Supply Chain Innovation Awards Cisco Borrows from Sales, Finance to Transform Returns Into a Profit Maker
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Cisco Borrows from Sales, Finance to Transform Returns Into a Profit Maker

Cisco Systems earned the top spot in this year's Supply Chain Innovators competition by transforming its reverse logistics operation from a non-value-adding cost center to a profit generating program that enhances the satisfaction of both internal and external customers. Cisco's rigorous, innovative approach takes something from both marketing and finance to treat returns as a virtual business.

In 2005, Cisco's reverse logistics operation was focused on making sure that returned product was processed efficiently and recycled in an environmentally sound way. The 6 million pounds of returned gear that it handled each year was almost universally treated as scrap. Little attention was paid to capturing residual value and less than 5 percent of returned product was ever reused. This program was costing Cisco approximately $8m a year.

That changed when the company began to put more emphasis on "green" operations and when Dan Gilbert, vice president of global supply chain management, assumed leadership of Worldwide Reverse Logistics at Cisco. Gilbert was confident that the company's recycling effort was well managed but he saw an opportunity to unlock additional value from returned product. Instead of allowing returns to automatically default to recycle mode, Gilbert's goal was to drive them to their "highest and best use," adding up to six years of life with a second or even a third incarnation. "By working together as a company, we found we could give a tremendous amount of equipment new life by extending its usefulness before it is ultimately recycled," he says.

Today, about 44 percent of returned assets are redistributed to internal customers for re-use, "with substantial upside still to go," says Gilbert. For fiscal year 2008, which ended July 1, this resulted in a net contribution of $100m, or a penny a share, to Cisco's bottom line-a goal that was reached a year earlier than anticipated.

Over the same period, the reverse logistics team also improved productivity and reined in costs. Operational expenses, as a percentage of the value of processed returns, dropped from 119 percent in 2005 to 39 percent at the end of 2007. This reduction came despite a 110 percent increase in tonnage processed, as more aggressive recovery efforts captured additional obsolete gear from the field for recycling.

Achieving this dramatic turnaround required a radical shift in the role that reverse logistics plays within Cisco.

The core of this shift was application of a profit-oriented business model to reverse logistics, an area that previously had been viewed as a costly requirement. A profit-oriented concept "unleashed the entrepreneurial drive that creates new ways to deal with old problems," says Gilbert. "It informs every strategic and tactical decision we make."

As the reverse logistics team began looking at the problem, they realized there were four myths about returns that needed to be addressed. These myths held that:

• Returns are largely defective goods
• The returns process is a "hairball" and too hard to optimize
• Treating all returns the same keeps costs down
• Cisco's reverse supply chain is probably good enough.

To challenge the first of these myths, the reverse logistics group performed an experiment in which it shipped a large random sampling of returned products designated as scrap to a repair center. It put these products through the same diagnostic process as products returned for repair. "We found that 80 percent of these products were perfectly good," says Gilbert. "They may have needed a flash upgrade or minor cosmetic work, but this demonstrated that we were leaving a lot of value on the table." There had been a core assumption that most returns were defective when, in fact, many were returned after being traded in on new purchases, he explains. These trade-ins typically had many more years of useful life.

This insight coincided with a growing realization within Cisco that the corporation's focus on recycling compliance was missing the mark. "We realized that we needed to not only recycle well but to recycle less," says Gilbert.

Together, these ideas formed the basis of a new initiative: re-think the value of reverse logistics and focus on the reduction and reuse of returns as well as on efficient and compliant recycling. "It was clear we would need a new infrastructure to implement this strategy, but the bigger challenge was in re-thinking-the change management part of it," says Gilbert.

The biggest re-thinking was to see reverse logistics as a business that exists to generate a profit for Cisco by improving both bottom-line and top-line performance. "The team now talks about generating a net contribution, or 'profit,' while decreasing expenses or 'losses' as a percentage of the value of equipment processed," says Gilbert.

