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Assessing and Optimizing the Reverse Logistic Process Using Computer Aided Modelling Techniques

©2011 Diplomarbeit 153 Seiten


As the world population is growing continuously and emerging markets are expanding, natural recourses are being used even more intensively. Because of the scarcity of natural resources, industry faces a changing business environment. Due to government regulations, companies nowadays must handle not only in terms of efficiency, but also of sustainable development and new market opportunities. Thus, with the progression of the logistics sector in recent years, supply chain management and especially the concept of reverse logistics have become more important for both, industry and science. By utilizing reverse logistics, companies aim at maximizing their product revenue while reducing the costs of product returns. Accordingly, implementing an effective concept of reverse logistics, while manufacturing environmentally friendly products, has become a strategic issue. In order to meet the requirements, companies are confronted with the problem of reducing the uncertainties regarding the quality, quantity and timing of the product returns. In this context, a high level of uncertainty leads to a strong increase in complexity compared to the traditional forward supply chains. Using modern computer aided modelling techniques such as system dynamics, helps to counteract this complexity since they not only enable a better understanding of the dynamic behaviour of such complex systems but also allow an improved estimation of the impact of a changing environment and management decisions.
This thesis contributes towards an improvement of the strategic decision making process in the field of reverse logistics by providing a generic simulation model which can be used to analyse the influence of different environmental and economical policies with respect to prevailing market conditions. To achieve this objective, the following approach is proposed:
In Chapter 2, the theoretical foundation of reverse logistics is characterized forming the framework for the subsequent analytical approach concerning the appropriate model development. For this purpose, first, an overview of the state of the art concerning the processes and influencing factors within the field of reverse logistics is provided. This is achieved by describing the theoretical background of the topic, including a characterization of the impact of individual reverse logistic activities on each other and on their environment. Afterwards, current challenges and trends when […]


Table of Contents

List of Figures

List of Tables

List of Abbreviations

1 Introduction

2 Literature Review
2.1 Fundamentals of Reverse Logistics
2.1.1 Introduction to Reverse Logistics
2.1.2 Characterizing Supply Chain Management and Reverse Logistics
2.1.3 Classifying Reverse Logistics Drivers
2.1.4 Specifying Return Reasons for Reverse Logistics
2.1.5 Analyzing Types and Characteristics of Returned Products
2.1.6 Describing the Reverse Logistics System
2.2 Impact on Reverse Logistic Activities
2.2.1 Describing Positive Effects on Closed-Loop Supply Chains
2.2.2 Characterizing the Waste Hierarchy Pyramid and Regulations
2.2.3 Gatekeeping as an Effective Intake Control for the Reverse Logistic
2.2.4 Analyzing Barriers of Reverse Logistics
2.3 General Trends and Challenges of Reverse Logistics
2.4 Uncertainty as a key feature of the reverse logistics environment

3 Analytical Approach
3.1 Process Oriented View on Reverse Logistics
3.1.1 The Five Star Model as a Starting Point of an Efficient Business Model
3.1.2 Optimizing Approaches to Processes for Reverse Logistics
3.2 Dynamic Approach to Reverse Logistics
3.2.1 Reverse Logistics as a Dynamic System
3.2.2 Computer Aided Modelling Techniques for Studying Dynamic Systems
3.2.3 Using System Dynamics for Reverse Logistic Processes
3.3 System Dynamics Modelling Methodology

4 Model Development
4.1 Clarifying the Research Methodology
4.2 Phase 1: Problem Articulation
4.2.1 Structuring the Modelling Objectives
4.2.2 Characterizing the Framework for the System Dynamics Model
4.2.3 Describing the Design of the Model System
4.2.4 Specifying the Evaluation Method
4.2.5 Outlining the Key Aspects for the Modelling Task
4.3 Phase 2: Formulating a Dynamic Hypothesis
4.3.1 Using the Integrated Definition for Function Modelling
4.3.2 Creating a Value Stream Mapping
4.3.3 Structuring the Framework with Causal Loop Diagrams
4.3.4 Formulating Stock and Flow Maps
4.3.5 Summarizing the Hypothetical Results
4.4 Phase 3: Formulating a Simulation Model
4.4.1 Characterizing General Assumptions
4.4.2 Sector 1: Collection
4.4.3 Sector 2: Disposal
4.4.4 Sector 3: Inspection
4.4.5 Sector 4: Recycling
4.4.6 The Functionality of Shipment
4.5 Phase 4: Testing
4.5.1 Characterizing the Testing Approach
4.5.2 Describing the Base Run Resulting Behaviour
4.6 Phase 5: Policy and Design Evaluation
4.6.1 Characterizing the Environmental Policy
4.6.2 Specifying the Economical Policy
4.6.3 Optimizing the System Performance

5 Conclusions and Future Work

6 Bibliography

Appendix 1: Report of the Company Visit

Appendix 2: Taguchi L27 Orthogonal Array

Appendix 3: IDEFo Diagrams

List of Figures

Figure 1: Forward Logistic Process.

Figure 2: Reverse Logistics Process.

Figure 3: Reverse Logistics Drivers

Figure 4: Return Reasons for Reverse Logistics

Figure 5: Supply Chain with Reverse Flow

Figure 6: The Waste Hierarchy Pyramid

Figure 7: Final Result of the Uncertainty-Investigation

Figure 8: The Star Model of Organizational Design

Figure 9: Dynamic System

Figure 10: Creating a Model

Figure 11: Developing a System Dynamics Model

Figure 12: The Impact of Uncertainties on the Return Quantity

Figure 13: The World Reverse Logistics and Repair Service Market .

