Developing a Theory of Reverse Logistics

Shad Dowlatshahi

Division of Business Administration HW Bloch School of Business and Public Administration University of Missouri-Kansas City Kansas City, Missouri 64110-2499

Reverse logistics, a fairly new concept in logistics, has gained increasing importance as a protable and sustainable business strategy. I describe a holistic view of reverse logistics and distill 11 insights for successful implementation of reverse logistics from the existing literature and published case studies. The strategic factors consist of strategic costs, overall quality, customer service, environmental concerns, and legislative concerns. The operational factors consist of cost-benet analysis, transportation, warehousing, supply management, remanufacturing and recycling, and packaging. Insights about these factors together form the state-of-the-art knowledge about the keys to successful design and use of reverse-logistics systems.

everse logistics is a process in which a manufacturer systematically accepts previously shipped products or parts from the point for consumption for possible recycling, remanufacturing, or disposal. A reverse-logistics system incorporates a supply chain that has been redesigned to manage the ow of products or parts destined for remanufacturing, recycling, or disposal and to use re-

sources effectively. Reverse logistics has received a great deal of attention from operations managers and company executives. The issues surrounding functions, channels, differences between forward and reverse operations, cost, and other general information about reverse logistics have been described by Kopicki et al. [1993], Pohlen and Farris [1992], Sarkis [1995], Stock [1992], and Thierry et al. [1995].
TRANSPORTATIONFREIGHT/MATERIALS HANDLING ENVIRONMENT

Copyright 2000 INFORMS 0092-2102/00/3003/0143/$05.00 1526551X electronic ISSN This paper was refereed.

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Reverse logistics is practiced in many industries, including those producing steel, commercial aircraft, computers, automobiles, chemicals, appliances and medical items. Companies that have practiced reverse logistics include BMW, Delphi, DuPont, General Motors, HewlettPackard, Storage Tek, and TRW. Thierry et al. [1995] report that reverse logistics is widely used in the automobile industry. It provides automobile rms with farreaching cost and strategic advantages in a highly competitive industry. BMWs strategic goal is to design a totally reclaimable automobile by the 21st century. Its objective is to recover, recondition, and then reuse all parts [Giuntini and Andel 1995a]. The effective use of reverse logistics can help a rm to compete in its industry, especially when confronting intense competition and low prot margins. For a variety of economic, environmental, or legislative reasons, product disposal may no longer be the consumers responsibility as products come to be recycled or remanufactured by the original manufacturers. Increasingly, stringent environmental and packaging regulations are forcing companies to become more accountable for residual and nal products, long after they sell the products. Fewer products will be disposed of as rms investigate their reusability, remanufacturability, and recyclability. Fewer disposed products can benet companies and the environment [Phelan 1996]. Conceptually, reverse logistics can promote alternate uses of resources that can be cost effective and ecologically friendly by extending products normal life cycles [Melbin 1995]. From design through manufacture to consumer, rms should explore and integrate reverse logistics as a viable business option in the product life cycle. By using reverse logistics, they can achieve the goals of sustainable development. Within reverse logistics, maintaining the environment and making prots are actually complimentary. Reverse logistics focuses on both environmental and economic goals. The effective implementation of reverse logistics does not preclude achieving one goal at the expense of the other. Companies that remanufacture are estimated to save 40 to 60 percent of the cost of manufacturing a completely new product [Cohen 1988; Heeb 1989; Toensmeier 1992; Wilder 1988] while requiring only 20 percent of the effort [Lund 1984; Sturgess 1992]. Reverse logistics provides strategic cost savings unlike traditional quick-x cost-saving methods, such as reducing payrolls through layoffs or purchasing substandard materials. Business entities are evaluated on their productivity and protability. Productivity is measured by the ratio of outputs to inputs. No supply chain can be productive without a systematic process to manage material movement. Reverse logistics can increase a rms productivity and protability by using low-cost, traditionally unused inputs or resources. Inputs generally include materials, managerial and labor expertise, and variable xed overhead. Productivity is measured by the ratio of output (sales volumes or dollars) to inputs. Decreasing inputs (thereby lowering the denominator of the productivity ratio) increases a rms productivity and protability. If a rm uses resources properly,

