Bsc(B) 6th Semester

Author: Aleksandar Marinov

Supervisor: Marcel Turkensteen

Bachelor Thesis

Formulation of a basic facility model, based on the Danish Deposit Law, and the

challenges in doing so

Aarhus BSS, University of Aarhus

4th of May, 2015

Abstract

This bachelor thesis tackles the topic of reverse logistics and the formulation of a network

design using a basic facility model. The reason for covering reverse logistics is that it has been

shown in case studies to be a factor in increasing the profitability of a company, while also

having a positive impact on their environmental footprint. Due to the limited amount of case

studies available it is difficult to find the right way to tackle the problem. Also reverse logistics

do not appear in financial statements so it is hard to obtain the right data about the profitability

and the costs of running such a network. The use of a basic facility model is one way to create a

reverse logistics network. To formulate the model, the working system by Dansk Retursystems

A/S for glass containers has been used as an inspiration. The approach was to do a theory

review on the subject, covering relevant information such as internal and external factors for

implementing reverse logistics, legislation and network design. Using that a basic facility model

was formulated and the obstacles in obtaining the data were touched upon. The end result is a

potential framework for the implementation of a reverse logistics network for beverage

containers, a description of potential extensions to the model and an explanation of what

information is difficult to obtain.

Key words: Reverse logistics, network design, recycling, mixed integer linear programming,

basic facility model, data collection

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Table of Contents1. Introduction..............................................................................................................................4

1.1 Research statement............................................................................................................6

Formulation of a basic facility model, based on the Danish Deposit Law, and the challenges in doing so....................................................................................................................................6

1.2 Structure.................................................................................................................................6

1.3 Methodology..........................................................................................................................7

1.4 Delimitations..........................................................................................................................7

2. Reverse logistics..........................................................................................................................8

2.1 What is Reverse Logistics?....................................................................................................8

2.2 The importance of reverse logistics.......................................................................................9

2.3 Terminology........................................................................................................................10

2.4 European Legislation concerning reverse logistics.............................................................11

2.5 The value of reverse logistics..............................................................................................13

2.6 Reverse channel choice........................................................................................................15

2.7 The returned products..........................................................................................................16

2.7.1 Product composition.........................................................................................................16

2.7.2 The product use pattern....................................................................................................17

2.7.3 Deterioration.....................................................................................................................17

2.8 Types of recovery................................................................................................................18

2.9 Obstacles with remanufacturing and recycling....................................................................20

3. Network design.........................................................................................................................21

3.1 Product recovery network design........................................................................................22

3.2 Design of the collection system...........................................................................................23

3.2.1 Collection system design considerations..........................................................................23

3.2.2 Collection design aspects..................................................................................................25

3.2.3 Features of vehicle routing models for product recovery.................................................26

3.3 The environmental perspective............................................................................................27

4. Danish Deposit law....................................................................................................................28

4.1 History.................................................................................................................................29

4.2 How it works........................................................................................................................29

5. Basic facility model...................................................................................................................31

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5.1 Structure of the reverse logistics network...........................................................................32

5.2 Characteristics of a network for refillable containers..........................................................33

5.3 Mixed integer linear programming (MILP).........................................................................34

5.4 Mathematical formulation of a basic facility location model..............................................34

5.5 Explanation of the model.....................................................................................................37

5.6 Extensions to the model.......................................................................................................38

5.7 Relevant data for the model.................................................................................................39

5.8 Uncertainty with data collection..........................................................................................39

6. Conclusion.................................................................................................................................40

List of references:......................................................................................................................43

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1. Introduction

The 20th century has presented great leaps in the level of prosperity, quality of life and

technological development. This has been supported by governments, because the economic

model of choice has been one that emphasizes growth. For this sustained growth to happen, there

has to be an equal increase in the levels of the resources used and products created on a yearly

basis. The situation is further complicated, because a lot of the goods come from around the

world and that puts even more strain on finite resources. Industrial hubs, such as China, Malaysia

and Indonesia, have made it possible to increase production, keep the costs and allow for mass

produced products at an affordable price for the end user. In order to accommodate all this

movement of goods companies had to develop intricate supply chains and logistics

infrastructure. This has worked exceedingly well for a lot of companies and the benefactors have

been the industry and consumers.