Figure 14: Framework for the Reference Model

Figure 15: Generic Structural Diagram for the Reverse Logistic System

Figure 16: Generic IDEFo Diagram of the Service Channel

Figure 17: IDEFo Diagram of a Complete Service Channel

Figure 18: Starting Section of VSM Service Channel

Figure 19: Generic Causal Loop Diagram of the Reverse Logistic Model

Figure 20: Generic Stock and Flow Map for the Reverse Logistic Model

Figure 21: Basic Simulation Model: Sector Collection

Figure 22: Basic Simulation Model: Sector Disposal

Figure 23: Basic Simulation Model: Sector Inspection

Figure 24: Basic Simulation Model: Sector Recycling

Figure 25: Basic Simulation Model: Functionality of Shipment

Figure 26: Return Product Allocation Resulting from the Base Run

Figure 27: Total Reverse Logistics Costs Resulting from the Base Run

Figure 28: Total Disposal Resulting from the Base Run

Figure 29: Utilization Ratio Resulting from the Base Run

Figure 30: Performance Measurements resulting from Process Capacity Limitations

Figure 31: Affect of the Increase Rate Considering Capacity Restrictions

Figure 32: Environmental Scenario Sub Model

Figure 33: Effect of the Environmental Scenario

Figure 34: Economical Scenario Sub Model

Figure 35: Effect of the Economical Scenario

Figure 36: Performance Measurements Resulting from Parameter Adjustments

Figure 37: Performance Measurements resulting from the Policy Implementation

Figure 38: Performance Measurements Resulting from the Capacity Expansion

Figure 39: Policy Impact on the Remanufacturing and Recycling Process

List of Tables

Table 1: Economic Drivers for Reverse Logistics

Table 2: Reasons causing Manufacturing Returns

Table 3: Reasons causing Distribution Returns

Table 4: Reasons causing Customer Returns

Table 5: Characteristics determining Product Returns

Table 6: Subsystem Chart 1: Stocks with Inflows and Outflows

Table 7: Subsystem Chart 2: Stocks with Inflows and Outflows and Unattached Variables

List of Abbreviations

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1 Introduction

As the world population is growing continuously and emerging markets are expanding, natural recourses are being used even more intensively. Because of the scarcity of natural resources, industry faces a changing business environment. Due to government regulations, companies nowadays must handle not only in terms of efficiency, but also of sustainable development and new market opportunities [Blu05]. Thus, with the progression of the logistics sector in recent years, supply chain management and especially the concept of reverse logistics have become more important for both, industry and science [Ena06]. By utilizing reverse logistics, companies aim at maximizing their product revenue while reducing the costs of product returns. Accordingly, implementing an effective concept of reverse logistics, while manufacturing environmentally friendly products, has become a strategic issue. In order to meet the requirements, companies are confronted with the problem of reducing the uncertainties regarding the quality, quantity and timing of the product returns [Ind05]. In this context, a high level of uncertainty leads to a strong increase in complexity compared to the traditional forward supply chains [Leh09]. Using modern computer aided modelling techniques such as system dynamics, helps to counteract this complexity since they not only enable a better understanding of the dynamic behaviour of such complex systems but also allow an improved estimation of the impact of a changing environment and management decisions [Rey10].

This thesis contributes towards an improvement of the strategic decision making process in the field of reverse logistics by providing a generic simulation model which can be used to analyse the influence of different environmental and economical policies with respect to prevailing market conditions. To achieve this objective, the following approach is proposed:

In Chapter 2, the theoretical foundation of reverse logistics is characterized forming the framework for the subsequent analytical approach concerning the appropriate model development. For this purpose, first, an overview of the state of the art concerning the processes and influencing factors within the field of reverse logistics is provided. This is achieved by describing the theoretical background of the topic, including a characterization of the impact of individual reverse logistic activities on each other and on their environment. Afterwards, current challenges and trends when managing product returns are discussed with a particular focus on the major role of uncertainties on the reverse logistic environment.

Based on the gained results, Chapter 3 reconsiders the present conceptional formulation in a systematic manner which requires the application of assistant system dynamics methods for studying reverse logistic processes. Thereafter, current approaches introduced in literature are reviewed in order to clarify the prerequisites of the proposed modelling procedure. In Chapter 4, the defined procedure is employed and, consequently, the individual steps of the system dynamics modelling methodology are outlined. The described methodology considers the objectives for the model development in accordance with the specific practises and techniques characteristic of the research group on site. Finally, in Chapter 5, the achieved results are presented in reference to the formulated task definition.

2 Literature Review

2.1 Fundamentals of Reverse Logistics

2.1.1 Introduction to Reverse Logistics

Ever-increasing globalization, rapid progress in the field of information technology as well as dynamically changing market requirements pose global challenges to companies and define the business environment on the 21st Century [Her10]. A global market competition, free from entry barrier, enables higher product diversity and better customer service. However, at the same time, companies are confronted with new problems concerning their growth strategies. Since the commencement of the industrialization, the number of manufactured goods has been increasing steadily, in order to meet the consumption needs of the growing world population. With the demographic upsurge, the pressure on limited natural resources has been intensified causing a greater environmental burden [Bru87]. As both, the ability of the natural environment to supply the society with enough resources and its capacity to absorb the generated by-products are limited, new business models had to be created to enable a sustainable development [Sch06].

The growing interest in the importance of the environmental impact has been initially promoted by governments which have created environmental-juridical standards for companies in accordance with the “polluter pays” principal.[1] At the same time, environmental concerns have obliged customers to pay stronger attention to the “green image” of companies - by demanding environmentally friendly products.[2] As a consequence, many companies have begun to focus on used products and materials, because of legislative, economic and commercial factors [Fle01b]. To gain competitive advantages, it has become important to develop product-specific collection and recycling strategies at an early stage of the product lifetime [Sch06]. With growing disposal costs and stricter environmental directives, the attention has also been shifting towards the end of a product’s lifecycle [Mar06], regarding used products as an alternative to primary recourses [Dow05]. Facing the challenge of managing product return flows, organizations strive to develop strategies for designing product recovery activities efficiently [Leh09]. In academia, the concept of reverse logistics has arisen; encompassing all activities related to planning, implementing and controlling the cost effective return flow of raw material and goods [Rog98]. Moreover, with reverse logistics as an opportunity for enhanced business, enterprises can maintain customer support, ensure the ultimate issue of profitability and gain competitive advantage [Kru02].

However, before discussing the concept of reverse logistics in detail, a clear definition of the term itself and the way it contributes to the thesis is given. The following paragraph also provides a brief overview of the topic under study and sets it in comparison to supply chain management.

