Rijksuniversiteit Groningen Maria Xavier
August 2006
Downstream reverse logistics at Organisation Alpha Moving towards returns management
Author: Maria Xavier
University of Groningen Faculty of Management and Organisation 1
Stsupervisor: Drs. D. Vegter 2
ndsupervisor: Dr. G. Rüel
Organisation Alpha Supervisor: [CONFIDENTIAL]
Groningen, The Netherlands, August 2006
Management Summary
Organisation Alpha is a GHI company. The organisation manufactures and markets high-level medical devices which are distributed worldwide. The ABC sub-department of Organisation Alpha acts as the focal point of contact between the organisation and its customers.
DRL services are perceived as non-value-adding activities by the organisation. Controversially, it still is in the interest of the ABC management to keep these services available. Therefore the research question of this research is:
How can Organisation Alpha optimise its DRL activities, still fulfiling both customers’ expectations and ABC management objectives?
To answer the research question, the research is composed of three phases. The first two phases aim at finding the characteristics of DRL activities that are requiring more resources than necessary. The last one outlines the recommendations.
The first phase depicts how DRL activities are organised at Organisation Alpha It presents the delivery process of the DRL services and provides a cost estimate:
□ The two classes of DRL services, return authorisation (RA) and shipment complaint (SC), have particular delivery processes which may cause differences in time consumption.
□ A cost estimate indicated that DRL operations at Organisation Alpha costs €10.180,00 per month.
□ Handlers, who are shared resources, have the highest time consumption rate on DRL activities. In the view of ABC management, the amount of work hours involved in returns has to be reduced.
The second phase of the research is divided in three steps. The first one investigates demand characteristics for the two classes of DRL services provided by the organisation. The results are:
□ Demand for the RA service accounts for 80% of the total demand for DRL services at Organisation Alpha.
□ The main return reasons reported by customers are overstocked, C2 only, received damaged, and ordered wrong.
□ The main customers for DRL services are C2, C1, C3, C5, C18 and C22.
□ The global return rate is 0.92%. The rate differs strongly per distribution channel and system. The biggest demand for DRL services comes from MNO customers (return rate of 2.04%), followed by PQR customers (return rate of 0.97%) and JKL countries (return rate of 0.20%).
The second step analyses the performance of DRL services.
□ On average, the throughput time for the RA process is 11.07 days and for the SC process is 9.75 days.
□ Analysis of individual operations’ reliability showed that the WH team is late in 23.46% of cases regarding the RA service.
□ Handling SC is 1.7 times more time-consuming than it is RA.
□ From employees input, it is seen that the timeline rules are not completely known by the WH team. And also, approvers try to avoid dealing with C2 requests. Finally, in the view of both handlers and the WH team, dealing with SC is more complex than with RA.
The third and last step of the second phase searches how the impact of DRL services is felt downstream in the supply chain and the customers’ satisfaction. The most important findings are as follows.
□ The main DRL customers confirmed that to a great extent the same DRL services are also provided to end-customers.
□ DRL services provided to MNO customers enable these customers to supply DRL services to end- customers (e.g. hospitals).
□ Customers indicated that the quality of information, the reliability of the DRL services, the accessibility to the department and the supply of information could be improved.
□ Organisation Alpha authorises the return of 94.60% of the requested units. In their turn, customers send back to Organisation Alpha 93.52% of all authorised units. Out of the returned units, value can be recovered for 92.01%.
The last phase of the research responds the research question by presenting recommendations to meet the objective outlined by the ABC management for DRL services. Recommendations in areas through which the organisation can optimise its DRL activities were clustered into three levels to be described next.
□ Operational recommendations
o Adjustments to SC handling o Managing demand for RA service o Adjustments to the RDB
o Empowerment of the WH team o Empowerment of handlers o Adjustments to timeline rules
o Improvements aiming towards customer satisfaction
□ Tactical
o A returns policy segmentation model
□ Strategic
o An avoidance component for the organisation’s current returns policy
Preface
In the context of my study in the field of Business Administration in the Faculty of Management &
Organisation (FMO) of the University of Groningen, I have performed my final assignment at the ABC department of Organisation Alpha The organisation offered me an extremely appealing subject to put into practice the knowledge obtained during my master program with specialisation in Operations and Supply Chains. The investigation took four and a half months and its results are presented in the following pages.
I take the opportunity here to thank some people who have supported me during my studies in Groningen.
I would like to start with those who assisted me during the final assignment. Organisation Alpha’
employees have been of great assistance in my search of information throughout the organisation. I must also thank for the Nederlandse lessen. Firstly, I thank [CONFIDENTIAL], my supervisor at Organisation Alpha, who stood by my first steps in the organisation and made a lot of good practical comments on the project. I am really thankful to the warehouse team and ABC employees for kindly participating in the surveys. I have to thank especially [CONFIDENTIAL], [CONFIDENTIAL] and [CONFIDENTIAL]. Hartstikke bedankt!
Following, I thank both my supervisors of the FMO for the time invested in my project. Drs. D. Vegter, my first supervisor, for his constructive criticism and comments, and dr. G. Rüel, my second supervisor, for her helpful orientation in the research setup.
Secondly, I am thankful to all lecturers of the program of the MScBA – Operations and Supply Chains who offered me such an enriching experience. Dr. M. Land absolutely has to be mentioned here for his prompt and always gentle assistance. I also thank Drs. D. Schaap who welcomed me to important discussions.
Last, but not least, I owe much gratitude to my family and friends who virtually make themselves present
during good occasions, but also in hard times. I especially thank my parents and Jaco for always being
present. Muitíssimo obrigada!