However all of this consumption leads to a similarly high amount of products and materials,

some of them useful and reusable, that often would be disposed of incorrectly and end up in a

landfill. Some companies have seen the value of these disposed of goods and have created

reverse logistics networks in order to implement those products into their existing logistics

network. Such a market driven approach has not shown to be very popular, because a lot of these

products would present low profit margins and companies would label them as waste (Rogers

and Tibben-Lembke (2001)). The economic benefits would be the driver for manufacturers, but

the environmental benefits are the reasons for the push of governmental organs to make use of

these disposed of products. The European Union has been, and still is, very proactive in setting

up legislation to enforce rules on recycling and remanufacturing. This has resulted in companies

being forced by law to take responsibility about their production. A working example of this is

that car manufacturers have to take back their vehicles after their useful life has finished. This

made manufacturers, wanting to sell cars in the European Union, to favor design decisions

increasing the recyclability of their vehicles.

This combination of a market driven approach and legislation has created the need for efficient

and effective reverse logistics flows. By implementing reverse flows, companies can manage the

collection, inspection and reuse of their products. This field of research has become a popular

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subject in the nineties, where the most widely used definition for reverse logistics was created by

Rogers and Tibben-Lembke (1999).

Most of the papers have focused on the economic benefits and network design, but there has

been some papers on the environmental benefits- Jayaraman et al. (2007). This aspect is

important, because legislation has been pushing reverse product flows for that very reason. These

laws have been put into place to try and combat the adverse effects on the environment which are

an effect of the huge needs for new raw materials and production. Senge et al. (2007) shows that

climate change, soil erosion, pollution and waste, water overuse, and resource depletion are all

part of the unsustainable ways of the industry. With the implementation of reverse logistics, the

impact on the latter three would be lowered, thanks to the lower demands for new raw materials.

That would indirectly influence the first two and help create a more sustainable and

environmentally friendly production.

The Danish Deposit law presents an example of how reverse flows can be implemented to have

both an economic and environmental benefit. This law deals with the recycling and reusing of

glass bottles that have been used as beverage containers. A paper by Birgitte Kjær (2013) written

for the European Environment Agency has used a life-cycle approach to evaluate the

environmental benefits of better municipal waste management seen in Figure 1.

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Figure 1. GHG emission from Municipal Waste Management in Denmark, source: Birgitte Kjær

(2013) EEA

The avoided Greenhouse gases from recycling are quite striking and also more than those created

during the process itself. Another way to calculate the avoided GHG emissions is to use the

recycled content tool, made by the US environmental agency. By inputting the tons of recycled

glass from 2009, from the above mentioned paper, the avoided GHG emissions amount to

59,210.50 Million tons of CO2 equivalence for 98,000 tons of glass. The recycling of glass has

proved itself to be also be profitable, where Dansk Retursystem A/S (the sole entity dealing with

recycling and reusing of glass in Denmark) is reporting a turnover of DKK 1.56 billion for 2013

(http://www.dansk-retursystem.dk/)

1.1 Research statement

The aim of this bachelor thesis is to formulate a basic facility model for a reverse logistics

network and to present the challenges in doing so. The basic facility model has been taken from

the research of Fleischmann et al. (2001) The data used for the formulation would be based on

the publicly available articles for the Danish Deposit Law. Thus the research statement would be

as follows:

Formulation of a basic facility model, based on the Danish Deposit Law, and the challenges in

doing so.

1.2 Structure

The topic of reverse logistics is a broad one and also one where some of the terminology might

make it confusing to understand. To handle this the paper is divided into four parts, each

presenting as clear a picture of the topic as possible. The first part would cover the basics of

reverse logistics. The chapter would begin with giving the most widely accepted definition and

explain the importance of the topic at hand. Before anything else some of the terminology would

be explained, because as noted there are competing terms in the literature. Following that would

be a review on the European legislation. The rest of the chapter would present the motivators,

obstacles and more in-depths aspects of reverse logistics.

The next part would take the knowledge that has been presented previously and then expand

upon it with the information about network design. With the use of different research papers a

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thorough explanation of the whole system will be given, with respect to product recovery,

collection and features of vehicle routing models.