2.1.2 Characterizing Supply Chain Management and Reverse Logistics

In the 60-s and the 70-s of the last century, various endeavours have been made to advance system optimization. The fundamental finding was that optimizing system components generally leads to sub-optimal solution for the system as a whole [Ber76]. To avoid this, methods for collaborative planning and guidelines for cooperation between corresponding industry partners were developed. Soon the concept of supply chain management (SCM) arose and became a significant topic in science and industry. Even though the term “supply chain management” has been discussed intensively in literature, no commonly accepted definition can be given, mainly because of the different fields that deal with the topic [Dyc04]. Nevertheless, in order to avoid misapprehensions, a specification of the term supply chain is needed. The following definition is not only well-suited to the purposes of this thesis, but is also one of the first all-encompassing definitions concerning this topic, which have been given in literature:

“A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. The supply chain includes not only the manufacturer suppliers, but also transporters, warehouses, retailers, and even customers themselves.” [Cho10, p. 20].

According to this definition, supply chain not only includes the suppliers, manufacturers and retailers across the value aided chain, but also takes other factors like transportation and customers into account, as displayed in the figure below. Therefore, supply chain management can be further defined as the optimization of the whole value aided chain with all its economical activities.

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Figure 1: Forward Logistic Process.

However, most supply chain models only deal with optimizing and managing linear flows of raw materials and goods from suppliers, via producers to final customers [Gey05]. This means that they focus especially on forward logistics, whereas conceptional extensions beyond the point of sale are few. Nevertheless, with the increasing flow of product returns, companies have begun to pay attention to used products and materials [Fle01b]. The attention has shifted from the idea of a linear forward supply chain towards the concept of a closed loop supply chain.

As discussed previously, dealing with product returns, collecting and handling them, has become a major topic in the last few decades. In this context, the term reverse logistics (RL) has been used intensively in literature as a concept of managing goods and material flows in the opposite direction of the traditional supply chain, as shown in the figure below.

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Figure 2: Reverse Logistics Process.

A more precise and widely accepted definition of the term reverse logistics was been given by the American Reverse Logistics Executive Council as follows: “The process of planning, implementing, and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods, and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal” [Rog98, p. 2].

However, this definition of reverse logistics has become somewhat lacking over the years, since it does not account for return flows which are not necessarily consumed first, like stock adjustments due to overstock, or for return flows which might not go back to the point of origin at all, like goods meant for reuse [Dek04]. Nevertheless, the definition shows that the concept of reverse logistic focuses on activities with the purpose of value recovering and therefore differs from concepts such as:

- waste management, as for these products there is no new use or recovery value,
- green logistics, which conciders enviromental aspects in logistic activities, focussing particularly on forward logistics,
- supplementary activities such as trasportation of empty materials, e.g. moving containers, is regarded as being supplementary activitiy [deB02].

Having characterized the term reverse logistics in the context of the traditional forward supply chain, the main driving forces of companies for focussing actitivites related to reverse logistics are presented in the next paragraph.

2.1.3 Classifying Reverse Logistics Drivers

Although the main driver for the traditional forward logistic flow seems to be the demand or the customer at the end of the supply chain, the key driving factors for the reverse logistics might not be as obvious. According to literature, the identified reverse logistics drivers can be classified into three groups, as displayed in Figure 3 below. In the following paragraphs, these three drivers are further specified in order to demonstrate how enterprises might be influenced by activities related to backward logistics.

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Figure 3: Reverse Logistics Drivers (adapted from de Brito et al.(2003) [Deb03, p. 12]) Economics

One of the main reasons why corporations focus on reverse logistics is, as expected, the ambition of gaining profit out of it. Due to high market competition, companies aim for better efficiency. With the effective use of reverse logistics, such improvements can be achieved by reducing the use of raw materials, adding value with recovery, or decreasing disposal costs. Furthermore, independent businesses, such as metal scrap brokers, are present on markets because of the economic possibilities. They achieve high profits, by collecting metal scrap and selling it to steelworks. Another example for new business opportunities can be found in the electronic industry. In particular, the cell phone market has demonstrated that there is a high demand for refurbished products, which swiftly become out-of-date, but which are still fully functional [Gui03b].

Moreover, many companies engage with reverse logistics because of marketing, competition, or strategic reasons. Some companies, for example, use recovery processes to prevent other competitors from obtaining their technology, to avoid trading with brokers or simply to be prepared for future legislation [Lou99]. Further indirect gains can be achieved by improving the relationship to customers or suppliers. For instance, manufacturers of white goods, such as Bauknecht, might initiate old product collection campaigns, whereby customers can replace their outdated goods with new ones [Bau09]. Therefore, the economic drivers for getting involved with reverse logistics can be summed up as follows:

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Table 1: Economic Drivers for Reverse Logistics Legislation

In this context, legislation comprises any juridical regulation addressing product recovery instruction or take-back obligation of companies. Various environmental legislations, such as recycling quotas, packaging regulation and manufacturing take-back responsibility, have been created, mainly in Europe and Japan, in order to protect the environment and make enterprises to think in a new direction. According to Japan’s National Institute of Environmental Studies, Japan has managed to break the rising CO2-curve within the transportation sector as the first country in the world. This has been achieved through strict regulations forcing the automotive industry to bring forward innovative technological solutions [NIE10]. Another example for successful legislation would be the manufacturer’s take-back responsibility whereby the original manufacturer or dealer is responsible for the final disposal or recycling of products. If an end user fails to dispose the unwanted product properly, the manufacturer has to bear the responsibly in case this product becomes a hazard. In this case, the additional expenses have to be covered by the manufacturer. The companies in charge are therefore interested in controlling and managing the full return process of the customers’ purchases [Blu05]. Corporate Citizenship

Another main reverse logistics driver is corporate citizenship. Here, enterprises feel obligated or responsible to enter reverse logistics through a set of corporate values or principles. Establishing these values makes companies operate in a more social and environmental way. Certainly, the “green image” of companies is mainly pushed by the rising customer expectations, rather than by the ecological motivation. In other words, the expectations of the end users urge companies to reduce the environmental burden of their products. Nonetheless, such a corporate value can be used as a marketing element and therefore be further communicated to the customers, in order to achieve competitive advantage [deB03].

While the paragraph above deals with the main driving forces of companies for getting involved with reverse logistics, the next paragraph’s focus is on why there are returned products at all.

