An analysis of current adoption levels of reverse logistics software in the North American market

Thanks to an increased emphasis on aftermarket service revenue and end-of-life management, reverse logistics is becoming a more central part of the business model used by North American manufacturers, contractors and product-centric companies. But are companies making the investment in software to streamline the reverse logistics process so that it can be a profit center rather than a cost center? Charles Rathmann, Global Senior Marketing Content Strategist at IFS, offers a review of current primary research into current adoption levels of field service software across manufacturing, construction and other industries that support equipment and assets in the field.

We are witnessing an inexorable change in product-centric business models. Gone are the days when a product could be marketed with little to no thought as to what happens after the initial sale. Global commerce has resulted in a world where products are commoditized, and downward price pressure limits revenue from product sales. The aftermarket is where the profits are, and this is driving a move towards servitization.

Trending towards servitization

The move to servitization is a long time coming, given what has been happening in recent years with revenue from new product sales. According to a 2013 IDC Manufacturing Insights survey, just 12 percent of capital equipment manufacturers expected a substantial increase in equipment sales revenue over the next three years. This makes the aftermarket service space a prime target for the companies wanting to identify new profit centers.

Aftermarket service may encompass several different business processes from warranty management, contract management, field service and subcontractor functionality to streamline bid letting, bid acceptance and work order management for third parties—and of course reverse logistics.

Servitization complicates the reverse logistics challenge

Reverse logistics is a particular challenge for companies pursuing servitization because there is a high degree of diversity in terms of how different parts need to be treated. Software must formalize a value chain for everything from inventory cores that are refurbished, to parts that are returned as defective or for break-fix repair. Even parts returned for disposal might be traced due to regulations on the end-of-life treatment of electronics.

Customer-specific requirements can affect ownership of the part as it enters the reverse logistics supply chain. That means software must help a service organization track and manage the extent to which repair work on the part may be billable or included in an existing contract. Returning inventory handled by subcontractors must also be tracked as part of the reverse logistics supply chain.

Industries where reverse logistics is key - compliance a factor for adoption

According to recent research conducted by IFS, adoption rates of reverse logistics software to manage these complexities vary by industry. The early 2018 study reveals that these adoption rates break down along predictable lines, with perhaps a few surprises.

Thirty percent of food and beverage industries had adopted reverse logistics software. In this space, the returns process is mission critical because it involves applying credit to customer accounts and updating the product disposition. Usually, these products are removed from distribution because they are damaged, discontinued, expired or recalled. In some cases, they may want to record root cause of returns and collect other actionable intelligence.

Discrete manufacturing disciplines often operate a depot repair environment in addition to the returns process. Inventory may be returned to the customer, be entered back into inventory, sold as reconditioned or be dispositioned in a number of other ways. It is no surprise that manufacturers of high-value, mission-critical systems in industries like medical device and aviation/aerospace products were most likely to have specific reverse logistics software systems in place. For each of these industries, traceability of the inventory is required for safety and regulatory purposes, adding a layer of complexity to the reverse logistics process.

Companies providing aftermarket support on aviation and aerospace assets will face various regulations depending on whether they are working on commercial or military aircraft. If they are removing life-limited parts from the aircraft, they must document the current life status of the part. They also must maintain records of any repairs—including those performed in a depot environment—for a year in the case of basic repairs and for the life of the aircraft in the case of major alterations. The takeaway here is that companies in regulated industries must be prepared for serial traceability and this is one more requirement that reverse logistics software must satisfy.

Poor software getting in the way of business?

Reverse logistics is not just a factor for manufacturers. Contractors, too, are pursuing more aftermarket revenue and often have warranty and service activities that involve a reverse logistics supply chain. Almost 80 percent of contractors in a 2018 IFS study of HVAC, mechanical, plumbing and other trade contractors indicated reverse logistics was a relevant discipline in their business. Yet only 10 percent of respondents said their software handled reverse logistics “very well,” while more than 37 percent said their software was an impediment to successful reverse logistics processes. Just 14 percent of HVAC companies in the IFS study reported having implemented reverse logistics software, despite the fact that there is a real and documented need.

Respondent organizations in the IFS trade contractor study did not have to be very large before reverse logistics became important to them. Companies between $5 million and $10 million in revenue were least likely to report involvement in reverse logistics at 73 percent. This is in contrast to 88 percent of companies between $10 million and $20 million, 89 percent of those between $20 million and $50 million and 90 percent of those over $50 million.

Software leaves reverse logistics gaps for field serve organizations

A survey of field service organizations conducted for IFS by WBR Research suggested that field service organizations still face substantial gaps when it comes to reverse logistics with 45 percent struggling with serial traceability and tracking of the location and status of parts during the reverse logistics process.

And while 42 percent had problems handling the return materials authorization (RMA) process, 24 percent cited the component repair and overhaul process as a functional gap. Training and education of bench and repair technicians, managing third party contractors involved in the service process, tracking a specific piece of equipment and the customer site the part came from—as well as determining who owns a part once it is removed from a customer’s equipment—all ranked as challenges for field service organizations.

A critical discipline for the future of servitization

Reverse logistics is a critical business discipline across multiple product- and asset-centric industries regardless of company size. Current trends among companies offering aftermarket services to augment and differentiate products and assets means it is desirable to treat these aftermarket activities as their own profit center as opposed to a net cost or as overhead. This means companies will be under increasing pressure to implement enterprise software that encompasses and streamlines steps in the aftermarket service value chain, not only to ensure profitable returns and depot repair, but to protect or enhance the customer experience and comply with regulation.

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Charles Rathmann
Charles Rathmann has more than 25 years of experience in business-to-business journalism, primary research, industrial product marketing, media relations and sales and business development. Rathmann holds a degree in journalism from the University of Wisconsin-Oshkosh and is based in IFS’s Brookfield, Wis. office.