TABLE OF CONTENTS
Management summary ... 2
Preface ... 4
Chapter 1. The organisation – Organisation Alpha, a GHI company... 8
1.1. Introduction ... 8
1.2. GHI group ... 8
1.3. Organisation Alpha Worldwide and Organisation Alpha... 8
1.4. The DEF Department at Organisation Alpha ... 8
1.5. Conclusion ... 9
Chapter 2. Research setup... 10
2.1. Introduction ... 10
2.2. Motivation and objectives ... 10
2.3. Research question and sub-questions ... 10
2.4. Research approach, data collection and resources ... 11
2.5. Theoretical framework ... 13
2.6. Structure of the report... 15
Chapter 3. Organisation of DRL activities at Organisation Alpha ... 16
3.1. Introduction ... 16
3.2. Downstream reverse logistics (DRL) ... 16
3.3. DRL at Organisation Alpha ... 16
3.4. The current returns policy of Organisation Alpha ... 17
3.5. Actors within Organisation Alpha... 18
3.6. The delivery process of DRL services ... 19
3.7. Costs involved ... 23
3.8. Conclusion ... 24
Chapter 4. Demand characteristics... 26
4.1. Introduction ... 26
4.2. Demand volume ... 26
4.3. Demand fluctuation... 26
4.4. Main reasons ... 27
4.5. Main costumers ... 28
4.6. Reasons per main customers ... 30
4.7. Return rate... 30
4.8. Conclusion ... 32
Chapter 5. Service performance... 33
5.1. Introduction ... 33
5.2. Throughput time ... 33
5.3. Service reliability... 34
5.4. Time-consuming ... 34
5.5. Employees’ experience ... 35
5.6. Conclusion ... 36
Chapter 6. Customers input... 38
6.1. Introduction ... 38
6.2. GHI affiliates and their customers... 38
6.3. Organisation Alpha and GHI affiliates... 39
6.4. Voice of the customer ... 39
6.5. Customer reliability ... 41
6.6. Conclusion ... 42
Chapter 7. Recommendations ... 44
7.1. Introduction ... 44
7.2. Operational recommendations... 44
7.3. Tactical recommendations... 46
7.4. Strategic recommendations ... 47
References ... 45
Appendices ... 46
Chapter 1. The organisation – Organisation Alpha, a GHI company
1.1. Introduction
The aim of this first chapter is to introduce Organisation Alpha, the organisation, to provide the reader with an understanding about the organisation over which this research is performed. For that, first a brief presentation about the GHI group, which Organisation Alpha belongs to, is given. Organisation Alpha Worldwide is presented next along with Organisation Alpha Finally, the ABC sub-department (ABC) is presented where this research is performed.
1.2. GHI group [CONFIDENTIAL]
1.3. Organisation Alpha Worldwide and Organisation Alpha [CONFIDENTIAL]
1.4. The DEF Department at Organisation Alpha
The DEF department is responsible for the distribution of end products. The department takes care that sufficient products are available in the warehouse in order to meet customers’ demand in time. In this task, DEF department is right between two conflicting interests. On one hand, customers wish their orders to be fulfilled in time. On the other hand, factory prefers a steady order load [Krom, 2006:10].
[CONFIDENTIAL]
In order to carry out one of the three core activities of Organisation Alpha, DEF department is divided in three sub-departments illustrated in figure 1.2 and further described [Intranet Organisation Alpha, 2006].
□ Supply & Demand Planning ensures that enough products will be available to meet customers’ needs, by estimating demand for products before production begins. During monthly meetings held with production, capacities are discussed. Agreed upon that, Supply Planning places an order weekly. Next to products manufactured in Location Alpha, the organisation also place orders in Mexico’s and Puerto Rico’s plants. However, Organisation Alpha has also external suppliers, that is, Original Equipment Manufacturers (OEM).
□ ABC (ABC) is the focal point of contact between the organisation and GHI affiliates, distributors and Organisation Alpha warehouses. There are three teams within this sub-department, namely Master File Maintenance (MFM), Cardio Team and Endo Team. MFM deals with the maintenance of Distribution Control System (DCS), the information system used throughout the DEF department in order processing activities. This system has to be often updated with information on new products and clients’ codes.
Otherwise products cannot be stored in the warehouse and, consequently, will not be shipped to customers. Regular updating is also made to pricelists in order to create customer invoices and for customs clearance purposes as well. Endo and Cardio teams have similar tasks. These are processing orders and related activities (e.g. maintenance of contact with customers, supply of documentation and reports), handling of returns and shipment complaints, processing of credit entries, planning supply and demand, and maintenance of master files. Endo team takes care of replenishing Organisation Alpha local warehouses in C10 and C17 and the Regional Distribution Centre for APAC area (C5) in Singapore.
Besides these countries, Endo team also handles orders from GHI affiliates and distributors in other Asia Pacific Countries (APAC), Latin America and C22. Cardio team handles orders from C1, C2, C3, C4, C6, C7, and other European customers, Africa, Middle East.
Orders handled by ABC sub-department are distributed through two distinct channels; so-called MNO (MNO) and via PQR (PQR). Especially in Europe, a growing number of customers is moving towards MNO channel. This means, products are shipped straight to end-customers (e.g. hospitals) upon placement of an order via the GHI affiliate in their own country. C1, C3, C2, C14, and C19 are examples of countries which employ currently this distribution channel. The second distribution channel, via local GHI
Figure 1.1: Organisation of DEF department
warehouse, is employed by countries as C4, C17, C34 and C37. The GHI affiliates or distributors in these areas buy products from Organisation Alpha in Location Alpha and store them in their own warehouses to sell to end-customers at a later stage. In addition to that, for same countries, Organisation Alpha operates the JKL process. That is, the organisation is responsible for replenishing local Organisation Alpha warehouses in the C17, C4, C5, C6, C7, and C10.
□ Warehouse & Shipping (WHS) can be seen as two parallel departments. Warehouse registers products from the sterilization department and other external suppliers. Products are stored in the warehouse and registered within the DCS. Upon release of an order by ABC, warehouse takes care of the picking, packing and shipping of the products. The growing number of MNO orders has increased the workload at the warehouse. That’s because this distribution channel originates a great number of small shipments. This increase of workload is also experienced at the Shipping department which takes care of all necessary paperwork for transportation. The transportation of products towards customers is performed by third part companies, such as DHL and UPS.
1.5. Conclusion
[CONFIDENTIAL]
Chapter 2. Research setup
2.1. Introduction
The purpose of the second chapter is to put forward the research outline. First, the motivation and objectives of this research are presented so that the research question and sub-questions are formulated.