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they become assets. Their value reects the cost of research and development, product design, manufacturing, purchasing, packaging, and distribution. If these assets follow a cradle-to-grave life cycle, they end up in a landll or incinerator and have a negative effect on the environment and the companys bottom line. In the next generation of logistics, proactive companies must be innovative and integrate all strategic and operational factors in their reverse-logistics systems. Review of Literature Reverse logistics is a fairly new concept in logistics and supply-chain management. Most articles on reverse logistics are in practitioner-related journals, rather than academic journals. I categorized articles related to reverse logistics by topic into ve groups. The rst group of articles address global concepts of reverse logistics. Koepfer [1993] focused on remanufacturing and examined the three options of rebuilding, remanufacturing, and retrotting in a machine tool industry, analyzing the choices among these options regarding machine-tool life cycles. Koepfer concluded that the life cycles of capital-intensive machine tools can be extended through rebuilding, remanufacturing, and retrotting. Krupp [1993] focused on bill-of-material restructurings and discussed the development of bills of material to accommodate the unique challenges of remanufacturing, particularly as they apply to exchange environments in the automotive industry. He highlighted the evolution of such bills within the context of a classical MRP II system. Krupp concluded that sales forecasts need to be adjusted to reect the uncertainty and variety of core returns for both salvaged and new parts. An article published in Transportation and Distribution [1993] focused on environmental issues and stated that as the green movement gathers momentum in Europe, more environmental concerns are affecting logistics. From packaging regulations to customer preferences, environmental issues are contributing to a strong focus on reverse logistics. Environmental concerns, not limited to conducting business in Europe, are affecting reverselogistics trends in North America. Willits and Giuntini [1994] focused on costing and proposed an integrated environmental management system (EMS) that considered a costing system from cradle to grave. They explored the role of an accounting system in generating accurate and relevant cost data in EMS. Companies without EMS are at a competitive disadvantage, and accountants who focus only on liability accounting miss the opportunity of adding value by failing to become involved in EMS. Giuntini and Andel [1995a] discussed various concepts and forms of reverse logistics and described its importance, the trends driving the need for it, and the functional areas involved. Reverse logistics can take several forms. They discussed the roles of pieces or parts and lease versus buy. Although the recovery of impaired material resources can be highly protable, it takes years for an organizational structure to deal effectively with reverse logistics. Giuntini and Andel [1995b], in describing the mechanics of reverse logistics, stated that the management of reverse logistics depends on the successful execution of the six Rs (recognition, recovery, review, renewal, removal,

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and reengineering). Defective inventory should be treated with the same respect and effort given to good on-hand inventory. Reverse logistics is still at its infancy. Melbin [1995], in focusing on transportation networks, stated that companies that establish reverse-logistics systems benet from repeat customers, higher returns on investment, and benets to the environment. AT&T saved $30,000 from a reverselogistics program, as did Roses Stores. Third-party, multiuse, multiclient centers can be used for several companies to consolidate transportation or warehouse functions. Wilmshurst and Newson [1996] addressed packaging legislation by discussing the passage of the EU packaging directive and its effects upon environmental measures and supply-chain costs. A general waste-management priority should be established, in order: minimize, reuse, recycle, incinerate, and landll. Packaging has a signicant impact on logistical processes. The cost of packaging includes not only the impact on logistical productivity but also the cost of purchase and now, increasingly, the cost of disposal. Additional relevant references for global concepts include Barry, Girard, and Perras [1993]; Byrne and Deeb [1993]; Cairncross [1992]; Kopicki et al. [1993]; Kuuva and Airila [1994]; Murphy, Poist, and Braunschwieg [1994]; Stock [1992]; and Thierry et al. [1995]. The literature cited in this section points to the importance of the following factors for an effective implementation of reverselogistics systems: (1) Remanufacturing operations compatible with the current manufacturing processes are needed. It is generally preferable to rely on current and proven manufacturing processes. This eliminates the need to reinvent entirely new remanufacturing processes for reverse logistics. Reverse logistics and the accompanying remanufacturing or recycling operations can pinpoint or identify possible deciencies in current manufacturing operations. Building reverse logistics into the current manufacturing processes is a cost-effective proposal that can ultimately improve both the manufacturing and remanufacturing operations. (2) A costbenets analysis must be performed. (3) An improved or restructured bill of material is essential. (4) Effective management and organizational procedures for dealing with the requirements of reverse logistics must be in place. (5) Transportation modes and networks must be well integrated with the existing transportation systems. (6) The packaging used in reverse logistics should be less costly, easy to handle, and environmentally friendly. The second group of papers address quantitative models. Krupp [1992] focused on simple or variable return models, providing a model for forecasting core obsolescence in remanufacturing environments. Products are supplied in exchange for a right rate of return of products referred to as cores. The actual return of the product occurs after the product sale. Product obsolescence is of great concern in a remanufacturing environment. Krupp develops a complex model that considers out-dated core return. The model includes the comparison of forecast versus actual usage, core returns, and the number of years in a product life cycle. DiMarco, Eubanks, and Ishii [1994] presented a

