White Paper

Reverse Lifecycle Management: ROI Model and Analysis for Reverse Logistics

Table of Contents
1. Introduction..................................................................3 2. What is Reverse Lifecycle Management?...................3 3. Key Challenges in Reverse Logistics..........................4 4. Business Benefits of RLM...........................................4 5. The Financial Impact of RLM......................................6 6. RLM Financial Scenario.............................................8 About the Authors...........................................................9 About Kewill...................................................................10

Entire contents 2010-2011 Kewill, Inc. and Blumberg Advisory Group, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained in this report is from sources believed to be reliable. Kewill and Blumberg Advisory Group disclaim all warranties as to the accuracy, completeness, or adequacy of such information. Kewill and Blumberg Advisory Group shall have no liability for errors, omissions or inadequacies in the information contained herein or for the interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve the intended results. The information and opinions expressed herein are subject to change without notice.

1. Introduction
In our initial white paper entitled Reverse Lifecycle Management: the Next Opportunity in Reverse Logistics, we examined some of the underlying challenges facing the Reverse Logistics (RL) industry and the role technology can play in streamlining operations and automating reverse logistics processes. In this white paper, which can be read by itself or as a companion to the previous white paper, we examine the potential financial returns that may be realized through the implementation of an advanced Reverse Lifecycle Management (RLM) solution. The purpose of this white paper is not to definitively calculate the exact savings that may be obtained through RLM, but rather to highlight major areas for further exploration and financial analysis. That being said, the ROI model embedded in this analysis is based on our collective experience working with clients and customers, including some of the largest and most sophisticated operations in the world. While every RL operation is different, there are some common areas where our clients have been able to save costs or generate new sources of revenue. In addition, and difficult to quantify, are the oftentimes significant financial benefits and brand equity that can be achieved through improved customer service and goodwill. With this in mind, we encourage you to read this paper with an aim to understand how RLM may benefit your own reverse logistics operation.

2. What is Reverse Lifecycle Management?

For many companies in the reverse logistics industry, best practices in operations management have outpaced the capabilities of their current processes and systems. Trends such as outsourcing, contract manufacturing, and sourcing from global suppliers have exposed the limitations of the many rigid, proprietary, fragmented, and/or home-grown systems that are common in the industry. These limitations include poor product visibility, weak operational performance and asset utilization, and missed customer commitments that can lead to penalties for low service levels. As a result, many companies miss opportunities to reduce costs, grow profitable revenues, improve customer service, and enhance their competitiveness. To effectively manage todays complex RL operations, a new holistic concept for reverse logistics is needed one that integrates business processes with a next-generation reverse lifecycle management (RLM) system. The ideal RLM system is one that is based on a flexible, multi-function, integrated, and end-to-end platform that can manage reverse logistics on a global scale. This RLM system enables integration of business processes related to reverse logistics (e.g., returns management, repair, warranty entitlement, warehouse management) and interfaces to other backend systems such as CRM, supply chain planning systems, and financial systems. In essence, a true RLM system provides real-time visibility, tracking and control of labor, material, and data throughout the entire reverse logistics service network.

3. Key Challenges in Reverse Logistics

As discussed in the previous RLM white paper and summarized here, the typical reverse logistics operation experiences five very unique and interdependent problems with respect to operational execution: 1. Lack of visibility to the volume, location, and disposition of inventory at various points within the Reverse Supply Chain Inability to meet customer expectations, contractual obligations, and compliance regulations due to lack of reliable and relevant data Limitations to maximizing asset utilization and resources (e.g., labor, parts, etc.) Challenges to benchmarking, optimizing, and improving operational performance Lack of execution on opportunities to generate income from customer returns (collections, upgrades, add-ons, extended warranties)

2.

3. 4. 5.

