Pricing Problem
Logistics and supply chain management are important processes in an organization. Organizations may face various problems related in implementation of these processes. Closed loop supply chain is a network of supply chain, which includes the processes of return. In this, the producer has the purpose of gaining additional value and then integrates all the processes of supply chain system. Closed loop supply chain deals with the recovery of products from the customers in lieu of value and further recycling the product in order to get profit through the processes of quality checking as well as refurbishment. Closed loop supply chain involves various issues related to pricing, profit maximization, pricing decision and other problems related to costs. There is the discussion about different costs, which may occur in the process of supply chain management in the organization. This report includes the analysis of these above-written issues by using their supporting and contradicting factors.
The pricing problem in closed loop supply chain is because of one retailer and a dominant manufacturer. The variations of the remanufacturing cost and collection cost of user products are very uncertain in the closed supply chain system (Zheng, Wang, & Liu 2015). High transportation and logistics costs are the problems associated with closed loop supply chain. Once a product reaches the end user from the manufacturer, it involves a cost. Again, when the customer returns the product, it again involves some transportation cost. Thus, the cost is enhanced considerably.
Cost in information sharing in the supply chain is a big issue (Christopher 2016). The increased dependence on information technology for sharing of information has led to enhancement of costs (Peppard and John 2016). This leads to managerial and organizational barriers. For setting effective communication in the supply chain, the organization has to use advanced technologies, which increase the cost of organization.
Apart from this, Information sharing in supply chain management may face various challenges. From all the barriers, confidentiality of the shared information, reliability, cost of technology advancements and accuracy and timeless of the information are intense challenges for the closed loop supply chain. They have to use various security and safety measures to secure the information. In current business environment, the firms are hiring technology experts to deal with the issues related to the information sharing and information security. It also enhances the administrative expenses of the organization.
Apart from these problems, the information sharing may have benefits to supply chain operations. These are the supporting factors for this issue. The possible advantage of information sharing for the manufacturers is the reduction in cost and inventory. Zhao et al. stated that if the information sharing is utilized very effectively and efficiently in the organization’s supply chain, then manufacturers will be able to decrease the costs of inventory by 5 to 35.
The problem of symmetric and asymmetric information is quite prevalent in closed loop supply chain. The suppliers always have private information regarding their odds of experiencing any sort of disruptions. In this context, Wei, Govindan, Li & Zhao, 2015 stated that retailer and manufacturer make the decisions about retail price, whole price under asymmetric and symmetric information conditions. The authors analyzed this issue using the game theories and models. These theories can be used by the retailers and manufacturers for dealing with both types of information.
Cost of Information Sharing
When an organization designs its Closed Loop Supply Chain Model, then it may have to face the issues related to refurbished products. According to Rao, Gaur and Amini, 2016, product refurbishment operations in reverse supply chain face quickly changing demand because of the growing number of products with reduced lifecycle (Gaur, Rao, & Amini, 2016). In this way, capacity planning works as a significant strategic issue for profitability of the closed loop supply chains. Supporting the above information, Bhattacharjee & Cruz (2016) stated that under the conditions of the increasing waste, the organizations require including the decision strategies for environmental sustainability. This comprises of different higher prices or costs of recycling and remanufacturing of old products. There are so many organizations, which have focused on the management of waste. Therefore, it is vital for the businesses to make a view of the closed loop supply chain, which includes the whole product life cycle from first phase to end of its life. The products, which cannot be refurbished, require being recycled (Bhattacharjee and Cruz, 2016). It increases the prices of products. So, such organizations should consider the second-hand value of the products in market. These increased prices and costs can impact the customer’s perception about the refurbished products. It in turn affects their buying decisions about these products, which can influence the company’s sales.
Location inventory issue aims to combine the strategic supply chain designing decisions with operational and strategic inventory management decisions. The organizations have to manage the new and returned inventory at different inventory locations, like; retailers, reverse and forward distribution centers. For effective inventory management, the organizations have to integrate all the parties like; supplier, manufacturer and retailer (Mangan and Chandra 2016). It is very difficult for the organization to establish this integrated inventory model, where the producer of goods inspects all the returned products, which are collected from the end-customers and categorizes these items as waste or recyclable. In this situation, the manufacturers have to fulfill the demand of customers and retailers. The companies sell the refurbished products at reduced price. Thus, it affects the pricing of the products.