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clumping model for evaluating the compatibility of product design to end-of-life product retirement issues. By using a clumping model, which groups component parts, rms can make product-lifecycle decisions effectively. Clegg, Williams, and Uzsoy [1995] explored the effects of recycling and remanufacturing on companies operations by presenting linear programming models of production systems. The models examined the longterm viability of remanufacturing operations and short-term operationsmanagement issues. Companies in the electronics industry can use linearprogramming models to analyze the viability of the variety of recovered parts in remanufacturing operations. Shu and Flowers [1995] emphasized remanufacturing as an end-of-life option and considered the effects of fastening and joining methods on remanufacture. They cited three case studies of examples of fastening and joining that facilitate assembly and recycling but impede remanufacturing. The elements of fastening methods prone to failure should be separated from the remainder of the part. Guide, Srivastava, and Spencer [1996] presented a simulation model for rough-cut capacity planning. The remanufacturing environment is a growing segment of the overall environmental green effort. They provide clear evidence that current productionplanning-and-control (PPC) methods are not able to address remanufacturing issues regarding capacity planning. Remanufacturing rms must have accurate and upto-date information on material-recovery rates and routing-operation frequency to cope with uncertainty. New PPC methods need to be developed and implemented to accommodate capacity planning; otherwise chaos may emerge on the shop oor. Additional relevant references pertaining to quantitative models include Fleischmann et al. [1997], Kroon and Vrijens [1995], and Krupp [1992]. These models and techniques, such as cost and linearprogramming models, can be used to improve various aspects of reverse-logistics systems, such as remanufacturing operations, extending product life cycles, and improving product failure rates in the automobile and electronics industries. Publications in the third group address distribution, warehousing, and transportation. White [1994] discussed the signicance of reverse logistics for material handling, especially regarding the protecting dimension. The units of products in reverse logistics can be transported in bulk in specially designed returnable containers. This way, the packaging and packing occur at the ultimate point of sale. The material-handling functions of moving, storing, protecting, and controlling materials will evolve and change as reverselogistics systems are developed. Witt [1995] explored new technologies and efciencies within the supply chain that allow customers to bypass retailers and yet receive quality merchandise and also information and warehouse management in the next decade. Since 55 percent of purchases are expected to be nonstore, information and warehouse technology will change the way all warehousing facilities operate. Andel [1995] discussed how cost-efcient transportation routes can be designated to transport return products for reverselogistics purposes. Consolidating and cen-