To attack the top line, a value recovery team was formed to identify internal customers and generate demand for returned products. Modeled after traditional sales and marketing functions, this team targets groups within the company that can benefit from refurbished gear.

"It was clear that it would not be enough for us to simply publish the availability of returned products," says Gilbert. "The value recovery team applies sales and marketing disciplines to drive a classic supply and demand alignment: find a need and fill it."

The team reaches out to potential customers through established Cisco communications channels, such as internal newsletters and bulletin boards, and through events like the Earth Day Fair at Cisco. To aggressively drive "sales", staff members are assigned individual productivity targets and quarterly quotas. Performance to these targets is tracked and used as a key group metric.

"One of the biggest learnings we had from sales was to set targets and keep track weekly of where we were against the plan," says Rehman Mohammed, head of supply chain field operations. This approach worked well, he says, noting that "our team hasn't missed a target for the last 16 quarters."

The reverse logistics team also borrowed a few lessons from marketing, Mohammed says. "Marketing taught us the importance of identifying customer segments and polling customers to understand their pain points."

He explains that the value recovery team polls its internal customers to get a deep understanding of their needs and processes so they could ensure that the supporting systems and processes developed to serve them will work smoothly and meet their requirements. "For example, parts' planning is a complex process with its own methodologies, accounting methods, and systems," says Mohammed. "Reverse logistics had to learn how to engage this and other customers within those existing processes."

The team also learned from marketing the importance of going after the "kingpin" of internal customers, where a win would produce traction and momentum. In Cisco's case, that was the service supply chain. Known within Cisco as the Customer Advocacy Service Supply Chain organization, SSC stocks a wide range of products to support warranty claims and service contracts for customers in the field.

It seemed clear that SSC would offer a solid sales channel since refurbishing and re-using returned parts is less expensive than buying new ones. But the reverse logistics team had to make its case. "We took a two-pronged approach and looked simultaneously at SSC's internal needs as well as pain points being experienced by its external customers," says Mohammed. This research uncovered a lot of dissatisfaction among external customers with the returns process, he says. "There was frustration over things like web links that didn't go anywhere and non-working phone numbers. We were able to show that we could help SSC provide better customer support at a lower cost structure."

Reverse logistics now ships more than 100,000 units per year to SSC, providing around 10 percent of its inventory needs. SSC returns the favor by passing surplus inventory to reverse logistics for reuse or recycling.

Another important internal customer that has developed for returned products is Cisco's global network of labs, which provide demonstrations, technical support and training.

One example is Gurgaon, a technical assistance center (TAC) near New Delhi, in India. TAC Gurgaon is one of Cisco's largest technical labs worldwide, but to meet its very aggressive launch timelines, it was faced with having to ask engineers to share equipment. Reverse logistics came to the rescue, giving TAC Gurgaon immediate access to more than $7m in premium equipment.

This equipment enables TAC Gurgaon engineers to re-create customer issues and resolve them on the same equipment that customers use. Moreover, having the equipment available for training has enabled the lab's certification program to turn out additional experts in Cisco equipment, which, in turn, increases the ability to serve customers around the globe 24x7. Today, this TAC has the largest concentration of Cisco-certified engineers of all non-US Cisco locations as well as the largest concentration of engineers certified in Cisco Advanced Technologies, such as voice and security.

And this is not the only lab being served. Reverse logistics is becoming a central clearing house for all types of labs throughout the company, supplying reused products for building, upgrading, and supplementing facilities. "Most Cisco sales, support, and training labs wish they had unlimited budgets to buy the latest products to demonstrate Cisco solutions, solve customer support issues, or train engineers," says Mohammed. "Reused gear gives lab users access to more Cisco products and the ability to obtain expensive items previously beyond their budgets."

