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Reverse Logistics: Backwards Practices that Matter

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Reverse Logistics: Backwards Practices that Matter GENCO DISTRIBUTION SYSTEM, INC. CASE STUDY Site Visit Date: January 12, 2007 Site Visit Location: Pittsburg, Pennsylvania Site Visit Hosts: John Coffield;
Reverse Logistics: Backwards Practices that Matter GENCO DISTRIBUTION SYSTEM, INC. CASE STUDY Site Visit Date: January 12, 2007 Site Visit Location: Pittsburg, Pennsylvania Site Visit Hosts: John Coffield; vice president, sales; reverse logistics Colleen Donoghue, director of corporate marketing; reverse logistics Lauren Conner, inside sales manager; reverse logistics 2007 APQC Case Study GENCO I. GENERAL OVERVIEW GENCO, a private third-party logistics provider, has several business units, including contract warehousing and distribution, reverse logistics, pharmaceutical returns, transportation management, supply chain analysis, damage research (a team that helps customers locate and minimize damages in their supply chains), parcel management, government logistics, and GENCO Marketplace (a wholly owned subsidiary that manages product liquidation). It is a financially stable company with ever-increasing revenues ($377 million in 2002, $409 million in 2003, $459 million in 2004, $514 million in 2005, $571 million in 2006), and it is on pace to generate $1billion in revenues by Because GENCO is privately owned, it is not required to report its financial statement to the public. However, the company has a philosophy of openness; it shares its revenue, profit, and pricing information. GENCO partners with its customers, and its honesty and forthrightness makes the partnerships more fruitful. GENCO manages 28,646,553 square feet of warehouse space for its 173 customers. It has 122 operations in the United States and Canada, and 5,536 combined full- and part-time employees. Currently, it operates chiefly as a North American corporation, but is changing rapidly to develop a global reach. In 2006, GENCO was ranked as a top-10 supply chain services provider for the fifth consecutive year, and is ranked No. 1 in best customer experience in the Consumer Goods Technology Annual Logistics Survey. GENCO was founded in 1898 by Hyman Shear, who delivered goods using a horse and cart. In the 1950s, the company expanded into warehousing. Current president and CEO Herb Shear joined the company in In 1996, GENCO added Canadian operations and began increasing its capacity though acquisitions. In 1997, it acquired A&O, a warehouse management system provider. In 1999, it acquired Cumberland Distribution, a regional third-party logistics (3PL) company. It increased its fulfillment capacity by acquiring MTL/JV in 1999 and its transportation and supply chain management capacity by acquiring IOgistics in In 2005, to manage unsaleables, it acquired Damage Research Incorporated, and to manage pharmaceutical returns, it purchased Capital Returns Incorporated. In 2005, GENCO formed an LLC with BDP, a Philadelphia based global freight forwarder, to form BDP GENCO LLC, providing end-to-end capability for customers throughout the world. GENCO s mission is to provide value to its customers and teammates (employees) and to make money. It is committed to provide the best non-asset-based supply chain solution experience for its customers and to be the productivity, data management, and innovation leader for its industry. As Figure 1 illustrates, GENCO places its customers at the top of its organizational chart. Its teammate values are to: continually strive for better practices in all business processes; make and keep commitments to customers, teammates, business partners, and shareholders; behave in a legal, fair, and ethical manner; and show respect for self, other teammates, and customers by being prepared, open, and honest, and by resolving conflict APQC 1 Case Study GENCO GENCO Organizational Chart Figure 1 GENCO Supply Chain Solutions Figure APQC 2 Case Study GENCO Figure 2 illustrates how the companies processes are integrated with one another. GENCO s execution is based on its technology. The company has forward, reverse, and transportation solutions. Its reverse solutions include return center operations; value inspections; and asset recovery, which is executed through its wholly owned liquidation subsidiary GENCO Marketplace. GENCO s transportation solution is growing rapidly, especially internationally. It offers increased dedicated capacity opportunities through its Shipper Alliance program. The analysis solution examines the entire supply chain network. GENCO works with a variety of customers in a wide range of industries and provides a specialized set of services to each. (Appendix A contains a partial customer list.) The customer list includes original equipment manufacturers (OEMs) and original device manufacturers (ODMs), which turn to GENCO to meet the challenges of dealing with numerous parts, some of which are components of other manufactured goods. GENCO currently has its