Journal of Business Logistics, 2012, 33(2): 107117 Council of Supply Chain Management Professionals

Modeling and Analysis of Reverse Logistics

Dale S. Rogers1,2, Benjamin Melamed1, and Ronald S. Lembke3
1 2

Rutgers University ILOSInstituto de Logstica e Supply Chain 3 University of Nevada

any modeling techniques have been developed to maximize the eectiveness and eciency of forward logistics and supply chain management. As this article will illustrate, modeling techniques can be helpful in improving the management of reverse logistics as well. Companies and researchers are just beginning to appreciate the important dierences between forward and reverse chains, and there is great opportunity to apply modeling methodologies to managing reverse logistics problems and issues. This article describes how modeling techniques can be utilized to improve reverse logistics processes and aid in solving real-world reverse logistics problems. We focus on specic reverse logistics processes that rms, which sell products, are likely to address. In fact, the area of reverse logistics has broadened of late to include many activities that were not originally part of simply returning consumer products to a retailer. Herein, we present an overview of opportunities, where improved modeling eorts should be able to provide substantial benets to supply chain professionals. Keywords: reverse logistics; modeling methods; returns; secondary markets

INTRODUCTION The last 20 years have witnessed a surge of good work in reverse logistics. Concomitantly, much has been written in the logistics trade press and in the research literature about this topic. Authors such as Carter and Ellram (1998), Jayaraman et al. (1999), Rogers and Tibben-Lembke (1999, 2001), Dowlatshahi (2000), Stock and Mulki (2009), and Guide and Van Wassenhove (2009) have described a broad range of reverse logistics systems and structures and analyzed a variety of attendant reverse logistics problems. As research in reverse logistics grew and gave rise to a body of knowledge, a number of researchers have made suggestions for future research directions (Carter and Ellram 1998; Stock and Mulki 2009). Theories describing best practices for handling reverse logistics have been developed in Rogers and Tibben-Lembke (2001) and Greve and Davis (2012). It has become clear that reverse logistics, as a eld of study, is suciently broad to support specialized research. Although dierent from forward logistics or other areas of supply chain management, the tools needed to explore reverse logistics in a structured manner have not yet been completely identied and described. This article presents an overview of modeling techniques that can be applied to reverse logistics problems, to better frame future discourse on reverse logistics and assist managers in improving reverse logistic performance. The past quarter century has seen a tremendous growth in computational power available to supply chain professionals, and a corresponding growth in modeling tools and solution
Corresponding author: Dale S. Rogers, Department of Supply Chain Management and Marketing Sciences, Center for Supply Chain Management, Rutgers Business SchoolNewark and New Brunswick, Rutgers University, 1 Washington Park, Room 950, Newark, NJ 07102, USA; E-mail: dale.rogers@rutgers.edu

methodologies provided by researchers. As reverse logistics has become an item of concern to professionals only relatively lately, it has not been studied as widely in the literature. Fawcett and Waller (2011) in the introduction to the rst Thought Leader series in the Journal of Business Logistics suggested that the easy questions have been answered and the easy research has been done (p. 291). In this article, we present a summary of modeling opportunitiesareas we believe would benet reverse logistics operations. Overview of reverse logistics Reverse logistics has been dened as The process of planning, implementing, and controlling the ecient, costeective ow of raw materials, in-process inventory, nished goods, and related information from the point of consumption to the point of origin for the purpose of recapturing or creating value or proper disposal (Rogers and TibbenLembke 2001, 130). Remanufacturing and refurbishment can be included within the concept of reverse logistics, as are disposition decisions, such as moving product to the secondary market or to a landll. Both products and packaging may be included in the reverse ow, and consequently, both have been studied extensively in the literature. The reverse logistics ow is very dierent from the forward ow. The majority of reverse logistics ows are much more reactive and with much less visibility. Firms generally do not initiate reverse logistics activity as a result of planning and decision making on the part of the rm, but in response to actions by consumers or downstream channel members. The reverse ow of products is often a variation of the one depicted in Figure 1. Here, material owing backward through the system is either rst-quality goods that are not wanted due to slow sales, or damaged, obsolete, or otherwise not rst-quality product. Some products are either

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Figure 1: Reverse logistics network structure.

