Economies of scale and postponement as critical factors to the effectiveness and efficiency in reverse logistics systems (RLSs)


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Economies of scale and postponement as critical factors to the effectiveness and efficiency in reverse logistics systems (RLSs)
    Economies of scale and postponement as critical factors to theeffectiveness and efficiency in reverse logistics systems (RLSs) Francisco Gaudêncio Mendonça Freires  Universidade Federal da Bahia, Brazil (email of author   )  Fernando Ribeiro de Melo Nunes  Universidade Federal do Ceara, Brazil (email of author  )  Fernando Ribeiro de Melo Nunes Filho  Universidade Federal do Ceara, Brazil (email of author  )   Abstract  This paper deals with the influence of economies of scale and postponement on theefficiency and effectiveness of reverse logistics systems   (RLSs). It is a qualitativeapproach over two case studies carried out in Portugal and Brazil dealing with end of life tires. O ne deals with management system while the other deals with the reverselogistics system. As conclusions, the efficiency of RLSs is aided by economies of scale. Postponement has positive effects on efficiency by increasing the system capacityreducing logistics costs which indirectly leads to economies of scale, having a positiveinfluence on the effectiveness of RLSs. Key words: reverse logistics systems, economies of scale, postponement 1: INTRODUCTION   Business performance management was mainly financial for many years. Nowadays,however, models such as the Balanced Scorecard (BSC) are designed to monitor theimplementation of the strategy outlined for the company, promoting their re-evaluation,   from strategic discussions, but keeping the financial indicators and also including non-financial indicators, united in order to form a system of evaluation.Holmberg (2000) states that companies that have succeeded in managing the performance of their supply chains thought about chain as a whole and sought resultsshown in the revenue growth, asset utilization and cost reduction, in other words, thestrategic themes. When talking about performance management, you cannot leave asidetwo concepts: effectiveness and efficiency. Both are components of performance, whichare addressed in different ways according to the subject or discipline to be investigated.According to Harrington (1993) and Neely et al. (1995), the effectiveness refers to theextent to which the outputs of the processes or sub-processes reach the needs andexpectations of customers. You could say that effectiveness refers to produce the ‘rightthings’ . Organizations must meet the needs of customers and then produce theappropriate product (product being a good or a service). To measure the effectiveness of an organization, one must measure the results achieved by the processes. Efficiency is anindication of how resources are used by the organization (resources are minimized andwastes are eliminated) to achieve efficacy (Harrington, 1993; Neely et al., 1995). Insim  ple words, efficiency is doing ‘ things righ t’ . Once the organization found the needs of its customers, it should produce the product/service using minimum resources possible.Like any logistics system, the RLSs must be effective and efficient. Logisticseffectiveness and efficiency can be approached from several perspectives and be relatedto several issues. In this section, the determinants for logistics effectiveness andefficiency will be described and discussed. The aim is to settle specific issues related tothe effectiveness and efficiency of reverse logistics systems (RLSs) that will beaddressed throughout this work. As logistics is a vast topic and includes a wide range of issues and aspects concerning performance management, three areas were chosen to beinvestigated afterwards.The discussion of this work is centered on two principles covered to a certain extent bythe literature on logistics. The principles presented are economies of scale and the postponement  , both associated with the push strategy. The two principles aim theincrease of logistics effectiveness and efficiency in terms of cost reduction, increased   resource utilization and customer satisfaction. Due to the descriptive and partly analyticalinterest of this work, we intend to answer a question: What is the influence of economies of scale and postponement on the efficiency and effectiveness of RLSs?  Economies of scale and postponement relate to several decisions of interest to thelogistics, such as variety of products, location of factories and warehouses,modularization of products and process reengineering. Both principles aim the increaseof logistics effectiveness and efficiency in terms of cost reduction, increased resourceutilization and customer satisfaction. Therefore, they work as determinants for logisticseffectiveness and efficiency in logistics systems (direct or reverse).The discussion throughout the paper will be based specifically on reverse logisticssystems for waste tire. The choice for this type of product is due to the fact that waste tirerepresents a large environmental problem both within Brazil and globally and also present challenges in terms of achieving economies of scale and adoption of  postponement. Case studies were conducted in Portugal and Brazil as part of thecollection of data from a doctoral project. Findings related to these two principles areanalyzed and the answers to the research question are presented in the form of  propositions. 2: ECONOMIES OF SCALE AND POSTPONEMENT   Both principles, economies of scale and postponement were largely related to the directdistribution of logistics systems. As the main objective of this paper is the investigationof RLSs, basically the collection and post-collection systems, it’s possible to perceive thecollection system as an inverted image of the distribution (Figure 1).In general, property recovered or recycled must compete on price with virgin materials or new products. Thus, the reverse channel development with a focus on cost reduction becomes necessary for these prices to remain low. The possibility of achieving thisreduction passes through economies of scale in steps of collecting, sorting, and especiallyin transportation. In order to achieve these savings, companies involved in the reversechannels should have focus on the volume of collected and processed material. In thesame line of thought, Stock (1998) argues that economies of scale, in respect to volumes,   are important for the viability of reverse logistics programs, both for an individualcompany and for the partnership between businesses. Figure 1: Collection systems, as   reverse channels of distribution.   MRF is theabbreviation for materials recovery facility, where products pass through the earlystages of the recycling process (Source: Jahre, 1995a).  Economies of scale are closely related to push strategies. This type of strategy is basedon demand forecasts horizons established by long term planning. Push strategies aremore suitable when opportunities to reduce costs due to economies of scale anduncertainty of demand are low. For certain RLSs, a push strategy demonstrates to be themost appropriate in the collection stage, since the service level at this stage is lessimportant than the reduction in costs that results from economies of scale (especially intransports).Transport costs are especially important for the discussion of economies of scale. Thereis little margin in the recycling business and product recovery and the costs associatedwith transportation are comparatively high relative to direct logistics systems (Stock,1998). Regarding the possibility of centralizing the operations of recycling or recovery,the author states that although such operations benefit from economies of scale, Suppliers Reverse flowDirect flow ClientsRecyclingmarketsHouseholdwaste   transportation costs may rise because of the distances between the sources, processing/production and consumer market.The postponement principle was studied by Jahre (1995b) with respect to RLSs for household wastes. In this context, postponement means not making any selection of waste collected until the latest possible stage. The gains are in volume, in terms of costsreduction and opportunity to make your selection according to the existing demand bythe output fraction. Basically, the postponement principle for RLSs is the same as in aform postponement in production. In his doctoral thesis, Jahre (1995a) arrived at twoconclusions regarding household wastes:    In areas of low population density, recycling programs for household wastes shouldinclude fewer fractions and the selection should be done at the source (speculation),while;      In areas of high population concentration, recycling programs should include severalfractions with the separation of waste held in central units of recovery.   The first type of structure results in low costs and low service levels, while the secondstructure achieves high service level and keeps costs down. Therefore, the system choicewith respect to the principle adopted (   postponement or speculation) should be conducted by the supplier structure.The principle of economies of scale is of special interest to investigate the performanceof reverse logistics systems because the focus on costs is both relevant to the logisticsand how to produce. Economies of scale are applicable to a number of areas, of which production was the focus for a long time, both at the level of corporations as at the levelof chains.With respect to the postponement principle  , a basic point is the trade-off between risk reduction through the postponement of irreversible operations until the point wherecustomer demand is known and costs reduction happen through, for example, economiesof scale. According to Van Hoek (1999), the postponement principle is generic in nature,for being applicable to different parts of a company or supply chain and to be related todifferent criteria, such as shape and time. In summary, the main purpose of the principle
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