2.1.4 Specifying Return Reasons for Reverse Logistics

Generally speaking, products are returned or abolished because their function is disturbed, outdated or no longer needed. When looking into the reasons of product returns or rejects in detail, several groups can be identified. Similar to the paragraph above, there are once again three main clusters related to product returns.

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Figure 4: Return Reasons for Reverse Logistics (adapted from de Brito & Dekker, 2003, p. 14)

As displayed in Figure 4 above, according to the general supply chain hierarchy, reasons for product returns are classified in manufacturing returns, distribution returns and customer returns. In the following each reason is explained in detail, starting with the first link along the supply chain. Manufacturing Returns

Manufacturing returns are related to all types of returns where the components or products need to be recovered during the actual production phase. There are several reasons for such returns, as can be seen in Table 2 below. Manufacturing returns are often handled in the product planning context and are therefore already reviewed while optimizing the forward supply chain. Nevertheless, since these returns are part of the reverse logistics flow, at this point they have to be at least re-examined.

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Table 2: Reasons causing Manufacturing Returns

Raw material surplus occurs when too much raw material has been ordered. Reasons for that might be a wrong material consumption forecast or unpredicted changes in demand. Returns caused by quality-control arise when products fail quality checks and have to be reworked, before entering the next stage of production. Production leftovers/by-products result from overproduction and can be categorized as ‘unnecessary’ products. Overproduction usually indicates insufficient production control. Distribution Returns

After having characterized manufacturing returns, the return reasons characteristic of the distribution phase are explained. Since the distributor operates as an intermediary between manufacturer and retailer, the returns in this phase are related to both. The resulting reasons are listed in a table and elaborated afterwards.

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Table 3: Reasons causing Distribution Returns

Product recalls refer to products removed from the marketplace because of safety or health problems connected to their use. Such activities are usually initiated by manufacturer or supplier.

B2B commercial returns crop up when a retailer has a contractual option to return products to the supplier. The returned products have either been wrongly delivered, damaged during the transportation or can no longer be placed on the market due to expiring shelf-time or lack of demand. Returns caused by outdated products play a major role when dealing with goods such as pharmaceuticals and food.

Stock adjustments occur when a link in the supply chain redistributes stocks or reallocates merchandises to different location. This could for example happen between warehouses or shops due to a temporary increase in demand for a specific reason, such as seasonal products.

In the end, functional returns concern products made for being moved back and forward in the chain. This can be products whose function is to carry goods within this chain. Pallets, crates, containers or packaging are particularly good examples for functional returns. Customer Returns

Customer returns is the last group of the return reasons for reverse logistics. Here, the products have at least reached their final destination, i.e. the customer. Therefore, the decision whether the product needs to be repaired, replaced or thrown away is made by the customer (see Chapter 2.1.6). This last group can again be broken down into subcategories, which are listed according to the lifecycle of a product, as shown in Table 4 below.

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Table 4: Reasons causing Customer Returns

B2C commercial returns take place when customers decide to return non-defective and therefore functional products as their requirements are not met. Examples can be found in various areas of the retail industry, such as the clothing industry, where end users often bring back purchases, when they don’t match the desired features, such as size and quality.

Service returns refer to defective product returns owing to deficient functioning and also include warranty cases. In all those cases, the products are usually returned to the retailer or to a service unit in order to be repaired or replaced. Although returns during the warranty period are not associated with additional costs for the customer, after the warranty period customers can be charged for the provided maintenance or repair service. Products can be repaired either at the customer’s site or send back to the service unit in charge or manufacturer accordingly.

End-of-use returns arise when a customer has the opportunity of returning a product at a certain stage of its lifetime. This product is usually in a good functional condition and is returned due to several reasons. First, the product was leased and can therefore be replaced after a predefined period, like bottles where the product has completed his dedicated function. Secondly, the merchandise has completed the intended purpose and can then be forwards to second-hand markets, like to Amazon and EBay.

End-of-life returns occur when products reach the useful end of their economic or physical life. In those cases the products are either returned back to the original equipment manufacturer (OEM) because of take-back obligations or sold to other companies, such as brokers that use the products for material or value-added recovery (see Chapter [deB02].

To summarize, much of the returned material and products are not just scrap, but have a real product value. Therefore, making use of the remained value through reverse logistic activities, such as disposal, remanufacturing or recycling, creates a real economic opportunity [Blu05]. Having described why product returns occur and how they can be classified within the context of reverse logistics, the focus now shifts to the factors which actually affect the handling of returned products.

2.1.5 Analyzing Types and Characteristics of Returned Products

In literature three groups have been identified as being useful noteworthy when pointing out the characteristics of returned products [deB02]:

- composition
- deterioration
- use pattern Composition

In this context, product composition refers to more than the material properties of the product components: it also takes the number of components and of materials into account [Gun99]. As Goggin & Browne (2000) further state, the amount of components and how they are assembled directly effects how easy the reprocessing can be done and therefore how efficient and costly the reverse logistics activities will be [Gog00]. Subsequently, it is important to know if a return hazardous material is involved, since it requires special treatment. For instance, batteries in PCs or monitors need to be removed before these products can be recycled. Another issue concerns the material homogeneity. Especially in the case of recycling, it is important to separate products in categories containing homogenous material in order to use them as feedstock for new materials. Particularly, plastics are difficult to separate and therefore their recycling is more complicated.[3]

The ease of transportation has further been highlighted as an important factor for recovery systems. In some cases, such as for reusable bottles, the collection of old and the distribution of new bottles can be combined to lower the transportation costs. As for other products, for instance refrigerators, it might be undesirable to combine the transportation, due to the dirt coming from these used items [deB02]. Finally, the size of the product also indicates the complexity of reverse logistic activities, since it effects the transportation and handling of the return process. In the case of returned white goods for example, the involved reverse logistic activities, such as transportation, disassembling, remanufacturing or recycling demand different treatment than those for handling mobile phones.

