DESIGN PRINCIPLES FOR CLOSED LOOP SUPPLY CHAINS:
OPTIMIZING ECONOMIC, LOGISTIC AND ENVIRONMENTAL
PERFORMANCE
HAROLD KRIKKE, COSTAS P. PAPPIS, GIANNIS T. TSOULFAS AND
JACQUELINE BLOEMHOF-RUWAARD
ERIM REPORT SERIES RESEARCH IN MANAGEMENT
ERIM Report Series reference number
ERS-2001-62-LIS
Publication
October 2001
Number of pages
14
Email address corresponding author
hkrikke@fbk.eur.nl
Address
Erasmus Research Institute of Management (ERIM)
Rotterdam School of Management / Faculteit Bedrijfskunde
Erasmus Universiteit Rotterdam
P.O. Box 1738
3000 DR Rotterdam, The Netherlands
Phone:
+31 10 408 1182
Fax:
+31 10 408 9640
Email:
info@erim.eur.nl
Internet:
www.erim.eur.nl
Bibliographic data and classifications of all the ERIM reports are also available on the ERIM website:
www.erim.eur.nl
ERASMUS RESEARCH INSTITUTE OF MANAGEMENT
REPORT SERIES
RESEARCH IN MANAGEMENT
BIBLIOGRAPHIC DATA AND CLASSIFICATIONS
Abstract
In this paper we study design principles for closed loop supply chains. Closed loop supply
chains aim at closing material flows thereby limiting emission and residual waste, but also
providing customer service at low cost. We study ‘traditional’ and ‘new’ design principles known
in the literature. It appears that setting up closed loop supply chains requires some additional
design principles because of sustainability requirements. At the same time however, we see
that traditional principles also apply. Subsequently we look at a business situation at Honeywell.
Here, only a subset of the relevant design principles is applied. The apparent low status of
reverse logistics may provide an explanation for this. To some extent, the same mistakes are
made again as were 20 years ago in, for instance, inbound logistics. Thus, obvious
improvements can be made by applying traditional principles. Also new principles, which require
a life cycle driven approach, need to be applied. This can be supported by advanced
management tools such as LCA and LCC.
Library of Congress
Classification
5001-6182
Business
5201-5982
Business Science
(LCC)
HF 5410+
Distribution of products
Journal of Economic
Literature
M
Business Administration and Business Economics
M 11
Production Management
(JEL)
R4
Transportation Systems
R 49
Transportation systems: Other
European Business Schools
Library Group
85 A
Business General
260 K
Logistics
(EBSLG)
240 B
Information Systems Management
260 K
Logistics
Gemeenschappelijke Onderwerpsontsluiting (GOO)
Classification GOO
Keywords GOO
85.00
Bedrijfskunde, Organisatiekunde: algemeen
85.34
Logistiek management
85.20
Bestuurlijke informatie, informatieverzorging
85.34
Logistiek management
Bedrijfskunde / Bedrijfseconomie
Bedrijfsprocessen, logistiek, management informatiesystemen
Distributiekanalen, Logistiek, Hergebruik, Casestudies (vorm )
Free keywords
closed loop supply chains, case-study, reverse logistics
Design principles for closed loop supply chains:
optimizing economic, logistic and environmental
performance
Harold Krikke1, Costas P. Pappis2, Giannis T. Tsoulfas2 and Jacqueline B.
Bloemhof-Ruwaard1
1.
2.
Erasmus University, RSM/Fac.Bedrijfskunde, P.O.Box 1738, 3000 DR,
Rotterdam, The Netherlands
University of Piraeus, Dept. of Industrial Management, 80, Karaoli &
Dimitriou Str., 18534 Piraeus, Greece
Abstract. In this paper we study design principles for closed loop supply chains.
Closed loop supply chains aim at closing material flows thereby limiting emission
and residual waste, but also providing customer service at low cost. We study
‘traditional’ and ‘new’ design principles known in the literature. It appears that
setting up closed loop supply chains requires some additional design principles
because of sustainability requirements. At the same time however, we see that
traditional principles also apply. Subsequently we look at a business situation at
Honeywell. Here, only a subset of the relevant design principles is applied. The
apparent low status of reverse logistics may provide an explanation for this. To
some extent, the same mistakes are made again as were 20 years ago in, for
instance, inbound logistics. Thus, obvious improvements can be made by applying
traditional principles. Also new principles, which require a life cycle driven
approach, need to be applied. This can be supported by advanced management
tools such as LCA and LCC.