Other customers include a program under which surplus, non-proprietary components are auctioned to Cisco affiliates, which in turn sell them to the open market under strict controls; demo loan and "try before you buy" programs; and the Cisco Networking Academy, which distributes a small percentage of refurbished gear to educational institutions with tight budget constraints. "Using returned equipment helps the Networking Academy program make donations that would otherwise be impossible, enabling the training of future Cisco customers and network experts," says Gilbert.

To enable service to its growing customer base, reverse logistics had to develop robust processes and systems. It established a program management office to take on this job. "There was no off-the-shelf supply chain management product available to support this unique operational model, so the team custom-built an IT architecture to manage its inventory," says Gilbert. "Growing from a manual process based on exchanging spreadsheets, the group now uses a central database to track inventory and take requests from internal customers." Efficient, automated systems support continuous product flows from one virtual inventory pool across Cisco, driving reusable product to its "best economic use" at each stage in its lifecycle, he says.

The group also established value recovery criteria to ensure that reuse inventories consist only of viable products. Selection criteria include product age and whether it is still being supported, product condition and product popularity.

Certain products are in high demand, constraining their supply. To reconcile requests with available inventory, the team developed a hierarchical allocation algorithm that distributes inventory based on highest and best economic use for greatest customer impact. The allocation system allows the team to adjust priority on an as-needed basis, giving the team flexibility to accommodate important projects and special requests from internal customers.

Gilbert notes that this program also can give Cisco's sales people an advantage in negotiating trade-in values. "If we know there is a big secondary market for a product, we can let the sales guys know that they can be more aggressive with replacement sales," he says.

With initial processes in place, the team expanded its operational capacity and developed the ability to capture more assets from more sources. It developed policies and enforcement processes, established asset recovery targets and improved return materials authorization (RMA) closure rates. Each quarter, sales staff must meet increasingly ambitious quotas and targets, which form the basis for operational metrics.

As with any profit/loss business, credible metrics such as these enable Worldwide Reverse Logistics to track and report its P&L performance, allowing the group to manage itself as a virtual business unit. The group leveraged expertise in its finance organization to design, develop and implement a metrics and reporting framework. The development process led to the ongoing commitment of the finance organization to publish the virtual P&L as an accurate representation of organizational performance.

"We learned from finance to rigorously manage our portfolio and our methods so we are completely transparent in terms of showing the revenue we generate as well as all of our overhead and the resulting margin we bring," says Gilbert.

Other Gains

As part of its transformation, Reverse Logistics also achieved other important goals. For one, it gained much better control of returns by taking in-house the management of core processes that previously had been contracted out to third-parties. These include receiving, tracking and redistributing returns.

Another achievement is better brand protection. Because over 50 percent of trade-in returns were not being recovered, there was a risk of leakage into the gray market with the potential of affecting Cisco's reputation and premium brand. Increasing asset recovery efforts-now inventory sources-divert more products from the gray market.

Increased consistency in returns policies with customers strengthened the returns process overall and reduced losses from improper returns. Finally, establishing automated data sharing processes between the reverse logistics unit and Cisco third-parties reduced losses from under-managed parts inventories and excess and obsolete parts.

Improvements also were made in recycling operations, where all products ultimately go. Seeking efficiencies and tighter controls, Reverse Logistics rigorously selected four providers with locations worldwide to convert obsolete or damaged goods and components into raw commodities, such as ferrous metals, non-ferrous metals, plastics and paper. Each vendor must follow strict processes to certify destruction in compliance with ISO 14001; recovered commodities are then resold through tightly governed processes.  Depending upon their location, each facility must also verify compliance with local environmental protection laws.

Before the transformation, the recycling program cost the company more than $8m each year. In 2007, the company reduced its recycling costs by 40 percent and improved commodity recoveries by more than 300 percent, enabling Cisco for the first time to achieve a positive net contribution from recycling.

"This transformation has been a true win-win-good for Cisco and good for the environment," says Gilbert. "We think it provides a practical example for other companies seeking to unlock more value from their own products and parts."

Cisco Systems,

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