The third part will present the important aspects of the Danish deposit law and how it works. It

will present a reverse logistics system in the real world and serve as part of the data for the

formulation of the model.

The last part will take the preceding three and formulate a basic facility model. While doing so

the challenges of creating such a model would be discussed.

1.3 Methodology

Reverse logistics is a relatively new field of study and it has not been utilized enough to warrant

full university books on the subject. This is why a selection of articles have been used on the

topic to get a complete understanding on the issues discussed. Papers by De Brito and Dekker

(2002), Beullens (2004), Fleischmann (2001) and Rogers and Tibben-Lembke (2001) have

constituted the majority of the information needed for constructing this thesis. Other authors and

articles have been used and cited, but they have had limited input into the creation of this paper.

1.4 Delimitations

While this paper is going to present the topic of reverse logistics, it is going to focus more upon a

certain theoretical model- Basic facility model. In this way more complicated models, such as

mixed integer modelling approaches will not be discussed. The scope of the paper is not to give

an answer to the model, but more to formulate and present the difficulties, and challenges, that

are present in doing so. When the model is done it is not going to be made as an alternative to

already existing models in Denmark, but use the information from Danish articles to formulate

the above mentioned model.

The audience for this paper is expected to be of academic background, thus general economic,

business and marketing terminology will not be explained. Also the notation and structure of the

mixed integer linear programming will not be explained, due to the scope of the paper not being

for statistical research.

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2. Reverse logistics

2.1 What is Reverse Logistics?

Reverse logistics is a topic that has been studied for far less time than forward logistics, with the

first papers coming up in the mid-70s with papers from Guiltinan and Nwokoye in 1974.

However that field of research didn’t have a big growth of popularity due to the focus on

improving the established logistics flows. This is evident by the time it took for the first official

definition of reverse logistics to be established by the Council of Logistics Management (Stock,

1992). This definition lead the way for research in the next decade, but it was still a flawed term.

The problems that came with the definition was that it had a very general tone to it- the direction

of the flow was not mentioned which would lead to confusion. Over the next decade there have

been various developments in the field. Most notably would be the paper of Thierry et al. (1995)

where the topic of product recovery management is brought up as follows:

“… the management of all used and discarded products, components, and materials that fall

under the responsibility of a manufacturing company.”

This development is of particular interest due to the fine explanation of how product recovery

works and how it can be implemented in the already existing supply chain.

The most notable, and consequently most used, definition came from Rogers and Tibben-

Lembke (1999) and then was slightly revised by the European Working Group on Reverse

logistics ( RevLog), formally presented in the paper of De Brito and Dekker (2002), which states

the following:

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“The process of planning, implementing and controlling flows of raw materials, in process

inventory, and finished goods, from a manufacturing, distribution or use point to a point of

recovery or point of proper disposal”

This proposed definition has given a good view over what reverse logistics currently entails. The

structure is being presented in the form of the activities that are needed- “planning, implementing

and controlling flows”- the flows that are being used- “raw materials… and finished goods”.

However the most important part of this definition is the idea that the product flows can end up

in “a point of recovery or point of proper disposal”, which means that they can end up in a

different supply chain than the one previous. This entails that there can be actors, different than

the manufacturer, that can make use of the reverse product flows.

The definition used above has been the most used, but that doesn’t mean that other researchers

have not come up with their own definitions. For the most part the terminology and definitions

end up mostly similar, but they do tend to offer their own unique spin on the formulations. On

the one hand this is good, because it shows that different research ends up coming up with

similar results, though on the other hand there has been some confusion over some of the terms

used in the literature.

2.2 The importance of reverse logistics

With the explanation of what reverse logistics is, the importance of the subject has to be

determined. The main issue with finding the economic impact that reverse logistics has is that

most companies would either not track these flows separately from the forward flows, or they

wouldn’t present it separately in their annual reports. To get a sense of the economic value the

paper by Rogers and Tibben-Lembke (2001) will be be used. The investigation produced by the

authors shows that reverse logistics was only a small part of the logistics costs of the companies,

amounting to around 4% or around $37 billion in 1999. These estimations have to be taken with

a bit of skepticism due to the amount of companies answering their interviews and the size of the

respondents. This is an important observation, because Beullens et al. (2004) has presented

evidence that suggest that smaller firms might be more willing to have reverse logistics flows.