The factors mentioned above mainly effect the profitability of the reverse logistics activities. They are defined during the product design phase and used to determine which reverse logistics activity, for example asset recovery or recycling (see chapter 2.1.6), is the most reasonable. Consequently, it is important to consider these product characteristics while designing a product, which is also known as design for disassembly (DFD) [Boo92]. Deterioration

The deterioration characteristics are another factor that affects the reverse logistic process. The degree of the product deterioration determines whether there is enough functionality left for further use of the product or at least for parts of it, or whether other reverse logistic activities, such as proper disposal or recycling (see Chapter 2.1.6), need to be done. According to literature several questions need to be asked when apprising how profitable recovery options are. The first question to ask is if the product ages during use? The official term for that is intrinsic deterioration: it refers to how fast the product ages and if it is totally consumed during use, such as e.g. gases, or if it ages fast, e.g. batteries. Another important issue is whether the product components age equally, i.e. how good is the homogeneity of the product’s deterioration? The other important question when defining the deterioration characteristics refers to the so-called economic deterioration of the product. In some industries, especially in the electronic industry, the lifetime of products is extremely short. Due to new products entering the market in short sequences, existing products may become obsolete as their technical specifications becomes outdated. Another issue refers to the products reparability. Since repair services take a lot of manual work, with increasing product complexity, they tend to become more and more expensive. This product characteristic is important especially in the case of service and warranty returns, where the trend often goes to recycling or replacement accordingly [deB03]. Use Pattern

Finally, the product use pattern plays a significant role for the reverse logistic process. It determines the collection of items and their use characteristics, such as duration, intensity and location. The location of use is crucial for the collection process. Generally speaking, the more use locations are involved, the more difficult the collection is. Reusable packaging in the food industry needs to be collected and returned. Other food and drink packages are the cause for expensive collection activities since, more often than not, they are thrown at the spot of use. Another important aspect is the intensity and duration of use. Products that are used once in a while and for a short period of time need to be treated differently than those which are used regularly. For instance, distribution items, such as containers, bottles and pallets, are used only for a short period of time and usually remain in a good condition. They can be often reused, but need to be collected and checked. A further significant factor is the use intensity. Books, for example, are generally read only once after purchase. Hence, they deteriorate insignificantly, even though they have already fulfilled their intended use. Companies like Amazon have identified the demand for second hand books and have become successful with reselling trading market [deB02].

On the whole, many aspects need to be considered when evaluating appropriate reverse logistic activities (see Chapter 2.1.6). Thus, in order to provide a better overview, the characteristics mentioned above are listed in table form below.

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Table 5: Characteristics determining Product Returns

Based on the characterized reasons for product returns above, the next paragraph deals with the actual reverse logistic activities, answering the question of how the returned merchandises are handled.

2.1.6 Describing the Reverse Logistics System

A reverse logistic system involves several reverse logistic activities, such as collection, cleaning, disassembly, inspection, storage, transport and recovery operations [Bos05]. Reverse logistics itself is sometimes also called “logistics backward”, as its flow of goods is opposite to the traditional supply chain flow (see 2.1.2). An integrated logistic system with forward and reverse flows can be displayed as represented in Figure 5.

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Figure 5: Supply Chain with Reverse Flow (adapted from Kokkinaki et al. [Kok99, p. 4])

The main idea of the above shown figure is that products enter the market through the traditional supply chain. To keep a clear view of the model, only the most important reverse logistic activities are displayed. Moreover, there are return flows that have not been added explicitly but can be expressed with the existing flows. Hence returns, like service returns, can be added to the end-of-life flow since they usually come from customers and go to a collection point. However, while the forward flow of goods goes linearly through the forward supply chain, the reverse logistics flow branches significantly in order to enclose all potential flows of goods and information, which are necessary to collect product returns. Such product returns might include used products, packaging materials, production leftovers, etc. (see Chapter 2.1.4). After the product returns have been collected, they are inspected and can be further reused, remanufactured, recycled or disposed properly. As the arrows indicate, the relation between the actors of the model is very versatile. Return flows originate from different links of the forward supply chain, but also directly from customers. Moreover, recycled material can be used as secondary material by suppliers. Reused and remanufactured products are afterwards redistributed and either return to the original use or enter a secondary market. In case no secondary use of the material is possible, product returns are disposed properly [Dyc04].

Following, the main reverse logistic processes are further specified. Some of them may also be relevant in the forward supply chain; whereas others, such as recycling and disposal, are specific for reverse flows [Bru97]. Collection

The reverse logistic process beginns with the collection phase. It comprises all activities centered on gathering used products, leftovers or by-products and transporting them to some location where further examination and processing is done. Collection may include locating such products, puchasing, transportating and storing them at collection points. Furthermore, collection activities may, to some degree, be necessitated by legislation. In some countries in Western Europe for instance, there is an obligation to manufacturies for 100% collectoin of white goods [Vla07]. Moreover, at this point of the reverse logistic system companies have to deal with a high degree of uncertainty concerning not only the location from where the products need to be collected but also their quantity and the time of their arrival (see chapter 2.4). Such uncertainties need to be carefully concidered when it comes to planing and contorlling collection processes [Kok99]. Inspection

After the products have been collected, in the inspection phase they are further examined. Here, the quality of products plays a major role, since it determines whether a product, or parts of it, will be reused, remanufactured, recycled or disposed. Therefore, the inspection phase results in splitting the flow of used products according to the appropriate processing, which is to follow afterwards. In general, the required physical inspection involves a lot manual work. Remote operating and control has been applied only in some cases, mainly those relating to computing equipment and electronics [Kok99]. Since the decision for the following activities is set at this point, it is important to identify the optimal solution for further processing by evaluating the alternatives concidering the implied pollution. Thus, sometimes inspection is also called selection and seperation, which underlines its dividing character. The activities involved with inspection are disassembly, shredding, testing, sorting and storiging [Fle00]. Finally, it should be noted that uncertainties regarding the retruned products strongly affect the reverse flow for the inspection part as well. Remanufacturing

