Navigating the Reverse Supply Chain for Connected Devices

Unless you were an early adopter of one of those clunky analog true cellular phones that were only available with per-minute calling plans, you probably don’t have to look back beyond 15 years to remember your first mobile phone. The sales proposition was pretty universal across carriers: Sign a contract and get a free phone that would be subsidized by your monthly service payment. Then, every so often, you might be able to get an upgrade—but you probably had to switch providers to get the best “new customer” deals.

Those plans have almost all gone the way of the dodo. Service plans are now typically distinct from phone purchasing. Carriers often arrange financing options, but don’t actually subsidize the cost of the phone. Though trade-ins are still commonly referred to as upgrades, they are based on the remaining values of the devices that are turned in. So what changed, and why does it matter to you as a supply chain manager?

The seismic shift that affected practically the entire cell phone industry was the result of changes in the actual technology, its secondary market value and the supply chains that move the products. A slew of electronic products and everyday items not generally regarded as electronics, like appliances, are about to become technologically advanced, connected items as the Internet of Things explodes. As with the cell phone, manufacturers, distributors and retailers will not only manage the forward supply chain; they will also manage reverse logistics as some of those devices come back from the end user early in the sales cycle along with the repair, resale and ultimately the disposal of those products at the end of their useful life.

The journey is akin to the cell phone’s evolution from analog bricks with pullout antennas to modern smartphones. That makes the cell phone industry the perfect barometer for anticipating game changing transformations in how manufacturers of all kinds will manage the lifecycles of the products they sell now that they are connected to the Internet and collecting personal data that must be managed.

New life for aging technology fuels revenue

Last year, over 1.4 billion smartphones were shipped to customers. That represents a growth rate of 300% over five years. However, volumes for new devices are beginning to flat line as evidenced by slowing iPhone sales reported by Apple. Sales growth that was anticipated in emerging markets is taking place, but it is being solved through reverse logistics by recovering and repositioning second-hand phones from North America and Europe to these highly price-sensitive regions.

Coupled with deceleration in the velocity of new device sales, year-over-year performance improvement in new models has also declined and subsequent models offer fewer “must-have” features to encourage users to ditch their old devices. That means the viable lifecycles of devices is longer, but according to Gallup, more than half of American iPhone users upgrade every two years—flooding international markets with viable used devices.

Five years ago, a two-year-old smartphone was generally doomed to be unceremoniously thrown away or sold for spare parts. Today, secondary markets in places like Africa and Latin America have created strong demand for used devices based on price sensitivities that make marketing the newest technology for a premium problematic for manufacturers. At the same time, environmentally conscious consumers do not want to send old cell phones to landfills just because they are done with them. We have entered an era where virtually every smartphone that enters the marketplace will come back through the supply chain. The scale of reverse logistics channels must equal that of forward logistics to keep pace, making smartphones one of the first near-perfect prototypes for building circular economies.

When used smartphones make their way back to manufacturers or carriers, they are destined for one of two primary fates: reselling or recycling. It is critical to have processes in place that evaluate the condition and viability of each unit so it is properly routed for reconditioning or disassembly—but either way, the device is coming back with something it never had when it left the factory: user data.

The devil is in the data

Questions about who actually owns the data on these devices have yet to be solved in a concrete way, but wise manufacturers are erring on the side of user ownership. Apple CEO Tim Cook has stated: “We believe the customer should be in control of their own information,” and, as an example, stood firmly against FBI demands to unlock data from one of the San Bernardino gunmen’s iPhone. Because smartphones come back through the supply chain chock full of user data, secure wiping of that information is a crucial aspect of both reselling and recycling. Failure to completely eliminate the risk from this information necessarily results in lost consumer confidence and could lead to litigation.

The complexity of managing data contributes to making the reverse flow of smartphones more difficult to manage than forward logistics. However, the market is pressuring companies to recapture the value of smartphones that have life left in them due to a number of forces, including consumer concern over used products entering the waste stream, and carriers are eager to capitalize on recovering these devices so they can generate additional revenue from second-hand sales thereby introducing lower price points to entice new customers and prevent churn.

Evolutions in product lifecycle management and reverse logistics that the mobile phone industry is experiencing today are but a small indication of what the electronics industry at large is expected to face in the coming years. According to Gartner, the Internet of Things is going to see 5.5 million new devices come online every day this year; by 2020, there will be 20.8 billion connected items. Everything from cars to toasters to refrigerators will have connectivity capabilities, in both the consumer and enterprise markets. At the end of their useful lives, all of these devices will have to move through channels that do not exist today, and they will all be loaded with data that belongs to users and must be dealt with swiftly and securely.