Keywords: closed loop supply chains, case-study, reverse logistics
1. Introduction
Over the past few years increasing volumes of return flows, varying from end-oflife returns to marketing or commercial returns, has reinforced interest in the
effective management of such flows. More and more, Original Equipment
Manufacturers are held responsible by new environmental legislation for the
recovery of their own products. In case the OEM is out of the country, importers
are held responsible and new parties, mainly profit-oriented, deal also with the
recovery and recycling of used products. This results in closed material flows as
shown in Figure 1. A new managerial area called reverse logistics management
emerges, which can be described as the process of planning, implementing and
controlling the efficient and effective inbound flow and storage of secondary
goods and related information opposite to the traditional supply chain, for the
purpose of recovering value or proper disposal (Fleischmann, 2000). Typically,
this comprehends a set of processes such as collection, inspection/separation,
reprocessing (including disassembly), disposal and redistribution (see Fleischmann
et. al, 2000).
Closed loop supply chain management goes beyond that. It comprehends
all business functions and hence decisions regarding the adaptation of business
strategy, marketing, quality management, information systems, logistics and so on
in view of closing material flows, thereby limiting emission and residual waste, but
also providing customer service at low cost. Both the forward and reverse chain
are considered, since there is a strong interaction between the two.
(re-)assembly
component manufacturing
forward logistics
material supply
material recovery
waste disposal
use
component recovery
disassembly
product recovery
reverse logistics
Figure 1: Forward and reverse supply chain (similar to Ferrer, 1997)
It is essential to analyze in what respect closed loop supply chains
fundamentally differ from forward logistics, and how this affects design
principles. Closed loop supply chains are different on the following aspects
(Fleischmann et. al, 2000) and (Faucheux and Nicolaï, 1998):
q In addition to cost and service there are environmental drivers, complicating
the objective function.
q Higher system complexity, in particular in closed loop systems due to
increased number of - and interaction between goods flows. Uncertainty on
2
q
q
q
the supply (collection) side of the system regarding volumes, quality,
composition and timing.
Push-pull nature. There is often a mismatch between supply and demand.
“Production” (i.e. supply of used products) is not coupled with “demand” (i.e.
producer’s requirements).
Numerous “suppliers”/ few “customers”. Used products are the raw materials
for the reverse chain. Unlike the forward chain, there are a lot more sources of
raw materials and they enter the reverse chain at small cost or at no cost at all.
However, although obtained for ‘free’, the value of return flows is low and
may be limited to a small fraction of the flow.
Unexplored market opportunities. Environmental requirements can be the
basis of the creation of new markets or result in the reorganization of existing
ones for by-products of the production process. With such reorganization,
materials that would otherwise end as wastes would turn into useful products.
The above distinguishing characteristics might justify the development of
special approaches. However, little attention has been paid to the question whether
design choices in closed loop supply chains differ from those in traditional
‘forward’ logistics. For example, logistics networks may be more decentralized in
closed loop supply chains, but the underlying trade-off between economies of scale
and transportation costs might be exactly the same.
The purpose of the paper is to see to what extent design principles, as
described in the ‘traditional’ logistics literature, are also applicable to closed loop
supply chains and in what respect they need to be extended or adapted. We ask
ourselves the following questions:
q What forward and closed loop logistics design principles are known from the
literature?
q Are design principles for closed loop supply chains fundamentally different or
do different parameter values simply lead to different solutions?
q To what extent are design principles well understood and applied in business
practice?
We develop a theoretical framework in Section 2, which is split in a first part
concerning design principles from traditional supply chain literature and a second
part concerning design principles from closed loop supply chain studies. In Section
3 we discuss the Honeywell case to illustrate application and understanding of the
principles in practice. Clearly, one case is insufficient to get a full picture of what’s
going on in business practice, however valuable lessons can be learned. In Section
4 we discuss results and draw conclusions.
3
2.Theoretical framework
2.1
Design principles in traditional logistics
Several principles, which apply to supply chain (or parts of it) design, are referred
to in bibliographies (e.g. Ralph Sims, 1991). A quite comprehensive list of such
principles, which appears in (Gattorna, 1997) is described below. Where
appropriate, we added the interpretation of these principles for closed loop supply
chains.
1. Link logistics to corporate strategy
All aspects of logistics operations must be directly linked to the corporate strategic
plan. It appears that many companies do not consider closed loop supply chains as
a strategic issue (Caldwell, 1999). However, companies with successful closed
loop supply chains, such as Xerox, BMW, 3M etc., do consider asset recovery as
essential part of their business.
2. Organize comprehensively
All corporate logistics functions should be unified under a combination of
centralized and decentralized management. Grouping all logistics-related functions
under a single umbrella facilitates effective decisions. In several studies the
authors found that the responsibility for the returns handling was often not clearly
assigned, neither in the supply chain nor at a company level.
3. Use the power of information
Successful logistics implementation takes full advantage of information and
information-processing technology, not only for data interchange, but also for
decision support. Good return management requires up-to-date information on the
installed base, making use of product data management systems, remote sensing
and tracking and tracing systems. Also, information can be retrieved from returns,
for example by analyzing wear out of returned cores.
4. Emphasize human resources
Logistics excellence flourishes in an environment that recognizes people as the
department’s most important resource. Recruiting, education, training and job
enrichment are standard practice. Experienced, well-trained managers are critical
to the success of business strategies and plans. In returns management, elderly
employees, those who assembled the products 5-20 years ago, are often employed
in the Asset Recovery department, since they are the only ones with the knowledge
necessary to recover the returns.
