Volume 3 (17)  Issue 3  2012

The Meaning and Properties of Closed-Loop in Supply Chain

Management (SCM)

Marta STAROSTKA-PATYK
Czestochowa University of Technology, Poland
[email protected]

Abstract
Nowadays, there are a lot of products which are design and manufacture for future
reuse. It becomes possible because of remanufacturing processes or recycling, or their
connections. These processes are the crucial elements of reverse logistics system.
Managing the closed-loop supply chains is one of the main goals of the reverse logistics
activity. In this paper is specified the essence of reverse logistics, and after, in this context,
the characteristics and meaning of closed-loop supply chains.

Keywords: reverse logistics, closed-loop, supply chain management

JEL Classification: M11, M54

Reverse logistics is an important subsystem of the traditional forward logistics. By

the definition of reverse logistics, according to the Council of Logistics Management, it is
characterized as a process of planning, implementing and monitoring the effectiveness, raw
materials flow cost efficiency, processes involving the accumulation of stocks, finished
products and information links starting with the consumption point and ending with the
point of value recovery or proper actions [Rogers, 1998]. In other words, reverse logistics
is the process of moving products from their typical final destination with the purpose to
the value recovery or proper operation.
Reverse logistics being the traditional logistics subsystem, is characterized by
many features which distinguish it from the forward system and they are presented in
Table 1.
Characteristics of reverse logistics on the background of forward logistics are very
diverse in all areas. Reverse logistics utilizes production waste, trade returns and product
returns after their use. They are collected from various sources (such as storage centers)
and selected. Depending on the selection process some of the products are stored and some
are passed to the re-use or recycling processes. Products of the recycling process are then
passed to the forward logistics, and products after processing and re-use are moved in the
reverse logistics flows, so are used in accordance with the original intended purposes or
used in any other way (more or less equivalent to the original purposes).
The organization of all these processes is quite difficult due to the problem of
defining the product way back from the end customer to the manufacturer, which should be
the most economical and efficient. This is particularly important in recycling processes, as

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one of the obstacles in this process is the lack of an orderly reverse distribution system and
the enormous costs of collection and transport of waste products.

Table 1.
Main differences between reverse and forward logistics
FORWARD LOGISTICS REVERSE LOGISTICS
Quite easy forecasting Not predictable forecasting
Distribution from one point to many Distribution from many points to one
Uniform product quality Different product quality
Uniform product packaging Damaged product packing
Specified destinations and routes Not specified destinations and routes
Specified decision options Not specified decision options
Uniform pricing Pricing depends on many factors
Speed importance Speed is not necessary
Clear costs of distribution Costs of distribution less visible
Consistent inventory management Not consistent inventory management
Controllability product life cycle Complexity of product life cycle
Easy negotiations in supply chain Complicated negotiations in supply chain
Well-known marketing methods Complicated marketing by many factors
Large transparency of processes Small transparency of processes
(Source: Author`s own elaboration based on: Grabara J., Wykorzystanie Handlu Elektronicznego
do Realizacji Zadań Logistyki Odwrotnej, [in] Komputerowo Zintegrowane Zarządzanie; 2004)

Also it is important to notice that reverse logistics system has its beginning when
the used products are coming back to the supply chain or when some kinds of waste show
up in the production processes. So reverse logistics processes are strongly connected with
production waste or returned products.
To make sure that after creation of reverse logistics system in the company there
will be the stable flow of used products or waste, there are forming special organizations,
like collection centers, which collect and manage objects for reverse logistics and reverse
flows [Starostka-Patyk, Kozak, 2006]. Than the objects are selected, what means the
control and tests of quality, which products or materials can be remanufacture and reuse.
These with very small value are disposing on the landfill. And these, which are still
valuable for the enterprise, are farther reprocessing and remanufacturing and after
depending on this value are using in processes like reusing, repairing, refreshing or
recycling. When products are on the end of reverse supply chain, than they can join the
beginning of the forward supply chain.
In theory organization of reverse logistics processes should not be very
complicated. But the practice shows that it is much more difficult as it seems. The main
concept of reverse logistics is shown on figure 1.

