The reverse supply chain function has filled an important role for manufacturers to control the flow of product returns back through the distribution channel. This function has become even more important in the technology space where the stakes are high, as grueling competition and razor-thin margins have already driven companies to squeeze every last dollar out of the manufacturing process. As these companies search for new ways to reduce their operating expense, many technology manufacturers still find themselves grappling with stubborn inefficiencies embedded within their reverse supply chain.
It is estimated that 70% to 85% of products returned through this channel have what is known as no trouble found (NTF), where materials are returned for reasons other than a product defect. However, amongst the advanced processes prevalent in today's supply chain, which are primarily designed to minimize costs, there is not a well-defined focus on the timely repair, warranty evaluation, remarketing and intelligently reintroducing product back into the service supply chain.
With the Aberdeen Group estimating that high-tech organizations spend approximately 8% of revenues on reverse logistics activities, there are new opportunities and techniques to intelligently manage product returns and reintroduce materials that pass a stringent testing and screening evaluation, back into the service supply chain. This process can not only introduce new cost saving opportunities throughout all levels of the supply chain, but also generate new revenue opportunities that can streamline the overall management of the reverse supply chain function.
In a reverse supply chain model, materials that are sold through the forward supply chain are received back at the point of purchase as "returns" for a number of reasons including wrong item, color, style, price, user issues, buyer remorse, defective product, etc. Materials received are then forced back through the forward supply chain channel to the manufacturer through their existing distribution network. In many instances, materials are accumulated at a processing center until a quantity large enough for cost effective processing is achieved. This accumulation could take place over several weeks to several months and is not the primary focus of the product support teams.
With the average technology-based product life cycle measured in months, this method of accumulating product is very inefficient. With existing processes designed to save costs, the returned materials quickly lose potential value the longer they sit in storage waiting to be processed. In many instances, these materials are never screened to save costs. Because returns are the necessary evil of the supply chain, materials are usually sent directly for recycling to recover a small percentage of their original cost through the recovery of intrinsic value or base materials, typically by weight. This inefficient method not only fails to reuse materials with NTF - an essential part of recycling, but loses the ability to process manufacturer warranty claims for full value recovery for defective materials.
It is estimated that more than half of technology firms use a warranty claim processing system. However, these systems are primarily used for materials identified as substandard in the forward supply chain. In most instances, materials that are received through the reverse supply chain remain under ODM warranty but lose precious processing time sitting idle in warehouse depots. The end result is the expiration of warranty periods and the value of components dramatically decline.
Another area of the reverse supply chain where inefficiency is the most prevalent is found in the service supply function, where field support and product returns are one of the most difficult reverse supply chain operations to streamline. Not only is an adequate inventory of replacement components needed to support these service repair calls, but the improper processing of materials returned back to the service depot from field technicians can cost organizations millions each year. In this area, delays, shipping charges, warranty claims and administrative overhead cost drive the inefficiencies upward as material scrap and inventory management drain valuable resources.
Consider a typical scenario: A customer contacts the manufacturer, distributor or retailer for a warranty claim on their computer. The company dispatches a field service technician to diagnose a potential memory problem with the users system. Components are pulled from service spare inventory and the field support representative arrives at the customer's business or residence with a service kit containing replacement components to troubleshoot the reported problem.
For service calls, time is money and there's not much time for troubleshooting. In most instances, it's less expensive to simply replace suspect parts than to take the time to diagnose the problem. In this example, the customer's problem may have been caused by one bad memory module out of a possible four found on the computer's motherboard. For a typical service call, all four modules would be replaced and the customer's problem would be solved. Off goes the technician to the next service call.
This scenario doesn't just happen with on-site service calls. Many repair depots employ the same philosophy that time is money and it is easier to replace parts than troubleshoot specific issues.
This is where the inefficiencies of service supply become apparent. Of the four memory modules replaced in our example, three were still in good working order with one possible defective module. Perhaps this module is still under ODM warranty? However, these components are collected and combined with other materials replaced during service calls attended during the week. This is where this situation gets worse. Materials are then shipped back to the service depot were materials are aggregated; a combination of possible NTF, defective components and scrap materials are mixed. For many organizations, these materials are typically sent directly to recycling after sitting for months in storage.
What is astounding is the percentage of returned components that have NTF whatsoever. These no-fault-found rates can be as high as 77% for some components. In fact, about 40% of products that come back from the field as defective are, in fact, in perfectly good working order*.
Implementing a uniform testing and screening inspection process to review materials received through the reverse service supply chain for no-trouble found (NTF), no-fault found (NFF) and potential warranty returns can recover lost bottom-line revenue while removing fully functioning materials from the waste stream. A typical win-win scenario. And, to maximize the return velocity, materials should be sorted, inspected and tested on an ongoing basis to manufacturer specifications to determine if value can be recovered through warranty credits, intelligent redeployment into the service supply chain or remarketing in the secondary market.