In the following, readers will find the research approach, data collection and resources. Thirdly, the theoretical framework is presented. The chapter ends with a presentation of the structure of the research.
2.2. Motivation and objectives
The ABC management proposed an assignment to analyse and improve its downstream reverse logistics (DRL), or returns as it was known. Although the existing limited insight into DRL activities, there was a perception that the handling of returns was absorbing more resources than necessary.
In the view of ABC management, returns handling is a non-value-adding activity performed by non- dedicated resources within the department. ABC employees are shared resources processing both customer orders and returns requests. Given that, the main concern of ABC management is that the handling of returns may jeopardize the processing of customer orders, ABC employees’ main task.
Why does the organisation provide such services, though? The answer to this question lies in the fact that these are perceived by ABC management itself as additional services provided by the organisation to its customers. Controversially, no formal reference is made to returns within the organisation’s product/service agreements (PSAs), but an informal agreement. It is recognizable in the words of ABC management when stating that “we have been handling returns this way ever since”. Such informal agreement takes shape through the organisation’s returns policy which outlines conditions for returns acceptance and credit.
Clearly, consumers of high-level products expect them to be supplied with additional services.
Organisation Alpha’ customers benefit from two classes of returns services, return authorisations (RA) and shipment complaints (SC). For brevity, the term “returns request” is used in this research covering both RA and SC. Such informal agreement takes shape through the organisation’s returns policy which outlines conditions for returns acceptance and credit.
What distinguishes the two classes is the root of the return reason. The root of RA services lies on customers’ side or still within Organisation Alpha, but out of the boundaries of the DEF department (e.g.
invited bys, return invited by Organisation Alpha). For instance, customers can use RA to get rid of old or low-moving products. Keeping “fresh” inventory is of great importance mainly for items with short use before date (UBD). On the other hand, demand for SC services is linked to some failure on order processing activities within Organisation Alpha which led customer to receive products out of ordered specifications.
Provided the points above, it is the aim of ABC management to keep DRL services available in such way that delivering them does not hamper shared resources on their forward-logistics tasks. Achieving this goal requires DRL operations in Organisation Alpha to be clarified first. Lack of clarity into this logistics field is not experienced only in Organisation Alpha. The greatest barrier to implementation of reverse logistics solutions is its importance relative to other issues. There is, however, evidence that this way of reasoning is changing, as good reverse logistics practices can be used to enhance company’s overall performance [adapted from Rogers et al, 2001]. Seemingly, ABC management realises that.
Further to the recognition of research motivation, the objectives of this research are twofold:
□ To provide Organisation Alpha with clarity about its DRL activities
□ To make recommendations about how DRL operations can be optimised, regarding ABC targets
2.3. Research question and sub-questions
Once the objectives of this research are stated, the research question is formulated as follows.
How can Organisation Alpha optimise its DRL activities, still fulfiling both customers’ expectations and ABC management objectives?
In order to get the research question answered, it is split into a number of research sub-questions The
research sub-questions begin to investigate the first element of the research question (i.e. DRL operations
organises its DRL operations, demand characteristics for such services and, finally, their performance.
These research sub-questions aim at clarifying the origin of resources consumption.
To be able to understand the current delivery process of DRL services provided by the organisation and the costs involved, the way Organisation Alpha organises such operations must be investigated. The first research sub-question therefore is:
1. How DRL operations are organised within Organisation Alpha?
□ What are the returns services delivered by the organisation to its customers?
□ What is the current DRL policy?
□ What are the actors involved within Organisation Alpha and what are their tasks?
□ How is the service delivery process organised?
□ What are the involved costs in handling returns?
Aiming towards achieving the first objective of this research, to provide Organisation Alpha with clarity about its DRL activities, the second research sub-question is defined hereunder.
2. What are the demand characteristics for DRL services?
□ What is the volume of requests?
□ Is there any demand fluctuation?
□ What are the main reasons of returns?
□ Who are the main customers of these services and which service do they consume?
□ What is the experienced return rate?
Further to depict the main characteristics of returns operations within Organisation Alpha, disclosing how these services perform is the next step of this research.
3. What is the performance of DRL services?
□ What are the throughput time of each operation and the total throughput time for each returns class?
□ Are these reliable services?
□ Which return class is more time-consuming?
□ What is employees’ experience with these services?
As Organisation Alpha understands its returns activities as an additional service provided to its customers, they are asked to voice their experience with the services delivered. Moreover, the point of consumption of products manufactured by Organisation Alpha is not located in the next position of the supply chain.
Therefore, understanding how the next tier in this chain, GHI affiliate/hospital, works and to which extent Organisation Alpha returns policy influences this link is the purpose here. By answering the next research sub-question, the first objective of this research is to be reached.
4. What is customers’ experience with these services?
□ How do the referred two tiers (e.g. Organisation Alpha/GHI affiliate and GHI affiliate/hospitals)
□ How reliable are customers regarding DRL services?
□ What does the voice-of the-customer (V-O-C) tell us?
The following research sub-question aim at finding potential areas for improvements, in the eyes of ABC management.
5. From the ABC point of view, what are the objectives for these services?
After potential areas for improvements are found, recommendations to optimise the current operations are to arise from the redesign of the current delivery processes. Research sub-question 6 is thus set as:
6. How could the processes be optimised regarding the targets established by ABC management?
2.4. Research approach, data collection and resources
In this section the research approach is presented. The research approach describes how the answers to the research sub-questions are obtained. This section also addresses how data is collected and from which sources. Finally, if any research constraints exist, they are presented here.
This research is a case study. According to Yin [1994: 13], a case study is an empirical enquiry that
investigates a contemporary phenomenon within its real-life context, especially when the boundaries
between phenomenon and context are not clearly evident. Still in terms of Yin, case study has a distinctive
advantage as research strategy when a “how” or ”why” (research question) is being asked about a
contemporary set of events over which the investigator has little or no control.
Regarding the method of data collection, it concerns the choice between primary and secondary data, the selection of techniques to use for data selection and the adequate design of these methods. Primary data consist of “information especially collected for the specific target”, and secondary data of “data that already has been collected for other purposes” [Kotler, 1993].
