Quantitative Models for Reverse Logistics

In a world of finite resources and disposal capacities, recovery of used products and materials is key to supporting a growing population at an increasing level of consumption. As waste reduction is becoming a major concern in industrialised countries a concept of material cycles is gradually replacing a ‘one way’ perception of economy. Increasingly, customers expect companies to minimise the environmental impact of their products and processes. Moreover, legislation extending producers’ responsibility has become an important element of public environmental policy. Several countries, in particular in Europe, have introduced environmental legislation charging manufacturers with responsibility for the whole lifecycle of their products. Take-back and recovery obligations have been enacted or are underway for a number of product categories including electronic equipment in the European Union and in Japan, cars in the European Union and in Taiwan, and packaging material in Germany. At the same time, companies are recognising opportunities for combining environmental stewardship with plain financial benefits, brought about by production cost savings and access to new market segments. In this vein, the past decade has seen an explosive growth of product recovery activities both in scope and scale.

To highlight the importance of Reverse Logistics in today’s business environments and to illustrate emerging issues we discuss an exemplary case in some detail. For this purpose, this chapter considers the Reverse Logistics activities of IBM, one of the major players in the electronics business. At the same time, this sector is one of the most prominent in the recent Reverse Logistics developments. High market volumes, short product life-cycles, and technical feasibility of electronic component reuse due to the absence of ‘wear and tear’, in contrast to mechanical components, result in a vast product recovery potential. Moreover, disposal of electronic equipment is increasingly being restricted in many countries (see e.g. VROM, 2000).

The objective of this chapter is to lay out a structure of Reverse Logistics serving as a point of reference in the remainder of our investigation. Section 3.1 discusses major dimensions of the Reverse Logistics context, namely drivers, actors, dispositioning options, and cycle times. Based on these aspects, Section 3.2 characterises different categories of Reverse Logistics flows. Section 3.3 concludes the chapter with a literature review complementing the field of our investigation.

Transportation of used or returned goods is probably the most salient issue in Reverse Logistics. Products need to be physically moved from the former user to a point of future exploitation or from the buyer back to the sender. In many cases transportation costs largely influence economic viability of product recovery. At the same time, it is the requirement of additional transportation that is often conflicting with the environmental benefits of product take-back and recovery. Therefore, careful design and control of adequate transportation systems is crucial in Reverse Logistics.

This chapter is concerned with quantitative decision models for an efficient design of logistics networks in a product recovery context. We start by reviewing literature in Section 5.1. Based on the characteristics identified in the previous chapter we then present a generic recovery network model in Section 5.2 and discuss its generality and limitations. Section 5.3 illustrates the model by means of two numerical examples. In particular, the impact of product return flows on the network design is highlighted. Section 5.4 presents a more systematic sensitivity analysis and investigates factors that determine network robustness. Finally, a number of model extensions is discussed in Section 5.5.

The past two chapters have addressed distribution management in a Reverse Logistics context. In particular, logistics network design issues. have been analysed. A review of ten recent case studies has illustrated that many companies are concerned with setting up logistics infrastructures for the recovery of used products. Moreover, the available business examples have been shown to be rather similar both in their scope and in the overall network structure. In all cases the recoverer considers goods flows beginning with the collection of used products and ending with the distribution of recovered products. Intermediate activities include inspection and separation, re-processing, and disposal steps. The typical logistics network structure encompasses a convergent collection part, a divergent distribution part, and an intermediate part related with the specific recovery processing steps. In particular, these networks encompass both ‘reverse’ and ‘forward’ flows and hence show Reverse Logistics to be a subset of a company’s overall logistics task.

As explained in Chapter 1 this part of the book is dedicated to inventory management issues in Reverse Logistics. Complementing the spatial considerations addressed in the preceding chapters inventory management is concerned with the temporal co-ordination of subsequent business processes and, eventually, between supply and demand. Inventory management has been investigated in much detail during the past fifty years. Different reasons for stock-keeping have been distinguished, such as lotsizing stock, safety stock, and seasonal stock. Corresponding management issues that have been addressed include determination of process decoupling points, optimal order policies, and expected stock levels. Countless quantitative models have been proposed for inventory management including, in particular, numerous classes of deterministic and stochastic inventory control models. We refer to Silver et al. (1998) for a detailed discussion of inventory management. Recent developments in supply chain management have led to an increasing effort to reduce inventory levels on a global scale. Just-in-time philosophies and vendor-managed-inventories are some of the concepts pointing in this direction (compare Tayur et al., 1998).