Inventory management has been a critical factor in logistics (Mangan and Chandra 2016). The problem of inventory management in the close loop supply chain is because of the lack of forecasting. The issues of inventory management occur mostly at the retail stores. The inventory policies also have adverse effects on the pricing of the closed loop supply chain. The recession is another factor that is responsible for the activities of this management and the various types of pricing. Pricing of old products is also a problem in closed loop supply chain. The most significant factor to consider in terms of pricing is the huge amount of money invested in inventory for the manufacturing and retail organizations. When there is excess inventory, the money is stuck up and the product value is reduced. According to Xu, Liu, Li and Zhou (2016), the disruption on closed loop supply chain refers to the damages to organizational personnel, internal equipment and systems in organization. Disruption is also an important factor, which can impact the pricing of new and remanufacturing products (Xua, Liub, Lid & Zhoue, 2016). Whether it is damage to the production machinery or equipment or business personnel, but the major point is that it influences the cost of production of new products and other products, which are under remanufacturing in closed loop supply chain system. The reason behind this that disruptions impact internal supply chain system that is very different from supply of products.
Refurbished Products
Making proper and effective pricing decision may have impact on the closed supply chain in the organization. Pricing decision is to make decision regarding, what producers may get in exchange of their product. It is very important to the organizations because it shows assessment of the marketers about the value, which the people see in the products and services and what they are desiring to pay for that product (Xua, Liub, Lid & Zhoue, 2016). There are so many factors, on which pricing decision relies upon and these factors impact the closed loop supply chain system. Pricing decision issues in closed supply chain has attracted interest of various researches. Closed loop supply chain contains various factors, which have great impact on decisions of members. Primarily, this problem exists where uncertainty and randomness exist together.
When any product comes under the supply chain process, the manufacturer decides the prices of products for the wholesalers and retailers. If they think that prices of the products are affordable and reasonable then they will buy their products. In same manner, retailers decide the prices of products for their customers. If this pricing decision will be improper then it will impact the sale of products. In the closed loop supply chain, there are two different types of supply chain. One is forward supply chain and another one is reverse supply chain. In the reverse supply chain, the customers can return the products after using it. The organization collects the product from consumers. Therefore, the return rate of these products is influenced by the willingness of the customers and willingness of customers is impacted by the prices (Wei, et al, 2015). In another supply chain, i.e. forward supply chain, the retail prices and wholesale prices are affected by the collection price. So, the organization should use some strategies for managing the retail price, collecting price and wholesale price for closed loop supply chain system.
In the business environment, the customers decide that whether to buy the product or return the product, while the seller decides the quantity, price and amount of refund. In the situation of product return, the organizations develop two types of return policies, i.e. full return policies and partial return policies. Both the return policies have a large impact on the performance of supply chain. According to the author, product return policies can change the incentives under supply chain contracts, for example; buy backs to manufacturers (Xu, 2016). There are various return and pricing policies under many supply chain contracts in closed loop supply chain, in which the suppliers of organization have more bargaining power in comparison to retailer. Return policies can cause and contribute to the blue whip effect in the supply chain process. Implementation of free return policies can raise an issue in closed loop supply chain system. Customers can intentionally exaggerate the demands because of shortages and then they can cancel when the supply of products becomes adequate back, without any return amount, retailers would continue to overstate their needs, demands and cancelled orders; ensuing in surplus material. Although the blue whip impact is the common issue in the supply chain management. By understanding these reasons behind blue whip effect, the managers can find the strategies to lessen the effect.
Location Inventory Issue
Pricing decision also relies on the product selection in the supply chain system. If the product selection is not proper, then there is a high chance of getting returned or the product may not be selected by the customer for purchase. The product valuation is lowered due to this phenomenon (Wei, et al, 2015). Sometimes, the original manufacturers are grateful to take the products returned from the customers after the end of use of the products. There are various other companies, which work as third party companies. These companies collect the used products to make their own profits. These organizations choose only those products, for which the revenues from recycling and reselling of the products are estimated to be higher than the cost in the collection process.
Gao et. al. (2016) analyzed in their article about the impact of acceptance of customers of the direct channel on pricing decisions and estimated profits of closed loop supply chain. Furthermore, the results in the article have shown that when the customer acceptance changes to a certain level, the retail price, wholesale price and retailer’s profits will decrease with the increase in this variable. Damaged inventory and inaccurate inventory counts lead to financial problems to the companies associated with the supply chain activities. Location inventory costs are the problems for most of the companies that occur because of the lack of proper planning (Gao et al. 2016). The capacity issues in the warehouses often act as problems for the logistics companies. Storage becomes a problem and lot of products is left in the warehouse that reduces the revenue of the companies. At the warehouse, if there is very much stock then it can damage the previously kept stock in the warehouse. There may be loss of products. It impacts the capacity of the organization to make effective decisions regarding pricing. So, it needs effective and proper planning to manage the storage at the warehouse of the organization. Thus, these are the pricing decisions issues, which can impact the strategic performance of the supply chain management of an organization.