Factory

Manufacturer DC

Retailer DC

Store

Customer

Returns Center Overstock Broker Salvage Broker Legend Primary product ow Product ow to secondary market

introduced into the system by end customers who have returned the items, or by retail partners who discover that some product has been damaged in transit. Other product enters the reverse ow because it is being repositioned or is headed for remanufacture and refurbishment. As TibbenLembke (2002) noted, the nature and volume of the reverse ow may change signicantly over the products life cycle. In previous research, Rogers and Tibben-Lembke (1999) found that many retail companies use centralized returns centers (CRCs) to process returned product. The store collects returned items and ships them to CRCs. Information about each item and its condition may be entered into the retailers information systems, and forwarded to the CRC, but in the authors experience, this information capture and processing rarely occurs. When an item arrives at the CRC, a determination must be made on where the product should be sent. The condition of each item is assessed, and the best disposition for the item is determined. With returned product, a wide range of disposition options is available, all with dierent revenue streams. In addition to returns, the store may have other items to dispose of, such as slow-moving merchandise that needs to be sold o or repositioned to other stores, or seasonal product that has reached the end of its sales life. This product may go back to a distribution center (DC) or to a CRC. Other unsold, new merchandise at the DC may be sent back to the manufacturers DC for credit. The new merchandise will likely be sold o to an overstock broker who specializes in new product, and the items no longer in new condition will be sold to a salvage broker who specializes in such products (Tibben-Lembke 2004; Rogers et al. 2010).

will ultimately be remanufactured, an extremely important area of research has addressed the control and scheduling of remanufacturing; for overviews, refer to Fleischmann et al. (1997), Vlachos and Dekker (2003), Inderfurth et al. (2001), and Nakashima et al. (2002). Guide (2000) and Flapper (1995) also examined supply chain management issues for manufacturing and remanufacturing. Finally, we mention that whereas much has been written about many specic aspects of reverse logistics, the collection, disposition and sale of product through the secondary market has been largely ignored.

OVERVIEW OF REVERSE LOGISTICS MODELING METHODOLOGIES Eective planning and management of complex systems calls for employing modeling and analysis of the system under study; such a system may be extant (deployed in the eld) or it may only exist in the mind and imagination of planners and designers. Recall that a model is a simplied representation of a system that aims to capture only those system aspects, which are of interest to the modeler (Altiok and Melamed 2007). For example, when modeling car safety one must account for the shape of the cars interior, but can ignore its color scheme. Naturally, supply chains and their important subset of reverse logistics are included as particular classes of often complex systems. We use models as an in vitro laboratory to understand and predict system performance. The reality is that in vivo manipulation can rarely be applied to a system deployed in the eld for a variety of reasons: unacceptable disruption of operations, excessively high cost, or simply because the system under study does not yet exist. A good model, properly manipulated, can then provide a cost-eective substitute for the real-thing. The main downside of models as substitutes for reality is that the former are perforce approximations of the latter. Thus, a key issue is model delity (also called goodness-of-t), namely, how well the model captures the salient features of interest of the system under study. The process of assessing model delity is called model validation. Roughly speaking, the modeler compares model predictions to historical data and rejects model validity with respect to the compared aspect if the discrepancy is too large. Thus,

LITERATURE REVIEW A literature review on reverse logistics up to 1998 appears in Carter and Ellram (1998). Recycling has been discussed in the literature for some 20 years (Pohlen and Farris 1992; Stock 1992, 1998). Numerous case studies have been written for a variety of environments (e.g., Klausner and Hendrickson 2000; Richey et al. 2005; for an extensive review, see Fleischmann et al. 1997). The special case of product recalls has been considered in Murphy (1986) and Murphy and Poist (1989). Because much of the product in the reverse ow

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model validity is relative to the aspect under consideration. Note that if the underlying system to be modeled does not exist, validation becomes far more uncertain. All in all, model validation is generally a dicult and error-prone task requiring considerable expertise. For a discussion of model validation, refer to Altiok and Melamed (2007, ch. 1) and Kelton et al. (2010, ch. 5). The modeling endeavor calls for constructing a model that settles on two compromises: the rst is between model complexity and model tractability, and the other between model delity and model cost. Compromises are required because high-model delity generally calls for more complex models, which in turn are less tractable and more costly to devise and manipulate. Because the ow of product backward in a supply chain can be more complex due to the nature of the returned product (Rogers and Tibben-Lembke 2006), complexity is often present in reverse logistics problems. Consequently, the good modeler strives to construct the least complex (least costly) model that still possesses adequate delity. As such, modeling is both science and art, but whereas the science can be taught at school or in the eld, the art can only be acquired through prolonged experience and practice. Models can be broadly categorized into physical models (e.g., a scale airplane or just a wing in a wind tunnel), prosebased conceptual models (e.g., Freudian psychological models of the mind), and mathematical models. Here, we shall be solely concerned with mathematical models and their role in the context of reverse logistics, although much of the discussion is pertinent to other model categories as well. Mathematical models share a number of key characteristics. First, the prose description of the system to be modeled lends itself to a precise model formulation, which consists of system components (e.g., transportation methods or DCs), attributes (e.g., parameters such as transportation capacity and inventory capacity), rules of operation, both formulas and algorithms (e.g., reverse logistics policies), and performance metrics (e.g., cost statistics over some time horizon). Random phenomena (e.g., consumer decisions and product return reoccurrence) are modeled using probabilistic distributions (either deduced from historical data or postulated by the modeler); when randomness is present, and it frequently is, output metrics are typically formulated in terms of probabilities, expectations, or other statistics. For a survey of probability and statistics elements, refer to Altiok and Melamed (2007, ch. 3). Second, models require the computation of their output metrics, using so-called evaluators. Evaluators are used for the following two purposes: 1. What-if Predictions: A what-if prediction answers a question of the form: What would happen to one or more prescribed system performance metrics if we change some elements of the system under study? Such changes might be dierent parameters, an added or deleted system component, or even a new system conguration. Evaluators are applied to compute and compare the prescribed metrics before and after the change, the latter typically being a prediction, whereas the former may be