Remanufaturing involves a series of activities, which are necessary to bring back the used product to an ‘as new’ condition. Reyes et. al (1995) elaborates on the process of remanufaturing: according to him, the discarded product is first completely disassembled;then the usable parts are cleaned, refurbished and brought into inventory. Here, the on-demand disassembling requires extensive sotrage capacity and strongly varies in yields and throughput time. Therefore, companies have to be prepared for uncertainties in the remanufacturing phase. Next, the product is reassemled and the necessary new parts are added. Remanufacturing thus consists of disassembling, cleaning, overhauling and replacement. Since new parts might be added in the course of the process, the remanufactured product may in the end have a better performance and a protracted expected lifetime than the origal new product [Rey95]. Such a reverse logistic process is typically applied in the automotive, electronics and tire manufacturers industry [Gun99]. Especially in the automotive inductry, a high potential for remanufacturing activities exists. The Automotive Parts Rebuilders Association (APRA), for inastance estimates that worldwide in the automotive industry alone, 155,000 railroad cars (or a train 1,100 miles long) could be filled annually by the raw materials saved by remanufacturing [Rog01]. However, uncertainties have to be concidered here as well. There is no preset succession of production steps and the operation that needs to be done at this point strongly depend on the product condition, which is known only after testing. Furthermore, as operations are often done simultaniosly, a capacity problem might occur since product components could require the same repair equipment at the same time [Bos05]. Reuse

The process of reusing products takes places when the returned products are in such a good condition that they can be utilized almost immidiately either for the original or for an alternative market. Typical examples for reused returned products are glass bottles, containers and most leased or rented equipment. However, the reuse process can also be extended to all cases of end-of-use returns. The returned products are usually reused without being subjected to any repair processes. Extreme examples for that are all worn out products that are directly reused for second-hand markets like Amazon and EBay (see 2.1.4). Recycling

During the recycling process, the products are disassembled and grinded. Their material is separated into homogeneous components. Afterwards the material is treated to acquire the quality required for further use, like paper pulp or glass [deB02]. Another example of recycling can be found in the automotive industry where the recycling process usually consists of two stages, dismantling and shredding. In the first stage, the dismantling, the cars arrive at the dismantling facility either directly from customers or from car dealers. Here, reusable and particular valuable components, such as batteries, are removed. Subsequently, tires and fluids are removed and the remaining body is further transported to the shredding processor. After that, the components are separated into ferrous, nonferrous and non-metallic materials [Gun99]. The recycling process is similarly conducted for other products. . In the case of white goods, e.g. washing machines, the product is first dismantled. The components are then separated, according to their material properties and grinded or shred afterwards. Finally, in the recycling process uncertainties play a major role again since the quality and quantity of the returned products cannot be predicted reliably. Therefore, the limited recycling capacity has to be considered when dealing with planning and optimization issues of recycling processes. Moreover, separating processes can differ depending on each returned product. Some older washing machines, for instance, have different construction and consist of variable components, which make the process of disassembling and separating more complex [Mit10]. Despite all the difficulties with recycling, it has been applied widely in industry. For example, most of the metals in discarded cars, which make about 75% of the weight of a car in average, are recycled in countries like Germany, the United Kingdom and the United States [See96]. Disposal

Returned products need to be disposed in case none of the above mentioned options can be conducted due to technical or economical reasons., In the inspection phase, for example, products can be rejected either for remanufacturing or for reuse, if they are in a too severe condition for being further reused or if they cannot be remanufactured due to excessive repair costs. Another example would be outdated products that neither have market potential nor can be recycled properly. Consequently, disposal may involve transportation, land filling and incineration activities [Fle00]. Redistribution

Redistribution refers either to directly usable products or to products that have been brought in a reusable condition through the process of remanufacturing. These products are physically brought either to the original market or to the new users of an alternative market. Hence, redistribution involves several logistic activities, such as storage, sales and transportation [Kok99]. A major challenge in this phase is the matching of both sites, i.e. redistribution and potential customers, in case the product enters an alternative market. Typical examples are to be found in leased products, such as copy machines. These products are usually leased to an organization. With the end of the leasing contract, the copy machines are further remanufactured and again offered for leasing [Fle00].

In academia remanufacturing and recycling are often subordinated to the term reprocessing. Here reprocessing is a more general expression and usually refers to the actual transformation of the returned product into a usable product again. Besides recycling and remanufacturing, reprocessing may contain additional activities, such as cleaning, replacement, retrieval, reassembly and refurbishing. Another classification refers to the different types of recovery. In general, the recovery process can be divided into product recovery, component recovery, material recovery and energy recovery. Here, product recovery contains the process of reuse. While component recovery specifies the process of remanufacturing, material recovery refers to recycling. Finally in case of energy recovery, returned products are combusted and the released energy is captured and used for further processing [deB02].

For the purpose of clarity, the structure of the reverse logistic system is kept as simple as possible. The further conducted analysis is therefore done pertaining to these elements of the system, which have been classified in Figure 5. The main objective of the hereto proposed research is to make use of appropriate system modelling techniques for studying reverse flows. The approach is characterized by a high degree of abstractness, as it does not focus on individual reverse logistic process in detail; however, it explores the whole reverse flow from the beginning to the end. The main focal point is set on keeping the above-mentioned system as simple and elegant as possible, in order to retain the required control and to focus on the main aspects (see Chapter 0). Therefore, when using the term “remanufacturing” it may also represent other related repair activities, such as refurbishing. Even though these processes may involve different treatment steps, regarded abstractly, they all consist of some kind of processing of a product that is afterwards ready for being reused and further placed on the market.

Having defined the reverse logistic system including its main activities, the following paragraph deals with how these activities are classified with respect to the previously mentioned reverse logistics drivers

2.2 Impact on Reverse Logistic Activities

2.2.1 Describing Positive Effects on Closed-Loop Supply Chains

The environmental impact of the unceasing growth of the population and the increasing consumption demand characteristic of the last decades has become abundantly apparent. Wagner et al. (1997) identified the need for reverse logistics as a corrective solution for general problems of environmental economics [Wag97]. The growth of the world population implies increasing demand on natural resources and a growing amount of waste to be disposed at the same time. Furthermore, economies have realized that the natural recourses are not only finite, but also have already reached an alarmingly low level. Relief can be achieved at least partly by transforming the traditional economy flow into a closed-loop supply chain. A working closed-loop supply chain imitates natural ecosystems and returns waste and returned products back to the economic process through the above-mentioned mentioned reverse logistic activities (see 2.1.6.). Additionally, several positive effects can be derived from the efficient implementation of reverse logistics:

- Raw material savings, due to recycled or reused materials
- Energy savings, due to the high level of value added to the secondary resources
- Less emissions and landfill, due to less waste brought into the enviroment
- Less landfill costs, due to reduction of steadly increasing ladfill activities [Ste94].

