CSCMP's Supply Chain Quarterly
February 21, 2020

Full circle

Reverse supply chain management and closed-loop recycling reintroduce reusable parts and materials into the forward supply chain. Manufacturers, consumers, and even the planet can benefit from this practice.

Today's accelerated pace of innovation is a double-edged sword. While it has led to an unprecedented proliferation of technological devices—a boon for consumers—it is creating a serious problem for manufacturers. A combination of demand-related challenges, including fluctuations in the supply and price of raw materials, such as rare earth; an increase in labor costs in places like China; rising distribution costs; and the increasingly high standard for aftermarket services for electronics and consumer devices are all factors in the worldwide increase in manufacturing and supply chain costs as well as in the consumption of labor and materials.

This bottleneck of materials, labor, and costs is becoming a crisis on a global scale. It requires action on the part of manufacturers of consumer electronics, telecommunication equipment, computers, and other high-tech products. But it also represents an opportunity for them to innovate within their logistics and supply chain processes.

One way that electronics and high-tech original equipment manufacturers (OEMs) can do that is through a new, proactive approach to both post-industrial and post-consumer recycling known as reverse supply chain management (RSCM). RSCM employs closed-loop recycling to recover and reintroduce reusable materials—specifically, manufactured parts and components—into the forward supply chain. RSCM is changing how OEMs use and reuse obsolete and older technology in a way that is not only good for business, but also good for the planet.

What is RSCM?
Just five years ago, an electronic or high-tech product that had reached the end of its lifespan was automatically disposed of through conventional recycling methods. These methods, called "cradle-to-grave" or "downcycling," degrade the quality of materials over time and eventually result in waste. While effective for returning technology to its raw material state, this process is taxing on the environment and can be very costly.

Rather than return devices directly to their raw material state, electronics and high-tech manufacturers can consider adopting reverse supply chain management. A major component of this strategy is closed-loop recycling, which reduces the demand for raw materials for producing a new product by using materials harvested from end-of-life assets and/or surplus inventory, and then strategically introducing them into the forward supply chain.

There are seven main stages in the product lifecycle in a reverse supply chain management program. They include:

  1. Consumer take-back: The first stage in the RSCM process is to use effective methods for collecting products from consumers. One example is a program my company manages for Microsoft Hong Kong, where consumers can trade in mobile phones, laptops, game consoles, and tablets for coupons they can apply toward the purchase of new products through Microsoft's online store.
  2. Reverse logistics: This involves optimizing and increasing the efficiency of aftermarket processes for a device, such as pickup, collection, transportation, and warehousing.
  3. Data sanitization: At this stage of the reverse supply chain, the irretrievable or permanent data erasure, degaussing (demagnetizing the data-storage chip and hard drive), and physical destruction of data occur both onsite and offsite. Removing data safely and securely is a critical step that protects the primary user's privacy and data security.
  4. Testing and sorting: Components are tested to determine their value for reuse and/or repair, including (if necessary) for use in the remanufacturing process, then are classified accordingly.
  5. Parts harvesting and repurposing: Parts harvesting involves removing usable or repairable parts and components from an end-of-life product. Repurposing refers to using a part or component in a different application than its original use. One example of the latter would be using the liquid crystal diode (LCD) module harvested from a tablet computer to make the touch-panel control of a home entertainment system. Such transferable components can be reprogrammed so that they can have a second life in alternative applications. Making the right decisions about parts harvesting and component-level reuse and repurposing requires a high level of product knowledge and technical sophistication.
  6. Remarketing and resale: Remarketing refers to bringing new or refurbished products or devices built with harvested components to market. Remanufactured parts, however, can either go back into the OEM's original forward manufacturing supply chain or they can be resold in another market.
  7. Recycling and reclamation: The final stage returns components and devices to their raw material state, but only if they cannot be further repurposed or reused as per the previous steps of the RSCM product lifecycle.

Making the right decisions about parts harvesting and repurposing requires a high level of product knowledge and technical sophistication.

Benefits of RSCM and closed-loop recycling
The purpose of reverse supply chain management is similar to that of other recycling initiatives: to save money, reduce waste, and improve the environment. But the benefits to be gained through closed-loop recycling often can extend far beyond those associated with traditional approaches. Here are some of the most important ones:

Environmental. Electronic devices are an integral part of society today, from personal to professional to enterprise applications. However, when it comes to disposing of the waste they generate in a manner that minimizes environmental damage, the world still has a long way to go. According to the most recent U.S. Environmental Protection Agency (EPA) report on electronics waste management, by 2009 approximately 438 million electronic products had been sold and over 2 million short tons of electronic products were ready for end-of-life management in the United States alone.1These numbers have surely increased with the boom in personal and enterprise technology industries in the major emerging and mature markets around the world.

