposal

Oper Costs

Inventory, PrepaidRent and Insurance

Current assets

Trade Payables,Accrued Expenses(e.g. unpaid salaries)

Current liabilities

PBIT

Fixed

Cash taxes

Machines & Bldg

Fixed assets

Working capitalrequirement

NOPAT

Capital employed WACC

Fixed

EVA

Capital Charge

+__

x

__

__

Revenue - Costs

PBIT - Cash taxes

Fixed assets + Working capital

Average assets· WACC

PBIT = Profit before income taxesNOPAT = Net operating profit after taxesWACC = Weighted average cost of capital

x


Example of a simple acquisition model

Determine quantities to be acquired of different quality classes of used phones

Within a given quality class prices increase with quantity

Lower quality phones require higher refurbishment costs

The quantity of refurbished phones sold decreases with the sales price






Time value


redesign


Time-sensitive product return streams Short life-cycles; high obsolescence risk Returned products losing value rapidly “Value of time” a key parameter Examples:

PCs Printers and Computer PeripheralsMobile PhonesTelecommunications Equipment


How to maximize value recovery?

The longer it takes to put a returned product back on the market, the lower the likelihood that there are economically viable reuse options.

Cost minimisation typically leads to slow and centralized returns handling and high product value erosion.


Two types of optimisation model opportunities

Optimise across the key activities for a given type of returns

Optimise across types of returns over the lifecycle of the product

The latter is more important for short life cycle products


Example: operational management for rapid response

Notebooks returns management at HP Europe Returned notebooks refurbished by ODM Fragmented process designed to minimise

refurbishment costs Management did not take into account time

value


Example: price erosion notebooksAverage price erosion laptops

all channels

0 10 20 30 40

Age (months)

Avera

ge p

rice

Quality 1

Quality 2

Price erosion: quality 1: $25 per month

quality 2: $40 per month


Cumulative shipments to and from the ODM over a 10 month period

0

2000

4000

6000

8000

10000A

pr-0

2

May

-02

Jun-

02

Jul-0

2

Aug

-02

Sep

-02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Vol

ume

(cum

ul.)

Sent

Received

LEAD TIME

INVENTORYTHROUGHPUT


Flow diagram for notebook computers

DispositionLow-touch

EMRWarehouse(Refurbished)

High-touchODM

2000 2000

2600

LT = 1.4 m

LT = 1 m

1000

Warehouse(Un-refurbished)

1000

1000

1000

1000

1000

2800

LT = 2.6 m


High-touch refurbishment by the ODM,

assuming the ODM lead time is two months

Supply S1,1 S1,2 S1,3

...

S2,1 S2,2 S2,3

...

S3,1 S3,2 S3,3

...

Month 1 Month 3Month 2

Demand(Quality 1)

D1 D2 D3

ODM

3 4

...

3 4

...

3 4

...

P3

CH

1 2 3

...

1 2 3 1 2 3 ...Un-refurbished

Refurbished

CH

CHT

flows =< Cap

P4 P3 P3P4 P4

IO(i,j)

X(i,j)

O(i,j)

IE(i,j)

R(i,j)

......


The effect of better disposition

INPUT(used products)

ODMrefurbishment

TEST

Low touchrefurbishment

SALES

POLICY TEST a

a-1

Price erosion 1 (same price)

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

alpha

prof

it

ODM LT = 3 m

ODM LT = 2 m

ODM LT = 1 m`


Example: design for rapid response

When should one design product return processes for minimum cost as opposed to minimum time value decay?

What are the major drivers? Queuing model to maximise profit over the

lifecycle of the product


Centralized, “Efficient” Returns Process Design

Re-stock

Remanufacture

PartsRecovery

Scrap

ProductReturns

Retailers &Resellers

Centralized Evaluation & Test Facility


% Loss in Value

Time-sensitiveProduct (High MVT)

Time-insensitive Product (Low MVT)

Time

Differences in Marginal Value of Time for Returns

e.g. PowerTools

e.g. Printers& mobile phones


The value of lead time reduction HP printers (US):

One day reduction between evaluation and remanufacturing $72k

One day reduction between remanufacturing and the secondary market $79k

Bosch Power Tools: One day reduction between evaluation and remanufacturing $11k One day reduction between remanufacturing and the secondary

market $12k


0.0010.002

0.0030.004

value_decay0

5

10

15

return_rate0

100000200000300000

Value

0.0010.002

0.0030.004

value_decay

0.0010.002

0.0030.004

value_decay 50000

100000

150000

200000

250000

P00

200000400000600000

Value

0.0010.002

0.0030.004

value_decay

Value ($) of One–Day Reduction Between Evaluating Facility and Remanufacturing Completion as a Function of

Value Decay Parameter, Return Rate (left), and Product Value (right)


Decentralized reverse supply chain with pre-ponement for fast clock speed industries

Returns

Reseller

Reseller

Reseller

Reseller

Reseller

Scrap

Restock

Test & RepairFacility

Refurbish

Parts Recovery

Evaluation of product at retailer or reseller


f dr

m c

s

2

Factory Distributor Retailer

Customer

ConsumptionScrapSales: secondary market

Returns

Remanufacturing

+(1-p)r

r

pr

+(1-p)r

sr

(1-p-s)r

(1-p-s)r

e

Sales

Preponement Eval.

Process Flow: Decentralized Network with “Preponement”

+r

As p increases

Increased value of “preponement”

Decreased congestion, lower delay cost






Time value


redesign


Roadmap for reverse supply chain redesign

1. Treat returns as a value stream, as opposed to a waste stream.

2. Consider the reverse supply chain from end-to-end. Any sub-process can become a system bottleneck.

3. Identify and develop the right performance metrics and track them systematically.


Roadmap for reverse supply chain redesign

4. Start by constructing simple models based on the right information. Pay particular attention to the economic impact of

time. 5. Use the insights obtained from the models to

fully understand the economic impact of alternative designs and operational policies.

6. Align the organizational structure and the incentives/reward systems.


Where do we go from here? Additional empirical research

Case studies Laboratory and field experiments

Commercial product returns projects Models that take into account the time-value of

product returns (e.g.: demo reuse) Product acquisition models Marketing models (e.g.: cannibalisation) Installed base management

©


For further reading Guide & Van Wassenhove (Eds.), 2003. Business Aspects of

Closed-Loop Supply Chains. Carnegie Mellon University Press Dekker, Fleischmann, Inderfurth & Van Wassenhove (Eds.), 2004.

Reverse Logistics: Quantitative Models for Closed-Loop Supply Chains. Springer-Verlag

Flapper, van Nunen & Van Wassenhove (Eds.), 2005. Managing Closed-Loop Supply Chains. Springer-Verlag

Guide & Van Wassenhove (Eds.), California Management Review Vol. 46 Nr. 2, Winter 2004

Guide & Van Wassenhove (Eds.), Interfaces Vol. 33 Nr. 6, Nov.-Dec. 2003

Guide & Van Wassenhove (Eds.), Production and Operations Management, in-progress.

© 2005 guide & van wassenhove1 closed-loop supply chains: practice and potential v. daniel r....

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