Furthermore, the concept of reverse logistics and closed loop supply chains has become a strategic issue, especially for organizations with a strong focus on providing service and support either for their own merchandises or for other companies as a business strategy. On the whole, a well developed strategy of reverse logistic management can result in the following positive effects on enterprises:

- Reducing return costs, through efficient return handling and reduced labor costs
- Increasing value of salvage merchandise, through a controlled recycling within environmental and other legal requirements
- Reducing transportation and warehousing costs and time, for instance through a reduction or elimination of small package shipment and reduction of disposition cycle times
- Return process improvement, through simplifying processes and process automating and control [Blu05].

2.2.2 Characterizing the Waste Hierarchy Pyramid and Regulations

Governments have realized the positive effect of closed-loop supply chains and have therefore pushed the development of environmental regulations more consistently. In particular, Europe, the United States and Japan have build up regulations to promote the reuse, remanufacturing and recycling of goods and materials. Most of the regulations focus on preventing and managing waste streams, such as industrial and hazardous waste, and are driven by social, customer and environmental values. The illustrated hierarchy of the main reverse logistic activities below can be seen as a general guidance for the regulations.

Abbildung in dieser Leseprobe nicht enthalten

Figure 6: The Waste Hierarchy Pyramid (Figure based on Carter et al. (1998), p. 92)

This figure represents the hierarchy of the reverse logistics activity options starting with the most favoured option on the top. Clearly, the highest priority is to prevent waste. If waste prevention is not possible, activities related to the further treatment of products follow.

One of the first steps towards a governmental cooperation is the Basil Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal from 1992. Its main pupose is to prohibit the international shipmend and trade of hazardous waste, particularly to developing countries [Kum08]. Even though many countries have ratified the convention, not all have supported the regulation. A few years later, in 1996, the German Commercial and Industrial Waste Avoidance and Management Act (Kreislaufwirtschafts- und Abfallgesetz, KrW-/ AbfG) came into force; it classified the waste related activities according to the waste hierarchy pyramid mentioned above. Yet again, the main scope of the act was to force companies to prevent waste and to build up a cuircular flow economy. Another regulation addressed particularly the automotive industry. Thereby, car manufactures in Europe, Japan and the US which import cars in the European Union are forced to keep to regulations, such as End of Life Vehicle Directive (ELV) and the Waste Electrical and Electronic Equipment Directive (WEEE). These directives require the producers to take responsibility and to arrange for disposal and for recycling of the vehicles. The target for 2015 for example stipulates a reuse or recycling percentage of 95% of the vehicle’s weight. Moreover, at least 10% of energy recovery and disposal of no more than 5% of the vehicle’s weight are prescribed. Furthermore, the original equipment manufacturers (OEMs) are required to produce components that can be dismantled easily and disassembled accordingly. The WEEE further implies that all equipments either need to be plugged into an electrical circuit or to operate on batteries. Another regulation, the so-called Restriction of use of certain Hazardous Substances Directive (RoHS), refers to the handling of hazardous material. This directive restricts the use of several hazardous heavy metals in electronic and electrical equipments, such as:

- Lead
- Mercury
- Cadmium
- Chromium
- Brominated Flame-Retardants.

Finally, a regulation regarding the packaging area has been developed. The so-called Packaging and Packaging Waste Directive aims at minimizing the creation of wrapping waste material and promotes energy recovery, reuse and recycling of packing. This directive further addresses the retail industry and pursues environmental goals regarding packaging within the EU market [Kum08].

2.2.3 Gatekeeping as an Effective Intake Control for the Reverse Logistic System

As described in Chapter 2.1.6, the reverse logistic system contains a set of activities that are arranged and connected in a particular order. Since companies aim at maximizing the revenue from products in the reverse logistic system, while reducing the costs, the conducted activities are the main factor influencing the systems profitability. Thus, from an economical point of view, the point of entry is crucial for the reverse logistics flow, as it determines the further steps of the products entering the system. In literature the term gatekeeping defines why products enter the reverse logistic flow, what activities are further involved and where the products are send afterwards. Hence, gatekeeping has a broader meaning than the process of inspection where only those products are examined that already have entered the system, and involves additional activities, such as collection. Many of the uncertainties mentioned above come together at this point and can be identified by asking product related questions, i.e. why, what and where. Detecting the condition of the merchandises at a very early stage of the progress prevents from adding unnecessary activities and costs. The liberal return policies of companies attract many customers including those who want to profit from the system: excluding those returns may have a positive effect on retailers’ and manufacturers’ profitability. Furthermore, as transportation is a major cost factor, wrongly sorted or belatedly inspected products may cause high return expenses. For example, if a product is damaged beyond repair, no further transportation related to repair activities are needed. Such a condition should be identified as soon as possible, i.e. at the retailer site or at the site of other organizations involved with the point of entry [Rog98].

Based on the described impact on the reverse logistic activities, the following Chapter characterizes aspects that complicate an effective implementation of the reverse logistic system.

2.2.4 Analyzing Barriers of Reverse Logistics Limitations of Recycling as a Model Example

Besides the necessity and the advantages of an efficiently applied reverse logistic system, it faces several limitations with regards to the reverse logistic drivers. Thus, for example, the process of recycling is only profitable if the generated costs are not higher than the savings achieved by reducing the material and energy on the input site and the waste on the output side of the cycle. Furthermore, from a technical point of view, in the majority of cases, with the exception of a direct reuse in a secondary market, a complete reuse of products or material is impossible. In addition, the material quality lessens with each recycling process unless primary material is added. In academia this effect is called ‘down cycling’ and occurs typically in paper recycling. Moreover, the recycling process demands a positive environmental impact. This can only be achieved when the ecological damage caused by recycling is lower than the prevented one. Although measuring such impacts is still somewhat complicated and imprecise, recent studies (e.g. on the material recycling of small plastic objects in the German DSD (Duales System Deutschland) system) have shown that this premise could not be achieved. However, even if the advantages of recycling are prevailing, many customers are not willing to pay the same price for a recycled product with the same quality as a product made from primary recourses [Ste04]. Limited forecasting and planning

In addition to limitations related to reverse logistics activities, producer surveys have identified a set of general characteristics describing barriers to closed loop supply chains and reverse logistic services [Jan09]. These characteristics have been ranked according to their importance as indicated by the participators. Limited forecasting planning of reverse merchandises has been ranked as being the highest barrier to managing reverse logistics. As return flows fluctuate significantly concerning time, quality, quantity and location, companies do not know when items will be entering the backward logistics system, nor do they know their condition [Blu05]. Uncertain flow of materials hinders accurate return forecasting and is a direct barrier to strategic and operational planning [Kir97].