5. Form strategic alliances
Forming close partnerships with other participants in the product chain or channel
can boost logistics operation. Pre- or non competitive R&D is often done in
cooperation. For example, Sony, Motorola, Nokia, IKP, Indumetal and Gaiker
jointly develop new construction techniques enabling a returned product, once
exposed to the correct trigger temperature, to self-disassemble. But also collection
and recovery may be done by joint systems.
6. Focus on financial performance
4
The logistics function should use return on assets, economic value added, cost and
operating standards, or similar indicators as measures of performance. Functions
as transportation, warehousing and customer service are best managed as cost or
profit centers. So far, reverse logistics is seen as a cost issue by most companies,
however potential revenues from reuse and the avoidance of disposal costs is often
neglected.
7. Target optimum service levels
Companies need to calculate their “optimum” service levels and pinpoint the costs
associated with sustaining those levels. Clearly, only a few companies see reverse
logistics as a service tool. For product lines phased out, return flows may serve as
a cheap source of spare parts.
8. Manage the details
Attention to details can mean real savings. Effective detail management produces
consistency of purpose, objectives, image and information to customers.
Obviously, this principle is equally applied to both forward and reverse supply
chain design and operations. For example, when tracing cause of returns (failure,
bad manual, overadvertising etc.), it is necessary not to have general figures but to
analyze carefully per retailer, distribution channel, type of product and so on.
9. Leverage logistics volumes
Successful logistics operations consolidate shipment volumes, inventories and the
like to gain operating and financial leverage, whether the logistics function is
performed in-house or by an outside contractor. Leveraging can be increased by
good collection systems and joint ventures. A problem with return flows is that
only a small part is valuable and therefore remanufactured/reused whilst the
majority is low value and will be scrapped. Hence, reverse substreams follow
different recovery routes which complicates consolidation.
10. Measure and react to performance
Companies must measure their logistics performance and react to the results in an
on-going dynamic fashion. Reverse logistics processes should be benchmarked as
any other business process.
By definition, closed loop supply chains aim at closing material flows,
thereby limiting emission and residual waste, but also providing customer service
at low cost. Thus, closed loop supply chains do what traditional supply chains do
and in addition contribute to sustainability. Therefore traditional design principles
also apply to closed loop supply chains, although in some cases with slight
adaptation or different interpretation. In addition, we investigate design principles
specifically for closed loop supply chains in 2.2.
2.2 Design principles for closed loop supply chains
From a closed loop supply chains point of view, the above list of design principles
may be extended to include other important rules. Again we remark that both
forward and reverse chain are relevant here. From literature study, we are able to
propose the following:
5
11. Impose sustainability standards on suppliers. Selecting sustainable suppliers
requires additional selection criteria. One of the issues to be solved is the supplier
paradox: the one supplying reusable parts may loose most business. This needs to
be compensated, for example by outsourcing repair to the original supplier, who as
a bonus also has most knowledge and dedicated equipment. Also, suppliers may
co-design the product to enable modularization and design for recycling. See also
(Corbett and Van Wassenhove, 1993) and (Tsoulfas and Pappis, 2001).
12. Make use of accounting systems that account for the full life-cycle costing of a
product or service, and the environmental impacts it creates. Based on this,
develop and design recoverable products, which should be technically durable,
repeatedly usable, harmlessly recoverable after use and environmentally
compatible in disposal (Gotzel, et. al, 1999). Extending service and function,
especially at the usage phase, improves eco-efficiency and reusability (Tsoulfas
and Pappis, 2001). Modularity and standardization also improves opportunities for
repair and (cross-supply chain) reuse of components and materials.
13. Make use of management tools, such as ISO 9000-14000, life cycle analysis,
environmental accounting methods, that may help business to identify and select
opportunities for improvement. For example, using less energy is obviously good
for the environment. It is also self-evidently good for business because it cuts
companies’ costs, and eventually avoids potential environmental liabilities. It is,
therefore, a prerequisite to the long-term sustainability of business. To replace
non-renewable and polluting technologies, it is crucial to support the use of solar,
wind, water and geothermal energy (among others), as well as reduction in energy
consumption (Tsoulfas and Pappis, 2001).
14. Create new markets. The environment can be at the basis of the creation of
new markets or of the reorganization of existing ones for certain (material) flows
resulting from the production process. With such a technical reorganization,
materials that would formerly have ended as wastes are turned into useful byproducts (Faucheux and Nicolai, 1998). Facilities should be located close to
possible end-users. Such a policy would ease the direct delivery of used products
from end-users (Angell and Klassen, 1999). Furthermore, companies can also offer
waste disposal services (Corbett and van Wassenhove, 1993).