The problem with the channel members is that they are not motivated enough to comply with the principals when the market is very tough (Kashyap and Murtha 2017). In the closed loop supply chain, distribution network design plays an important role for improving the effectiveness of system. Ineffective management of distribution network design and product flow can impact overall supply chain operations of the organization. The problem of channel members arises when there are not enough people to support the distribution process. There may be the conflict issues among the channel members, which can impact their work and roles in the supply chain system. The reverse channels of distribution are looked as the logical extension of the function of marketing. This can create the physical and non-physical gaps between consumers and manufacturers (Xu et al. 2016).
Another issue can be that when another member affects the behavior of one marketing channel member. There can be another situation where one member is showing power or authority over another. This affects the marketing channel. There are cases of horizontal and vertical conflicts among the channel members.
Inventory Management
There is a problem of Bullwhip effect regarding the distribution network of supply chain when there is deviation between the manufacturer and the end-users (Xu et al. 2016). Longer the distribution network more is the transportation costs. It also leads to more delivery time in forward as well as backward supply chain systems. There can be lots of variability in the distribution network when the channel is very long as it involves many organizations, facilities and activities. It can cause the loss of the customers, as they may feel that the services and delivery of the company are not good. So, they can switch to other competitors. The problem of blue whip effect can also be caused by the order batching, demand forecast updating and variations in prices.
The problem of optimal vehicle routing has become an integral part of closed loop supply chain that affects the productivity improvement for the organizations (Wang et al. 2016). The problem with the vehicle routing system is due to a set of identical vehicles, a central depot node, customer nodes and a network connecting the customer and the depot.
There can be problems with product returns in the closed loop supply chain (Ferguson and Souza 2016). When the members associated with the supply chain management, do not follow the rules of the effective return policies, problem arises in the system during the time of product returns by customers (Pagell and Wu 2017). Lack of development of appropriate gate keeping, disposition and avoidance policies lead to various issues regarding return policies. A customer is forced to return a product when either there is any defect in the product or a different product has been delivered (Sekaran and Roger 2016). The problem of return comes into play in these situations. Return avoidance has been a critical component in the closed supply chain. Returns of products increase when there is lack of proper utilization of SKU (Kembro, Veronica and Granit 2017).
Gate keeping takes into consideration the screening of both return request as well as return merchandise (Landin and Helena 2015). The problem with gate keeping arises when the policies are not followed properly in an organization. There can be issues when the process of physical screening of the merchandise is not properly done at the customer locations. The result is that unwarranted merchandise enters the distribution channel. Disposition of goods requires proper determination. It is done only after they have been received. Lack of this determination policy leads to problems (Braglia, Castellano and Frosolini 2016). The other sources of problems are when performance expectations and metrics for the process of return management do not align with the supply chain strategy and the different functional areas.
There are certain risks associated with strategic alliances that affect the profit of the alliances. These can be performance and relationship risks. The issues related to the strategic alliances can be because no one is ready to work on shared risks and rewards in the supply chain (Pearlson, Carol and Dennis 2016). It is not always easy to establish relationships based on rewards and shared risks. If the organizations are successful in forming strategic alliances and making investments in other companies, then any of these activities can have negative effect on the outcomes of business operations, especially when the operations of acquired company are being incorporated. It is also a problem that integration of purchased business will lead the loss of key personnel from the companies or it can also lead to the loss of loyal and other customer of the organizations. It can impact the profit earning capacity of all the organizations in the strategic alliance. In the situation of alliance, the profit from supply chain activities would not be divided to one organization solely; it will be allocated to all the organizations in alliance.
Third or fourth party logistics can be examples of this. Like; a company hires the third party logistics for increasing efficiency of supply chain system, then it has to face some risks, like; increase in the costs, leakage of the information and data and sharing of profit. Thus, it can impact the profit maximization in closed loop supply chain system.
There is a problem of decentralized decision making in closed loop supply chain as the companies associated with the logistics system are not truly empowered and integrated. There is no support across all the supply chain functions, which are not supervised by the companies involved in the supply chain activities. Many companies have not focused on integrating the supply chains. The companies do not view the supply chain organization and the capabilities of the company as a single resource. This is the reason why complications arise in the operations of the supply chain activities. The companies face challenges in decision making because of the inefficient leadership.
Another problem that can affect profit maximization in the closed loop supply chain is the volatility and the uncertainty of the supply chain. The enhanced commoditization of products affects the supply chain beyond the demand volatility. Selection and evaluation of supplier is also a vital issue in supply chain management, in which two factors, i.e. product quality and procurement quality are important. Other factors, like product delivery time and behavior of customers against quality of product are uncertain.