Overcoming the described barriers may bring the following advantages of handling reverse flows:[4]

- Assets and resources utilization in the reverse chain can be improved
- Accurate return forecasts can help to identify optimal return policies and to benefit from the gained economies of scale though the established network
- Forecasting and planning of returns ensures optimal timing of introduction of new products on the marker and maximizes sales [PWC09]. Lack of Clear Return Policies

Return policies have become loose due to strong market competition. Retailers such as Wal-Mart have created liberal return policies allowing customers to return their purchase for an array of reasons. As a result, customers take more frequently advantage of this option, while items are sometimes even wrongfully returned. Such customer behaviour causes increased inventories and leads to higher costs [Kru02]. However, there the benefit of providing additional customer service, by simplifying the return process for the customers, is indisputable. However, in order for the return process to be beneficial to both parties, it is important to communicate clearly when goods are allowed to be returned [Fer05]. Furthermore, organizations might profit by providing additional recovery services on return goods. Clients gain advantages from repair services as well: such services create for them opportunities to buy or receive a product that fulfils the original product standard at a lower price, or even free of charge in case of warranty returns, than a new one [Jay99].

In summary, clear defined return policies bring profits for both companies and organizations. Customers benefit from additional services and from receiving products via alternative channels, such as second hand markets and warranty services. At the same time enterprises gain profits from adding additional recovery services by maximizing customer satisfaction and building and maintaining customer’s loyalty [Muk07]. The challenge at this point is to find the optimal policy for returning goods in order to achieve high customer dependability and to keep the costs for the returned merchandises on a reasonable level [Muk04]. Little recognition of reverse logistics as a factor in creating competitive advantage

The insufficient use of reverse logistics as a means of gaining competitive advantage has been pointed out as another major barrier to managing reverse logistics. Enterprises mainly focus on the traditional forward logistic flow of goods while only little attention is paid on return flows [Kir97]. Hence, even though recent surveys have shown that reverse logistics is rated as being important for businesses, only few organizations are satisfied with their reverse logistics management [Jan09]. Since optimizing return flows requires the collaboration of many departments, such as production, logistics and marketing, overcoming this barrier improves the cooperation within organizations [PWC09]. Lack of appropriate performance management system

As explained in Chapter 2.1.5, managing reverse logistics is characterized as being a rather complex process due to a variety of reasons. Thus, measuring and managing the true performance of reverse logistics appear to be a challenging task. Organizations have made several attempts to analyze the accurate performance of return activities. The created metrics are mainly restricted to individual activities; metrics covering the end-to-end process performance have not been adequately developed so far. Furthermore, producer surveys have shown that the existing metrics often do not meet the process requirements. For example, while processes and programs have changed over the last ten years, the same metrics have been used. Additionally, many indicators still measure using units inappropriate for the program objectives. Moreover, in many cases (60%), there has been only a key performance indicator (KPI) dashboard, displaying the current process performance [Jan09]. Inadequate information technology support

Even though a flexible reverse logistics information system has been characterized as being important for the support of managing reverse logistic activities, according to surveys, managers are not satisfied with the existing support [Jan09]. Reverse logistics typically involves a set of activities related to various business units within an organization or between autonomous organizations. Thus, deployed systems have to work across boundaries and therefore involve additional complexity. For retailers it is, for instance, important to employ a system that is capable of tracking returns at store level. In the created database it should be possible to follow the returned goods though the whole supply chain. In addition, it should also allow evaluation of significant statistic data, such as return rates, recovery rates and return inventory turnover. However, current information systems most often do not support monitoring the status of the returns. Recent development within the field of tracking and tracing goods through radio frequency has turned out to be a useful tool when following up returned merchandises. Innovations, such as two-dimensional bar codes and radio frequency identification license plates (RFID), have been newly developed and may soon be widely used in industry [Sas08a].

Having characterized the most important barriers to managing reverse logistics, next, current challenges and trends enterprises face when dealing with reverse logistics are analyzed as follows.

2.3 General Trends and Challenges of Reverse Logistics

As the global competition is increasing, product life-cycles are getting shorter. Manufacturers are required to design products faster and more efficiently and to place them successfully on markets. Improved design techniques and better developing procedures, such as the concept of concurrent or simultaneous engineering,[5] helped organizations to respond these challenges [Epp94]. However, these strategies need to be further developed to meet current requirements. Handling the rising complexity of supply chains, both reverse and forward, pose a major challenge [Chr05]. Fast changing technology combined with the trend to mass customization causes difficulties in managing and coordinating the value and supply chain of goods. Therefore, it is expected that organizations will have to deal with increased scrap and rework, as well as with more obsoletes [Fla05]. This trend will evidently lead to higher amount of return flows.


[1] According to the principal, the polluter should take responsibility for the cost of degree to reduce pollution of either the damage done to society or the transgression of an acceptable level of pollution [UN97].

[2] The “green image” refers to customers’ expectations urging manufacturer to reduce the environmental burden of their products [Geo04a].

[3] This statement was confirmed by employees of Mitsubishi Electric, in particular from Hyper Cycle Systems Corporation, a subsidiary company.

[4] The Producer Survey was conducted with the help of PWC Consultancy and further contains reasons to overcome this barrier seen from value and cash flow perspectives. Due to the limitation of the thesis, such aspects have not completely been considered within the proposed framework.

[5] Concurrent engineering is defined as a successful multi-functional team approach to product development, where multiple issues are integrated, by allowing design engineers to work closely with manufacturing engineers, field service engineers and other representatives. See Eppinger et al. [Epp94, p. 1].


ISBN (eBook)
7.4 MB
Institution / Hochschule
Gottfried Wilhelm Leibniz Universität Hannover – Wirtschaftsingenieur, Maschinenbau
2011 (August)
reverse logistics uncertainties muda system dynamics model

Titel: Assessing and Optimizing the Reverse Logistic Process Using Computer Aided Modelling Techniques