15. Manage additional uncertainty. In recovery situations only a part of the flow is
valuable, but it is hard to say beforehand which part. This means that sorting and
initial testing should be decentralized to separate junk from valuable returns. The
same goes for sorting and volume reduction in e.g. plastics recycling. Intrinsic to
the push-pull nature of reverse channels, there will often be a mismatch between
supply and demand for recyclable products and choice of the right recovery
channels, even in situations with perfect information. E-market places provide a
good support tool. Companies that manipulate materials and energy should be
organized in such a way that they can respond rapidly to changes in management
and processes (Tsoulfas and Pappis, 2001). Changing demands for goods and
services will also push design changes. The study of alternative plans is necessary
in order to achieve eco-optimization. “Do the same but do it better or try to do
6
something different.”(Klassen and Angell, 1998). Pro-activeness, especially to
intended legislation, has proven to be effective in many situations.
16. Match network design with recovery option. Regarding cost and service driven
network design, (Fleischmann et. al, 2000) and (Bloemhof-Ruwaard et. al, 1999)
give an overview of case studies. They conclude that compared to traditional
forward logistics, closed loop supply chains have some distinguishing common
characteristics, in particular in terms of processes to be carried out. Typical
characteristics of product recovery networks include a convergent part concerned
with collection and transportation from a disposer market to recovery facilities, a
divergent part for distribution to a re-use market, and an intermediate part related
with the recovery processing steps required. Moreover, they derive typical types
of networks per recovery option, where they distinguish networks for material
recycling, remanufacturing, reusable components, reusable packaging, warranty
and commercial returns. These network types generally differ in terms of network
topology, the role of and cooperation between actors and the collection and routing
system used.
17. Enhance design for recycling. Regarding the environmentally driven network
design, in (Tsoulfas et al., 2000), a sector analysis of batteries from the point of
view of closed loop supply chains is presented, where several network design
criteria are discussed. Environmental aspects may influence network topology, the
role and cooperation between actors and the collection and routing system used,
and they also raise the issue of product design as a critical element. Decisions to be
taken concern modularity, kind of materials, involvement of suppliers (co-design),
disassemblability, life cycle considerations (will it last for a long period or a short
one?), type of equipment used and standardization of modules/components in the
product. Parameters affecting the decision include pollution generated, energy use,
residual waste, life cycle cost, production technology, secondary materials, byproducts, recyclability, product complexity, product function, and so on.
18. Enhance quality and rate of return. In (Krikke et. al, 2000) a multicriteria
model is presented that optimizes the supply chain of refrigerators on both
economic and environmental (LCA based) criteria. The model is run for different
scenarios using different parameter settings such as centralized versus
decentralized operations, alternative product designs, varying recovery feasibility
and return quantity, and potential EU legislation. The most important conclusion
of the project is that, next to efficient logistics combined with optimal product
design, system optimality depends on return quality and rate of return. In fact, in
this case study these effects outperform the impact of product design and logistics
network structure.
3. Remanufacturing of Printed Wiring Assemblies at Honeywell
3.1 Case description
Honeywell Industrial Automation and Control (IAC) is a global player in industrial
7
automation. It produces, supplies and maintains Distributed Control Systems, i.e.,
both hardware and software to measure, monitor and control production processes
of its customers. Distributed Control Systems are networks of intelligent
(automated) stations, which control an industrial (chemical) plant or process,
where the network distributes logic control, data access and process management.
Because of the high capital value of the plants involved and their dependence on
control systems, the control systems are often redundant, and need fast service in
case of failure. In this case, we study the repair of Printed Wiring Assemblies
(PWAs). These PWAs are a critical and valuable component in the TDC-3000
system. They are serviced by well trained service engineers of the national
affiliates and regularly replaced due to failure or potential failure. Service
contracts oblige Honeywell to respond to a customer call within 24 or 48 hours.
The service process goes as follows. After a call, a service engineer is
dispatched to the customer location. The engineer replaces the bad or suspicious
PWAs and brings it back in his car to the affiliate depot. Here, the PWA is visually
inspected. Some parts are rejected and scrapped, others are tested. Good parts are
restocked, either at the depot or the engineer’s car. Malfunctioning parts are
returned for repair after authorization of the central logistics department ISLC.
ISLC controls all logistics and tactical support for European customers. Local
repair by affiliates also takes place, but is not officially approved. PWAs are
returned by truck to the central warehouse for Europe in Amsterdam, operated by
Van Ommeren Intexo (VOI) and controlled by ISLC. VOI is a logistics service
provider that operates the warehouse and transportation for Honeywell. Returned
PWAs are consolidated at this central warehouse and from there transported in
large batches to the Honeywell production and repair sites in Phoenix (USA) and
Johannesburg (SA) by plane (Burlington Air). Here returned PWAs are inspected
and, if feasible, repaired or upgraded. Johannesburg is given priority, because it is
more dedicated to repair. However, also here regular production takes place.