Both primary and secondary data are collected by means of company documents and procedures, literature, data from information systems, observation and interviews. Table 2.1 presents an overview of methods of data collection and techniques for every research sub-question.
Table 2.1:Data collection, methods and techniques
To answer research sub-question 1, “How DRL operations are organised within Organisation Alpha?”, first a literature review was conducted to outline the term downstream reserve logistics. Company documents about procedures and tasks were studied. Interviews were performed with ABC employees and other cooperating departments as Warehouse, Financial and Quality Assurance (QA) to get practical information about how returns are handled. The scope of costs to be investigated in this research was outlined together the ABC management.
Sub-question 2, “What are the demand characteristics for DRL services?”, was answered using existing data in two different information systems. ABC sub-department makes use of the Returns Database (RDB) to handle return requests. In this database is also stored all historical data about requests. Hence, it was the source to search the following data: quantity of received requests and requests lines during the first 22 weeks of 2006, return reasons, customers (Organisation Alpha Division in the RDB), returned units.
The second information system, Distribution Control System (DCS), through which customer orders are processed, also provided data for this research. From DCS, quantity of shipped units to customers during the 22 first weeks of 2006 was obtained
Sub-question 3, What is the performance of DRL services?, was also investigated making use of the RDB.
The system provided this research with the length of time of each DRL operation. Besides that, employees were asked to voice their experience with the processes of DRL services. Individual structured interviews took place. In these interviews questionnaires were applied offering a scale for employees to express their experience with DRL services, from 1 (completely disagree) to 5 (completely agree). Employees of each team applies different acceptance rules, deals with different actors, have different degree of interaction with customers (refer to sections 3.5 and 3.6). These particularities were considered when formulating the questionnaires that given in appendix 6.
To get sub-question 4 answered, “What is customers’ experience with these services?”, main customers were asked to take part in a survey to voice their experience and satisfaction with DRL services provided by Organisation Alpha. This survey consisted of a two-block-question interview realised by phone calls.
Initially, customers were presented with a semi-structured interview to get better insight into the customer/end-customer tier. Next, customers voiced their satisfaction through a structured interview. ABC management was presented with questionnaires contents prior surveys took place.
In the course of this research, ABC sub-department was presented with findings on every research sub- question. Next, based on such findings, ABC management was anticipated to set objectives or optimal performances for the service. It could answer research sub-question 5, “From the ABC point of view, what are the objectives for these services?”
Finally, sub-question 6, “How could the processes be optimised regarding the targets established by ABC management?”, required three sources of information to be answered. Firstly, the pool of data gathered throughout this research. In addition, general practices on DRL services were investigated through a literature review and an examination of another GHI organisation’ DRL procedures.
Sub-question Method of data collection Technique
1 Primary and secondary data Literature, semi-structured interviews, observation, data from information systems 2 Secondary data Data from information systems
3 Primary and secondary data Data from information systems, semi-structured and structured interviews 4 Primary data Semi-structured and structured interviews
5 Primary data Brainstorm session, interview 6 Primary and secondary data Literature, company documents
2.5. Theoretical framework
In this section, the three theories which guided this research are put forward. They were applied to investigate the characteristics of DRL activities that are causing the unnecessary consumption of resources, in the view of ABC management, and to discover potential areas for improvements.
The referred three theories and their application in this research are outlined next.
□ Actor Activity Diagramming (AAD)
AAD is a modeling tool normally used in the field of management and organisation owing to its characteristics. It consists of the decomposition of business processes in terms of actors involved, activities and transitions where exceptions are put aside. Information systems can be also considered as an actor. Business processes are then supposed to be typical making processes less complex to model.
In this modeling tool, actors perform activities, transforming input into output, and transfer the output of their activities to one or more actors. The first and the last transitions have special status, regarded as transactions, outlining the business process; from the placement of a customer request to the delivery of the service/product [ref.; Centre of Actor Activity Diagramming].
AAD was used in this research to portray the service delivery processes. It yielded a comprehensive insight into each actor involved, its respective activities and every step of the delivery process of DRL services.
□ Pareto Law
Named after the person who described it, Pareto Law is a general low found to operate in many situations.
It indicates that 20% of something causes 80% of something else. It is often used in inventory management (e.g. 20% of the products produce 80% of sales value) [Slack, 2004: 776]. Pareto Law was used in many occasions throughout this research. It consisted of a valuable tool mostly to outline some demand characteristics, for example main customers and main DRL services.
□ The Service Scan
The Service Scan provides a framework for diagnosing service processes. It is focused on logistics performance and enables the disclosure of potential areas for improvements through three phases [Broekhuis, M., & Land, M. 2005]:
1. Determine appropriate performance objectives 2. Diagnose of the business processes
3. Identify operational opportunities for improvements.
Therefore, the theory was used in this research with the purpose of identifying potential areas for improvements by also learning from Organisation Alpha employees’ and customers’ experience.
Moreover, are customers satisfied with the services provided?
The Service Scan provided the framework for examining solely two elements of the service, customer and Organisation Alpha personnel (service provider), due to the research time constrains. Determining the performance objective for all DRL-services-related activities requires information that was still being gathered throughout this investigation.
The ABC management has experienced both Service Scan and the five performance dimensions theories [ref.; Slack, L., Chambers, S., & Johnson, R. 2004: 43-55] during a recent study about order processing activities within the ABC department [ref.; Krom, 2005].
Hence, defining on which performance dimensions of DRL services to focus was straightforward discussed in a brainstorm session. In order to disclose employees’ and customers’ experience with DRL services, operational indicators and the related optimal performance on three dimensions are stated hereunder.
□ Quality
According to Slack, quality means “doing things right”, but the things which the operation needs to do right will vary according to the kind of operation (Slack et al, 2004, 45). However, owing to some service characteristics (e.g. intangibility), quality is seemingly a complex dimension within services processes.
There are distinct operational indicators on both employees’ and customers’ perspectives. They are
stressed next.
From the employees’ perspective, quality is defined as to be clarity about dealing with return requests. The operational indicators follow next. Poor performance in these indicators may lead to extra time consumption. Employees are able to deal with return requests was defined as the optimal performance.