As revealed in the previous chapter, one of the major distinguishing characteristics of inventory control in a Reverse Logistics context is the need for integrating a largely exogenously determined goods inflow. In this chapter we address this issue in more detail and quantify the impact of inbound goods flows on inventory dynamics and appropriate control strategies. For the sake of focus we start from a basic situation allowing for a detailed analysis. Subsequently, potential extensions and limitations of this approach are discussed. As with many of the models discussed in the previous chapter, we therefore aggregate the two inventory types distinguished in the framework of Figure 6.1 into a single stock point. Moreover, we assume demand and returns to be independent. Finally, we do not include a disposal option, hence procurement is the only means to control the system. One may view this setup as the common core of the models discussed in Chapter 6. Our goal is to identify appropriate decision rules in the above setting and to investigate the impact of the return flow on the system’s performance.

Another major characteristic of inventory systems in a Reverse Logistics context as identified in Chapter 6 concerns the presence of multiple, alternative supply sources, namely recovery of used products versus procurement of new ones. In the previous chapter we assumed that the goods return flow directly affects the serviceable inventory and cannot be influenced. Therefore, procurement orders have, in fact, been the only means to control the system. Let us now turn to a more detailed picture of the inbound channel where the recovery of returned products is also a decision variable (see Figure 6.1). To this end, we assume that returned products are collected in a distinct inventory upon arrival. The serviceable stock can then be replenished alternatively by means of procurement or by processing recoverable stock. In addition to lotsizing and safety stock considerations the choice between both sources then becomes an important issue in achieving efficient system performance.

The past three chapters have addressed inventory management in a Reverse Logistics context. Several business examples have illustrated the issues that companies face as they incorporate flows of secondary resources in their material management. Comparing these scenarios with traditional inventory management situations, two main aspects appear to give rise to additional complexity. On the one hand, one needs to incorporate exogenous inbound goods flows, which may raise stocklevels. On the other hand, multiple alternative supply sources need to be coordinated, namely the recovery of returned goods and the procurement of new ones. A special class of examples of recoverable inventory management that has been around for a long time concerns rotable spare parts systems. However, more recent examples involving end-of- use product returns appear to be significantly different in that inbound and outbound flows do not form a closed loop where every return triggers an immediate demand for a replacement. Therefore, efficient inventory management in a Reverse Logistics environment has been shown to require novel approaches.

In this chapter we return to the business example of IBM. For the general context of IBM’s Reverse Logistics activities we refer to Chapter 2. Now focus is on the integration of returned used equipment into the spare parts management more specifically. Applying conclusions from the previous chapters we propose a systematic logistics concept for this channel. The material presented in this chapter summarises the results of a joint study in co-operation with IBM’s spare parts logistics division in Amsterdam.

We have begun our investigation in Chapter 1 by pointing out that goods flows in today’s business environments are no longer unidirectional. Rather than following a clearly ordered hierarchy, supply chain members form general networks and the corresponding goods flows involve loops. Goods flows. opposite to the traditional supply chain direction becoming increasingly important has given rise to the notion of 'Reverse Logistics'. In Chapter 3 we have indicated several categories of such 'reverse' flows. Although including traditional elements such as warranty returns and by-product recycling the recent interest in Reverse Logistics is mainly driven by the growing importance of used product and commercial returns. Throughout this monograph we have illustrated the relevance of reverse goods flows to companies' business activities by giving numerous examples stretching from copier remanufacturing to carpet recycling and from single-use cameras to reusable packaging. In particular, we have taken a closer look at return flow management at IBM, which we have seen to include used equipment recovery on the product, component, and material level. To round up our investigation we now return to the research questions formulated in Chapter 1.