own warehouse management system (WMS) as well as Manhattan s complete integrated logistics suite and its own returns management system (RMS), and a transportation management system (TMS) powered by Sterling. The WMS is available for companies to purchase and adapt to their operations; however, GENCO s RMS,R-Log, is recognized as the industry s leading reverse logistics management system. R-Log is also available as a stand-alone system. Reverse Logistics Overview Reverse logistics is the process of moving returned, overstocked, and seasonal goods back through the supply chain for disposition to capture value otherwise unavailable, or for the proper disposal. GENCO s reverse logistics services include: processing returned merchandise for reasons such as damage, seasonality, restocking, salvaging, recall, or excess inventory; recycling packaging materials and reusing containers; reconditioning, remanufacturing, and refurbishing products; disposing of obsolete equipment; managing hazardous material; recovering assets; and reporting and providing decision support information. In 1988, GENCO s reverse logistics service, then known as returns, became a department. The early focus of reverse logistics was satisfying the unique needs of customers in the grocery industry. During the early 1990s, U.S. companies relaxed their return policies, and returns increased dramatically. In 1993, with the addition of Target to its customer base, GENCO s reverse logistics expanded to a national business unit. The business unit helped Target set up return policies, collected the returns from the stores, and brought them to one return center in Indianapolis. GENCO s reverse logistics team then provided four regional centers for K- Mart, thus introducing the regional-return-center concept. GENCO has 31 reverse logistics customers across North America, and revenue from managing return centers accounts for approximately 40 percent of total revenue. See Appendix B for a partial list of reverse customers. Figure 3 is the organizational chart for the reverse business, which includes both sales and operations and currently manages and operates 36 return centers (a total of 4 million square feet). Each center uses R-Log as its RMS. Because R-Log can save money and reduce costs for both customers and GENCO, the company discourages the use of customers RMS APQC 3 Case Study GENCO GENCO Reverse Business Organization Chart Figure 3 For retail customers, GENCO provides the advantage of speed. Companies cannot afford to have their products sitting in a warehouse for months; they need a proper disposition strategy executed rapidly so that they can receive credits and improve cash flow to invest in other areas. The return process has various sub-processes, which are listed in Figure 4. As products move through the sub-processes, GENCO serves as a gatekeeper, verifying whether they should have been returned, the reasons for return, the parties responsible for paying for transportation, and the best means of product disposition (in terms of both economy and ecology) APQC 4 Case Study GENCO The Return Process and Its Sub-Processes Figure 4 The Green Movement has caused many companies to rethink product design and logistics to minimize their impact on the environment. In many cases, this may extend to disposing of products at the end of their life cycles. Logistics managers must plan the reverse flow of products from the consumer with the same care as the distribution flow. GENCO explores all environmentally sound options with its customers. Figure 5 breaks down the costs of a product return. Components of cost include credit processing, customer service, repackaging, and disposal. Each company s costs will vary based on the market and type of product. As a cost-saving measure, GENCO also helps customers manage vendor return material authorizations (RMAs) APQC 5 Case Study GENCO Cost Breakdown of a Returned Product Figure 5 Figure 6 shows the average percentage of returns by industry. Comparing rates of return gives companies incentive to find areas for improvement. For example, preventing damage in the forward logistics process changing pallet packaging or stacking methods, improving packaging, or changing shipping loads is a way to reduce return rates. Percentage Return by Industry Figure APQC 6 Case Study GENCO Reverse Logistics Partnerships GENCO reverse logistics works with the following partners: RLEC (Reverse Logistics Executive Council); RLA (Reverse Logistics Association); Wincanton, a European partner using R-Log for all return center operations; Foxconn, which provides the product configuration for distribution and repair of returned product; Telamon, which is helpful in the Asia market and provides kitting/cto/bto and depot repair services; and BDP GENCO LLC, which provides international logistics solutions. II. REVERSE LOGISTICS STRATEGY DESIGN Figure 7 demonstrates the difference between reverse logistics and forward logistics. According to John Coffield, GENCO s vice president, sales, Reverse Logistics Solutions, forward logistics is a