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Figure 1.
Scheme of flows in forward and reverse logistics

(Source: Author`s own elaboration based on: Stefansson G., Business-to-business data sharing: A
source for integration of supply chains. International Journal of Production Economics 75, 2002)

Companies using the concept of reverse logistics in their activities are still a
minority in the market, because the processing industry is still not very popular.
Meanwhile, more and more advantageous is such design of the finished products that they
could be re-used and processed at the end of their life. It is important here to recover the
value that had the original product and taking care about the natural environment.
Reprocessing problem is complex and difficult. In addition, the supply chain management
of reprocessed products is much more complex [Popa, 2012]. Customers require more
knowledge on this subject, together with the belief that the reprocessed products do not
differ much from the properties of a new products and it is necessary to convince them to
buy such products. So with these concerns also the market capacity for recycled products is
strongly important, and currently there is not enough of information on how the sale of
reprocessed products affects the sale of new products.
With regard to reverse logistics there are four principles sorted out with their
importance [Wu, Dunn, 1995].
1. use in the production the raw materials derived from recovery instead of new
ones;
2. use of organic ecological materials;
3. reuse of recovered materials (mainly packaging);
4. recovery of materials and used products.
These are expensive operations and require additional effort from the company.
Already at the design stage of the product there should be taken into account the
requirements for re-use. With operations in reverse logistics are resulting consequences for
all types of business activities in the field of production. Analyzing the life cycle of final

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products, the impact of environmental factors on the production process, use the consumer
and disposal, will allow the design of such a product that is easy to remove and can be used
for recovery. The result will also be cooperation more closely with suppliers and
subcontractors to obtain materials and components suitable for reuse [Grabara, 2003].
Actually, on the market there are a whole range of different products. Some have
been characterized by the dynamics and instability, which depend on rapid changes in
technology and changes in customer demand for such products. For this type of product is
the hardest to create an attractive range of products processed. Sale of used or processed
products for the enterprise is closely related to cost reduction. Despite the limitations of
resources dedicated to the production of those products, their quality must be maintained at
a high level, making them possible to compete with new products. The customer must feel
that no matter which product he will buy, its quality and basic features are the same. In the
sale of processed products are important processes of classification and sorting of used
products, processing, packing, logistics and source of mobilization.
However, not only products are dynamic, as exemplified by the sales market. It is
characterized by dynamics of fast changing customer requirements and reliance on new
technologies, pricing changes, promotional campaigns, open new markets or the number of
producers. Also, the lack of technological standards in the world makes it necessary for
companies to adapt frequently changing technologies and requirements. These differences
are the cause of difficult operations in regional markets, especially in situations where
there is no local market for specific types or products models, requiring a global company
sales management and procurement. These factors make it possible for companies to be
competitive against any challenges to the production of the original product and its
equipment. Companies offering used or processed products and equipment, identify the
various factors affecting the supplies of used products. Determination of them and take
measures to reduce negative impacts or uncertainties against reverse flows as soon as
possible is important in the processing operations. Supplies of used products are volatile
market, and their quantity and prices are flexible [Kot, Starostka-Patyk, 2008].
To determine the nature of the market is taken into account both the traditional
flow of materials, as well as the reverse one. The traditional forward material movement is
from suppliers to manufacturers, from manufacturers to retailers and from retailers to
customers. Reverse flows are more complex. Processing firms are not able to collect used
products directly from the end user, so they rely on the vendor or the third part collector.
The collected items are sorted and graded and sold in the state in which they are currently,
or are passed for processing. Some of the harvested products may be outdated, or corrupted
by the user or the recovery process and these products can be sold as waste to the recycling
process (this flow can come from both the processors and the collecting third part). Such
waste may be separated from the product and then re-sold as separate parts suitable for
reuse in other applications than the original. They may also be offered as materials sorted
for recycling. Suppliers can then buy the materials after the recycling process and use them
in the production of new products.
Collecting old products is the most important issue in terms of reprocessing
operations. Possible ways of collecting these products are determined by the requirements
of the future usage of these products, which are currently unknown. The most important
for capturing waste products are the sellers and the third part collectors. They collect used
products directly from customers who give them because of variety reasons, mainly
exchanged for newer models or newer technologies. Both of these sources can offer variety
of products and accessories under various conditions, and a wide range of prices and