These problems are often the result of a number of inefficiencies and bottlenecks and are symptomatic of disjointed and fragmented processes and systems. These shortcomings can have dramatic and negative consequences on financial performance and thus lead to lower profit margins. Fortunately, each of these challenges can be overcome through the implementation of an integrated, end-to-end Reverse Lifecycle Management solution as outlined in Table 1 (in Section 5).

4. Business Benefits of RLM

There are a number of measurable and tangible benefits that can be achieved through the features and functionality found within a state of the art RLM solution. These benefits, listed below, are analyzed in Section 5 and serve as the basis for the financial model scenario in Section 6. By deploying this set of functionality, RL organizations can achieve some or all of the following: Profitability: One of the major business drivers for implementing a new RLM system is to drive ongoing profitability through cost reduction and reverse logistics efficiencies. These bottom line improvements can be derived from every facet of the operation from process, to people, to inventory. Improve labor productivity and process efficiency Minimize losses from pipeline depreciation and shrinkage Improve shop floor velocity Improve returns inventory utilization Improve asset to cash cycle time Streamline collaboration across multiple suppliers

Capture accurate reverse logistics and depot operations costs Improve regulatory compliance and customer penalty avoidance Improve component warranty entitlement and qualification Process return-to-vendor warranty Track repair workmanship warranty

Customer Retention: Among the more subtle benefits of advanced RLM systems are increased service levels and improved customer satisfaction. In short, RLM keeps customers happy and coming back. Minimize touch points and fail points Implement faster, simpler returns processing and turn-around time for customers Establish enterprise-wide visibility for customer order and asset tracking Define, automate, and standardize business processes for a consistent customer experience across product lines

Revenue Generation: Best-in-class companies see RLM not just as a cost-reducing exercise, but also an opportunity to establish and enhance revenue generation programs. It all starts with streamlined reverse logistics processes and end-to-end visibility. Reduce objections to sale due to poor returns/service reputation Refurbish and resell Sell extended warranty services Sell extended service contracts Sell add-on accessories Sell upgrades Cross-sell products

Brand Equity: For many companies, a long-term corporate strategy is not complete without understanding how current operational goals will improve brand equity. RLM is no exception. Beyond simply improving customer service and retention, advanced RLM systems can help companies build strong corporate brands as well as protect against any threats that may damage them. Establish reputation for best-in-class returns operations Create green PR through recycling and sustainability Delight customers and build customer intimacy Improve relationships with suppliers and channels Effectively manage recalls Protect corporate reputation through proper regulatory compliance

All of these benefits can have a direct impact to a companys bottom line and are the basis for the calculations in Table 1. In fact, just about every aspect of RLMs feature-functionality has a financial impact toward lowering labor and material costs or increasing top line opportunities.

5. The Financial Impact of RLM

RLM can have a major impact on financial performance by streamlining and automating keys aspect of reverse logistics operations thereby reducing or eliminating highly labor intensive and time consuming tasks. In addition, the visibility of data throughout the RL supply chain enables a company to better control, plan, and anticipate service events. As a result, the labor force can work more efficiently and obtain a higher level of productivity. As mentioned above, RLM can also facilitate a considerable reduction in material costs (e.g. inventory). This can be achieved through visibility and planning tools, real-time information tracking and tracing, standardized processes and procedures, and the self-monitoring of RLM events. In essence, RLM provides better control and confidence that the right level of inventory is available at the right place, at the right time and at the optimal cost. Visibility tools also provide greater control and help to accelerate the flow of returned goods throughout the reverse logistics service network. This has a multiplier effect because the return flow provides a readily available and low cost source for spare parts inventory. This in turn allows the RL operation to reduce the overall level of investment in inventory. However, this can only be achieved if the RL service network has the systems and processes in place to process returns in a timely manner and also provide real-time data regarding inventory stock levels. Another benefit of these visibility tools is that they enable the RL operation to have better information on the quantity, disposition, and value of returned products. With this knowledge, a company can be more effective in managing key processes of the reverse logistics operation that impact cash flow, such as asset recovery and return to vendor (RTV) programs. RLM can have a dramatic impact on revenue growth. With real-time knowledge of product return levels and condition, organizations can now implement programs to cross-sell or up-sell new products. In addition, the company can offer new service plans or extended warranties. Improved warehouse management can also enable revenue-generating services for same day parts delivery or advanced exchanges. In addition, advanced RLM systems can help companies to disposition parts and refurbished goods for sale on the secondary market. Managing warranty programs is one of the intersections where the forward supply chain meets reverse logistics. Warranty is as critical to recovering costs as it is to ensuring customer satisfaction. It can also be a profitable source of revenues for companies that sell extended warranty programs. To effectively manage warranty entitlements you must first identify that you have a warranty event and then connect that event to the warranty genealogy that started in the forward supply chain and now needs fulfillment somewhere in the reverse logistics network. That frequently starts with serialized unit tracking and accurate, early failure disposition. Effective and expedient handling of warranty claims has the added benefit of instilling a sense of confidence and quality with your customers.