process ruled by monotony every product is the same, disposition processes are the same, process costs are the same, etc. With reverse logistics, however, each product is unique and requires specific thought and problem solving. Forward Logistics versus Reverse Logistics Figure 7 Coffield lists traditional stumbling blocks to a successful reverse logistics strategy: No executive overseer or champion takes responsibility to drive reverse logistics. Coffield says, We are beginning to see changes in the level of the person responsible for reverse logistics. In the past, a buyer, supply chain employee, or engineer handled returns. Today, a vice president or a president of reverse logistics is 2007 APQC 7 Case Study GENCO responsible. Before, we would have to find a person in the company who would champion or drive the management of returns. Reverse logistics is seen as just a cost. GENCO helps companies recognize customer satisfaction and service differentiation opportunities. Companies are unable to quantify the cost of returns. Reverse logistics involves soft costs, so without quantified data and cross-functional involvement, activity-based costing can be difficult to implement. GENCO helps quantify returns management and address various soft costs. For example, some companies manage returns in their distribution centers, but do not account for the space that the returns occupy or the shared resources that they consume. Some companies lack systems and information visibility. If an activity is not seen as a core business function, it receives low priority on the internal-programming and budget expenditure priority list. Coffield finds that companies, such as IT and communications corporations, have grown so rapidly and expanded so globally that the systems have not caught up. Coffield says, A rapidly expanding company is likely to adopt the various systems of its regional partners, creating a disjointed operation where there is no knowledge of its inventory through the world. Product is being shipped from one location to the other with no visibility. Inventory, disposition, and customer information is lost. Coffield says that GENCO s RMS is so strong that it can be adapted to harness reverse logistics across the entire company, increasing information visibility. Some companies have a silo rather than a cross-functional mentality. Communication among departments is limited. No one in the company knows who handles returns or how they are handled. Returns and manufacturing are not communicating, so manufacturing does not understand why its products are failing. Using RMS, GENCO can provide visibility across the company to enable communication for collaborative improvement initiatives. Some companies have poor (or poorly defined) manual processes. Companies cannot build a good reverse logistics program on a soft foundation. Coffield says, No matter how often a scenario happens or does not happen, it should be proscribed in the system. It should not be a company s tribal knowledge. Reasons for Managing Reverse Logistics The catalyst for each of GENCO s customers to begin managing reverse logistics varies widely.. One of its customers, a major computer OEM, began to do business with GENCO to do the following: improve the customer experience through credit accuracy and timeliness; lower operating costs through improved processes (e.g., implementing item rather than vendor sorts); force tribal knowledge into system features and functionality to document appropriate employee actions; reduce inventory levels; decrease cycle times; increase the visibility of returns; and increase focus APQC 8 Case Study GENCO III. ESTABLISHING A PHYSICAL REVERSE CHANNEL GENCO s reverse logistics solution includes an optimized, centralized return facility network in which GENCO manages the freight. GENCO has a proven returned products design and process, comprehensive disposition management, and a coordinated asset recovery program. End-user practices are changing because of the global economy. GENCO is able to track the customer who buys a laptop in the United States and returns it for another one in China. Because the laptop has U.S. software on it, the vendor partner in China knows to ship it back to the U.S. The system tracks the computer at every touch point, and GENCO handles the documentation required to move it from one country to another. As Coffield says, Everything is virtual. We may never touch the computer in transit, but the system touches it. For buyers and vendors, GENCO has established education, communication, and negotiation programs, including setting return policies, for buyers and vendors. Many OEM suppliers, especially high-volume electronics manufacturers, place limits on returns, accepting, for example, only a small percentage of total purchases. GENCO helps buyers negotiate better deals with suppliers, then helps them liquidate products they are not allowed to return under the newly negotiated agreement. Engineering, Designing, and Implementing a Solution GENCO is non-asset-based. It does not own warehouses, trucks, or