Johannesburg sends repaired PWAs to the central European warehouse and
Phoenix restocks them in their own facility for possible supply to Europe or other
warehouses worldwide. As soon as a PWA has been replaced and returned, the
inventories are replenished, i.e., the affiliate replenishes the engineer’s car, the
central warehouse replenishes the affiliate depot and the production factories
replenish the central warehouse. Return of repaired PWAs from Johannesburg to
the European warehouse runs independently from the replenishment procedure.
Also in replenishment, inter-continental transportation is covered by plane, intra
continental transport by truck.
Affiliate
Germany
f actory locations
European
warehouse
A'dam
Affiliate
England
repair locations
SA+USA
Customer Sites
Affilate
France
More
warehouses
8
More
affiliates
Figure 2: Honeywell European supply chain for service of TDC 3000-PWAs
Figure 2 represents the existing closed loop supply chain for service of
PWAs for TDC-3000 system in Europe, including return flows for repair.
Replenishment rush orders can skip one or more echelons, depending on the cause
and location of demand: PWAs can be delivered straight from the factories to the
affiliate, from the central European warehouse to the affiliate or from the central
warehouse to the customer site. This is done by DHL. Inventories are kept at the
production and repair sites, the central warehouse, affiliate locations and in the
service engineer’s car. In terms of volumes, about 500 are returned each year, of
which the majority is remanufactured (note that defects are generally not returned).
About 3000 pieces are in stock. Total reverse chain cost are about 360 EURO per
item, whereas the reuse value is estimated 700 EURO. The lead-time from the
moment of return at the customer site, through repair and back to serviceable stock
is approximately 34 weeks, which is a major concern for the management because
of the risk of obsolescence. In comparison, the lead-time from production to stock
for new spare parts is only 3-4 weeks. For an extensive description of the case, we
refer to (Breunesse, 1997). The following shortcomings have been identified:
(i)
Return procedure. Non-reusable and reusable PWAs are not separated
correctly at the source, because there is no clear procedure and
responsibility for return shipping is not assigned. There is a lack of
awareness of service engineers that broken PWAs should be returned in a
correct manner (e.g. packaged correctly). As a result too many PWAs
which are not reusable (due to lack of demand or technical failure) are
returned, while reusable PWAs are sometimes not returned.
(ii)
Lead-time. Return shipments are done via the forward logistic systems
leading to long and also stochastic lead times of returns. In reverse
distribution, consolidation times for small return volumes are long and the
reusable PWAs that are returned stay too long in the pipeline, due to
capacity problems at the production/repair sites. Long lead times are
9
(iii)
costly due to high capital value of PWAs and danger for obsolescence.
Availability planning. Also as a result of the long and stochastic leadtime, returned PWAs are not taken into account in the availability
planning of ISLC for the VOI warehouse. This is no problem for Phoenix
repairables, since they are restocked in Phoenix. However, the
Johannesburg repairables are restocked at the VOI warehouse in
Amsterdam. They cannot be taken into account in the availability
planning, because a lack of logistic control makes lead times long and
stochastic, hence Johannesburg is not sufficiently reliable as an internal
supplier of PWAs. This is complicated by the fact that valuable
information is lost in the long reverse chain, because information does not
stay with the product nor is an information system in place to deal with
this.
The supply chain improvements suggested in this study were based on the
following considerations:
· lead time reduction
· controlling out-of-pocket costs
· no defect PWAs should be returned
· all good PWAs should indeed be returned quickly
· information should be kept with the PWA.
The possibilities for re-design are limited, because existing repair centers (in
Phoenix and Johannesburg) cannot be closed down nor can new ones be opened.
This is due to the fact that in the near future Honeywell will outsource repair
activities. Also, Johannesburg is a priori chosen as the repair facility for Europe, in
order to equalize capacity loads company-wide. In other words, only the collection
system, goods flows and make-or-buy decisions may be affected. Improvements
must be found in simplifying the reverse logistic system. The following solution is
suggested: (i) an improved return shipping procedure for service engineers and
clients makes sure the right PWAs are returned, (ii) direct shipping by DHL from
affiliates to the repair center in Johannesburg reduces lead time and makes it easier
to keep information with the PWA. The forward system and the shipping from
Johannesburg back to stock in central European warehouse remain the same. This
reverse supply chain has a better performance, while unit out-of-pocket cost
increases from 360 EURO to 373 EURO per PWA. However, total shipping costs
may be reduced because useless returns are avoided by the improved shipping
procedure.
3.2 Analysis
In the old situation the supply chain is not geared for return flows. This can be
explained by two design principles used at the time:
q Use the forward supply chain as much as possible
q Minimize out-of-pocket costs per stage in the reverse chain.
10
We see that lousy performance necessitates the re-design of the supply chain for
repair of PWAs. To this end a subset of design principles presented in Section 2 is
applied. Table 1 gives an overview of the design principles and their application in
the re-design. They are explained below.