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quantities. Lack of acceptance for individual returns occurs when such form of product
collection is too expensive to be effective. The main task is to gather old products in high
condition at the lowest price. This can ensure the success of business activity. The value of
used products largely depends on future market requirements for each models, both
processed and for existing ones. The current requirements in the classification of the
existing used products are known for the current period, but according to the dynamic
nature of production, their prices are not stable. The market may even suddenly change the
earlier conditions without warning, and this may cause a decrease or increase in products
value. In addition, the selling prices of the processed products are generally in downward
trend, which makes these products perishable.
The nature of the re-used products market requires fast, respectively responsible
supply chain. It identifies the source of used products as an appropriate price effective, and
prospective buyers of processed products. The system must be supplied with these
products in a manner consistent with the requirements of timing, sort and classify them,
have the ability to quickly process the products to order, and to apply a quick and tailored
method of transport to ensure the time of delivery.
The basic requirement for the processors is the global scope of activity. As the
level of processing technology and recovery is different for each country in the world,
products that may be technologically obsolete in one country may be up to date
technologically in another. This causes the need for global actions and appropriate
decision-making system in this regard. Closely linked with the concept of the global
market is to acquire the best quality used products at the lowest price, but in the world
scale.
Some products are aging rapidly morally. For example, electronics manufacturers
have the highest loss of value over time, on average after 18 months, and it makes that the
most important is the response system to the demands presented to obtain benefits [Bajdor,
2012].
Therefore, a huge role in this field has to fulfill the principle of closed-loop in
supply chains. Good and effective management of closed-loop in the supply chain is one of
the most important issues in reverse logistics. Typically, the closed-loop supply chains
have a standard layout of operations. In contrast, the processing includes several well-
defined and related sub-processes such as product acquisition, reverse logistics, inspection
and testing, sorting and classification, and the restoration and distribution and sale of
refurbished products. Then the chains differ in both the general characteristics and in terms
of supply chain management issues. Table 2 shows the differences in the three forms of
closed-loop supply chains. These forms relate to the most commonly used products in the
processing processes. These are re-usable containers (such as toner cartridges or bottles),
products processed by manufacturer (e.g. copiers), and electronic products (e.g. mobile
phones).

Table 2.
Key links between closed-loop in supply chains.
Testing,
Product Reverse Value Distribution
sorting,
collection logistics recovery and sale
classification
Re-usable
containers Easy Easy Easy Easy Easy

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Testing,
Product Reverse Value Distribution
sorting,
collection logistics recovery and sale
classification
Products
processed by Medium Difficult Difficult Difficult Trudne
manufacturer
Electronic
Difficult Medium Easy Easy Medium
products
(Source: Author`s own elaboration based on: Guide R., Van Wassenhove N.: Closed-loop Supply
Chains, [in] Quantitative Approaches to Distribution Logistics and Supply Chain Management;
2002)