either an empirical fact or another prediction. It is usually convenient to think of system attributes as inputs and of performance metrics as outputs. Modelers often plot system performance metrics as function of changed parameters, producing so-called response surfaces, to gauge their functional dependence. 2. Performance Optimization: Optimizing performance metrics is the ultimate goal of the bulk of modeling and analysis projects. Typically, the modeler aims to nd the best or good-enough congurations (optimized parameters, system structure, etc.), which reduce costs, improve customer service, and enhance operational eciency. As such, optimization is a search for the best answer (prediction) over a space of what-if questions, especially in simulation context. For example, the Simio simulation environment (Kelton et al. 2010) has a built-in optimization engine. Optimization problems can also be set up as mathematical programing problems that aim to optimize an objective function subject to mathematical constraints. Typical examples include linear programing for linear objective functions and constraints, integer programing for integer solutions, as well as mixed programing. Computer solvers for solving such optimization formulations are widely available (e.g., CPLEX; see Mittelmann 2007). Depending on the evaluator type used, mathematical models can be classied into two main types: analytical models and simulation models. Each model type carries its own set of trade-os between model delity and computational complexity. Keep in mind, however, that deriving fast and exact evaluators is helpful, but not conclusive, as these evaluate a model metric as a prediction of the true real-life metric; the validation issue of model (and metric) delity still holds. We next discuss each model type and the associated tradeos. Analytical models This type of model employs an analytical abstraction consisting of equations and constraints (e.g., inequalities) to represent a system under study. However, the attendant evaluators vary in their computational methodology. Analytical models can be static (have no time element) or dynamic (their state evolves over time). They often include randomness, which is modeled by probability theory and random processes over time (commonly called stochastic processes). In the simplest cases, an evaluator computes values from formulas or solves an equation or a set thereof. The outputs are exact (up to the round-o errors of digital computation on a modern computer). In more complex cases, the analytical model cannot be solved exactly, but a reasonable approximation can be computed using a numerical algorithm. Thus, the availability of numerical evaluators will often allow the modeler to analyze more complex systems as compared with purely analytical evaluators. However, numerical computations typically require more computing resources in terms of computing time and memory, and the outputs are approximate and require an error analysis.

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Analytical models, especially those incorporating randomness, only have a tractable analytical or numerical solution when the model is relatively simple. In consequence, such models are limited in applicability to comparatively simple systems. In many cases, modeling reverse logistics processes with the appropriate amount of granularity can be dicult. However, if an exact solution can be found, the computational time tends to be relatively low and the functional relationships between input and outputs are easier to discern. As analytical evaluators typically produce rough but fast solutions, modelers sometimes use them to construct a quick and dirty model of a complex system. Keeping in mind the models limited delity, they use model evaluators just to gauge the order of magnitude of resultant metrics, or to glean an understanding of high-level relationships between model inputs and outputs. The actual output values are taken with a grain of salt. For reverse logistics problems, learning the rough high-level relationships may provide valuable guidance for improving the quality of decisions. Simulation models Most real-life systems of interest are too complex for capture by analytical or numerical models at acceptable delity. This situation is especially acute for real-life systems with random elements. As reverse logistics processes can be quite complex and contain high variability, this problem can easily occur. Starting around World War II, the advent of ever faster computers has fostered the development of a comparatively new modeling methodology, called simulation (or Monte Carlo simulation when randomness is present), which relies on statistics rather than analytics. To model the complexity of reverse logistics problems and processes, simulation can be a most useful tool. Simulation employs a system description as well as operational rules to write a computer program, which serves both as a model representation and evaluator. It computes (simulates) sample histories (called replications) of the model. Special purpose languages are available today to rapidly develop elaborate simulation models through a visual user interface by either writing code (e.g., Simscript; Rice et al. 2005), or conguring a model from component templates and then parameterizing them (e.g., Arena [Altiok and Melamed 2007], Simio [Kelton et al. 2010], or both). Simulation runs can employ animation to observe system evolution over time and to facilitate debugging. Summary statistics are produced and displayed at the end of a run. Randomness is modeled using sampling from probabilistic distributions via transformations of so-called random number generators (functions that produce streams of numbers that imitate randomness statistically; for more details, see Altiok and Melamed 2007, ch. 4). As each replication can produce an observation of each performance metric of interest, running a suciently large number of independent replications produces samples of independent observations amenable to statistical estimation and analysis. In this case, model evaluators assume the form of statistical estimators of the metrics of interest.