This could be the case due to the shareholder’s acceptance of smaller returns from small firms.

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The paper by Rogers and Tibben-Lembke (2001) has given an estimation of the size of reverse

logistics in the US, but there are also some other issues with their study, apart from the one

mentioned above. The biggest one is that in some industries the reverse logistics flows are much

higher, due to market driven demand or due to legislation. Such a market is the car market in the

US and Europe. In the US it is more market driven and in Europe it is forced by legislation. Due

to the above mentioned reasons the share of recycling and reusing of parts, in companies in those

sectors, are quite more significant than in others. Also industries which are experiencing a lot of

returns from their customers can also be benefiting a lot from having reverse flows, because in

the reverse logistics literature disposal is seen as the least efficient end result.

The last thing is that the interviews in the paper were conducted in the beginning of the century

and since then the legislation, especially in the European Union, has become more stringent

about recycling in some industries. This can be seen in the legislation part below. To conclude on

this part the paper by Rogers and Tibben-Lembke (2001) gives an economic value to reverse

logistics flows, but there are some factors that may make it outdated.

2.3 Terminology

As mentioned previously there is reason to believe that there is some confusion in the terms that

are being used in the literature, when it comes to reverse logistics. This part will consists firstly

with the terms that the paper is going use, and then some of the more popular, and sometimes

improperly used terms will be explained. This is done in order to give a clear understanding on

the topics that are going to be talked about and remove any confusion.

The terminology that this paper is going to use is as follows:

- Forward logistics which will be the opposite to Reverse logistics, the following terms

would follow the same pattern

- Outbound - Inbound

- Delivery - Collection

- Demand – Supply

- Demand node – Supply nodes

Common misconceptions come with terms such as reverse logistics, green logistics, closed loop

supply chain, waste management and cradle-to-cradle/cradle-to-grave. Closed loop supply chain

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is the term that often has been the one mistaken for reverse logistics. This is because it puts

reverse logistics as an integral part of the forward supply chain management which should also

be integrated with the forward streams (De Brito and Dekker, 2002). In this case reverse logistics

is part of closed loop supply chains.

Another misconception is the use of the term green logistics, when it comes to reverse logistics.

The reasoning for that is the view that reverse logistics are done solely because they offer

environmental benefits, due to their reuse/recycling or waste disposal of products. However

green logistics refers more to the overall increase of efficiency and lowering of the impact of the

whole supply chain. In most cases the term is used for forward supply chains, thanks to their

prevalence in logistics.

Waste management is another term that can be closely related to reverse logistics, but there is a

key difference. That one being that waste is something to be disposed of and has no economic

value to anyone. However with reverse flows some of the products can be reused, recycled,

remanufactured or in the most undesirable case incinerated for energy. In this way there is some

value to be gathered from the materials which are collected. A big distinction is also made due to

the term waste. The reason for that is that in many countries it is forbidden by law to import

waste (De Brito and Dekker (2002). In this case if a product, such as a reused glass bottle from

Denmark, cannot be exported and no economic value can be collected, it can be deemed waste.

Lastly cradle-to-cradle is going to be explained. This term is used mostly as a vision of how the

product design of one product enables it to get reused again. If the properties of said product do

not allow for that then it can be made to be bio-degradable, which would allow it to decrease

landfilling, because it can be used to replenish soils or help nature in some form. In that way if a

product is following the cradle-to-cradle philosophy then it makes a reverse logistics system

more efficient, because more products can be brought back up the supply chain and more value

can be extracted.

2.4 European Legislation concerning reverse logistics

In the paper by Tibben-Lembke (2001), as shown in 2.2, the importance of reverse logistics

activities, as opposed to other issues, has been shown as the biggest barrier for companies to start

implementing reverse flows into their forward supply chain. The assumption that can be made is

that a company that is not willing to invest into reverse logistics would not do so unless there are

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some exogenous factors. Such an exogenous factor could be legislation that is forcing a company

to take responsibility for the products that they are producing and their end-of-life disposal.

