Demand and Supply Integration in the Closed Loop Supply Chain

The last several articles in this series on Demand and Supply Integration (DSI) have set the stage for understanding the importance of both intra-firm and inter-firm collaboration in order to bring about truly integrated supply chain performance. As Terry Esper acknowledged in the second article of the series, DSI is “a holistic approach to managing demand creation and management activities by aligning them with all the processes and activities necessary to fulfill demand.”

To the uninitiated, this definition seems to reinforce the notion of a supply chain as a uni-directional flow of product (that, is products move “down” the supply chain, from suppliers to the ultimate customer). Nothing could be further from the truth, however. In the “Back to Basics” series, I addressed some of the issues of the reverse flow by discussing reverse logistics and returns management. The savvy supply chain manager, therefore, must consider how to develop a DSI orientation that integrates both the forward and reverse flows across the supply chain.

In a world of increasing resource scarcity (think water, rare-earth metals) and volatility (think fuel prices, carbon ‘taxes’), firms are increasingly addressing their roles as corporate citizens on a planet with finite carrying capacity. Such consideration was not part of business leaders’ “top issues” list during most of the 20th century. But as this century continues to advance, resource scarcity issues will come to dominate our business landscape. Developing effective DSI processes now will enable firms to develop competitive advantages and capabilities that will carry them in to the future.

While forward supply chains focus on moving product toward the customer, reverse supply chains focus on moving product from the customers back toward the point of origin.

Products move upstream for a variety of reasons (addressed in the “Back to Basics” article on returns management), but what’s important here is how and why companies manage the acquisition of such products, and then the processing and disposition of those “reverse” products. Actively designing supply chain structures and processes that integrate both forward and reverse product flows moves a firm into the realm of closed-loop supply chain management.

The closed-loop paradigm consists of three major themes:
1) Returns management, product acquisition, and asset recovery
2) remanufacturing and secondary markets, and
3) life-cycle management

Returns management, as discussed in the “Back-to-Basics” series requires supply chain capabilities for effectively and efficiently managing the reverse flow of product. However, it’s one thing to manage the returns that “happen”; it’s another to purposefully seek products to enter the reverse stream. Yet, product acquisition and asset recovery involve very proactive initiatives on the part of firms and their supply chain partners to recapture products from the marketplace. In a world of resource scarcity and rising raw material costs, such an approach increasingly makes sense. For example, the millions of de-commissioned cell phones sitting in consumers’ kitchen junk drawers may not be worth much individually, but the precious metals in them add up to significant dollar value when viewed collectively. Reverse supply chains to recapture used cell phones are now becoming commonplace for the purpose of recapturing the valuable components within the phones. As commodity prices rise, recapturing metals such as gold from individual phones becomes economically viable as a means to controlling costs for cell phone manufacturers (or any firm wishing to deal in precious metals).

Product recapture will require the joint efforts of end customers, retailers, 3rd-party logistics providers, and a host of processors that will become part of the reverse supply chain. The plethora of involved parties will demand a high level of inter-firm collaboration and efforts to create DSI-oriented supply chain relationships that are focused not only on getting products to the customer, but also on getting products from the customer.

Recapturing product or assets is only part of the story. Remanufacturing and refurbishment of returned products offers firms a significant opportunity to recapture value from the returned products. Whether the remanufacturing facilities are co-located with the original manufacturing sites or not, a high level of DSI is required to effectively manage the conversion of “used” inventory into sellable inventory. Whether parts can be recaptured for use in new products, or as repair/service parts in field support operations, this needs to be coordinated with existing production and procurement plans. Recovery rates on remanufactured/refurbished goods must be managed and integrated with production of new product and also aligned with market demand for products. Thus, a high level of intra-firm integration is required to coordinate the flow of inventory back to the firm, through the re-conversion process, and then, as the remanufactured product is re-inserted, to the forward supply chain again.

Such efforts also require a high level of DSI with suppliers and customers. In fact, integration efforts can be taken back to the product design stage. Many firms are increasingly working with their suppliers to design products for disassembly or remanufacturing. Such collaborative efforts in the early stages of a product’s life cycle ensure that the remanufacturing process will be more efficient, with higher recovery rates.

Firms are also finding it important to integrate their efforts with 3rd-party processing and logistics firms to better coordinate the flow of returned products back to the (re)manufacturing site, and aligning network flows with the more conventional forward distribution flow of products.

At the same time, marketing plans and activities need to focus on developing secondary markets in which the remanufactured products (or component parts) can be successfully sold. Obviously these markets should not compete with the firm’s primary markets, requiring a high level of understanding and joint decision-making across the operations, logistic, and marketing/sales functions of the firm to manage the multiple kinds of markets for the firm’s product offerings.

Discussion of secondary markets suggests that products often have multiple lives. Traditional supply chain management has focused on the ‘first’ product life of a product. But as recovery efforts increase, for both environmental impact reasons as well as for economic reasons related to value recapture, firms are recognizing that products have multiple lives. A closed-loop supply chain approach encourages a firm and its supply chain to actively manage products over multiple lives.

Some firms, like John Deere or Caterpillar, have long-recognized the long and multiple life cycles of their products. Tractors and earth-moving equipment tend to last for decades; these firms have developed expertise in servicing their products for their customers over very long life cycles. Recovery of parts and refurbishment and/or remanufacturing of parts (such as engines or turbines) are routine business practices for these firms.

Firms that have traditionally managed their supply chains only to the point of initial sale to the customer have much to learn from the expertise of firms such as Deere or Caterpillar. Not all products have the lengthy life cycle of tractors or heavy equipment, but many products can have multiple lives. Firms need to distinguish between end-of-use and end-of-life.

In our disposable culture, customers often “finish” with a product long before its useful life is over. Recapturing such products for refurbishment or remanufacture enables them to be sold in secondary markets over multiple lives. But unless firms have a closed-loop supply chain orientation and have purposefully set about to manage products over those multiple lives, they are losing out on potential profits, to say nothing of improved resource management.

Closed-loop supply chains don’t just happen. It takes leadership to transform a firm’s thinking from forward-flow-only to one of integrated forward and reverse flows. Corporate leaders needs to develop their corporate cultures to embrace upstream and downstream integration to better manage demand and supply across the multiple lives and markets of their products.

Editorial Note:
This series is titled “Supply Chain Management: Beyond the Basics” and a new installment will appear each week on our website. It picks up where our original series of articles from Tennessee—the “Basics of Supply Chain Management” — left off. Among the topics we’ll be covering in this latest series are successful collaboration, supply chain risk management, strategic sourcing, supply chain finance, and more.

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