Table 1: Overview of design principles application at Honeywell
principle description
yes, no, somewhat
1
link to business strategy
somewhat
2
organize comprehensively
somewhat
3
power of information
yes
4
exploit human resources
no
5
form strategic alliances
no
6
focus on financial performance
somewhat
7
target service levels
yes
8
manage details
no
9
leverage volumes
yes
10
performance mgt.
somewhat
11
use sustainable suppliers
no
12
use life cycle methodologies
no
13
use new management tools
no
14
create new markets
no
15
manage uncertainty
somewhat
16
enhance design for recycling
no
17
match network and recovery option
yes
18
enhance rate and quality of return
yes
Honeywell should consider closed loop supply chains as an essential part of
their service functions because returns are often the only source for spare parts,
especially for phased out products. Using a carrier for speeding up returns reduces
lead-time and variance and thus risk of obsolescence and uncertainty. By
outsourcing, the network structure is automatically changed. It also avoids
organizational and responsibility problems and leverages volumes. However, this
is also quite costly, in particular with long distances from Europe to South Africa.
A centralized network in Europe would be more feasible, however the phasing out
of proprietary hardware of Honeywell and thus the phasing out of own repair
operations makes this infeasible. Here we see that business strategy, i.e., the
decision to use IBM hardware and to phase out proprietary hardware, has an
impact on reverse logistics decisions. Decentralized testing and a simplified
returns procedure aim at improvement of rate and quality of return. Keeping the
information with the PWAs clearly enhances the power of information. The study
described by (Breunesse, 1997) is an extensive performance measurement,
however follow up is unclear. The definition of cost is widened, now including
obsolescence cost.
Taking a closer look, we see that Honeywell has focused on logistics,
11
operations and information aspects in order to optimize costs and availability. But
did Honeywell do the right thing from an environmental point of view? The use of
airplanes over long distance is an energy consuming activity. Although reusable
PWAs are well taken care of, non reusables are scrapped by local firms, of which
no information is available. The company appears to have little ‘product life cycle
consciousness’. No sustainable suppliers are used. Moreover, product modularity
or more general product design aspects have never been nor will not be an issue.
The company is unaware of future environmental legislation on producer
responsibility, although at the time this was being prepared by the European
Union. The phase out of propriety hardware might help Honeywell in this respect,
however this is pure coincidence. In conclusion, sustainability remains a
subordinate issue.
4
Discussion and Conclusions
Traditional wisdom holds that sustainability is costly and the domain of
environmental idealists. Few companies have established closed loop supply
chains and the ones that have usually implemented end-of-pipe solutions are
enforced by law. (Stock et. al, 1998) present results on the state of the art of
Reverse Logistics and conclude –amongst other things- that “the state of
development of Reverse Logistics is analogous to that of inbound logistics of 1020 years ago”. We consider Honeywell a typical example of this. Although one
case is insufficient to draw generic conclusions, our hypothesis is that the most
eminent mistakes made by business companies are:
· Life cycle approach is missing
Many troubles in recovery phase are caused by bad product design. Reverse chains
should be designed in concert with the forward chain. Sometimes this requires a
partial redesign of the forward chain as well. Existing supply chains thus strongly
affect the design of reverse supply chains but may also be affected themselves.
Extend service and enhance function, especially at the usage phase, to improve
eco-efficiency and reusability (Tsoulfas and Pappis, 2001). Modularity and
standardization also improves opportunities for repair and (cross-supply chain)
reuse of components and materials. Suppliers that are sustainable should be
selected and involved in product design and component repair.
· Optimization on out-of-pocket costs only
In the reverse chain, next to out-of-pocket costs we must also include obsolescence
costs and service related criteria must be included. This is in fact a very old
principle. The importance of lead time effects both on costs and service level has
been extensively reported in classic logistics literature. However, there is a danger
that reverse logistics is going to reinvent the wheel at this point.
· Neglect of sustainability as an optimization issue
It is necessary to develop and design recoverable products, which should be
technically durable, repeatedly usable, harmlessly recoverable after use and
environmentally compatible in disposal (Gotzel, et. al, 1999). Very important is to
add energy use of the entire system as an optimization criterion. Using less energy
12
is obviously good for the environment. It is also self-evidently good for business
because it cuts companies’ costs, and eventually avoids potential environmental
liabilities. It is, therefore, a prerequisite to the long-term sustainability of business.
To replace or reduce the use of non-renewable and polluting technologies, it is
crucial to support the use of solar, wind, water and geothermal energy (among
others), as well as to reduce energy consumption. A number of management tools,
such as environmental assessment, life cycle analysis, environmental accounting
methods, but also ‘simple’ logistics principles can help business identify and select
opportunities for improvement.
In conclusion, closed loop supply chains are fundamentally different from
traditional ‘open’ supply chains, particularly in view of sustainability. As a result,
traditional design principles need to be extended. However, also traditional
principles apply to closed loop supply chains. We suspect that both are often not
well understood by business practice. Thus, obvious improvements can be made
by applying traditional principles. This is the easy part. New principles are
necessary to reduce emission and waste, and require life cycle driven approaches
supported by advanced management tools such as LCA and LCC. A new attitude is
needed, both with supply chain actors and consumers.
