Reverse Logistics and Depot Repair Challenges with a Linear Service Model

According to Deloitte, one-fifth of businesses consider insufficient reverse logistics processes to be the main barrier to achieving aftermarket service profitability. Returns, refurbishment, and remanufacturing processes represent considerable service supply chain costs and impact the environment, but optimizing these processes is not high on the priority list. Low overall recovery rates, slow speed of returns, and insufficient repair processes make it difficult for service organizations to replenish their spare parts inventory.

These factors reinforce a linear process that does not support key business initiatives around sustainability and the circular economy. This article explores the obstacles associated with parts repair and returns to illustrate the global challenges many businesses face today.

Return and repair cycle

When a complex asset needs maintenance or repair, several parts are required to complete the job. Once inspections, checklists, and troubleshooting are completed, defective components might be removed from the asset, and they are replaced with the ordered parts.

What happens to any unused parts? How are the defective components disposed of? Can anything be returned and reused? Unfortunately, many of these parts are scrapped, remain onsite, are placed in a technician’s truck, or end up on an unmarked warehouse shelf.

Millions of dollars in parts value continue to age and remain untouched while manufacturers purchase and build new components to replenish their spare parts inventory. Instead of using valuable parts to meet mission-critical service level agreements (SLA), technicians drive around with them in their trucks.

Some manufacturers have created reverse logistics processes to address these issues. When unused or defective components need to be returned, they can get shipped to stocking locations and repair depots. From here, a return material authorization number (RMA) gets generated to track the return. This process starts to provide some inventory relief, but dynamic processes based on inventory planning that route parts to the correct destination are not being leveraged today.

Another issue is determining what parts need returning. How do manufacturers know where to ship the parts? What are the costs associated with this return? The global reverse logistics market was valued at $635.6 billion in 2020 and is projected to reach $985.3 billion in 2028. Businesses must prioritize this area of their operations to extract value from returned parts while reducing the negative shipping impacts on the environment.

Many service organizations do not have the right solutions to use open RMA data alongside depot repair work in progress (WIP) details as input to spare parts planning. This deficit creates an environment where many customers and technicians are not provided with the proper instructions and materials to process a return. When returns happen, manufacturers consolidate them at a few locations requiring additional shipping to send them to the correct stocking locations or repair depot.

Once parts arrive at the correct location, they might require an additional inspection process for scrapping, or failure analysis, or they may return to good inventory. These parts may also be sent to depots or production facilities for refurbishment or remanufacturing.

Parts sent to a depot for repair require additional considerations, including:

  • Do these need to be worked on immediately?
  • How long will it take to get through the depot repair process?
  • What’s the bandwidth of my repair team?

Many times, depot teams do not have the right level of visibility into inventory, and there are difficulties tracking what repairs will get completed every week. As a result, depots adopt a first-in, first-out (FIFO) process, leading to misalignment between inventory, install base, and customer SLAs.

Optimizing reverse logistics and repair cycle

 Transforming reverse logistics and depot repair requires a prioritized, focused strategy. Most complex equipment manufacturers lump these processes into overall logistics operations. To gain maximum value and leverage return and repair as a differentiator, companies need to consider creating a dedicated team to focus on this area of their business. These teams will need the right solutions to gain visibility across the service supply chain and develop dynamic processes for success. Based on a report from Purdue University, one company that has taken the right approach is Caterpillar, the heavy equipment manufacturer.

To transform its business, Caterpillar first had to change its mindset. They developed an ideology that anything thrown in the trash is equivalent to money getting thrown away. This concept resulted in employees saving every piece of equipment.

The Purdue study focused on the return and repair process for the 797 hauling trucks for construction and mining. Each day, 160 tons of engines, oil coolers, pumps, and hydraulic assemblies get returned to Caterpillar’s remanufacturing facility. It usually takes two workers half a day to break down the engines into individual parts. Once disassembled the components are cleaned using a mixture of baking soda and 10 percent alumina grit. The waste from cleaning the parts is used as a solution to neutralize acidic liquid waste. The company estimates they were able to reduce their annual liquid waste from 9 to 4.5 million pounds, significantly impacting the environment. Unsalvageable parts get melted for recasting. With these processes, Caterpillar estimates they can recycle 5.6 million pounds of steel and over 16 million pounds of cast iron, minimizing waste across their entire service supply chain.

Optimizing the remanufacturing process also requires businesses to rethink component design. For example, Caterpillar determined adding a one-sixteenth inch layer of metal on specific components will increase costs but allow them to remanufacture an engine up to three times. This process increased their sales by over $1 billion.

One of the most challenging areas in reverse logistics and the remanufacturing process is keeping a consistent stream of used parts coming into your depot locations. Low recovery rates and slow speed of returns are significant obstacles for manufacturers, impacting the inventory planning process and making it hard to use return data as input.

Caterpillar analyzed this issue and decided to provide customers incentives for returning defective parts. If a customer needs a new part, they are provided with clear instructions on returning the defective components. Also, the new part is not shipped until the defective component is received and it gets sold at half price.

Final thoughts

 The threat of an economic downturn combined with Covid-19 has pushed manufacturers to take a long hard look at their operations. Customers are delaying capital equipment purchases and businesses are looking to new areas to increase their revenue and strengthen margins. Aftermarket services are becoming the face of manufacturing businesses, with operating margins 2.5 times those from new equipment sales. Reverse logistics and depot repair are critical to the aftermarket service supply chain to partner, support, and build long-lasting relationships with customers.