A key advantage of simulation models is their ability, in principle, to capture any model description as computercoded algorithms. However, simulating a complex model can take a long time to run and can consume large amounts of memory, as acceptably reliable estimates may call for a large number of replications, each requiring a long run and substantial memory. Moreover, the resultant metric values are statistical estimates which contain experimental errors on top of numerical and modeling approximations. Thus, simulation analysis requires statistical expertise in addition to modeling acumen. Extensive coverage of simulation models may be found in Altiok and Melamed (2007) and Kelton et al. (2010). We conclude this section with a high-level procedure for selecting an appropriate modeling methodology for a system under study. The procedure aims to select the simplest model with the best compromise between adequate delity and acceptable computational cost: 1. If the system appears simple (i.e., it has a simple mathematical structure and few variables and parameters), try rst to nd or derive a tractable analytical model with an analytical evaluator. (Note: this may require considerable mathematical expertise.) Examples include simple queueing systems (Walrand 1988; Cooper 1990), and basic inventory systems (Nahmias 2008; Simchi-Levi et al. 2008). If you are lucky enough to develop a satisfactorily valid model, then settle on it. 2. If an analytical model with an analytical evaluator proves inadequate, try to similarly develop a more complex analytical model with a numerical evaluator. Examples include Markov chains (Breiman 1968), which require moderate vector-matrix arithmetic. 3. If all else fails, select the simulation approach as a last resort. Examples include multi-echelon supply chains and reverse chains; see Altiok and Melamed (2007, ch. 1113) for a variety of supply chain models. Be sure to expend sucient computing resources to achieve adequate statistical reliability of your estimates.

OVERVIEW OF REVERSE LOGISTICS MODELING OPPORTUNITIES The following sections are devoted to describing reverse logistics modeling applications. This is not a complete list of all possible areas where reverse logistics management could be improved, but it includes numerous problems that could be better understood and potentially solved through the utilization of modeling techniques. Reverse logistics network design For both manufacturers and retailers, the design process for a forward distribution network begins with network design: how many facilities should be in the network, where the facilities are to be placed, what customer areas they will serve, and how large they will be. Related to this is the issue

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of how often the customers will be served: under a continuous review policy, shipments are sent whenever needed, while under a periodic review policy, shipments are sent on a recurring, periodic basis. The inventory policy, the variability of demand, and lead times from suppliers all inuence the reordering policy (for an overview, see Silver et al. 1998). A reverse distribution network must consider all of these decisions, with the additional consideration of how to best account for the dierent nature of the reverse ow of material. CRCs are DCs that work in reverse. Many retail chains such as Walmart, Target, and Sears, have a network of CRCs that are designed to facilitate the processing of returned goods as they are picked up from the stores. Typically, DCs do not work well managing both forward and reverse distribution at the same location. The forward product almost always takes precedence over the returned product. As retailers are in the business of moving product to the consumer, returned product is not their primary focus. There are a couple of problems associated with managing a network of return centers that lend themselves to modeling techniques. One problem is the number and location of CRCs in the network. The solution to this problem is likely to be an optimization via network simulation. Network design has been much studied (e.g., Daskin 1995; Chan 2001). Much study has been carried out on optimization and simulation of networks for forward-moving goods. SimchiLevi (1991), Lei et al. (2006), and Simchi-Levi et al. (2003) examined this problem. The variables associated with most forward distribution network optimizations are generally well known. However, the increased options associated with a network of CRCs give rise to additional problems. In a forward distribution network, all product moves through the network in the direction of the consumer. In a reverse network, product may be dispositioned close to the gateway through which it enters the reverse network. Product value may vary based on its condition and location. These factors and others tend to make the reverse logistics network problem more complicated. Returned product route planning and scheduling Another interesting reverse logistics problem is the routing and pickup scheduling of returned product. There have been several articles in scholarly journals describing routing methodologies. For example, Simchi-Levi and Berman (1988) and Ball et al. (1995) developed a heuristic for the traveling salesman location problem on a network. Ballou (1990) described several types of algorithms that can be applied to this problem. For returned product, there can be some additional complications that could be included in a routing model. Because returned product often does not have the same delivery urgency possessed by new, forward-moving product, the routing decision may include in part the postponement of picking up the product until a full truckload is accumulated, or storage capacity of returned product is lled. A nancial decision to execute milk runs (where a truck stops at several locations and picks up less than truckload