Following will be the important legislation in the European Union concerning reverse logistics,

as reviewed by Kumar and Putnam (2008). There are three prevailing directives that are making

manufacturers take responsibility for their production. Those would be the EU’s End-of-Life

directive, Waste Electrical and Electronic Equipment Directive(WEEE) and Restriction of Use

Of Hazardous Substances directive (ROHS) (EU Directive 2002/95/EC).

The first directive to be presented is the EU’s End-of-Life directive. This directive makes a car

manufacturer responsible for the cars that they sell within the Europe. The responsibility is that

they have to arrange for disposal and recycling of the vehicles sold in EU. There are also targets

that are being set by the directive about the levels at which a car has to be able to be

reused/recycled, the energy recovery percentage and the percentage of the vehicle that cannot be

used and has to be disposed of into landfills- respectively 95%,10% and 5 %. These targets have

been set for 2015.

The second directive is the Waste of Electrical and Electronic Equipment Directive (WEEE).

This EU directive has put its sights on the electronic equipment sold within the European Union

boundaries. There is a need for such a directly as the development of many electronic devices

makes use of hazardous or scarce materials. This makes it essential for the hazardous materials to

be disposed of correctly, and to limit their use in the future, and for the scarce materials to be

reused as much as possible. An accompanying directive to WEEE is the Restriction of Use of

Hazardous Substances directive (RoHS). The objective being to ban certain heavy metals in new

electrical and electronic equipment- mercury, cadmium, lead, chromium and brominated flame

retardants.

Other non-EU wide legislation that has helped with the specific increase of, in more specifically,

recycling can be seen in countries such as Germany and UK during the economic recession,

starting in 2008. At that point these countries would subsidize the recycling of a vehicle, which

would in turn be used to get a new car. This measure was aimed more at improving the level of

the economy, as it was aimed at the customer and not at the recyclers and manufacturers.

However it had the added benefit of increasing recycling of older cars and putting some of their

materials back in the supply chain. A note has to be made about governmental subsidies for the

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remanufacturing process. In a study by Debo et al. (2001) it was presented that a subsidy can be

seen as an exogenous decrease in remanufacturing costs. This has given the result that new

products might be more in demand, which has the contrary effect to the one expected.

These directives have definitely had an effect on the market of goods in the European Union,

because manufacturers have to comply with these regulations or they wouldn’t be able to sell

goods on the EU market. That is one of the benefits of EU law that it is more enforceable than

other international law systems, which leads to positive changes for the environment and people.

2.5 The value of reverse logistics

Up until now the topics have been about what reverse logistics is, why it is important, the

terminology that is and the external factors that may be influencing companies to engage in

reverse logistics. Now that all that has been covered, the topic to be discussed is the reason for a

company to want to engage in reverse logistics on their own accord. The next parts follow the

structure shown in the paper of De Brito and Dekker (2002).

2.5.1 External factors

Implementing reverse flows into the already existing forward flows is an expensive and time

consuming endeavor. For this reason it is important to see which are the external and internal

factors that would lead a company to implement this change.

The external factors have already been touched upon a little bit in the part about legislation. This

is a big motivator for some firms to create a reverse logistics network in order for them not to

have to pay fines for not complying with the law or, as it is with the car industry in Europe, to be

banned from selling unless you comply. Some companies can also expect that there is going to

be incoming legislation and in that way get ahead of the curve and implement changes before the

others and get a competitive advantage when the laws change.

A more marketing focused external factor is to engage in recycling/reusing of goods in order to

get an image of an environmentally responsible company. This could be a way to gain new

customers, because they like the idea of not damaging the environment when they use your

products. However very little research has been done on the topic, so this is mostly assumptions

based on the actual marketing of some companies.

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The last external reason is to keep away the competition. There are two ways that this can be

done. Both can be seen in the approach of Xerox when it came to their printer cartridges. They

were doing their own recycling and also at the same time made it illegal for third party

disassemblers to recycle their new cartridges. In that way the threat of third party disassembles to

take part of their reverse flows was mitigated. In doing so they also limited the access to their

technology from other companies that can potentially be their competitors in the printer business.

2.5.2 Internal factors

The internal factors present cases where companies could benefit from implementing reverse

logistics. Those have to do mostly with returns that are happening at different points in the

process of manufacturing, distributing and lastly on the consumer side, as outlined in De Brito

and Dekker (2002).

