As the electronics industry increases its commitment to the environment, businesses are looking for cradle-to-grave management of electronics products. The after-market handling of products – repair, return, disposal and recycling – has largely been left to a highly fragmented set of companies that may or may not be familiar with the electronics supply chain.
In addition to environmental concerns, a sluggish economy has many companies holding on to their capital equipment longer. This presents a challenge to buyers in charge of maintenance, repair and operations (MRO) procurement. Often, end-of-life (EOL) components suitable for repair are widely available on the Internet, but these products may have passed through numerous customers before their final sale. The risk of procuring a damaged or counterfeit part increases dramatically.
For these and other reasons, established businesses in the logistics, electronics distribution and electronics manufacturing services (EMS) have been consolidating specialty companies and services under a broad category called “reverse logistics.” Although not entirely accurate, the term encompasses everything from the management of product recalls and returns through the final disposal of electronics equipment.
Leading players in this industry have also identified profitable opportunities in providing these services. One of the leading players in electronics reverse logistics, UPS, has sponsored a white paper, “Recovering Lost Profits by Improving Reverse Logistics” by consultancy Greve Davis. The paper notes further:
For high-tech companies, reverse logistics offers a wealth of revenue opportunities in addition to processes that can help them be more efficient and avoid fines. As a whole, the electronics industry spends over $14 billion on returns every year. High-tech manufacturers without a well-managed reverse logistics process could be losing over 50% of the returned inventory value since the majority of returned products can be sold in secondary channels.
This lost opportunity could add up to millions for a medium to large company. As noted by Best Buy CMO Barry Judge, “secondary market electronics sales represent an estimated $15B market in the United States.” In addition to missing revenue opportunities, high-tech companies could also face significant fines and penalties if they do not have a reliable reverse logistics process in place when it comes to regulations.
Reselling in the Secondary Market
One of the starkest examples of secondary market opportunities lies in the mobile phone industry. Every year, there are about 1.2 billion cell phones sold worldwide.13 The return rate for mobile phones in 2010 was 8% or 96 million phones that weigh about 16,000 tons.11 The average secondary market value for refurbished mobile phones ranges between 35% and 75% of the original value. The average retail value per phone is approximately $150. If liquidated on the secondary market, the manufacturer would recover on average $82.50 per phone. If a single manufacturer were able to resell only 250,000 of the phones returned to them, it could equal over $20M in additional revenue.
In the electronics supply chain, the industry’s two largest authorized distributors, Arrow Electronics Inc. and Avnet Inc., have made major investments in reverse logistics. Avnet recently folded its Avnet Integrated Services unit into its Technology Solutions global business.
In addition to focusing on taking back, repairing and recycling used equipment, the Avnet Services unit is providing a complete life cycle management service. On the front end, Avnet Services helps customers select and configure IT products and equipment; supports equipment through its useful life; and then can take it back and redeploy it into a secondary market. Used equipment is also used to secure spare parts, and anything that can’t be reclaimed is recycled or disposed of. Avnet owns the companies that provide these services.
As distributors authorized by their supplier partners, Avnet and Arrow have to meet supplier specification for all the services they provide. This means there is almost no risk that counterfeit or substandard parts will be bought and sold by the distributors. Additionally, since parts are often pulled off of boards destined for the scrap heaps, authorized distributors go through additional pains to make sure equipment is destroyed rather than diverted.
Arrow began building up its reverse logistics arsenal in 2010 with the acquisition of Converge, a specialist in excess components and computer products. Arrow has since expanded its offering via acquisition and most recently became PC maker Lenovo’s partner for returns. According to Arrow:
Asset disposition services supported by Arrow include secure logistics; data erasure, destruction processing and recycling according to rigorous standards; and comprehensive tracking and reporting for accounting and compliance purposes. In addition, Arrow evaluates, refurbishes and markets assets to help customers capture the highest possible return. Arrow has developed a global marketplace of diverse buyers to remarket quality refurbished IT assets.
The asset retirement service is managed through an online portal through which Lenovo customers can request pickups, view available credits, obtain real-time values for assets at any point in the lifecycle, and run a variety of reports on assets that have been or are being processed.
Customers using this service will be able to recoup some of the value of their used equipment.
Lenovo has also partnered with UPS, which maintains repair depots globally for Lenovo, and Jabil, a contract manufacturer for the Chinese OEM. Between UPS and Jabil, Lenovo manages its products’ life cycle from manufacturing through end-of life. UPS handles the logistics seamlessly—meaning Lenovo customers experience the services as provided by Lenovo; and Jabil handles Lenovo’s service business in much the same way.
Reverse logistics touches all aspects of the procurement function. Buyers of components now have to consider the environmental compliance status of the parts they buy. Once those parts go into a system, securing replacement parts becomes an issue. Savvy IT procurement professionals should think about managing the equipment they buy for the long haul, and investing in machines that retain their value or can be redeployed.
Finally, companies throughout the supply chain – suppliers, distributors and end-users—have to guard against the risk that the products they buy and sell don’t end up polluting a landfill somewhere. Whether the function is called life cycle management, reverse logistics or something else, the responsibility is now being shared throughout the supply chain.
But reverse logistics doesn’t have to be a cost center. Companies can actually cut costs and even make money through managing reverse logistics. As UPS concludes:
The opportunity to develop reverse logistics programs that take advantage of secondary markets and reclaimed materials is significant. Combined, these programs could provide manufacturers with ways to reduce the overall cost of manufacturing their products, increase revenue from new sources and improve customer service at the same time.