quantities) versus an on demand solution (where one waits for a truckload or storage capacity to be lled rst) could be modeled to ascertain whether or not faster service would lend itself to higher residual values for the product, or whether lower distribution costs should drive decision making. Further complicating the analysis is the fact that much of the returned product is not in its original packaging, and the longer it sits in the back of a retail store waiting to be picked up, the further its condition deteriorates. The total volume of new product to be delivered to a store is fairly stable over time, and deliveries can be planned in advance. Finally, the size and quantity of customer returns can be more variable than new product demand. Central return processing optimization Another problem associated with CRCs is the ow through return centers. In a forward DC, product is ooaded and cross-docked through the facility, provided it is a fast-moving product or stored inside the DC before being shipped to a customer. Returned product typically enters a CRC in a mixed pallet that consists of many dierent product types and quality levels. Each pallet must be broken down into individual pieces and sorted. Items are scanned and a disposition decision is made. Depending on item volume, quality, current inventory levels in the facility and or the network, product can be dispositioned to a variety of destinations. Modeling the ow of product through a return center and modeling the various dispositions leaving the CRC is a problem that could lend itself to optimization, typically via simulation techniques. The lack of uniformity in the physical condition of products has many consequences for reverse logistics. It means that the sorting and grading of product have to be completed before dispositioning, which is not necessary for new product. It also complicates the negotiations to sell the product, and vendor concerns reduce the number of possible buyers of the product in a way not typically seen with new product. In consequence, reverse logistics oer many challenges and opportunities not present with forward logistics. Another issue is whether or not to outsource reverse logistics activities. Rogers and Tibben-Lembke (1999) observed that rms that outsourced their reverse logistics activities experienced lower reverse logistics costs. However, since that time, retailers, manufacturers and logistics service providers (LSPs) have all become much more eective and ecient at managing reverse logistics processes. It would seem likely that LSPs still oer cost savings and other advantages over performing reverse logistics activities in-house. However, an area in need of study is under what conditions manufacturers or retailers should consider outsourcing recovery, refurbishing, or disposition activities. Secondary market optimization According to Rogers et al. (2010), the secondary market for consumer products in the United States was $329 billion in 2008. Given the billions of dollars of salvage goods sold

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every year domestically, optimizing (or simply improving) this process could be an important additional source of revenue for retailers and manufacturers. For some rms, selling through the secondary market to a disposition, such as a factory outlet store owned and operated by the manufacturer, can be more protable than their volume channel through distributors or retailers who buy product at wholesale price. If a manufacturer can sell an item for 70% of the retail pricewhich is a typical objectivethen they can often realize a higher prot through the secondary market as compared with wholesale price channels to the primary market. To maximize its revenue, the rm has a number of options available to it. If it can sell the product as new, or for a high percentage of the retail price, it can make a prot on the item (Rogers and Tibben-Lembke 1999). Depending on the agreement with the supplier, the rm may be able to return the item to the vendor (RTV), and recover the purchase cost, but because of the costs of handling the product repeatedly, the net result is likely to be a loss on the item. If RTV is not an option, the rm may mark the item down and recover something close to the items original retail price, but it still incurs the cost of pricing and managing these items. The retailer must devote a portion of its primary sales channel to these items, potentially harming that channel. Instead of marking an item down, the rm may choose to repackage or remanufacture the item so that it may be sold as a new or remanufactured item. Salvage dealers or brokers operate in the secondary market for products, buying and selling product that for one reason or another cannot be sold in the primary retail chanFigure 2: Disposition options.

nel. Brokers can be found who are willing to buy almost any product in any condition. They, in turn, sell the product to companies who will sell the product in places such as dollar stores, ea markets, pawn shops, value retailers, and other low-priced outlets, perhaps overseas. As a result, the prices that salvage dealers will pay vary widely. Often, the broker can buy product for less than the sellers original cost. If it seems hard to believe that a rm would sell an item below cost, consider that before new items would reach this point, they would likely have gone unsold at 50%75% o at the retail store, and a broker or salvage dealer is taking the unwanted inventory away and solving a problem for the seller. By selling the items to a broker, however, the rm gives up a degree of control over the future of the item. The broker is supposed to conform to the legal requirements stipulated by the rm, but in practice, the further the item gets away from the rm, the less closely these are followed, and the items may end up in retail locations that may damage brand equity. Rather than take that risk for a small return, some rms would donate or sell items to charity. If the rm can value the items at close to retail prices, the tax advantage may be greater than the payment from salvage brokers. However, the rm may still face loss of control over the product. Finally, if all other options have been eliminated, recycling the product to recover any raw materials may be considered, or as a last resort, moving the product to a landll. Figure 1, above, showed a highly simplied structure of the physical ows of product in a reverse logistics system. In reality, the decisions are more complicated, as shown in