There are limited processes available for OEMs, historically speaking, when it comes to dealing with post-consumer and post-industrial recycling of electronic devices. None of the traditional recycling measures, including selling to less-developed markets to recover value and minimize e-waste, is very efficient. Because they are not closing the loop, reuse of materials is not reaching its maximum potential, and a lot of energy and money are wasted on processing them.

Closed-loop RSCM addresses some of those shortcomings. For one thing, it reduces the carbon footprint of manufacturing through the recovery, reuse, and remanufacturing (3R) of end-of-life technology and its components. Reusing the LCD module from a tablet, for example, may reduce the carbon footprint generated by the entire product by as much as 70 percent. For another, it reduces supply chain costs for OEMs, which can be passed on to consumers.

Commercial. End-of-life technology does not have to be a burden on an OEM's bottom line. By harvesting parts and components from obsolete assets and excess inventory and injecting them into the manufacturing supply chain of new products, OEMs can simultaneously eliminate waste and reduce manufacturing costs. Moreover, closed-loop recycling can significantly prolong the lifecycle of the bill of materials (BOM) for the device. If parts or a special material (say, a carbon-fiber composite) can be reused in a closed-loop fashion, it will save the costs of making a new-generation device or model of that product.

OEMs are releasing new electronic and high-tech products at a faster rate than at any other time in history. Consequently, older models are reaching their end of life at a much quicker pace than in the past. On average, between 3 and 5 percent of a typical OEM's annual shipment volume becomes obsolete before it is sold or reaches the consumer. This is usually due to production defects, excess parts, and sales forecast inaccuracy. This is not an easy-to-solve problem, but RSCM can help OEMs do better by reducing the cost and carbon footprint as well as recovering more of the value of obsolete products.

Strategic. One trend that is quickly gaining momentum among OEMs that are using closed-loop reverse supply chain management is incentivized post-consumer take-back programs. By leveraging obsolete products through trade-ins and carefully planned reverse supply chain management, OEMs can build relationships with their customers and keep them coming back long after the initial sale transaction.

On average, the typical lifespan of a mobile device can vary between three to five years. Consumers, however, often choose to change or upgrade their products after using them for as little as a year and a half, even if the devices are still highly functional.

If a vendor offers an incentivized take-back program, owners of mobile phones that are about to become obsolete can trade in their phones for credit toward a new model. The volume of upgrades is generally five to 10 times higher than that experienced by programs that do not offer an incentive.

This type of program benefits the OEM in two significant ways. First, it focuses the consumer's attention on devices offered by that particular manufacturer. If consumers can apply the value of the phones they are using today toward the phones they want to use tomorrow, they are far less likely to investigate what other vendors are offering. Second, skillfully executed take-back programs help keep devices out of the unofficial channels that often cannibalize new products and markets, including the emerging markets that are strategically important for the OEM.

Ready for RSCM?
For the past few decades, OEMs based in the United States have had many good reasons to ship the bulk of their manufacturing and related jobs to other countries, especially in the Asia-Pacific (APAC) region. The most compelling reason was that it dramatically reduced costs. But there were other benefits as well, such as less-stringent regulations. The result, a massive supply chain network that they have built around the world, is a triumph of modern globalization.

Now, however, manufacturing is beginning to return to the United States, and that means a part of its supply chain network must also return. It's critical to establish a robust reverse supply chain management infrastructure so that excess, obsolete, and defective parts and products can be handled in a way that is both environmentally friendly and cost effective.

As of today, that infrastructure is not in place because the decades-long exodus of manufacturing rendered it unnecessary. There was not much of a market domestically for repurposing disposed parts and products, and industry has instead focused primarily on raw materials recycling and simple waste management.

This lack of RSCM expertise and capabilities is problematic in several ways, but two are of special importance to manufacturers returning to the United States. The first is that U.S. regulations in the areas of environmental health and safety, recycling, and others that affect manufacturing and product returns are more stringent and more complex than those in the APAC region. The second is that U.S. consumers increasingly want to know what happens to their products after they return them. This is partly out of a desire to hold corporations accountable for their environmental impact, and partly because they are concerned about issues such as data security and privacy.

Electronics and telecom manufacturers that are returning some of their operations to the United States will need to meet the expectations of both regulators and consumers. Regardless of where these OEMs are located, though, they must ensure that products moving through the reverse supply chain are handled and treated according to the same standards around the globe while also complying with local laws and regulations. To achieve those goals, many OEMs work with one or more providers of reverse supply chain management services with global coverage and facilities that maintain the same standards of process quality, security, and compliance.

No matter how a high-tech or electronics OEM may choose to handle its end-of-life products, one thing is clear: correctly managing reverse supply chain management can help it take advantage of those products' residual value to generate a positive financial return and create a sustainable business function instead of just an obligation and liability.

1. U.S. Environmental Protection Agency, Electronics Waste Management in the United States Through 2009 (May 2011).

Linda Li is chief strategy officer of Li Tong Group, a global provider of reverse supply chain management services for the high-tech industry.

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