planes. Because it has no assets, it is flexible. Customers are not forced to use GENCO-managed facilities and transportation. Coffield says, We set the system up so that it makes sense. It optimizes networks to achieve the cost savings that it needs. GENCO works with its customers to conduct in-depth strategy sessions that optimize the networks of return centers. Before it selects a site or a number of sites, it uses a modeling system that incorporates inputs such as to and from shipping data, customer locations, and product quantity. Return site selection is based on real estate costs, transportation costs, customer locations, and area labor costs and availability. The experienced returns center design team tailors a proven process flow and layout for specific product handling characteristics. It concentrates on scalability, flexibility, and efficient flows. A joint team comprising executive leadership and operational-level representation is responsible for implementation, which includes establishing connectivity and installing systems, phone lines, servers, and software. When a customer team is located in the center, the GENCO team needs to build its offices. The team integrates the site with transportation operations and carriers, defines current process and refinements, refines implementation plans and timelines, develops statements of expectations, and reviews proposed scopes in light of newly identified needs. Implementation methodology includes defining the project scope, identifying its objectives and assumptions, defining project constraints, preparing a scope management plan, defining implementation phases and creating task lists, estimating task duration, setting dependencies, allocating resources, and conducting risk assessment. Customer service vice presidents are responsible for tracking implementation progress, updating original estimates, reporting status to customers, identifying issues, taking corrective action and overseeing resolution, managing resources, reviewing planned and actual variances, and managing costs APQC 9 Case Study GENCO Responding to Requests for Proposal When GENCO responds to an RFP, it uses its engineering, design, and implementation methodologies to respond effectively. Each area involved estimates the price of its component based on the tested methodology. The company s proposal is detailed and open, and its pricing is divided between fixed and variable costs. GENCO has expertise in freight management. It is directly linked with FedEx, UPS, and DHL and helps customers locate discrepancies in bills. It can establish dedicated lanes for products; for example, a company may need to establish a scheduled weekly truckload from New York to a return center in Indianapolis. Various carriers bid with GENCO to move the returns, so it can negotiate to avoid LTL (less-than-truckload) and premium freight costs. GENCO s Project with a Major Computer OEM In April 2005, GENCO opened a return center for a major computer OEM in LaVergne, Tenn., marking a shift from the OEM s previous, multi-site management model. By consolidating operations at a single site, the OEM is able to receive real-time notification on inventory status that is, when inventory levels rise above or fall below a desirable range and take prompt corrective action when necessary. The return center, which handles peripherals, printers, and other non-computer devices, uses a vendor-mall model in which suppliers receive, test, and repair their parts in a dedicated section of the site. The vendor mall has reduced transportation and labor costs by 7 percent. This success with consumer returns, product refurbishment, and fulfillment convinced the OEM to trust GENCO with its Warranty Service Center. After some analysis, GENCO chose to locate the center in Columbus, Ohio due to its proximity to the OEM s existing fulfillment operation, the availability of technical labor, and its proximity to the headquarters of DHL the OEM s primary carrier for parts fulfillment. GENCO uses R-Log to manage all aspects of the OEM s returns, including the enabling of credit to the OEM s customers, tracking and disposition of each returned item, and management of all parts sent to both internal and external testing and screening vendors. R-Log has significantly improved knowledge transfer. In the past, no rules controlled the receiving of some small parts. Employees threw the parts into a bin and eventually recycled them. Many times, Coffield says, parts are lost when they are not inside the four walls of a company. With GENCO s Web-based systems, the OEM can now track parts along the entire supply chain, and departments across the enterprise can view returns status, inventory, analysis, and metrics. The OEM has experienced a considerable improvement in its net recovery on returned parts. Scrap was reduced and fulfillment improved; the company is better able to manage its inventory. Coffield says, For a company s employees to be able to view ad hoc how they are doing in return logistics
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