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tralizing returns through a third-party provider who offers sorting and dispatching by region can be cost-efcient. Dawe [1995] viewed return management as the best opportunity to differentiate customer service and create a competitive advantage for a rm. The areas most in need of reengineering were the return process and warehousing operations. On-site product inspection can reduce the cycle time of a typical return process from 125 days to seven days. This concept, however, might be impractical for some operations. Young [1996] described the closed-loop reverselogistics-system chain responsible for the disposal or use or reuse of the products from initial distribution to the nal disposition of the products. In exploring the role of distribution, Young saw a more important function for distributors with regard to managing trucking costs, waste removal, physical-handling methods, and warehousing and receiving functions. Additional relevant references pertaining to distribution, warehousing, and transportation include Zikmund and Stanton [1971]; Fuller [1978]; Murphy [1986]; Pohlen and Farris [1992]; Stock [1992]; Jahre [1995]; Kroon and Vrijens [1995]; and Fuller, Allen, and Glaser [1996]. The literature cited in this section points to the importance of distribution, warehousing, material handling, routing, and managing the ow of data regarding returned items in reverse-logistics systems. Although these areas add little value to a companys operations, they are important and involve signicant cost and time, neither of which should be ignored in any well-implemented reverse-logistics system. These authors discuss changes in technology, distribution, warehousing, transportation, and material-handling operations that are evolving as a result of the introduction of reverse-logistics systems in organizations. The fourth group concerns company proles. Russell [1993] emphasized the fundamentals of JIT manufacturing as it pertains to remanufacturing in a high-tech corporation. Remanufacturing resulted in substantial cost savings at Storage Tek. Heing [1995] described belt-worn electronic systems at TRW that are capable of voice data recognition, and bar-coding acceptance in the automotive industry, which is characterized by unknown part quantities and conditions from known customers. Using such technology as barcoding and voice-recognition systems can expedite the process of retrieving and handling the after-sales parts in automotiveparts-remanufacturing operations. Giuntini and Andel [1995c] proled organizations from the steel, personalcomputer, and commercial-aircraft manufacturing industries. The results showed extended product life cycles, material cost reduction, lower customer price, and improved equipment reliability. Phelan [1996] stated that DuPonts commitment to waste reduction created new markets, new products, and greater prot margins for the company. Innovations driven by reverse logistics and waste removal can lead to new markets and new products. In another paper on company proles, Thierry et al. [1995] outline the productrecovery efforts of a large number of companies, including 3M, Aurora, BMW, Chrysler, DEC, Ford, General Motors, IBM UK, IBM, Mercedes-Benz, Opel, Peugeot-

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Talbot, Philips, Shape, Volkswagen, Xerox, and an unidentied multinational copier manufacturer. EPA [1997] reported on a number of rms successfully engaged in recoverable manufacturing, including Union Carbide and Xerox for toner cartridges, and Ofce Plan Inc. and Miller SQA for ofce furniture. Deere and Company [1998] reported on the sales of remanufacturing products, which exceeded $2.5 billion in 1996. The literature in this group shows that some manufacturing concepts and technologies, such as JIT manufacturing, inventory reduction, waste removal, voice recognition, and bar coding, can contribute to effective and efcient implementation of reverse-logistics systems in some companies. The fth group addresses applications. By using current literature and interviews with government agencies, Pohlen and Farris [1992] developed the foundation for a framework of reverse-logistics channels for recycling. Greater coordination and better communication are needed to improve the exibility of reverse-logistics systems. Differing product characteristics, extensive handling, and low-density shipments pose obstacles to efcient channels for recycling. Webb [1994] discussed a paper-products-recycling company that used environmentally sound raw materials and minimized adverse environmental impact by developing detailed environmental proles of suppliers. Kroon and Vrijens [1995] examined the use of returnable containers as an example of reverse logistics. They developed a ve-party return system with specic application to a reverse-logistics system in the Netherlands. Additional publications pertaining to applications are those of Byrne and Deeb [1993], Fuller [1978], Kroon and Vrijens [1995], Melbin [1995], Thierry et al. [1995], and Wheeler [1992]. The literature in this group shows that reverse logistics can be applied to a variety of products that contain plastics, papers, metals, and other materials. An overview of all literature cited indicates the following points: The conceptual, quantitative, and application-case-based articles do not provide an extensive treatment of reverselogistics topics. The majority of articles are short and lack the depth to demonstrate the level of integration necessary to implement reverse logistics across various functional areas. Most authors assume prior, comprehensive understanding of the structure of a reverse-logistics system and do not describe the basic structure of a reverselogistics system. Most authors do not dene the basic concepts and terms. Most of the literature is practitioner-oriented. I address those aspects and factors of reverse logistics that are largely ignored in the literature. The Components of Reverse-Logistics Systems Carter and Ellram [1998] pointed out a lack of theoretically grounded and holistic views of reverse logistics, with most writings descriptive and anecdotal. Developing a theory requires both a strategic component and an operational component. To develop a reverse-logistics theory, I used factors and insights from the literature for each component. The mainstream nonaca-