Clarity about acceptance rules Clarity about Timeline rules Clarity about request processing Supply of information
Quality of information
In addition, five different operational indicators were thought relevant to measure customers’ perception of the quality of the DRL services provided. The optimal performance is defined as satisfaction meets or exceeds importance given to this indicator by customers. By means of the interviews, they are asked to express their experience with the following topics.
Correctness of feedback received from Organisation Alpha Accessibility to the department
Accessibility to the service Supply of information Quality of information
□ Dependability ↔ Reliability
Originally dependability is defined as doing things in time for customers to receive services exactly when they are needed, or at least when they were promised (Slack 2004, 49). However, it was better understood as keeping commitments and thus translated into reliability in this research.
It has a sole operational indicator of which optimal performance is defined as satisfaction meets or exceeds importance given to this indicator by customers.
Customers’ perception about how Organisation Alpha complies with commitments.
□ Cost ↔ Efficiency
The cost dimension of Slack is translated into efficiency here. That’s mainly because the research dedicates a whole section for DRL-activities cost estimate. To indicate employees’ experience with efficiency, the operational indicator used is communication exchanged, translated into quantity of e-mails.
The optimal performance is set as employees agree that the quantity of e-mails is optimal.
From the customers’ perspective, the operational indicator was set as customers’ perception about time spent by them on handling returns. During the interviews, customers are asked to express their experience with this subject. The optimal performance was outlined as satisfaction meets or exceeds importance given to this indicator by customers.
□ Flexibility
Defined as the ability to change the operation in some way (Slack 2004: 52), the flexibility objective seemingly does not apply this research concerning either employees’ or customers’ experience with DRL services. Underpinning it is the recognition by ABC management that these are not core, but supporting services. Hence, it is not worth to measure their operations ability to change their level of output over time, or to introduce new or modified services, or to change the timing of the delivery, for instance.
□ Speed
Slack’s speed dimension is neither investigated in this research. Throughput time analysis of DRL operations, presented further in section 5.2, is instead performed.
A constrain on the research is that ABC management has to outline the goals regarding DRL services in a
timely manner. As it can be observed in the research question, recommendations have to fulfil both
customers’ expectations and ABC management objectives. For that, research findings were systematically
presented during weekly meetings.
2.6. Structure of the report
The structure of the report reflects the structure of the research. It can be observed next in figure 2.1.
The first chapter is descriptive and introduces the organisation in which the research is performed. Further, the department where the research is conducted and its activities are given attention.
The second chapter is this and deals with the research setup. It presents the motivation and objectives of the research and the guiding theories. The research question and sub-questions are found here.
The descriptive chapter 3 answers the first research sub-question. It starts by using a typology to classify DRL activities at Organisation Alpha. A description of DRL activities within the organisation follows.
Finally, the chapter presents a cost estimate of DRL services.
The next three chapters compose the analysis phase of the research. As Organisation Alpha’ customers are GHI affiliates, distributors and Organisation Alpha’s warehouse worldwide, in these chapters the name of the countries where a customer is located is mentioned whenever this customer is referred to. From this phase, response to research sub-question 5 is drawn. This is because this phase exposes operational opportunities for improvements by portraying what lies behind the perceived excessive consumption of resources.
In chapter 4 the response for research sub-question two is found. It deals with a detailed analysis of demand characteristics for DRL services in terms of volume, fluctuation, customers, and return rate.
In chapter 5, the analysis of the service performance is presented. It responds research sub-question three. The first three sections deal with analyses on throughput time operations, service reliability and time-consuming services. The performance is also assessed by employees’ experience with the service.
Chapter 6 answers research sub-question four and ends the analysis phase of the research. In this chapter customers’ expectations and satisfaction are stated. Besides that, interactions within and across the two downstream tiers investigated in the research are presented.
In the last chapter, chapter 7, recommendations are put forward. They were clustered into three levels;
operational, tactical and strategic.
Figure 2.1: Report structure
The organisation Chapter 1
Research setup Chapter 2
DRL activities at Alpha Chapter 3
Demand characteristics Chapter 4
Service performance Chapter 5
Customer input Chapter 6
Recommendations Chapter 7
Chapter 3. Organisation of DRL activities at Organisation Alpha
3.1. Introduction
The purpose of this descriptive chapter is to examine how Organisation Alpha organises its DRL activities.
First, however, it is made clear what downstream reverse logistics stands for. Next, the services provided by Organisation Alpha are classified. Actors involved and their tasks are described including the service delivery processes. Finally, an overview of time consumption and costs involved is provided.
3.2. Downstream reverse logistics (DRL)
Traditionally supply chains are designed to enable a product to be manufactured and go through its forward flow (e.g. manufacturer-wholesaler-retailer) to be then finally sold to an end-customer. However, supply chains are steadily integrating more activities like service and product recovery [De Britto, M.P., Flapper, S.D.P., & Dekker, R. 2003: 1]. Based on the definition of logistics made by The Council of Logistics Management, Rogers and Tibben-Lembke [1999: 2] have defined reverse logistics as:
The process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in- process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal.
In addition to this definition reverse logistics also includes processing returned merchandise due to damage, seasonal inventory, restock, salvage, recalls and excess inventory.
In supply chain management literature, downstream stands for every tier within the chain linking the focal company to its customers. Therefore by downstream logistics is understood all related logistics functions among focal company, its customers and its customers’ customers. It may happen that the need to pull back a product occurs when it is already downstream, out of the boundaries of the focal company towards customers. Figure 3.1 illustrates both concepts of downstream and reverse logistics.
Focal company 1
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Inicial suppliers Tier3 to n suppliers Customers / End-customers
Tier3 to n customers
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n 2 1
1
n
1
2
1
n Tier 3 to
Initial suppliers
Tier 2 Suppliers
Tier 1
Suppliers Tier 3 to Customers
End-customers Tier 2
Customers Tier 1
Customers
Upstream logistics Downstream logistics
Forward logistics Reverse logistics
Flow of goods
Figure 3.1: Downstream reverse logistics [Adapted from Jespersen and Skjott-Larsen, 2005: 15]
In short, downstream reverse logistics can be understood as the process of moving goods from their customers backwards the focal company for the purpose of capturing value, or proper disposal.