One final element of an advanced RLM solution worth consideration is the ability to be deployed across the organization (and the globe) via a software-as-a-service (SaaS) platform. The rapid deployment times and subscription based pricing of SaaS-based platforms enables not only a reduced Total Cost of Ownership (TCO), but also a faster return on investment in the RLM system. And since the subscription model includes software maintenance and upgrades, the ongoing overhead costs to maintain and improve the system are reduced or eliminated.

Table 1: Summary of Potential Areas for RLM Improvement

Impact Area Feature/ Functionality
Visibility and Planning Tools

Major Benefits
- Increased utilization of assets and resources - Service parts optimization - Administration consolidation - Resource optimization - Automation and increased processing velocity - Regulatory compliance - Customer penalty avoidance - Administration consolidation - Protected revenue and income - Increased market share - Resource optimization - Liability protection - Revenue Generation (Cross-sell and up-sell - Productivity and efficiency gains - Customer experience improvement - Increased market share - IT resource reduction

Labor Cost Inventory Savings Reduction

Overhead Savings

Enhanced Revenue

x x x x x x

Business Rule Work Flow

Integration with Back Office End-to-End Solution Real-time Information Tracking and Tracing Standardized Processes and Procedures SaaS Platform

x x x x x x x x

- Protected revenue and income Self-Monitoring of - Resource optimization RL Events - Customer experience improvement - Increased market share Warranty Management - Customer experience improvement - Revenue generation

x x
7%

x x

x x
5%

Potential Improvement

7%

5%

6. RLM Financial Scenario

With this knowledge in hand, we can now examine the financial returns attainable through the broad array of feature-functionality found within an advanced RLM system. While every implementation is different, we will use a high-level portrait of a reverse logistics operation to illustrate our logic. In our example, we will use an operation responsible for $100 million in transactions (i.e., operating budget or sales). For the purposes of this analysis we will use the following assumptions: Labor Costs as a percentage of operating budget = 35% or $35M Inventory Costs as a percentage of operating budget = 30% or $30M Overhead Expense as a percentage of operating budget = 20% or $20M

Lets also assume the improvements in financial performance outlined in Table 1. In this scenario operating costs are reduced by 7% through a reduction in material costs achieved by better management of the returned inventory pipeline and a consequent reduction in labor costs through improved efficiency of service personnel. We also achieve a 5% reduction in overhead due to more efficient IT infrastructure and the lower TCO brought about by the SaaS platform. In our scenario, we are also able to launch several of the revenue-generating programs described above using our new visibility, tracking, and warranty management tools this results in a 5% increase in revenue. It is easy to see how the financial returns, even in the first year of implementation, can be quite significant. The cumulative impact is a $4.55 million reduction in operating costs (variable labor and inventory) and another $1 million savings in overhead expenses. In addition, $5 million a year in new revenue streams adds to the business case. In other words, more than $10 million of financial returns can be realized more than enough to justify the investment in an advanced RLM system. As noted in the Introduction, a more detailed modeling of your reverse logistics operation would be required to determine an accurate ROI that reflects your business challenges. Our goal in this paper was to illuminate some of these opportunities for you and to impart some knowledge based on our years of experience as a leading vendor of advanced RLM systems. If you are interested in learning more, or to work with our professionals to conduct a more detailed ROI analysis specific to your company, please contact Kewill directly at 877-872-2379 or visit www.kewill.com.