If a defective module is found during testing, it should be checked against the warranty status and, if covered, returned to the ODM. By pre-screening materials sent for warranty, any out-of-warranty components or in-warranty CID (customer-induced damage) components that may inadvertently be shipped to the manufacturer only to be denied coverage are removed. This process eliminates the liability for all parties that incur shipping, handling and administrative costs as well as delays for a product that may have no effective value.
And this process can benefit multiple service support groups within an OEM. Through vendor managed inventory programs (VMI) for the service supply chain, third party experts can manage the testing and screening process and fulfill inventory request across multiple departments for service spares. This eliminates the need and cost to procure new components by utilizing materials returned through multiple reverse supply channels.
Implementing a dynamic reverse supply chain model that can efficiently process customer or field service returns in a timely manner, utilizing a stringent testing and screening process, can realize immediate cost savings through the recovery of NTF components and warranty claims. Also, by intelligently redeploying NTF materials back into their service supply chain, manufacturers can harness additional efficiencies through cost reductions from procuring inventory from outside sources and revenue produced from remarketing materials no longer needed.
The reverse supply chain offers a "green field" of opportunities that are only just beginning to be explored by even the largest OEMs both domestically and on a global scale. With current business conditions driving the need to cut costs and increase operational efficiencies, you may want to look no further than your current reverse supply chain process. You may be glad you did.
*Converge has found that of materials tested, we've tracked a 40% NTF on hard drives, 64% NTF rate on memory and a 70% NTF rate for CPUs.
It is estimated that 70% to 85% of products returned through this channel have what is known as no trouble found (NTF), where materials are returned for reasons other than a product defect. However, amongst the advanced processes prevalent in today's supply chain, which are primarily designed to minimize costs, there is not a well-defined focus on the timely repair, warranty evaluation, remarketing and intelligently reintroducing product back into the service supply chain.
With the Aberdeen Group estimating that high-tech organizations spend approximately 8% of revenues on reverse logistics activities, there are new opportunities and techniques to intelligently manage product returns and reintroduce materials that pass a stringent testing and screening evaluation, back into the service supply chain. This process can not only introduce new cost saving opportunities throughout all levels of the supply chain, but also generate new revenue opportunities that can streamline the overall management of the reverse supply chain function.
Supply Chain Deep Dive
So what exactly is a reverse supply chain? In order to recognize potential inefficiencies as well as new revenue opportunities, we must first understand the flow of products and the steps associated with an average supply chain model. In a typical forward supply chain, raw materials are procured from many different sources (original design manufacturers (ODMs), inventory, spot market, etc), assembled at a manufacturing facility and distributed to customers, retailers, resellers and wholesalers for final sale. The forward supply chain is straightforward and has been the focus of many innovations and cost saving measures in the high technology industry.In a reverse supply chain model, materials that are sold through the forward supply chain are received back at the point of purchase as "returns" for a number of reasons including wrong item, color, style, price, user issues, buyer remorse, defective product, etc. Materials received are then forced back through the forward supply chain channel to the manufacturer through their existing distribution network. In many instances, materials are accumulated at a processing center until a quantity large enough for cost effective processing is achieved. This accumulation could take place over several weeks to several months and is not the primary focus of the product support teams.
With the average technology-based product life cycle measured in months, this method of accumulating product is very inefficient. With existing processes designed to save costs, the returned materials quickly lose potential value the longer they sit in storage waiting to be processed. In many instances, these materials are never screened to save costs. Because returns are the necessary evil of the supply chain, materials are usually sent directly for recycling to recover a small percentage of their original cost through the recovery of intrinsic value or base materials, typically by weight. This inefficient method not only fails to reuse materials with NTF - an essential part of recycling, but loses the ability to process manufacturer warranty claims for full value recovery for defective materials.
It is estimated that more than half of technology firms use a warranty claim processing system. However, these systems are primarily used for materials identified as substandard in the forward supply chain. In most instances, materials that are received through the reverse supply chain remain under ODM warranty but lose precious processing time sitting idle in warehouse depots. The end result is the expiration of warranty periods and the value of components dramatically decline.
Another area of the reverse supply chain where inefficiency is the most prevalent is found in the service supply function, where field support and product returns are one of the most difficult reverse supply chain operations to streamline. Not only is an adequate inventory of replacement components needed to support these service repair calls, but the improper processing of materials returned back to the service depot from field technicians can cost organizations millions each year. In this area, delays, shipping charges, warranty claims and administrative overhead cost drive the inefficiencies upward as material scrap and inventory management drain valuable resources.
Intelligent Redeployment
So where are the greatest opportunities to improve operational efficiencies?Consider a typical scenario: A customer contacts the manufacturer, distributor or retailer for a warranty claim on their computer. The company dispatches a field service technician to diagnose a potential memory problem with the users system. Components are pulled from service spare inventory and the field support representative arrives at the customer's business or residence with a service kit containing replacement components to troubleshoot the reported problem.