Collecting used products is related to the management and business processes in

manufacturing. Managing the process of acquiring the product determines the value of re-
use for a specific company. If reusability is advantageous it is necessary to choose the best
method of maximizing revenue and favorable for the management of product returns. Then
operational issues, such as creating facilities, the product planning, monitoring procedures
and storage procedure shall be under the chosen method of managing product returns.
Action of products acquisition management helps to identify and develop new markets for
used products, and adjusts the level of returns to the market requirements. Often, the
process of returns is stimulated by the use of monetary incentives (e.g. in the form of
prepaid postage) to motivate dealers and third part collectors to return used products. Such
strategy is a strategy of actively encouraging to the return of products, as opposed to waste
systems where returns are treated passively [Guide, Van Wassenhove, 2009].
Adjusting returns to the level of demand in the closed-loop supply chain of
used products is an easy process, in part thanks to customers who do not see
the difference between processed products and the new ones. This does not mean that the
processes used in the adaptation of returns to the level of demand are being
simplified, because the process is simple in comparison with other types of closed-
loop supply chains [Toktay, 2000]. When the technology including processed products is
stable then the market for them is very limited. It includes a small, local business, which
requires taking care of more details, as it can replace the standard treatment, but also to
destroy the company reputation. Returned products are mixed with new materials in
proportions depending on the needs and then re-packaged and passed to traditional forward
channels of distribution. Activities in the area of reverse logistics are processes that
require the movement of products from the end user to the point where the actions of re-
use are taken. Such system of actions is simple. The seller shall act as an amplifier and to
eliminate the need of manufacturer contacts with the individual customers.
Also, disassembly, testing, processes control and processing operations are simple
for certain product types. When the product itself is simple, the products damaged or
unsuitable for reuse can be recycled without paying attention to alternative materials.
The industrial processing sector for closed-loop in the supply chain is the best-
documented, but the hardest to plan, manage and control. Activities gaining to acquire
products for industrial processing may be based on the lease, for which the products will
be either refunded after the expiry of the lease or renewal rental of the same article.
Acquisition of product for a lease can be seen as a relatively simple, but so far still only a
small number (5%) of industrial processors is using this solution [Guide, 2000]. Processors

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use many other techniques (deposits, discounts and cash back) in which the degree of
satisfaction varies.
Adjusting returns to the level of demand for industrial processing is difficult, since
the inception of distinct and separate markets for new and recycled goods. Customers may
require the latest technology, but can also see the processed product as with secondary
quality. This market share may influence the distribution and sale of processed products.
Reverse logistics process is usually very difficult, because the processors must properly
organize the collection of used products from many different geographical locations. Many
of used industrial products can also be a hazardous waste and must be treated properly
during the transport. The processes of testing, sorting, classifying and testing are time-
consuming and complex as a single product may contain tens of thousands of parts and
components. The observations in this case are very important and must be extremely
rigorous in order to avoid processing or reuse of low quality products. Processing
operations mostly are often complex and difficult to plan, manage and control.
The types of closed-loop in the supply chain can fulfill many functions
corresponding to the number of products suitable for processing, but also the same types
are the certain challenges. Gathering the products used on a global scale is difficult in the
closed-loop of supply chain. Technological level is different in different geographical
areas. The collection of products must be taken on a global scale and the distribution
markets should be located in different geographical areas. Supply, demand and price levels
are then variable. Such products are also perishable articles, since the value of the
processed product may decrease from day to day by the rapid growth of the technological
level. Under such conditions, there are many options for product reuse.
Several main processes can be seen as easy to use in both, the forward distribution
processes and reverse distribution processes. The nature of products, with a small number
of mechanical parts, makes them easy to test, sorting, classifying and processing. Reverse
logistics processes are difficult to coordinate on such variety markets by the need to
manage in terms of various law, regulations and customer requirements. The processes of
distribution and sales are conducted in many countries and require technological expertise
together with the knowledge about the customer needs. Therefore, the sales process is not
without a reason closely related with the process of acquiring used products.
Companies now have wider knowledge about the processes of processing and
marketing of used products for the sale and reuse. For these purposes there are created
different, unique structure of the closed-loop in supply chains. This requires the
determining of appropriate actions for the used products collection, reverse logistics,
testing, sorting and classifying, processing, distribution and sales. The management of
these processes must be well prepared so that the business made sense and was able to
enter and stay at the market. Equally important as the management is to understand the
differences between many types of closed-loops in supply chains and their correct
implementation together with practical use in creating new structures.

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