Literature
Angell L.C. and R.D Klassen (1999), “Integrating environmental issues into the
mainstream: an agenda for research in operations management”, Journal of
Operations Management, 17, pp. 575-59
Bloemhof-Ruwaard, J.M., M. Fleischmann and J.A.E.E. van Nunen (1999),
“Reviewing Distribution Issues in Reverse Logistics”, Lecture Notes in Economical
and Mathematical Systems, 480, pp. 23-44, Springer Verlag, Berlin, Germany, edit.
Speranza and Staehly
Breunesse, H. (1997)., “Control in reverse logistics“, Masters Thesis, Twente
University, Mechanical Engineering, Enschede, The Netherlands
Caldwell, Bruce (1999), “Reverse Logistics”, Information week online, April
issue, www.informationweek.com/729/logistics.htm
Corbett C.J. and L.N. Van Wassenhove (1993), “The Green Fee: Internalizing
and Operationalizing Environmental Issues”, California Management Review, 36,
1, pp.116-135
Faucheux S. and I. Nicolaï (1998), “Environmental technological change and
governance in sustainable development policy”, Ecological Economics, 27, pp.
243–256
Ferrer, G. (1997), “Communicating developments in product recovery”, working
paper 97/30/TM, INSEAD, France
Fleischmann, M., H.R. Krikke, R. Dekker and S.D.P. Flapper (2000), “A
Characterisation of Logistics Networks for Product Recovery”, Omega, 28-6,
pp.653-666
13
Fleischmann, M. (2000), “Quantitative models for reverse logistics”, Ph.D. thesis,
Erasmus University, Rotterdam, The Netherlands
Gattorna, J.L. (1997), “The Gower Handbook of Logistics and Distribution
Management”, Gower, Vermont, USA
Gotzel C., J.G. Weidling, G. Heisig and K. Inderfurth (1999), “Product Return
and Recovery Concepts of Companies in Germany”, Preprint Nr. 31, Otto-vonGuericke University of Magdeburg, Germany
Klassen R.D. and L.C. Angell (1998), “An international comparison of
environmental management in operations: the impact of manufacturing flexibility
in the U.S. and Germany”, Journal of Operations Management, 16 (3–4), pp. 177–
194
Krikke, H.R., J. M. Bloemhof-Ruwaard and L.N. Van Wassenhove (2000),
“Design of closed loop supply chains for refrigerators”, working paper, Erasmus
University, Rotterdam, The Netherlands
Ralph Sims, E. (1991), “Planning and Managing Industrial Logistics Systems”,
Elsevier, Amsterdam, The Netherlands
Stock, J. (1998), “Reverse Logistics Programs”, Council of Logistics
Management, USA
Thierry, M., M. Salomon, J. van Nunen and L.N. Van Wassenhove (1995),
“Strategic issues in product recovery management”, California Management Review,
37-2, pp. 114-135
Tsoulfas, G.T., Pappis, C.P. and Minner, S. (2000), “A sector analysis of
batteries: the perspective of reverse logistics”, REVLOG Summer Workshop,
Lutherstadt Wittenberg, Germany
Tsoulfas, G.T. and C.P. Pappis (2001), “Application of environmental principles
to reverse supply chains”, in: proceedings of the 3rd Aegean Conference, Tinos,
Greece, May 19-22
14
Publications in the Report Series Research* in Management
ERIM Research Program: “Business Processes, Logistics and Information Systems”
2001
Bankruptcy Prediction with Rough Sets
Jan C. Bioch & Viara Popova
ERS-2001-11-LIS
Neural Networks for Target Selection in Direct Marketing
Rob Potharst, Uzay Kaymak & Wim Pijls
ERS-2001-14-LIS
An Inventory Model with Dependent Product Demands and Returns
Gudrun P. Kiesmüller & Erwin van der Laan
ERS-2001-16-LIS
Weighted Constraints in Fuzzy Optimization
U. Kaymak & J.M. Sousa
ERS-2001-19-LIS
Minimum Vehicle Fleet Size at a Container Terminal
Iris F.A. Vis, René de Koster & Martin W.P. Savelsbergh
ERS-2001-24-LIS
The algorithmic complexity of modular decompostion
Jan C. Bioch
ERS-2001-30-LIS
A Dynamic Approach to Vehicle Scheduling
Dennis Huisman, Richard Freling & Albert Wagelmans
ERS-2001- 35-LIS
Effective Algorithms for Integrated Scheduling of Handling Equipment at Automated Container Terminals
Patrick J.M. Meersmans & Albert Wagelmans
ERS-2001-36-LIS
Rostering at a Dutch Security Firm
Richard Freling, Nanda Piersma, Albert P.M. Wagelmans & Arjen van de Wetering