Return to Vendor

Charities Remanufacturer /Refurbisher Retailer

Manufacturer

Auctions

Recycler Open Box Resold in Store Landfill

Factory Outlets

Salvage
Salvage Dealer First Level Salvage Dealer Second Level

Value Retailers

International Disposition

Salvage Dealer Third Level

Dollar Stores

Pawn Shops

Flea Markets

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Figure 2. Once a retailer has determined that product should be disposed of at a salvage dealer or broker, several decisions must be made: which type of rm, international or domestic, how the actual broker should be selected, and how to get the product to the broker. Figure 2 is a more complete depiction of the decision faced by the rm from the vantage point of the retailer, but a manufacturer faces a very similar set of choices. To begin with, a rm must decide between selling domestically or internationally. Domestic sales are likely to bring higher prices, but there is a greater risk of cannibalizing market share from the primary channel. Further, the choice of salvage broker is complicated by the fact that there are different levels of salvage brokers, who deal in larger or smaller quantities of product (and oer lower or higher prices accordingly), as shown in Figure 3. Large-scale brokers might, for example, contract with a retailer to buy multiple truckloads of product, sight unseen. These brokers might then sell the truckloads to smaller-scale brokers; in fact, the large-scale brokers hope to make the sale without ever having to take physical possession. These smaller-scale brokers would likely sell individual pallets to other dealers, who might then either sell the goods directly to end customers, or act as wholesalers to secondary market retailers. At each stage in the process, the price increases, and the number of participants increases. By dealing with a small number of salvage dealers, the retailers simplify their disposition process, but lower the price they receive. In addition, the farther removed a salvage dealer is from a rm, the less condence the rm has that the salvage dealer will correctly follow their instructions. Product disposition revenue maximization Using the secondary market to maximize revenues would seem to be an area ripe for optimization modeling, for several reasons. First, as mentioned elsewhere, there can be a great deal of money involved. As a result, a small increase in the percentage of value recovered can have a signicant dollar impact on rms revenues. There are many disposition Figure 3: Salvage dealer levels.

options to be considered (Vorasaysn and Ryan 2006; Stock and Mulki 2009). Second, the attendant problems are very complex because the amount of data that could be potentially generated by rms is huge. Finally, information is not easily obtained. Firms generally have to contact a broker to get a price estimate, as the price is not known, a priori. For example, a typical Walmart store has 142,000 SKUs on its shelves, and the Walmart online store carries approximately 1,000,000 products (Investorplace.com 2012). Walmarts total sales for scal year 2011 were $444 billion (Walmart, 2012). A typical return rate for retail products has been estimated at 6% (Rogers and Tibben-Lembke 1999). Walmarts returns rate is approximately 3% in the United States and amounts to about $11 billion worth of returned product each year. About 7% of product is sent back in the form of marketing returns (Rogers et al. 2010), which would give Walmart $31 billion worth of marketing returns, for a total of $42 billion worth of product that needs to be dispositioned. In the past, companies believed that online auctions such as eBay, or outlet websites would be an easy way to dispose of large quantities of reverse logistics goods. However, these opportunities are nite, by denition, as rms quickly learned. Computer manufacturers would list dozens of identical laptops, all with the same auction ending time, and any that sold would sell for a low-starting bid. It is dicult to move large quantities quickly through eBay or one of the other auction sites. Selling through secondary markets can be more complicated than marketing new product. Suppliers are often concerned about brand equity, and this can constrain product entry to the secondary market. Several retailers in the United States, such as Ross or Marshalls, specialize in purchasing from manufacturers large lots of rst-quality product that has reached the end of its sales life. A condition on these purchases is often that the retailer cannot advertise the identity of the product outside the store. Such restrictions typically arise because vendors are concerned about market cannibalization. They believe customers are only likely to buy a given number of their products, and sales of

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reconditioned, remanufactured and returned product can only increase at the expense of sales of new product. Because new product is more protable, vendors are naturally much more interested in increasing new product sales. Companies need a way to gure out how to deal with the large volume of information and options associated with reverse logistics. For example, when should they sell in bulk, and when should they sell single items? Fixed price or auctions? Sell to brokers or via a network of outlet stores? There is no way to know exactly the prices oered by salvage dealers, but given the mountains of data collected by rms from past sales and auctions, it should be possible to make predictions about relative prices from dierent dealers and dierent types of dealers, as well as the maximum amount that can be disposed of via each method. Given the complexities and constraints of the problem, it would seem that secondary market sales would be a perfect candidate for a large-scale, mixed-integer programing type of approach, which could oer signicant benets. Simulation could also be a useful tool. There is one important consideration whose magnitude is unknown at this point and requires further study: the true impact of various disposition options on brand equity. A related question is to what extent various secondary channels might cannibalize primary sales. Disposition planning Since the arrival pattern of goods may vary by type, a manufacturer or distributor, like a retailer, must examine each item and decide its best disposition. The disposition options available to the manufacturer or distributor may be the same as those available to the retailer. However, the prices that an echelons entity upstream the supply chain may recover from each disposition may be dierent from those available to the retailer. Salvage dealers to whom manufacturers, distributors, or retailers sell product prefer to deal in large product quantities. Because salvage dealers receive product from multiple retailers, they collect larger volumes of product than any one retailer could, and the prices at which they can sell product to brokers may be considerably higher. As is clear from the preceding sections, developing a coherent secondary market strategy is a complicated problem. It includes a myriad of variables and potential dispositions options. Additionally, it includes factors such as loss of control over the product, brand value erosion, product life cycle, and market cannibalization, to name just a few issues. Each of these is a serious issue that can have an important impact on a product, brand, and the rm. This problem complexity means that utilizing simulation techniques to model possible outcomes is a wise undertaking, which can detect and prevent a serious mistake that might damage the brand, shorten the products life, or sub-optimize protability.