Multiple lives of technology products

Producers like Apple are now feeling motivated to make quality products that can enjoy second lifecycles and secondary markets are rewarding them for doing so. This new paradigm is pushing manufacturers to actively manage these lifecycles—along with the required forward and reverse logistics—edging them closer to becoming hardware as a service providers and abandon the “sell it and forget it” mentality of yore.

Supply chains are feeling the pinch at both ends. While many of today’s electronics are being manufactured to experience multiple lifecycles, the individual lifecycle for each owner is shrinking because of dynamic consumer behavior. Smartphones have enjoyed the benefit of robust secondary markets, but the universe of connected devices is about to become so vast that many products will face unique challenges retaining value at the end their primary lifecycles. Regardless of whether these smart products ultimately get reused, refurbished or recycled, they will have to come back through proper channels because they will all contain user data with varying levels of sensitivity.

As a quick example, imagine a connected electronic product that retains value after its first lifecycle—let’s say it’s a smart refrigerator. A few years after purchasing, its owner decides that she wants a newer model, so the unit heads back up the supply chain. Think about all the data that refrigerator is going to come back with—eating habits, food choices and maybe even credit card information. When you consider how much personal information could be gleaned from that data, it’s clear that it must be securely wiped before anyone new can take ownership, and it certainly can’t go straight to a landfill. If you have ever purchased a used car, or even rented one, that contained the previous user’s radio station presets, GPS coordinates in the navigation system or phone numbers dialed in the phone system, it’s the same exact mechanic.

That means that this product would necessarily have to go through a specialized process to completely eliminate the data. It’s easy to imagine the same thing happening all over again, as the unit gets passed on yet again to a third owner and so on down the line. Each time it changes hands, it has to be dealt with by whoever assumes responsibility for the process, and that could end up being manufacturers, dealers or some third party. Then, when all the ownership is over, the appliance will have to go through yet another supply chain to handle recycling. The circular economy demands that all parts—not just metal—are extracted and recycled properly. That includes circuit boards, rare earth metals and any other component used in the product.

This scenario takes for granted that it has been clearly decided that consumers retain ownership of their own data. What will perhaps emerge as an even larger question is who assumes liability for the data? If it does not get wiped properly or leaks out, who pays the price? The simplest answer to that question is whoever accepts the product back, which means anyone who wants to capitalize off second-hand value of these data laden devices will also have to assume significant risk. This will fuel a new level of security and checks in reverse logistics and could spur a cottage industry of specialty insurers equipped to deal with the problem and answer questions like: “What is the value of compromised data?”

Treasure troves of intelligence are buried deep in user data, but consumer ownership makes it forbidden fruit for manufacturers to access when their products come back. They can ask consumers for permission to access it, but the market has not typically been receptive to handing over private information and in fact, merely asking the question can serve to erode trust in the relationship. When products come back through the supply chain, they can provide a great deal of intelligence to anybody who acquires them, and most companies would be best advised to take ownership of this process.

Reverse logistics management: From prize pig to derby champion

Think of this as an extension of what quality manufacturers already do when they analyze merchandise that is returned to them. Why did it come back? Did it fail structurally? Did it fail technically? Did it fail to meet consumer demands? Now multiply that by 100 because failure is no longer a litmus test in determining whether a product comes back to electronics manufacturers. The intelligence that can be acquired by conducting a post-mortem on every SKU sold stands to be game changing if managed correctly. Everything from designing a more rugged chassis to optimizing packaging materials will be affected by savvy producers.

All of this skin in the game, coupled with the likelihood that product manufacturers will begin bearing legal cradle to grave product lifecycle responsibility including fines for goods that are disposed improperly, provides ample motivation to design effective reverse supply chain channels. This model also lends itself to offering more products as a service, akin to the well-known lease model car dealers use—and that provides manufacturers with reliable, recurring revenue streams.

Problematically, this falls well outside the expertise of most companies, which have historically put much greater emphasis on forward logistics (a profit center) than reverse logistics (a cost center). The addition of ITAD (information technology asset disposition)—especially the disposition of enterprise equipment—to the mix makes this reverse flow even costlier and more complex; but even more necessary. Most importantly, the benefits of proper product repurposing and recycling temper the increased costs when implemented properly.