To start from the top is to go and analyze the reasons for returns at the production stages of a

product. At this point the most common occurrence of a return is when a product doesn’t pass

quality control. Then the product would most likely have to be remanufactured or repaired to be

able to be sold afterwards. In rare cases at this point a product would have to be recycled, but

that would be due to unforeseen circumstances in the manufacturing stage. The other two reasons

are production leftovers and raw material surplus.

The next place where returns occur would be at the distributional level of the supply chain where

products are already manufactured and ready to be sold to customers. The most common reverse

flow at this level is the functional returns, because those are items which have an intended use to

be shipped between manufacturer/warehouse to the distributor. These concern items like pallets,

metal/plastic boxes or other type of multiuse containers. The next three most common types of

reverse flows are product recalls, commercial returns and stock adjustments. All of them concern

the movement of products that for some reason have been returned from the distributor. At this

point having extensive reverse flows can lead to lower costs for the manufacturer. Such flows

can be recycling, when a product has been damaged in transportation or deemed unusable

according to a product recall. A better situation is when these returned products can be

remanufactured or repaired, at that point having the proper system to deal with returns is of great

use.

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At the customer level most common reasons for returns are reimbursement guarantees, warranty

returns, end-of-use or end-of-life. Most of these returns would go through the distributor, so

again having effiicient reverse flows connecting the manufacturer with the distributor can lower

costs and add value to a company.

2.6 Reverse channel choice

After the last part a question that arises is who invests and operates the reverse channel and what

the benefits are for each party in the supply chain. This issue has been investigated in the paper

by Savaskan and Van Wassenhove (2000). The outcomes that are reached concern two different

market conditions- bilateral monopoly and competitive retailing.

When there is a bilateral monopoly the reverse channel has to be operated by the retailer,

because at this point everyone is better off. The manufacturer doesn’t have to invest in their own

system for collecting and infrastructure to accommodate for that. All of that is done by the

retailer. In the model this has also helped to increase the sales volume for the producer. On the

other hand is the retailer which does the collecting and needs to return the products to the

manufacturer. In order to do so the retailer gets buy-back payments which cover the expenses.

The last benefactor ends up being the consumer which would get lower prices, due to the

increased efficiency in the other two places, lower disposal costs, due to the usually close and

convenient drop off sites, and a decrease in the environmental costs.

In a competitive retailing situation the reverse channel has to be done by the manufacturer, as

dictated by the model that was used in the research. This leads to higher return rates for the

manufacturer, because the many different shops that they would be collecting products from

would usually not have the amount of products for them to have a steady stream to the

manufacturer. It would also lead to economies of scale in collection, because of the high amount

of products incoming. The many different, sometimes small, retailers would also benefit from

not having to invest into the whole process of collecting and sending the products to the

manufacturer. Also an additional benefit for the retailer would be potentially lower costs, due to

the manufacturer realizing economies of scale and having lower production costs. The benefit for

the customer would be the same as the ones in bilateral monopoly.

A note has to be made about this model and its validity. The problem with the model is that it

excludes the use of third parties, because they end up being inefficient. In the real world third

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party companies are used because they offer value adding services for the product recovery

process. Such services end up lowering the running and investment costs for manufacturers.

Those can be sorting, dismantling and quality control. These services can greatly affect the

efficiency and value coming from reverse logistics for the manufacturer. The most likely reason

for the model to exclude them would be the complexity of adding such details.

2.7 The returned products

An integral part of the reverse logistics are the products that have to be reused, remanufactured

or recycled. In other words, how much value do these products have and what are the

characteristics that would be ideally looked for. To find the answer to that De Brito and Dekker

(2002) have looked into three important aspects of a product- product composition, use pattern

and deterioration. This structure would also be used in the following paragraphs to look into the

products and the traits that can be of value.

2.7.1 Product composition

Economics often can be the main reason a company engages in reverse logistics and for them it

would be of high importance to look into the composition of the products that would end up in

the reverse streams. The composition is determined during the design stages of a product and

during that time the resources used are defined. Most products have a mix of valuable and non-

valuable resources in them. This is why parts recovery, material recycling and landfilling are all

part of reverse logistics. Following a strategy that would rely on reverse streams a product can be

designed using the philosophy of design for disassembly. The important facets of this philosophy

are as follows.

