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

Radio frequency identification implementation brings about many potential impacts on a closed-loop supply chain, and companies in various supply chain positions may reap different benefits from RFID applications. Radio frequency identification can be used to track the movement of items through the supply chain in real-time. This provides higher visibility for inventory and assets in the supply chain (Seideman, 2003) and facilitates better management of inventory and logistics (Jones et al., 2004). Radio frequency identification also improves the safety and security of the supply chain through improved track and trace, more efficient recall management, better expiration date management and reductions in shrinkage (Chappell et al., 2003). Hence, a higher level of detailed analysis can be done to guide the management and synchronization of the supply chain. Increased synchronization enables collaborative planning, forecasting, and replenishment (CFPR) activities beyond the typical buyer-seller relationship. In addition, RFID technology can also be used to enhance value recovery.

When products are returned, RFID can be used to accurately identify the point of sale and the specific model of the product. Accurate product identification will make the disposition process more efficient and speed up the value recovery process. Radio frequency identification tags could also contain valuable information on how the product was utilized by the customer, which can be used to estimate the quality level(s) of the return. This increased transparency and efficiency will facilitate the integration of return flows into the forward flows.

For example, suppose a truckload of machines is to be returned from a disposition center to the original equipment manufacturer (OEM) for either refurbishment or cannibalization. As the truck leaves the disposition center, the contents are scanned and the information is relayed to the OEM. Knowing the lead time for delivery, the OEM can begin planning the disassembly and refurbishment schedules. Forecasts of recoverable parts from cannibalization can be used to reduce the number of new parts needed to refurbish the machines, thereby reducing purchasing costs. Since cannibalized parts will be used in the refurbishment process, the disassembly and refurbishment schedules will need to be coordinated. Downstream customers can be notified of potential completion dates for refurbished machines, and upstream recyclers can be notified of raw materials availability, thereby reducing their purchase of more expensive virgin raw materials and facilitating their planning process. More efficient value recovery will reduce disposal waste, thereby benefiting society as a whole.

We now discuss in more detail the use of RFID to enable product identification and product disposition, and to enhance value recovery. In our discussion we assume that tagging is done for individual items that meet a value threshold determined by the supply chain entity that is either responsible for the recovery of the item or stands to gain from a value recovery option.

Enabling Product Identification

Before a product return is sent upstream for value recovery the product needs to be accurately identified and the correct disposition decision needs to be made. Due to lenient return policies for consumer goods by retailers, product returns at retail locations are increasing (Rogers and Tibben-Lembke, 2001; Guide et al., 2003). Most retailers have a no-questions-asked policy concerning returns since they want to keep customers happy and speed up the line at the customer service counter. Currently, a retail store cannot be 100% certain that the return was indeed sold by the store or even by the retail chain which the store is part of. It is estimated that fraudulent returns cost retailers and the manufacturers who often have to take back the returns billions of dollars annually. Fraudulent returns can be stolen at various points along the supply chain or purchased below full retail value at outlet stores and returned to retail stores for full refunds (O'Connor, 2004).

The serial number portion of the EPC on a tag is reserved to identify the unique product item and has the capacity to uniquely identify nearly 69 billion items for a single stock-keeping-unit (Brock, 2001). Since a tagged item can be monitored throughout the supply chain, the tags EPC is logged onto the company database when the company assumes ownership of the item. When an RFID-tagged item is sold or shipped to the customer, the tag can be locked so it cannot be written over. When the item is returned, the customer service representative can scan the tag and reconcile the item with the stores' records to determine the validity of the tag. The use of RFID to validate the item removes the proof-of-purchase from the customer and places it on the item. This system could also be used to effectively protect against returns of counterfeit items. In addition, the EPC code can be used to correctly identify returns of products that have undergone various model changes. These could include household appliances, kitchen equipment, electronics, and auto parts. In this scenario, automatic product identification can speed up the disposition process.

Enabling Product Disposition

After a product has been validated as a genuine return, a decision must be made regarding where to send the product to maximize value recovery. Correct product disposition requires knowledge of the value recovery options available. However, the employees processing the returns might not have this knowledge, especially in the retail environment. A survey on reverse logistics practices by Rogers and Tibben-Lembke (2001) found that nearly 70% of respondents used a central returns center (CRC) for processing returns. A CRC sorts and disposes all returns and is often located upstream from the point of return.

The benefits of a CRC are an increase in the percentage of value recovered, improved efficiencies and a gain in product information in regards to the best disposition. An obvious disadvantage of a CRC is the transportation and handling cost of product that should have been disposed of when it was returned. An additional drawback of a CRC is that product recovery lead times can increase. Blackburn et al. (2004) recommend disposition as early as possible in the reverse channel in order to avoid unnecessary processing expenses and to speed up the recovery of products with significant value. Recovery speed is critical for products such as electronics that have a high marginal value of time (MVT) or machines that can be cannibalized for repair or refurbishment operations. Products with high MVT rapidly lose value as they spend time in the reverse channel (Blackburn et al., 2004). Savaskan et al. (2004) conjecture that for manufacturing returns, the supply chain entity that is closest to the customer is the most effective point of return.

Radio frequency identification technology can improve the efficiency of the disposition process by enabling disposition at the point of return instead of at a CRC. When the tag is read to validate the return of the item, the reader can also retrieve the product information over the Internet. The system can then automatically select the value recovery option or activate a decision support system to aid in the selection of a value recovery option. The system can also recommend immediate disposal (Parlikad et al., 2003).

A key obstacle to maximizing the value from product recovery is that information associated with the product is often lost after the sale. This information includes product identity, components composition, and current state. The current state of a return is based on the operating conditions the product was used under and any maintenance performed. This obviously impacts the structural composition of the materials and the quality of the components.

An active or semi-active tag can be used to capture information on product usage and such information can be used to improve the accuracy of the estimated residual value of the return (Parlikad et al., 2003). For example, the Robert Bosch Group installs an Electric Data Log (EDL) in power tools with electric motors to optimize the end-of-life product recovery. The EDL collects information on a set of parameters measured during the use of the product that influence the life expectancy and therefore recovery value of the motor. The information on the EDL is retrieved via wireless data transmission using a light emitting diode (LED) and the measurements have proven to be more reliable in evaluating returned tools compared to the cost of testing (Klausner et al., 1998). The performance characteristics of a LED are similar to a bar code and it is foreseeable that low-cost RFID tags can be used to efficiently transmit information from the EDL.

The information collected on product usage can be forwarded to the manufacturer's new product development team to help them improve product quality (Gross et al., 2003). The specific benefits of sharing knowledge of part usage and failure include improved part design, lower redesign cost of a new replacement part, reductions in failures and repair costs, and improved customer service (Mabee et al., 1999). Information on usage and part failure can also be used to develop preventive maintenance and part replacement schedules.

Enhancing Value Recovery with RFID