About the Authors

Bob Leeds Global Product Manager, Kewill Reverse Logistics, Kewill Bob Leeds has over 15 years of domain expertise with service operations, service parts management, reverse logistics and associated software applications, including almost a decade of Product Management experience with some of the largest software players in the service parts planning and reverse logistics market. His expertise spans the spectrum of reverse logistics including inventory planning, warehousing, field service, and returns/repair operations. Bobs balanced perspective comes from management positions in both service/logistics operations and software product management. Bob has worked with industry leading brand owners, 3PLs, 3PSPs, and OEMs such as Jabil, Celestica, Ryder, Dell, IBM, Cisco, DecisionOne, and HP. He has a deep understanding of the operational processes, financials, and business requirements for Reverse Lifecycle Management and how to apply software solutions to improve cost control, revenue generation, and customer retention.

Michael R. Blumberg, CMC President, Blumberg Advisory Group, Inc. Michael R. Blumberg is President & CEO of Blumberg Advisory Group, Inc., Certified Management Consultant (CMC), and a respected author and speaker. His firm provides strategic and tactical assistance for improving the overall profitability and quality of aftermarket service operations. He has also served as President of the Delaware Valley Chapter of the Association for Field Service Managers International and president of the Philadelphia Chapter of the Institute of Management Consultants. Mr. Blumberg is an industry authority on Reverse Logistics and Closed Loop Supply Chain Management.

About Kewill
Global businesses face ever increasing complexity across their supply chains including decisions on sourcing, customs, compliance, transportation, storage, finance, visibility and connectivity. Inefficiency in any of these areas will lead to supply chain delays and result in increased costs. Kewill has a suite of software solutions that significantly simplify the management of the most complex global supply chains for enterprises and logistics service providers. With experience in global trade management and logistics since 1972, and over 600 employees worldwide, Kewill is a long-time innovator of solutions for manufacturers, distributors, retailers, freight forwarders, transport companies, customs brokers, 3PLs and 4PLs, as well as other related institutions involved in financing and underwriting global trade such as banks and insurance providers. Kewills solutions are in daily use by more than 40,000 users worldwide and our global customer base which entrusts us with the management of their supply networks includes divisions of Bayer, Caterpillar, DHL, FedEx, Ford, General Electric, General Motors, H.J. Heinz, Kimberly-Clark, Kraft, Levi Strauss, Mazda, Nestl, Nike, Palm, Procter & Gamble, Smith & Nephew, Sony, TNT, Unilever, UPS, Vodafone, Yamaha, Xerox. Kewills solutions include: Kewill Reverse Logistics - provides end-to-end reverse lifecycle management (RLM) for returns and service operations across your reverse supply chain. This award-winning platform integrates across trading partners to increase visibility and accelerate the flow of goods and information. Kewills Decision Engine enables rapid configuration of processes and business rules that are tailored and optimised to the way you run your business, whether outsourced or managed directly. Kewill Flagship - an enterprise parcel shipping solution that supports high performance and high volume shipping, serving both domestic and international requirements, with the broadest carrier compliance in the industry. Kewill's Export Compliance System (ECS) - an easy to use solution that provides regulatory compliance screening for denied/restricted parties, export license determination for 30+ countries, embargoed/sanctioned countries and active party screening using Reverse Denied Party Screening (RDPS). Kewill Export - helps exporters of all sizes to accelerate the creation and distribution of export documentation, perform compliance screening, and carry out government-mandated export filing.

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