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demic literature contains accounts of personal experiences, cases, and experiments useful in developing a theory. Strategic Factors in Reverse-Logistics Systems Strategic factors consist of strategic costs, overall quality, customer service, environmental concerns, and legislative concerns. They are critical and must be considered before operational factors. Strategic costs include life-cycle and performance costs but not purchasing and manufacturing costs. Minimizing strategic costs depends on effective utilization of current resources, methods, and technologies, which is essential for a successful reverse-logistics system [Fuller 1978; Kopicki et al. 1993; Kuuva and Airila 1994; Stock 1992; Thierry et. al 1995; Willits and Giuntini 1994]. Much of the investment in a reverselogistics system should be for improving long-term return on investment (ROI) to protect the stockholders interest. Strategic costs can include the costs of equipment for remanufacturing products, the costs for qualied workers to run the reverselogistics system, and the costs of additional warehouse facilities. Managers should ensure full utilization of current equipment, labor, and facilities to minimize the total cost of a reverse-logistics system. To use current resources for reverse-logistics operations, the remanufactured products must be compatible with the overall product strategy of the rm. Remanufactured products should be of the same high quality as the corresponding virgin products [Carter and Ellram 1998; Stock 1992; Thierry et al. 1995]. Customers usually expect consistent quality from a manufacturer regardless of the nature of the product. Poor quality remanufactured products can adversely affect a rms reputation and its overall sales. Identifying and fullling customerservice requirements is essential [Andel 1995; Byrne and Deeb 1993; Dawe 1995; Fuller 1978; Ginter and Starling 1978; Giuntini and Andel 1995b, 1995c; Kopicki et al. 1993, Murphy 1986; Stock 1992; Witt 1995; Zikmund and Stanton 1971]. This strategic factor of the reverse-logistics system should reect the basic logistics rule of right time, right place, right price, and right quantity. Recent shifts in consumer awareness have increased the strategic importance of capitalizing on noneconomic aspects of customer service, such as JIT deliveries and postsale service and repairs. Communities and customers are demanding that manufacturers take responsibility for the environmental impacts of their products. Taking environmental concerns into account in reverse logistics can lead to cost savings and environmental improvements because reverse-logistics systems retrieve resources that would not otherwise be used [Byrne and Deeb 1993; Carter and Ellram 1998; Kopicki et al. 1993; Kroon and Vrijens 1995; Kuuva and Airila 1994; Lockamy 1995; Melbin 1995; Monczka and Trent 1995; Sarkis 1995; Stock 1992; Thierry et al. 1995; Webb 1994; Wheeler 1992; Willits and Giuntini 1994; Zikmund and Stanton 1971]. On the other hand, such systems have costs, such as landll charges and transportation to approved disposal facilities. Consumers may be willing to pay more for products that benet their communities and the

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environment. Legislative actions are important factors. Companies can use reverse logistics to comply with existing and possible future legislation [Byrne and Deeb 1993; Carter and Ellram 1998; Fuller 1978; Ginter and Starling 1978; Kopicki et al. 1993; Sarkis 1995; Stock 1992; Thierry et al. 1995; Webb 1994; Wheeler 1992; Zikmund and Stanton 1971]. One inuential piece of legislation is the European Unions (EUs) packaging directive, signed into effect in 1994, which established packaging regulations for the European market. Firms competing in the market must meet the guidelines for the content of recycled or recyclable materials and avoid such substances as CFC and asbestos. Once a rm has considered and addressed these important strategic issues, it can focus on operational factors at the tactical level of reverse logistics. Operational Factors in Reverse-Logistics Systems Figure 1 shows the operational factors of reverse-logistics systems: cost-benet analysis, transportation, warehousing, supply management, remanufacturing and recycling, and packaging. Although the operational factors are not of equal importance in all organizations, rms should consider all seven operational factors, weighing them according to their importance. Customers, the external force, drive the reverse-logistics system depending on who they are, their needs, and their willingness to support reverse logistics. Firms must consider two issues: (1) the specic features (quality, reliability, delivery) customers want or expect from remanufactured or recycled products, and (2) customer education regarding the potential economic and noneconomic benets of re-

Figure 1: The operational factors of the reverse-logistics system consist of one external factor (the customer) and six internal factors. Each factor is further subdivided into two components.

