Reverse Logistics in Indian Automobile Industry

Reverse Logistics is a process in which a product moves in reverse through the supply chain network. It may be used for the purpose of recapturing value of a final product or for even proper disposal. It may also be termed – service, as the process of planning, implementing and controlling the efficient and cost effective transfer of raw materials, in-process inventory, finished products and related information, from consumption to the point of origin, for the purpose of recapturing value of proper disposal.

While the primary sectors involved in making use of this process may be classified as the Pharmaceutical Sector, Retail sector, Automobile sector and the Electronics sector, we are mainly about to focus all our attention to the practices of ‘Reverse Logistics’ in the Indian Automobile Industry.

To truly know why the whole idea of ‘Reverse Logistics’ assumes significance when considered in terms of the Automobile Industry, first we need to think of the nature of the final product i.e. Automobiles or Vehicles as we call them. The parameter one needs to look at is the life cycle of the product and what happens to the final product once it reaches the end of its useful life. By its very nature, it’s difficult to predict the life cycle of the final product. This is because; it is highly susceptible to the nuances of the human subjectivities. But even if we are unable to predict the duration of the life cycle, we have definitely something figured out for us. What I am referring to is a common observation that even if the vehicle (Here we will be primarily focusing on the flagship product, an automobile) becomes defunct and is no more suitable for use, the same rule doesn’t apply to the metal (that is primarily Iron) that it has been made from. The Iron that has been used in the manufacturing of a vehicle stays in pretty much the same and reusable condition through a considerable amount of time unless exposed to exceptional climactic conditions.

Rather than letting it turn into scrap, this piece of metal can be and must be sent back from the end consumer at the end of its life cycle to the production line once again as a part of recycling initiative. Automobile industries spent considerable amount of resources in terms of capital, labour, energy and raw materials in delivering goods and services to customers. With shorter consumer attention spans, increasing commodity prices and the need to introduce new models of vehicles at ever shorter time intervals, reverse logistics are becoming a necessity for the industry and cost cutting is not the only reason driving this necessity. The permeation of consumerism among Indians and awareness of the environment preservation has further led to a more emphasized approach towards the value attached to recycling. Hence, in the present day scenario, companies have to be more sensitive towards their approach to environmental sustainability through reuse and recycling, as it is one of the bases of winning the trust of customers and cementing long term loyalties. Transporting, handling, and returning used products present significant challenges, as well as potential profitability, for distributors. The opportunity for potential profitability actually is not limited to distributors, however; manufacturers also can experience significant gains by implementing a reverse logistics program. With studies showing return rates ranging from 5 percent to 25 percent in western countries, just a 1 percentage point reduction can mean significant savings to a company’s bottom line. Effectively managing this aspect of logistics thus has great significance as it has inevitably attached the company’s interests to the societal benefits as a whole.

The increasing importance of this in the country’s automobile industry can be further evidenced by the fact that the first car recycling facility in India was launched in Chennai in the month of August (2011) is expected to generate huge scrap metal for re-use in industry, according to Society of Indian Automobile Manufacturers Association(SIAM). According to SIAM, the attempt was to recover scrap material and spur growth of the automobile industry .The facility is a part of global automotive research center of the ministry of heavy industries in Oragadum near Chennai. This only further goes on to highlight the coming of age of the concept of Reverse Logistics. One of its main drivers has been the Government concern for sustainability and manufacturers continuous endeavor to garner customer satisfaction. On an additional note, the report further goes on to say that, ”With efficient recycling, India can hope to recover by the year 2020 over 1.5 million tons of steel scrap, 180,000 tons of Aluminum scrap and 75,000 tons each of recoverable plastic and rubber from scrapped automobiles" .It also said that currently, scrapped vehicles are cut and sold for scrap by low-tech units in the unorganized sector and  such crude techniques used by the sector were polluting the environment and recovering very low yields. The statement cited examples of US and Japan where recycling facilities help in the overall growth of automobile industry.

But challenges await the Indian reverse logistics business. Low importance given to returns management, infrastructure bottlenecks and warehouse space deficits are factors that hinder the market growth. The key issues in the market are mismanagement in segregating returns, high distribution costs and retailer-manufacturer conflict. In India, logistics cost in automobiles industry accounts for 2-3% of sales whereas in auto components industry it’s around 3-4%. Reverse logistics cost in Indian auto and auto components industry is estimated to be around 0.5-1% of auto and auto components industry and it is only expected to increase further in future. About 90% of the auto component Industry outsources their logistics requirement to 3rd Party Logistics.

A number of factors contribute to returns:

• Poor information flow
• Multiple networks that interface poorly with one another
• Different numbering schemes for the same replacement parts
• Data entry order errors
• Incorrect shipments
• Mis-diagnosis
• Over ordering
• Warranty/Defective parts

An ideal returns process is that which consolidates returns for shipment to a centralized location for processing and disposition establishes a framework and foundation for recovering assets through re-manufacturing, recycling, or refurbishing. Numerous studies have confirmed that re-manufacturing is profitable for manufacturers. While the automotive aftermarket industry faces many challenges related to reverse logistics, there are even more opportunities to implement new processes all the way to the shop that can help streamline operations, cut costs and improve profitability and at the same time apply green sustainability practices. With new environmental regulations and sustainability pressures, more companies are focusing on reverse logistics. Those that implement sooner rather than later will have a competitive advantage.

And Indian Automobile companies, it seems have started to believe in that fact. The trends of the last few months show that the concept of a ‘Vehicle recall’ has no longer been a foreign concept anymore. Automakers in India have recalled over 1.5 lakh cars and 11,500 bikes since a 'voluntary recall code' was adopted in July 2012 at the behest of Society of Indian Automobile Manufacturers (SIAM).Moving away from the practice of quietly informing relevant customers, Ford Motors made a big bang announcement that was also the biggest-ever recall in the domestic market when 1.28 lakh Figo hatchback and Classic sedans models were called back to service stations to re-check problems of rear suspension and steering in August last year. It is surprising that even after being the sixth largest Automobile market in the world (Automotive Industry forms 6% of GDP in the country), India doesn’t have a recall policy. But this trend of voluntary recall is sure to gain momentum due to growing consumerism among Indians along with the increasing economic viability of reusing goods.

Consequently, achieving a high level of sustained customer satisfaction over long period of time would be a huge incentive for the automobile manufacturers to focus more on developing their supply chain for Reverse Logistics. Besides, the presence of environmentally sensitive materials inside the vehicles makes it the responsibility of the vehicle manufactures to take care of the products after they have run their course on utility. All this along with the increasing environmental conscious user would definitely give further fillip to the importance of Reverse Logistics in the Indian Automobile industry.

  References:-

1. http://www.aftermarketsuppliers.org
2. http://www.commodityonline.com
3. http://articles.economictimes.indiatimes.com
4. 4.http://www.researchandmarkets.com/reports/548736/

This article is written by Smruti Prakash who is a PGDM student of 2013-15 batch of IIM Raipur. He is passionate about discovering new places and people, with special interests in quizzing and the study of human psychology. He can be reached at pgp13109.smruti@iimraipur.ac.in