For service calls, time is money and there's not much time for troubleshooting. In most instances, it's less expensive to simply replace suspect parts than to take the time to diagnose the problem. In this example, the customer's problem may have been caused by one bad memory module out of a possible four found on the computer's motherboard. For a typical service call, all four modules would be replaced and the customer's problem would be solved. Off goes the technician to the next service call.
This scenario doesn't just happen with on-site service calls. Many repair depots employ the same philosophy that time is money and it is easier to replace parts than troubleshoot specific issues.
This is where the inefficiencies of service supply become apparent. Of the four memory modules replaced in our example, three were still in good working order with one possible defective module. Perhaps this module is still under ODM warranty? However, these components are collected and combined with other materials replaced during service calls attended during the week. This is where this situation gets worse. Materials are then shipped back to the service depot were materials are aggregated; a combination of possible NTF, defective components and scrap materials are mixed. For many organizations, these materials are typically sent directly to recycling after sitting for months in storage.
What is astounding is the percentage of returned components that have NTF whatsoever. These no-fault-found rates can be as high as 77% for some components. In fact, about 40% of products that come back from the field as defective are, in fact, in perfectly good working order*.
Implementing a uniform testing and screening inspection process to review materials received through the reverse service supply chain for no-trouble found (NTF), no-fault found (NFF) and potential warranty returns can recover lost bottom-line revenue while removing fully functioning materials from the waste stream. A typical win-win scenario. And, to maximize the return velocity, materials should be sorted, inspected and tested on an ongoing basis to manufacturer specifications to determine if value can be recovered through warranty credits, intelligent redeployment into the service supply chain or remarketing in the secondary market.
If a defective module is found during testing, it should be checked against the warranty status and, if covered, returned to the ODM. By pre-screening materials sent for warranty, any out-of-warranty components or in-warranty CID (customer-induced damage) components that may inadvertently be shipped to the manufacturer only to be denied coverage are removed. This process eliminates the liability for all parties that incur shipping, handling and administrative costs as well as delays for a product that may have no effective value.
Inventory Cost Reduction
Testing and screening of returned components enables NTF materials, which meet strict manufacturer specifications, to be returned back into the service parts supply channel for reuse. In turn, this process enables material currently owned by the company and received through their reverse supply chain to be removed from the waste stream and utilized to fulfill service part demand. This process also eliminates the need to purchase new components exclusively from the procurement channel - to maintain a specific days-on-hand supply, thus dramatically reducing inventory acquisition costs as well as scrap disposition expenses.And this process can benefit multiple service support groups within an OEM. Through vendor managed inventory programs (VMI) for the service supply chain, third party experts can manage the testing and screening process and fulfill inventory request across multiple departments for service spares. This eliminates the need and cost to procure new components by utilizing materials returned through multiple reverse supply channels.
Generate Bottom Line Revenue
Components that pass the stringent testing and screening process and are not required for service parts inventory can be sold on the secondary market. This channel allows excess service supply inventory not required to generate a new revenue stream through remarketing. Depending upon the type of components and market demand, this channel can not only balance the cost for the testing and screening process, but can return millions of dollars in revenue back to the company's bottom line.Finding the right partners
Very few manufacturers are inclined to invest in a dedicated department or a specific group of individuals to manage this process. To take advantage of the efficiencies discussed, it is recommended to adopt an outsourced model that leverages the expertise of a reverse supply chain partner. A reverse supply chain specialist will have the processes and procedures in place to implement a full scale recovery option suited to meet your organizations individual needs. It is strongly recommend not to "home-grow" or partner with a "first-timer" as the processes and best practice models that come with experience will enhance your total recovery value and experience.Summary
For technology-driven companies, years of process refinement and cost controls have made the assignment of squeezing additional efficiencies and further cost savings from the forward supply chain a daunting task. However, the reverse supply chain remains an unexplored process that offers many opportunities for companies to reduce their operational costs and realize efficiencies that can dramatically affect their bottom line.Implementing a dynamic reverse supply chain model that can efficiently process customer or field service returns in a timely manner, utilizing a stringent testing and screening process, can realize immediate cost savings through the recovery of NTF components and warranty claims. Also, by intelligently redeploying NTF materials back into their service supply chain, manufacturers can harness additional efficiencies through cost reductions from procuring inventory from outside sources and revenue produced from remarketing materials no longer needed.
The reverse supply chain offers a "green field" of opportunities that are only just beginning to be explored by even the largest OEMs both domestically and on a global scale. With current business conditions driving the need to cut costs and increase operational efficiencies, you may want to look no further than your current reverse supply chain process. You may be glad you did.
*Converge has found that of materials tested, we've tracked a 40% NTF on hard drives, 64% NTF rate on memory and a 70% NTF rate for CPUs.
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