Faced with the responsibility and potential revenue of managing products after they have left the warehouse,
producers have two basic choices: manage the entire lifecycle themselves or engage with partners and outsource certain functions. It’s a simple cost-benefit problem where outsourcing reduces risk and simplifies operations at the cost of some revenue. Deciding how to best leverage the new product lifecycles of electronics requires a comprehensive understanding of what the model looks like and an honest assessment of whether the skills necessary to deliver results are available or justifiable internally.

The first step in turning over products in the middle of their lifecycles is actually obtaining them. This varies based on the nature of the merchandise and multiple channels yield the best results because it requires action on the part of individual consumers. Parcel carriers are good options for small items that are easy to ship, but for large products or items with high values, retail partners who can accept the merchandise work well. Remember, these products will come back in a wide variety of conditions and in all sorts of creative ways—hardly ever in the same streamlined packaging they were originally shipped in. Entrusting third-party carriers also introduces the risk of protecting data while units are in transit, which the industry has yet to address in a meaningful way.

Once an item is received, it has to go through an initial evaluation triage to determine the best way to optimize its remaining value. The complexity of this process depends heavily upon the nature of the merchandise. The smartphone market, for example, is quite complex because of the diversity in the number of handset models that are in the market at any given time. Each SKU has its own unique demand curve—sometimes, identical models even experience significant differences in value depending on which carrier they are provisioned for. This makes value appraisal a key—and sometimes complex—component to get right in order to best route merchandise to its next destination.

From there, each unit gets routed down one of three paths that lead to reselling, recycling or disposition. But the paths are far from direct lines. The path that ultimately leads to reselling has many forks and the exact route is determined by things like how much and what type of refurbishing is needed, the type of necessary cosmetic cleanup, etc. Similarly, the recycling path can be equally complex with several disassembly and material extraction processes involved. And as previously discussed, regardless of where the unit ends up, it must go through complete and verifiable data wiping.

Efficiencies can be gained throughout this process by identifying where the paths can share resources with existing forward logistics infrastructure. The speed at which the merchandise moves through the reverse chain is slower because it is less streamlined, and that makes it a unique operation distinct from forward logistics. However, manufacturing facilities have skills and processes that can sometimes be reversed to perform these functions using existing resources. In the simplest example, the people and equipment used to assemble products can generally be used to disassemble them.

With so many possible places to go and processes to go through, keeping track of returned products is vital. In forward logistics, tracking is generally performed by pallet or case, but returned products must be tracked individually as discrete items. The record of each item should not only be able to reveal the units physical location, but also every decision that has been made about it along the way that has advised its journey and even what facility was used for its production. As more connected items make their way back through supply chains, tracking will very quickly shift from a “nice to have” to “necessary for success.”

Geography and labor are also enormous factors in managing a process that is inherently more time consuming than forward logistics, but more importantly, involves products that depreciate quickly and can lose significant value by spending extra time in the supply chain. Despite the complexities that can be involved, keeping processes as streamlined as possible and minimizing transportation time are vital aspects to maximizing value in secondary markets. Calculating savings associated with geographies should consider the cost—and availability—of labor to perform all necessary functions. Data wiping requires experienced technicians and security personnel, and high cost labor like software engineers can be needed for some processes.

Finally, asset disposition is a topic that has continued to emerge and is ripe to begin maturing, escalating its strategic value in long-term planning. Pressures from consumers and governments alike are driving motivation to keep as much material as possible out of waste streams. It is not unthinkable that the next decade could see legislation that makes manufacturers directly responsible for the proper disposition of every material in every product they sell, and that makes taking control of end of lifecycle logistics a sound risk management strategy.

Reasonable preparation for encroaching environmental change

Preparing for an uncertain future is uncertain business. Is Gartner right? Do we have less than five years before we are buried neck deep in connected devices? While that may be difficult to know, it is fairly certain that more connected devices appear on store shelves each year and this connectivity has crossed the threshold of traditional technology devices. Consumer attitudes on privacy and data ownership show no signs of softening, so it is advisable for manufacturers to begin taking steps now that assume at least some degree of reverse logistics for a large percentage of the connected devices they sell.

Consumer behavior driven obsolescence, thriving secondary markets and highly sensitive user data have all presented large challenges for the cell phone industry to overcome. That makes it the best model to serve as an archetype that all manufacturers of connected devices can learn from—paving the road to future profitability. The Internet of Things is primed to revolutionize manufacturer relationships with customers and elevate the customer-facing nature of reverse logistics. Be ready for it.