Costs are very important and crucial factors in the logistics and supply chain management system. At every stage of supply chain, costs play an important role. There are different costs, which can occur at different level of the closed loop supply chain processes, such as; transportation cost, cost of information sharing, product return cost, system operating cost and elimination of RFID cost. Mainly, the supply chain process includes a manufacturer and a retailer. In the closed loop supply chain system, the changes of the production cost and collection cost of the products are uncertain (Monczka et al. 2015). Logistics cost and high transportation costs are major problems connected with the supply chain. When the products reach to the wholesaler or retailer, it includes a cost of transportation. If there is any issue with the product, the customers return back the products, and then it again charges transportation cost. In this way, the cost is increased accordingly. So, it indicates that there are so many costs associated with the supply chain management system of any organization. The issue of determining supply chain costs has been identified from last few decades. The organization faces the problems in choosing the combination of supplier chain partner and distribution channel networks, which will be most profitable for long term. Distribution cost is the dark zone through the early 1960s. Managers in distribution department had prominence over the costs of particular functions, like; transportation or warehousing.
Obyrne (2016) stated that apart from these costs, there may be some types of transaction costs, which come from the complicated processes and from poor information sharing. The process of transaction includes various processes like; placing an order, accepting the order, managing the invoices and managing the delivery of orders. The organizations have to spend money on the recruitment of personnel for handling all these activities (O’Byrne, 2016). Due to these issues, the organization have to implement advanced technology, like; e-commerce, which can help in solving some of the issues. But installation of new technologies in the organization can increase the costs of organization. If the companies are not able to easily access the information about their suppliers, they cannot make the procurement decisions effectively. The organization can use the buyer community and online supplier management method to reduce the procurement costs.
Operating costs are under pressure by increasing freight and energy costs, fuel costs, raising labor rates, technology, and increased number of global customers, laws and regulations and increasing prices of goods and commodities. This is one of the biggest challenges, which the organizations are facing in managing its supply chain operations (Mangan and Chandra 2016). For satisfying the needs and expectations of customers, organizations have chosen to move their manufacturing operations to low cost countries for reduction of their indirect and direct costs. But it is not possible, because having international suppliers can increase the complexity in the operations, which can come from the delayed delivery times. Today, the customers not only desire for the good quality products at lower and affordable prices but they also need their ordered products on prefixed time.
There are so many businesses, which are trying to implement the old-fashioned and technologies to the supply chain operations. Generally, the existing systems are not able to meet with the modern and global demands. Furthermore, another issue is involvement of 3PLs (Third Party Logistics). Third party logistics is the fast growing business in today’s era. Many of the large organizations are using these services to decrease operational costs, make the business operations easier and enhance flexibility of supply chain operations. Apart from these benefits, the organization has to face many problems with by using these services. If there will be involvement of the 3rd party logistics in the supply chain, then there can be increase in the costs. The organization hires the third party logistics by spending a higher costs, which in turn help it in improve the supply chain process, reduce overall costs and enhance the sales of organization (Huang, Hua and Wang, 2016). However, there are various risks, associated with the 3rd party logistics, like; underestimation about the cost of management, leakage of private information, negative impact on reputation, loss of supply chain prominence etc.
Furthermore, another issue in closed loop supply chain is product return rate. When any product is returned from the end-customer, then it affects the value and quality of the products. Sometimes, organizations make efforts to eliminate the costs of RFID (Radio Frequency Identification). They did not use this system in their supply chain operations. It can cause more costs to the organization. For example; Wal-Mart is using RFID system for boosting its supply chain system and it has most successful supply chain system in the world. Thus, implementation of RFID can reduce the costs of organization and it can give higher returns to the organization. RFID can improve the effectiveness and efficiency of the supply chain management system of organization. Though the implementation of RFID is not without the risks and costs, but many organizations in distribution, manufacturing and distribution have attained 200% return on investment (O’Byrne, 2016). So, if the firms try to eliminate the cost of RFID in supply chain, it may have adverse impact on the overall closed loop supply chain system. By using RFID, one can eliminate the errors in data entry and tracking and inventory mistakes. In the absence of RFID, the companies have to hire costly labor to resolve these issues. Thus, the organizations are facing various challenges in reducing the costs of the supply chain management system. They are spending money in terms of different costs, like; transportation cost, administrative costs, operating costs, technology costs, recruitment costs and other small costs. These costs may impact the profits and revenues of the organization against it competitors.
Conclusion
Thus, the report has included all the problems related to closed loop supply chain, like; pricing, pricing decisions, profit maximization and other costing issues. The report demonstrates that organizations are facing various issues in implementation of supply chain system. They have to spend more money via different costs, like; transaction cost, transportation costs, collection costs, recruitment costs, technology costs etc. These problems are affected the profits and revenues of organization in the phase of recession. The report includes all the problems by discussing their supporting and contracting factors. All these issues may impact the supply chain management system of the organization adversely. The organization should implement some strategies to mitigate the issues and gain competitive advantage in this business environment among competitors. It is important for an organization to deal with all these issues to stay in this competitive business environment.
References
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