ERS-2001-37-LIS
Probabilistic and Statistical Fuzzy Set Foundations of Competitive Exception Learning
J. van den Berg, W.M. van den Bergh, U. Kaymak
ERS-2001-40-LIS
Design of closed loop supply chains: a production and return network for refrigerators
Harold Krikke, Jacqueline Bloemhof-Ruwaard & Luk N. Van Wassenhove
ERS-2001-45-LIS
*
A complete overview of the ERIM Report Series Research in Management:
http://www.ers.erim.eur.nl
ERIM Research Programs:
LIS Business Processes, Logistics and Information Systems
ORG Organizing for Performance
MKT Marketing
F&A Finance and Accounting
STR Strategy and Entrepreneurship
Dataset of the refrigerator case. Design of closed loop supply chains: a production and return network for
refrigerators
Harold Krikke, Jacqueline Bloemhof-Ruwaard & Luk N. Van Wassenhove
ERS-2001-46-LIS
How to organize return handling: an exploratory study with nine retailer warehouses
René de Koster, Majsa van de Vendel, Marisa P. de Brito
ERS-2001-49-LIS
Reverse Logistics Network Structures and Design
Moritz Fleischmann
ERS-2001-52-LIS
What does it mean for an Organisation to be Intelligent? Measuring Intellectual Bandwidth for Value Creation
Sajda Qureshi, Andries van der Vaart, Gijs Kaulingfreeks, Gert-Jan de Vreede, Robert O. Briggs & J. Nunamaker
ERS-2001-54-LIS
Pattern-based Target Selection applied to Fund Raising
Wim Pijls, Rob Potharst & Uzay Kaymak
ERS-2001-56-LIS
A Decision Support System for Crew Planning in Passenger Transportation using a Flexible Branch-and-Price
Algorithm
ERS-2001-57-LIS
Richard Freling, Ramon M. Lentink & Albert P.M. Wagelmans
One and Two Way Packaging in the Dairy Sector
ERS-2001-58-LIS
Jacqueline Bloemhof, Jo van Nunen, Jurriaan Vroom, Ad van der Linden & Annemarie Kraal
Design principles for closed loop supply chains: optimizing economic, logistic and environmental performance
ERS-2001-62-LIS
Harold Krikke, Costas P. Pappis, Giannis T. Tsoulfas & Jacqueline Bloemhof-Ruwaard
2000
A Greedy Heuristic for a Three-Level Multi-Period Single-Sourcing Problem
H. Edwin Romeijn & Dolores Romero Morales
ERS-2000-04-LIS
Integer Constraints for Train Series Connections
Rob A. Zuidwijk & Leo G. Kroon
ERS-2000-05-LIS
Competitive Exception Learning Using Fuzzy Frequency Distribution
W-M. van den Bergh & J. van den Berg
ERS-2000-06-LIS
Models and Algorithms for Integration of Vehicle and Crew Scheduling
Richard Freling, Dennis Huisman & Albert P.M. Wagelmans
ERS-2000-14-LIS
Managing Knowledge in a Distributed Decision Making Context: The Way Forward for Decision Support Systems
Sajda Qureshi & Vlatka Hlupic
ERS-2000-16-LIS
Adaptiveness in Virtual Teams: Organisational Challenges and Research Direction
Sajda Qureshi & Doug Vogel
ERS-2000-20-LIS
ii
Assessment of Sustainable Development: a Novel Approach using Fuzzy Set Theory
A.M.G. Cornelissen, J. van den Berg, W.J. Koops, M. Grossman & H.M.J. Udo
ERS-2000-23-LIS
Applying an Integrated Approach to Vehicle and Crew Scheduling in Practice
Richard Freling, Dennis Huisman & Albert P.M. Wagelmans
ERS-2000-31-LIS
An NPV and AC analysis of a stochastic inventory system with joint manufacturing and remanufacturing
Erwin van der Laan
ERS-2000-38-LIS
Generalizing Refinement Operators to Learn Prenex Conjunctive Normal Forms
Shan-Hwei Nienhuys-Cheng, Wim Van Laer, Jan Ramon & Luc De Raedt
ERS-2000-39-LIS
Classification and Target Group Selection bases upon Frequent Patterns
Wim Pijls & Rob Potharst
ERS-2000-40-LIS
Average Costs versus Net Present Value: a Comparison for Multi-Source Inventory Models
Erwin van der Laan & Ruud Teunter
ERS-2000-47-LIS
Fuzzy Modeling of Client Preference in Data-Rich Marketing Environments
Magne Setnes & Uzay Kaymak
ERS-2000-49-LIS
Extended Fuzzy Clustering Algorithms
Uzay Kaymak & Magne Setnes
ERS-2000-51-LIS
Mining frequent itemsets in memory-resident databases
Wim Pijls & Jan C. Bioch
ERS-2000-53-LIS
Crew Scheduling for Netherlands Railways. “Destination: Curstomer”
Leo Kroon & Matteo Fischetti
ERS-2000-56-LIS
iii