Simply stated, avoiding returns is the best method of reducing the volume and cost of reverse logistics. Return avoidance is dened as nding ways to minimize the need for returns. It can be accomplished by ensuring that product quality and user friendliness to the consumer are at the highest attainable level before the product is sold and shipped. Changing promotional programs that load the trade when there is no realistic chance that product shipped to the customer will actually be sold can also be part of return avoidance (Rogers et al. 2002). A useful approach in the electronic industry is to give customers more accessible information when they are dealing with complex products, such as computers or printers, in order to increase the likelihood that they can successfully operate the product right out of the box. To this end, companies have signicantly increased the use of quick start sheets and prominently display tech support phone numbers. Since spending more money on such measures can signicantly reduce the volume of returns, companies would benet from modeling projects that could assist them in guring out spend amounts and mixes, which minimize the total costs of product support plus return costs. Simulating the cost and complexity of implementing return avoidance across all products or selected products can be useful in determining whether or not the additional eort of including extra instructional materials at a higher cost, or adjusting product design to make it easier to use, would result in lower product returns and costs. Limiting product to the reverse owgatekeeping Gatekeeping means making decisions to limit the number of items that are allowed into the reverse ow. Successful gatekeeping allows rms to control and reduce the rate of returns at the most cost-eective forward point in the channel. Gatekeeping eliminates the costs associated with returning products that should not have been returned, or the cost of products that have been returned to an inappropriate destination. The point of entry into the reverse ow is the best point to eliminate unnecessary cost and management of materials by screening unwarranted returned merchandise (Rogers et al. 2002). In recent years, retailers have instituted better gatekeeping programs. For example, requiring customers to have receipts is a standard practice that was uncommon at mass merchandisers a decade ago. Limiting the time period for returns and charging restocking fees for fast-depreciating products, like computers, are practices that have also become widespread. However, such limitations have the potential of further frustrating customers who already have a bad experience with the rms product. Once a customer has returned an item, the rm has to decide what to do with it as described elsewhere. An important consideration is where and when to make the decision on what items to allow into the reverse system. If an item is ultimately going to be thrown away, it is generally better to throw it away at the retail level, instead of spending more money to haul it somewhere else before throwing it away.

LIMITING PRODUCT TO THE REVERSE FLOWAVOIDANCE Companies have realized that in some ways, the easiest way to deal with returned goods is to reduce their volume.

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Companies and researchers have developed models to help with deciding how long to keep an item on store shelves, how soon to mark the item down, what percentage should be taken o of the price, and how many times an item should be marked down before pulling it. In some cases, the value that secondary market rms will pay for the item may be aected by how quickly it is pulled. For technologyrelated products, life-cycle time may be short, so incorporating secondary market factors into these pricing decisions will further help retailers. Modeling the trade-os between lower costs attendant to reduced customer service that could irritate consumers versus a liberal returns policy that allows most anything to be returned could be useful in establishing and testing dierent return policies before going out to the market place. Refurbishing, dispositioning, or recycling The decision about what to do with a product is usually made during processing at the retailer or manufacturer. A decision is made to remanufacture or refurbish product, or in some cases the product should be sold on a secondary market or scrapped. An analyst could develop models to better understand the trade-os between many of the potential end-of-life strategies for returned product. For example, in the latter case, a key issue is how much refurbishing should be done? Below we provide a list of key reverse logistics decisions by decision category (the disposition choice is determined by the most protable alternative): Perishable stock s How much perishable stock to keep? s When to salvage scrap versus remanufacture Stock disposition s s s s s s s s s Secondary marketsoptimize price cost Return to vendor Resell (returned product may be sold again as new) Repackage and sell as new Sell via outlet Sell to broker Donate to charity Landll Recycling (the product is reduced to its basic elements, which are reused) s Reconditioning (the product is cleaned and repaired to return it to a like new state) s Refurbishing (similar to reconditioning with perhaps more work involved in repairing the product) s Remanufacture (similar to refurbishing, but requiring more extensive work; often requires complete disassembly of the product)