3.3. DRL at Organisation Alpha
In the following some useful typologies of forward and reverse logistics are presented. These are then
used to describe DRL at Organisation Alpha.
De Brito et al provide meaningful typologies to characterize reverse logistics given return reason, driving force and recovery option which are presented next. [De Brito et al, 2003: 3]
Return reason typologies
□ Manufacturing returns: raw material surplus, quality-control returns and production left-overs
□ Distribution returns: product recalls, B2B commercial returns, stock adjustments and distribution items/functional returns
□ (Pos-) market returns:B2C commercial returns/ reimbursement returns, warranties, service returns/
repairs and spare parts, end-of-use, end-of life returns
Driving force typology
□ Economics: direct profit and indirect competition, green image, legislation’s anticipation, etc
□ Legislation
□ Extended responsibility Recovery option typology
□ Direct recovery: re-use, re-sale, re-distribution
□ Process recovery: repair, refurbishing, remanufacturing, (parts) retrieval, recycling, incineration and (proper) disposal.
As far as DRL practices are concerned, Organisation Alpha provides its customers with two different classes of services, as introduced in section 2.2. Customers make use of RA in the following cases;
overstocking, wrong ordering, recall and invited by. The latter means the customer was requested to return a certain product by a Organisation Alpha’ employee. It happens, for instance, should another customer be in need of an item that Organisation Alpha is not able to supply at that moment.
Typical customer order cycle consists of (1) order preparation and transmittal, (2) order receipt and order entry, (3) order processing, (4) warehouse picking and packing, (5) order transportation, and (6) customer delivery and unloading [Stock and Lambert, 2001: 145]. Failures may happen in the customer order cycle components performed by the organisation, as (2), (3), and (4). Such failures lead customers to receive mistaken shipments. Although component (5) is performed by third parties contracted by customers, the latter may use SC services if shipment were received damaged. In short, Organisation Alpha’ customers can count on SC services whenever they are faced with the following inconveniences: received damaged, short shipped, over shipped - not on paperwork, short UBD, wrong entered PO and stop shipment.
Stop shipment and recall reasons are of out of the scope of this research; as such reasons are QA-related and are processed in a particular manner by the respective department. Therefore, DRL practices at Organisation Alpha can be characterized as distribution and pos-market returns regarding the return reason typology. Economics is their driving force, as it is believed that these are extra services provided to customers. Concerning the recovery option, it is mostly direct recovery. If received in resaleable conditions (ref.; appendix 3), products are re-sold to customers. Only in cases of end-of-life returns, products are collected for disposal purposes.
In both classes, excluding short shipments cases, the customer can send the extra units back for credit upon placement of a shipment complaint form (NLSC) or a return authorisation form (NLRA), both are available in the intranet site of the organisation. DEF department employees analyse every form. Each type of form has a specific process that is described in section 3.6. As a result of their request, customers are given allowance to send products back to Organisation Alpha in Location Alpha. If products are received in good conditions, a credit note will be issued to the respective customer.
In case of short-shipped units, the form for a shipment complaint (NLSC) is to be filled out. However, the purpose here is exclusively to notify Organisation Alpha. This means, no new shipment will be generated to cover the missing units. It is on customers’ own initiative to place a new order. Organisation Alpha has made this decision based on its impossibility to create new orders for clients who use electronic ordering systems (e.g. C12 and C34 use EDI; C1, C2 and C3 have free access to DCS; C5, C10, and C6 use JKL).
3.4. The current returns policy of Organisation Alpha
Organisation Alpha’ returns policy consists of two components, namely: acceptance rules and timeline
rules. Acceptance rules are such that act as gatekeeping which is defined to be the screening of both the
return request and the returned merchandise (…) to identify as early as possible what products should de
accepted as a return [Rogers and Tibben-Lembke, 1998: 38].
At an early stage, acceptance rules are the screening of return requests. These rules were developed to allow into the reverse flow products with high likelihood of re-selling. Therefore requests are assessed against criteria such as UBD, stock level in Location Alpha, product life-cycle (for the complete list of acceptance rules, refer to appendix 3). At a later stage, acceptance rules are screening of returned products for full credit based on invoice value. Customers will receive credit only for products that, after physically inspected by the warehouse return team, are considered to be in resalable conditions [General Rules for Returns Acceptance Endo/Cardio, 2006].
Timeline rules are the same for both RA and SC. Organisation Alpha promises to analyse a return request within a three working days’ period. Should the return reason lead to a reverse flow of goods, it means in practice that customers will hear whether or not they were given approval to return extra products (first feedback). If there is a case of a short-shipped complaint, within the same three days’ period, the customer is anticipated to receive a CN.
After given approval, customers have to arrange shipment back to Organisation Alpha in such way that products reach Location Alpha’s warehouse within 21 after approval date. Theoretically, missing this dead- line imply the rejection of a previous approved form. In practice, handlers send alerts to customers about the closeness of the dead-line.
The same three working days’ period applies for the second feedback. At this stage, returned products have been processed in Location Alpha’s warehouse and credit needs to be given, as long as products are in resalable conditions. Therefore, the second feedback informs customers that products were received in satisfactory conditions and thus contains a CN. Such a CN can be either an inventory or a financial credit note.
A financial CN is issued should a customer report a short shipped complaint which could not be confirmed by the WH team. It might happen that products originally ordered by a customer are shipped to another by mistake. IT tools employed by DEF department do not detect which units were indeed shipped to which customer. Consequently, confirmation on the short-shipped complaint is only possible if the actual receiver of such extra units reports the case. Otherwise, WH team is not capable to confirm it.
3.5. Actors within Organisation Alpha
To better understand how return requests are processed within Organisation Alpha; the departments involved in these operations will first be presented and then their respective tasks. Within the DEF department, two sub-departments participate in processing returns request: ABC and WHS. Quality Assurance (QA) department also has its final release team involved in these operations. Departments, teams and number of employees involved, as well as their tasks are summarized in table 3.1.