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verse logistics. Through its costing system, the rm should establish the cost-and-benets structure for its reverse-logistics system so that it can appraise the value of returned materials, the costs of remanufacturing processes, and the overall costs and benets of remanufactured or recycled products. It should consider operational costs and landll and contingent liability costs [Fuller 1978; Ginter and Starling 1978; Giuntini and Andel 1995a; Kuuva and Airila 1994; Pohlen and Farris 1992; Russell 1993; Stock 1992; Willits and Giuntini 1994; Wilmshurst and Newson 1996; Zikmund and Stanton 1971]. In assessing disposal or landll costs, the rm may need to compare the cost of disposal with the savings (or loss) of running remanufacturing or recycling operations inhouse to choose the better alternative. In disposing of waste, the rm must consider its contingent liability, the costs associated with its long-term responsibility for landll waste and pollution. Firms must coordinate their reverselogistics activities with transportation modes, inbound and outbound transportation services, loads, networks, and resources to obtain the greatest benets [Andel 1995; Kroon and Vrijens 1995; Stock 1992; Thierry et al. 1995: White 1994; Young 1996; Zikmund and Stanton 1971]. The rm should use intermodal transport for transporting returned products for remanufacturing. Murphy [1986] stated that most rms relied on truck transportation in reverse logistics. In routing, the rm must also consider the number of customers, their locations, delivery or pickup schedules, and the criticality of the returned products or parts for the remanufacturing process. It should also consider the possibility of consolidating freight for low and high volume-to-weight-ratio products or parts within returned products or parts and between returned and regular products or parts. In considering the costs of warehousing, the rm must assess the requirements of returned and outgoing products or parts for storage space, material-handling procedures, and carrying costs [Andel 1995; Dawe 1995; Stock 1992; Thierry et al. 1995; Witt 1995; Young 1996]. Firms can warehouse returned products or parts themselves or lease space. Murphy [1986] stated that private warehousing was popular for reverse logistics because of its convenience and reliability. The rm must consider such storage issues as space availability and cost and capital investments in equipment, labor, and methods. It must also consider warehousing operations, that is materials-management activities, such as inventory, trafc, physical counting, control, coordination, material handling, and scheduling. Supply management in reverse logistics concerns the reuse of the parts and materials of returned products to reduce the use and costs of raw materials [Clegg et al. 1995; DiMarco, Eubanks, and Ishii 1994; Herberling and Graham 1993; Kuuva and Airila 1994; Sarkis 1995; Stock 1992; Thierry et al. 1995; Wheeler 1992]. A rm can restructure the bill of material to manage the ow of products or parts for redesigned products. The rm must manage the disposal of the obsolescent returned materials that cannot be used. Remanufacturing or recycling is at the

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heart of reverse logistics. A rms use of current manufacturing processes, standardized components, and design for remanufacturability or reassembly largely determines its success with reverse logistics [Clegg et al. 1995; DiMarco, Eubanks and Ishii 1994; Ginter and Starling 1978; Giuntini and Andel 1995a; Krupp 1993; Russell 1993; Sarkis 1995; Shu and Flowers 1995; Thierry et al. 1995]. The rm must consider whether its current manufacturing processes and operations, capabilities, and technology are suitable for remanufacturing. It must be efcient and able to produce quality remanufactured products. In designing for remanufacturability or reassembly, the rm must achieve an economic product that facilitates remanufacturing and reassembly operations. Packaging is a marketing tool that creates or enhances the products image and provides product information and promotion. It is also an element in the products overall cost, its ease of use, and customer perception. Packaging also protects the product from breakage and spillage. A reverse-logistics system should provide packaging that serves these purposes but reduces materials, costs, and transport requirements [Andel 1996; Byrne and Deeb 1993; Cooke 1992; Giuntini and Andel 1995b, 1995c; Hastings 1993; Kopicki et al. 1993; Kroon and Vrijens 1995; Lockamy 1995; Stock 1992; White 1994; Wilmhurst and Newson 1996; Zikmund and Stanton 1971]. Although operational factors differ in importance depending on the nature of remanufacturing operations, customer requirements, and the manufacturers internal resources and capabilities, I chose these seven operational factors because they were comprehensive, relevant, and interrelated. I have identied two broad categories of factors essential for effective implementation of reverse logistics. A holistic view of reverse logistics is essential for a protable and sustained business strategy. The insights I developed can be framed as testable hypotheses. These hypotheses constitute a theory of reverse logistics that can be compared to the practices of a company or group of companies to determine its generalizability and applicability. References
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