Impact of reverse logistics regulation Over the last 20 years, several countries developed regulations for end-of-life of materials and hazardous substances. Legislation such as the Waste Electrical and Electronic Equipment Directive (WEEE Directive; http://www.environment-agency.gov.uk/business/topics/waste/32084.aspx, March 22, 2012) or Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS; http://www.bis.gov.uk/nmo/enforcement, March 21, 2012) describe how waste materials have to be dispositioned in select European countries. In the United States, there is limited Federal regulation regarding waste. However, several states have adopted e-waste legislation aimed at controlling the amount of electronic products that are sent to landlls. These regulations vary greatly from state to state and are not synchronized. In addition to electronic waste legislation (http://www.electronicstakeback.com/promote-good-laws/statelegislation), there has been regulation related to air and water pollution in most countries for many years. While both the European and U.S. state regulations contain specic guidelines, they are open to some interpretation. Some of the regulations contain nancial penalties and others do not. Their purpose may be similar, but their language and implementation are not. It has been dicult for rms to manage inconsistent regulation across geographic areas. While a new product is in the development and commercialization stage prior to volume production, it could be very useful to examine potential product dispositions via a model that would include the impact of regulation on the disposition process. Disposition modes include resale of product as new, recycling by reduction to the products original components, and moving the end-of-life product to a landll. Understanding the cost and diculty of dispositioning on a state-by-state basis could be extremely helpful to the manager responsible for end-of-life product.

SUMMARY AND CONCLUSIONS In this article, we have considered a number of key reverse logistics problems where modeling techniques could be useful in understanding the problem and developing a solution. While problems can be complex and expensive, many people, however, have the mistaken belief that reverse logistics is exactly like forward logistics and consists primarily of driving the trucks in the opposite direction. The reality is that for many reverse logistics applications, the problem is much more complicated than corresponding forward logistics problems. As we have demonstrated in this article, reverse logistics and end-of-life issues are cases in point. Many logistics problems can be framed and modeled as trade-o analyses between costs and customer service. Reverse logistics problems are similar, and as mentioned elsewhere, they can also be quite complex. In forward logistics, costs are usually well dened and well known. Corporate systems are built to handle a comprehensive cost structure for the product as it moves through the rm going

Each of these questions and potential dispositions could be included in a system simulation that includes reverse logistics and multiple dispositions.

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forward. However, they are often not very eective at managing the amount of detail derived from a products reverse journey. More study is needed on how to develop the inputs to analyses of scenarios when reverse logistics cost and service factors are not clearly understood inside the organization or between suppliers and buyers. There is an acute need for more analysis of the secondary market. The limited extent of secondary market research todate and its incomplete understanding are unfortunate given the vast size of this market and the variety of protability opportunities inherent in it (Rogers et al. 2010). More analytical work needs to address the trade-os among potential dispositions for product that is not selling well via its primary channel, or has been returned because it is used, obsolete, or damaged. Recall that for some rms the secondary market can be more protable than any of their other channels. However, because the secondary markets can be nonstandard channels, they need to be understood before risking brand cannibalization and other risks. Many modeling techniques have been developed to maximize the eectiveness and eciency of forward logistics. As this article illustrates, modeling techniques can be helpful in improving the management of reverse logistics as well. Companies and researchers are just beginning to appreciate these important dierences, and much future research will be needed to discover how to best structure reverse logistics operations to deal with these special challenges.

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nal of Physical Distribution and Logistics Management 32(3):22344. Tibben-Lembke, R.S. 2004. Strategic use of the Secondary Market for Retail Consumer Goods. California Management Review 46(2):90104. Vlachos, D., and Dekker, R. 2003. Return Handling Options and Order Quantities for Single Period Products. European Journal of Operational Research 151(1):3852. Vorasaysn, J., and Ryan, S.M. 2006. Optimal Price and Quantity of Refurbished Products. Production and Operations Management 15(3):36983. Walmart. 2012. Walmart Reports Q4 EPS From Continuing Operations of $1.51. (March 21) http://investors. walmartstores.com/phoenix.zhtml?c=112761&p=irol-news Article&ID=1663026&highlight=. Walrand, J. 1988. An Introduction to Queueing Networks. Englewood Clis, NJ: Prentice Hall. SHORT BIOGRAPHIES Dale S. Rogers (PhD Michigan State University) is a Professor of Logistics and Supply Chain Management and the Co-Director of the Center for Supply Chain Management at Rutgers University. Dr. Rogers is the Leader in Sustainability and Reverse Logistics Practices for ILOS - Instituto de Log stica e Supply Chain in Rio de Janeiro, Brazil. In 2012 he became the rst academic to receive the International Warehouse and Logistics Association Distinguished Service Award in its 120-year history. Benjamin Melamed (PhD University of Michigan) is a Professor II at the Department of Supply Chain Management and Marketing Sciences, Rutgers Business School Newark and New Brunswick. His research interests include supply chain management, modeling, analysis and simulation, supply chain nance, systems modeling and performance evaluation (especially supply chains), stochastic processes, analytical and simulation modeling methodologies, and hybrid simulation (discrete event and uid ow paradigms). He authored or coauthored over 100 papers and coauthored two books. Melamed was awarded an AT&T Fellow in 1988 and an IEEE Fellow in 1994. Ronald S. Lembke (PhD Northwestern University) is an Associate Professor of Supply Chain Management at the University of Nevada, and author of numerous publications on reverse logistics. Ron serves as the Standards Committee Chair for the Reverse Logistics Association.

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