Table 3.1: Actors within Organisation Alpha
ABC sub-department has the greater number of employees involved in the returns process. Two handlers work also as approvers. In this department, employees are shared resources between forward distribution and returns handling. In addition to the ABC management concern about the impact of the returns handling in customer order processing, another concern arises. As returns are not given priority, service reliability may be negatively affected.
To complete the description of the actors in the DRL operations, the tasks of all teams are listed next.
□ Handlers
Receiving forms (requests) by e-mail and entering them in the RDB Checking forms for errors
Requests follow-up with customers and WHS Monitoring the database for delays
(Sub)-department Team Employees Tasks Handlers 3 Handling both SC and RA requests Approvers 7 Approving RA forms
Coordinators 2 Deciding on extraordinary cases
Processing returned products and SC (quantities) Issuing inventory credit notes
QA Final release 1 Checking about quarantine ABC
WHS Returns team 3
Issuing inventory and financial CN
□ Approvers
Approving RA requests (endo and cardio teams approve their respective items only, given that RDB signals to which group the items belong).
□ Coordinators
Deciding on extraordinary cases
□ WH returns team
Processing both RA (2 employees) and SC (1 employee) requests Receiving returned items
Interface with QA
Moving products back to their regular location in the WH Issuing inventory CN (depending on customer)
□ QA
Looking in BPDS for recall or stop shipment items Deciding on quarantine
3.6. The delivery process of DRL services
This section presents the service delivery process for both RA and SC. The point of consumption of Organisation Alpha’ products is located in the next tier of the supply chain. Products are consumed in hospitals which, indeed, are Organisation Alpha’ customers’ costumers. Obviously, one expects that these actors trigger the demand on both forward and reverse stream.
Existing interactions within tier 2 (e.g. GHI affiliate/end-customers) will be further investigated in chapter 6 by means of a survey with Organisation Alpha’ customers. Service delivery process in tier 1 (e.g.
Organisation Alpha/GHI affiliates) is described as follows for both RA and SC services. But first, a short explanation about the RDB is needed.
The RDB offers four different statuses to identify how far a request has been processed. ABC employees move the requests throughout the different statuses on RDB, as it does not go automatically.
New: request is saved in the database, but waiting for approval
Not received: requested was approved, but returned products not yet received by the WH team In process: returned products received and being processed by the WH team
Finished: request fully processed, file closed.
Besides providing quick information on request status, this classification is useful to signal if a request is late and further actions needed. RDB also makes a distinction between NLRA and NLSC forms so that approvers can have direct access to NLRA forms.
The delivery process of RA services is described as follows. In this process five actors are involved:
customers, handlers, approvers, the WH team and QA. For brevity, handlers and approvers are modeled as ABC (employee). For the same purpose, information systems (IS) includes Organisation Alpha intranet, e-mail, RDB, DCS and BPCS.
The customer triggers the process by sending a NLRA form by means of the intranet site of Organisation Alpha. Forms are e-mailed to the Returns_Mailbox. Handlers check for forms in the mail box and its
Figure 3.2: Downstream tiers
Organisation Alpha. Customers End-customers
Tier 1 Tier 2
contents. If a form presents any mistake, it is returned to the sender. If not, it is saved in the RDB under the status NEW. Approvers, who are daily assigned to assess requests, check NLRA files under the status NEW. Handlers search for forms already assessed by an approver and send the first feedback to customers. If the request was approved, handlers move the form to NOT RECEIVED. Otherwise, form is moved directly to FINISHED.
After receiving approval, customers are anticipated to send products back to Location Alpha’s warehouse within 21 days. The WH team receives returned products and moves the respective form into IN PROCESS. The WH team attributes a special location to such products in DCS so that QA is aware that there are products to be assessed. The WH team also prepares a printed list containing products to be analysed that day and hands it to QA. In its turn, QA checks if products can be put back in their regular position in the WH or if they need to be kept in quarantine or even be disposed. The WH team puts products physically in different locations following decisions made by QA (regular shelf, quarantine area or disposal).
Regardless QA’s decision, if products are received in resaleable conditions, customers are fully credited.
An inventory CN is issued by the WH team (or by handlers themselves, depending on the customer) and sent to handlers through the RDB. In their turn, handlers prepare the second and final feedback to customer, including the related CN for the request. This characterises the end of the process. The file is moved to FINISHED and final feedback is sent to the customer by e-mail. If the customer is from C2, C3 or C1, the WH team sends the second feedback and closes the file. Moreover, the WH team allocates products in DCS special locations for these customers who have free access to the system and process their own orders. The delivery process of RA services is represented by means of AAD in figure 3.3.
Now the delivery process of SC services is described. Due to the root cause of shipment complaints, if customer reports short shipment, there is no reverse flow of goods towards Organisation Alpha.
Consequently, the description of SC delivery process is split into two models: one with reverse flow of goods and another with no flow of goods.
Processes with reverse flow of goods (i.e. received damaged, over shipped - not on paperwork, short UBD, wrong entered PO) are described first. Such processes involve customers, handlers, the WH team and QA. Again, the customer triggers the process by sending a NLSC form via the Organisation Alpha intranet site. The whole path is similar to RA handling until handlers save the request in the RDB under status NEW.
For over-shipped complaints, handlers request the WH team by e-mail to check if any discrepancy exists in inventory levels. This check is performed by tracking the shipment back in DCS until the product location in the warehouse is disclosed. The WH team employee goes to such location to see if extra units indeed lie there.
In all other cases, it is a handlers’ task to investigate if the customer’s request can be approved. For example, the customer claims that he/she received a product with short UBD. Handlers then have to check with the contact person if the customer has not agreed to receive such units prior to shipment. After requests are analysed, first feedback is prepared and sent to the customer. Again, the delivery process onwards is similar to NLRA processing and described in figure 3.4.
Short-shipped return requests yield a different delivery process to be put forward next. The service is also
triggered by customers by the same means and processed by handlers and the WH team as any other SC
reason, but the whole process is shorter. If discrepancies on inventory levels are confirmed, the customer
receives an inventory CN. Otherwise, the customer receives a financial CN. Submitting a CN to the
customer ends the process. It is described in figure 3.5.
