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© 2005 Guide & Van Wassenhove1 Closed-Loop Supply Chains: Practice and Potential V. Daniel R. Guide, Jr.Luk N. Van Wassenhove Pennsylvania State UniversityINSEAD
© 2005 Guide & Van Wassenhove2 Migrant child from Hunan province sits atop one of countless piles of unrecyclable computer waste imported from around the world. Guiyu, China. December Copyright Basel Action Network.
© 2005 Guide & Van Wassenhove3 Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign
© 2005 Guide & Van Wassenhove4 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.
© 2005 Guide & Van Wassenhove5 A closed-loop supply chain
© 2005 Guide & Van Wassenhove6 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)
© 2005 Guide & Van Wassenhove7 Closed-loop supply chains for containers Cartridge reuseSingle-use cameras Characteristics: commodity goods, simple products, high volumes, low variance, non-distinguishable products, OEM controlled, short lead times
© 2005 Guide & Van Wassenhove8 A closed-loop supply chain for photocopiers Characteristics: high variances, stable production technology, limited volumes, modular design, imbalances in supply and demand, cannibalization
© 2005 Guide & Van Wassenhove9 A closed-loop supply chain for commercial tire retreading Characteristics: low variance in returns timing, low variance in quality, easy to sell, intermediate logistics costs
© 2005 Guide & Van Wassenhove10 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
© 2005 Guide & Van Wassenhove11 How hard are these key activities?
© 2005 Guide & Van Wassenhove12 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
© 2005 Guide & Van Wassenhove13 Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign
© 2005 Guide & Van Wassenhove14 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
© 2005 Guide & Van Wassenhove15 A business process approach 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
© 2005 Guide & Van Wassenhove16 A business process approach
© 2005 Guide & Van Wassenhove17 Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign
© 2005 Guide & Van Wassenhove18 Product returns represent a value stream, not just a waste stream
© 2005 Guide & Van Wassenhove19 A simple view on the impact of acquisition price
© 2005 Guide & Van Wassenhove20 EVA calculation
© 2005 Guide & Van Wassenhove21 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
© 2005 Guide & Van Wassenhove22 Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign
© 2005 Guide & Van Wassenhove23 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 Peripherals Mobile Phones Telecommunications Equipment
© 2005 Guide & Van Wassenhove24 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.
© 2005 Guide & Van Wassenhove25 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
© 2005 Guide & Van Wassenhove26 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
© 2005 Guide & Van Wassenhove27 Example: price erosion notebooks Price erosion: quality 1: $25 per month quality 2: $40 per month
© 2005 Guide & Van Wassenhove28 Cumulative shipments to and from the ODM over a 10 month period
© 2005 Guide & Van Wassenhove29 Flow diagram for notebook computers
© 2005 Guide & Van Wassenhove30 High-touch refurbishment by the ODM, assuming the ODM lead time is two months
© 2005 Guide & Van Wassenhove31 The effect of better disposition
© 2005 Guide & Van Wassenhove32 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
© 2005 Guide & Van Wassenhove33 Centralized, Efficient Returns Process Design Re-stock Remanufacture Parts Recovery Scrap Product Returns Retailers & Resellers Centralized Evaluation & Test Facility
© 2005 Guide & Van Wassenhove34 % Loss in Value Time-sensitive Product (High MVT) Time-insensitive Product (Low MVT) Time Differences in Marginal Value of Time for Returns e.g. Power Tools e.g. Printers & mobile phones
© 2005 Guide & Van Wassenhove35 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 $12k
© 2005 Guide & Van Wassenhove36 Value ($) of One–Day Reduction Between Evaluating Facility and Remanufacturing Completion as a Function of Value Decay Parameter, Return Rate (left), and Product Value (right)
© 2005 Guide & Van Wassenhove37 Decentralized reverse supply chain with pre-ponement for fast clock speed industries Returns Reseller Scrap Restock Test & Repair Facility Refurbish Parts Recovery Evaluation of product at retailer or reseller
© 2005 Guide & Van Wassenhove38 f d r m c s 2 FactoryDistributor Retailer Customer Consumption Scrap Sales: secondary market Returns Remanufacturing +(1-p) r r p r +(1-p) r 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
© 2005 Guide & Van Wassenhove39 Presentation outline Definition and examples Business process approach Economic attractiveness Time value Roadmap for reverse supply chain redesign
© 2005 Guide & Van Wassenhove40 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.
© 2005 Guide & Van Wassenhove41 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.
© 2005 Guide & Van Wassenhove42 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 ©
© 2005 Guide & Van Wassenhove43 For further reading Guide & Van Wassenhove (Eds.), Business Aspects of Closed-Loop Supply Chains. Carnegie Mellon University Press Dekker, Fleischmann, Inderfurth & Van Wassenhove (Eds.), Reverse Logistics: Quantitative Models for Closed-Loop Supply Chains. Springer-Verlag Flapper, van Nunen & Van Wassenhove (Eds.), 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 Guide & Van Wassenhove (Eds.), Production and Operations Management, in-progress.
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