Enhancing product recovery value in closed-loop supply chains with RFID.

The downstream movement of goods from the manufacturer to the retailer for sale to consumers is referred to as a forward supply chain. When consumers return their purchases to the retailer for a refund, a repair or a recall, an upstream movement of goods occurs from the retailer to the manufacturer. This upstream movement of product returns is termed a reverse supply chain (often called reverse logistics) (Tibben-Lembke and Rogers, 2002). Closed-loop supply chains refer to the integration of both forward and reverse supply chain activities (Guide et al., 2003).

Closed-loop supply chains are a key component of sustainable business operations and they have begun to receive increased attention from both practitioners and academicians. This interest is driven by legislative environmental regulation for companies that operate in the European Union and by economic factors for companies in the United States. Additionally, companies exporting to Europe will also have to abide by these laws and adjust their business practices to be environmentally friendly (Guide et al., 2003).

For U.S. manufacturers, product returns have expanded from a limited volume of high-value goods to a large variety of low-value goods, due to shorter product life cycles and lenient return policies at retailers (Tibben-Lembke and Rogers, 2002; Guide et al., 2003). Rogers and Tibben-Lembke (2001) estimated overall customer returns for general merchandise in the U.S. to be approximately 6% of sales, which in 1999 would have been over $38 billion worth of returned goods. These proliferations of product returns have increased costs for manufacturers since they typically must credit the retailer and then determine the most cost-effective way to dispose the returns (Blackburn et al., 2004). It should be noted that recovered parts and components often can be used to reduce production costs and to provide a cheap source of parts for service repairs (Toffel, 2004). Furthermore, the Supply Chain Council has identified the management of product returns as one of five key supply chain processes (SCOR, 2005). Hence, the development of effective and efficient, strategically managed closed-loop supply chains is becoming more important to practitioners.

Chopra and Meindl state "Information is crucial to supply chain performance because it provides the foundation on which supply chain processes execute transactions and managers make decisions" (2004: 482). To be useful in aiding supply chain decisions, information must be accurate, accessible in a timely manner, and be of the right kind (Chopra and Meindl, 2004). A relatively new information-sharing technology being utilized in the supply chain is radio frequency identification (RFID). Radio frequency identification is a data acquisition and storage method, which promises numerous supply chain benefits: improved speed, accuracy, efficiency and security of information sharing across supply chain (Jones et al., 2004). Additional benefits realized are: (1) reduced storage, handling and distribution expenses, (2) increased sales through reduced stock outs, and (3) improved cash flow through increased inventory turns and improved utilization of assets (Karkkainen, 2003).

The major drivers behind RFID implementation are retailers such as Wal-Mart and the U.S. Government. In January 2005, Wal-Marts' top 100 suppliers were required to tag all pallets and cases they shipped to Wal-Mart distribution centers. The next top 200 suppliers were to tag all pallets and cases by January, 2006 and all suppliers by the end of 2006 (RFID Journal, 2004). Other early retail adopters of RFID technology include The Gap, Woolworth's, Prada, Benetton, and Marks & Spencer (Wilding and Delgado, 2004c). The U.S. Department of Defense required its 43,000 suppliers to put RFID tags on pallets, cases and on any single item with a cost of more than $5,000 beginning January 1, 2005 (Collins, 2004a). In addition, the U.S. Food and Drug Administration (FDA) has called for the implementation of RFID technology to track the distribution of prescription medicine in order to protect the medical supply chain from counterfeit drugs. Companies in the health care industry will have to tag pallets and cases by 2007 to meet the FDA's goal (FDA, 2004).

Though the literature on closed-loop supply chains has discussed a large number of integrated aspects and value recovery options, none of these articles have described the use of RFID in a closed-loop supply chain. The purpose of this article is to introduce RFID technology in closed-loop supply chains to practitioners and academicians. This review will offer useful guidance for companies which plan to implement RFID and we expect it to provide the motivation for future research in this emerging area.

The article is organized as follows. We first define a closed-loop supply chain, discuss its key characteristics and describe all the available value recovery options. Next, we discuss how RFID systems work and provide the motivation for utilizing RFID in closed-loop supply chains. We then discuss how RFID can be effectively used to enable decision making during the return process and to enhance value recovery. Lastly, we offer our concluding remarks, suggestions for further research on RFID systems, and implementation advice for practitioners.

CLOSED-LOOP SUPPLY CHAINS

Closed-loop supply chains have become an important area of focus for both practitioners and researchers due to the potential benefits from integration of the forward and reverse supply chains. The differences between forward and reverse supply chains make the integration challenging and necessitates an understanding of the characteristics of a closed-loop supply chain.

Characteristics of a Closed-loop Supply Chain

Based on the work of Thierry et al. (1995) and Krikke et al. (2004) a general view of a closed-loop supply chain is presented in Figure 1. Key characteristics of Figure 1 are the supply chain entities, decision points, and value recovery options that close the loop between the forward and reverse supply chains. Depending on the firms' business model, different supply chains might exist for different product lines. In addition, the forward and reverse supply chains could operate in different channels, and a firm can potentially belong to several supply chains within the same industry. Therefore, some additional discussion concerning Figure 1 is warranted.

[FIGURE 1 OMITTED]

The majority of consumer goods are purchased at retail locations, but sales can also originate from paper catalogs, at call centers or over the Internet. Capital goods such as customized manufacturing equipment may be purchased directly from the manufacturer, thereby skipping the distribution center. We separate the point of return from the point of sale because not all products are returned to the original seller. Examples include community recycling centers, third-party service calls, and automotive scrap yards. We consider the service entity in our network to be a location where service technicians are dispatched from to perform maintenance and/or repairs at the customer's site. Byproducts from the service call initiate the reverse flow for product recovery, and the decision steps of product identification and product disposition are performed by the technician.

The process of product identification occurs before product disposition. Accurate product identification can eliminate return fraud by proving where and when a product was purchased. Product disposition determines where to send a returned item in order to either maximize value recovery and/or reduce the environmental impact of disposal. Some products might require testing in order to (hopefully) determine the correct final destination of the return.

We show reverse flows that originate from all entities in the forward supply chain. Van Nunen and Zuidwijk (2004) identified product returns that are initiated by: customers (warranty, service, end-of-use), distribution centers (product recalls, obsolete goods, redistribution of goods), and manufacturing facilities (raw materials surplus, re-work, production scrap). Product returns from retailers include damage in transit, expired date code, discontinued product, seasonal product, high and/ or imbalanced retailer inventories and retailer going out of business (Tibben-Lembke, 2002). Of course, all entities in the supply chain generate return flows as a normal by-product of conducting business operations (paper, packaging material, beverage containers, etc.). We assume that value recovery options for return flows emanating from supply chain entities do not need to go through an identification and disposition process.

Value Recovery Options in Closed-loop Supply Chains

Depending on the type of product returned, its condition and its anticipated future demand, a variety of value recovery options are available. Value recovery options include direct reuse, direct resale, repair, refurbish, re-manufacture, cannibalize, and recycle (Thierry et al., 1995; Krikke et al., 2004). The following discussion is based on Thierry et al. (1995) and Krikke et al. (2004).