Figure 3.3: RA delivery process
ABC WH QA
Organisation : Organisation Alpha .
Business Process : Return Authorisation (RA)
ACTOR ACTIVITY DIAGRAM
IS Customer
Send (numered) request C
Save request in RDB Check e-mail
Check for errors
Analyze request
Grant status Prepare Feedback
Feedback
Make decision
Goods back
Prepare list List
Check for warnings (BPSC) Decide on quarantine (DCS)
Check location (DCS) Reallocate items WH
Enter new data DCS Grant CN Feedback (CN)
Perform last check
Prepare Feedback
D D Feedback (CN)
Check goods
Grant status (In progress)
Close the file
c
Figure 3.4: SC (reverse flow of goods) delivery process
ABC WH QA
Organisation : Organisation Alpha
Business Process : Shipment Complaints (SC ) - reverse flow of goods
ACTOR ACTIVITY DIAGRAM
IS Customer
C Send (numered) request C
Save request Check e-mail
Check for errors
Prepare feedback
Feedback
Make decision
Return products
Prepare list List
Check for warnings
Decide on quarantine Check location
Reallocate items WH Enter new data DCS
Grant CN Feedback (CN)
Perform last check
Prepare Feedback
D Feedback (CN) D
Check products
Grant status
Close the file Prepare feedback Analyze request Check inventory levels
ABC WH QA
Organisation : Organisation Alpha
Business Process : Shipment Complaints (SC) - no flow of goods
ACTOR ACTIVITY DIAGRAM
IS Customer
C Send (numered) request C
Save request Check e-mail
Check for errors
Prepare Feedback (financial CN)
Feedback (Financial CN)
Check inventory levels
Figure 3.5: SC (no reverse flow of goods) delivery process
3.7. Costs involved
To come to an overview of costs involved, a brainstorm session with ABC management was held. As a result, the scope of returns-related costs was defined as transportation costs, product selling price, and consumption of employees’ time.
Firstly, considering the transportation costs, Organisation Alpha pays these costs in three cases only, namely: return invited by, over shipment or recall (refer to appendix 3). As these reasons are not among the main ones (further sorted in table 4.3), analysing transportation costs is thought not of essence for this research purpose.
Secondly, Organisation Alpha practises distinctive intercompany prices (ICP). It means that selling prices differ from customer to customer due to variables such as competition and local regulations and taxes.
Being so, gathering and comparing information on a selling price basis would be a too much time- consuming task considering this research timeline and purpose.
Most importantly, within the ABC sub-department, employees are shared resources processing customer orders, their main task, and returns requests. How much time is consumed by returns operations and, moreover, to which extent such activities jeopardize ABC employees’ work hours? During the representative period of three weeks, employees were asked to take note of how much time they dedicate to returns handling. Besides ABC employees, WH team and QA final release employees also participated in this survey. The survey form is available in appendix 5. The outcome of this survey can be found in table 3.2.
A list containing employees’ name is found in appendix 4. As anticipated, within the ABC sub-department, employees who dedicate more time to returns handling are the handlers (i.e. H1, H2, H3). It is, on average, nearly 30% of their work hours. H3 commenced as a handler on June 6
th2006 and during the investigated period he was not able to approve the forms yet.
Concerning approvers (A series), time reported as spent on returns does not seem to jeopardize them in their forward-logistics tasks. These employees spent, on average, only 0.77% of their work hours on returns, with a standard deviation of 0.004. Employees A5 and A6 act as backups for returns. During the survey period, there was no need to involve A5 in returns activities. However, A6 had to be consulted to decide if one specific request has to be approved as the customer claimed.
Department Employee Work hours Net hours on returns Time consumption
H1 76 25 32,89%
H2 58,5 18,25 31,20%
H3 103 29,75 28,88%
A1 84 1 1,19%
A2 108 0,75 0,69%
A3 96 0,7 0,73%
A4 110 0,99 0,90%
A5 56,5 0 0,00%
A6 46,5 0,5 1,08%
Co1 96 1,5 1,56%
Co2 64 0,25 0,39%
WHT 1 48 0 0,00%
WHT 2 109 100,5 92,20%
WHT 3 72 67,5 93,75%
WHT 4 66 31,5 47,73%
WHT 5 66,5 45 67,67%
QA QA 1 116 11,5 9,91%
ABC sub-department
WH returns team
Table 3.2: Employees’ time consumption
It has to be highlighted that A6 was not involved as an approver, but as the contact person of this customer in forward logistics. A6 had a two week’s time holiday, working solely 46.5 hours during this 3 week’s time survey. This explains why he apparently deals with returns significantly more than other approvers (i.e. 1.19%).
Both coordinators of ABC (i.e. Co1 and Co2) were involved during the survey. Their involvement did not request much of their work hours as can be seen in from table 5.4. It is unrealistic to consider no involvement from their side, as they need to make decisions in some extraordinary cases.
Not surprisingly, the WH team as a whole is the most involved in returns-related tasks. Despite of normally handling RA in the warehouse, employee WHT1 worked during only one week of this survey duration, due to holidays. However, during this week, he was helping in other warehouse tasks and was not needed to take part in processing returns requests. Initially working together, WHT2 was WHT1’s backup during holidays. So most likely WHT2 spent more work hours handling returns than normally. WHT3 undergoes training to replace WHT1 who is about to leave the organisation. Thus one expects that gradually WHT3 handles requests more efficiently.
WHT4 and WHT5 both exclusively handle shipment complaints. WHT4 is also leaving the organisation. At that point in time onwards, WHT5 will handle shipments complaints on his own. For that, WHT5 is also receiving training, enabling more efficiency.
Now that the net returns hours are known, an overview of how much the handling of returns costs to the organisation is presented in table 3.3.
Employee Net hours Hourly cost Total cost Handlers 73,00 € 30,00 € 2.190,00 Approvers 5,69 € 30,00 € 170,70 WHT 244,50 € 20,00 € 4.890,00
QA 11,50 € 30,00 € 345,00
Grand total 334,69 - € 7.595,70 Table 3.3: Estimated returns cost