A significant part of the expenses imposed during disassembly come from the amount of time

labor workers have to inspect and remanufacture, or extract, valuable parts of a product. Thus if

the assembly is done easily and quickly, the costs can be kept down. A different kind of cost

incurred is when there are hazardous materials in a product, which in many countries have to be

disposed of in special ways. This is again time consuming and costly for a remanufacturer. The

composition of a product is important, because having homogeneous parts can help with them

being used again into new products. A good example would be glass where it can be cleaned and

reused or melted. A bad example would be plastics which come in many different chemical

variations and that makes them difficult to reuse. The last thing to consider is the transportation

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of a product, where the least amount of trips incurred equates to lower costs. In this way if a co-

collection of old and new items is possible then that should be the norm. This would be

especially valid for products which do not have very high value when put back into the reverse

streams.

The conclusion for this part is that there are certain ways to increase the value or decrease the

costs of handling of the products in the reverse flows.

2.7.2 The product use pattern

Collection of the products is a major differentiation point of reverse logistics, when compared to

forward logistics. The reason for that is that collection for reverse flows often tend to come from

many different places and usually do not have a centralized hub. Having many locations of use

increases the costs because more vehicles have to be used, which might have a non-optimal

utilization. An example of this would be beverage containers which often times get thrown away

at either the point of use or specialized recycling bins in front of residential buildings. This

represents one part of the product use pattern because it deals with the location of use and

collection.

A different aspect of the product use pattern is the amount and intensity a product gets used.

Products that can be used multiple times are usually those that get used often but for a short time.

They do not tend to get damaged too much in their use and after inspection, and sometimes

cleaning, they are ready to be reused multiple times. Such products are glass beverage

containers, which get used up and then, hopefully, put into recycling bin. After cleaning they are

ready to be put to use again.

The conclusion for this part is that the location and intensity of use affect the difficulty of

collection and the amount a product can be reused.

2.7.3 Deterioration

Another big point of differentiation of reverse logistics is the quality of the returned objects and

also if they can be reused. The former has to do with the deterioration of a product, which is

directly related to the use patterns from the previous paragraph. The amount of deterioration has

a big effect on the possibility of recovery and the quality of the recovered items, which in turn

17

determines the economic benefit for the reverse flows. There are four points of note that are

explained below.

To begin the intrinsic deterioration has an impact on the economic profitability of a product,

because it is showing how much of a product, or parts of, can be brought back into the reverse

flows. Having a product that can usually be reused very efficiently, but has been used

extensively can lower the recoverability. In that manner the intrinsic deterioration has a strong

effect on the efficiency of the reverse flows.

Having a product that has not deteriorated much and can be recovered to a large extent, doesn’t

mean that one can profit from it. This is the case of economic deterioration, because the product,

or parts, recovered have become obsolete and can’t be used in their intended purpose. This

happens in areas where there is a lot of development into new technology, such as computers and

smartphones, and each generation has components that are different from the year prior. In such

a case the product doesn’t get sent to a landfill, because it could be used as parts, for repair, or in

the case of smartphones sent to a secondary market.

A different aspect to this topic is the reparability of the products. Manual labor is a big part of the

expenses of reverse logistics and thus the amount of time a product has to be repaired is

important. In some cases products would require a big investment in time to be repaired and the

economic benefit is lost, so they get recycled instead. This is a common issue, because there are

a lot of companies that already have these kinds of flows, due to their returns and warranty

policies.

Deterioration has been talked as a process that just happens to the whole product, but some parts

tend to get a higher use than others and they get worn out more. In a perfect situation all parts

would have a homogenous deterioration pattern and then everything can be reused in the same

manner. In another case only some parts get a lot of use and deteriorate, while others would be in

good condition.

The conclusion for this part is that product design that takes into consideration all of these assets

of deterioration would have a higher economic value when entering the reverse flows.

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2.8 Types of recovery

The considerations about the products have been covered and now the types of recovery will be

discussed. An overview of the process can be seen in Figure 2. The figure below shows that in

order for a product to reach the recovery stages, it has to go through other flows. These flows

will be briefly touched upon before investigating the different recovery options.

Figure 2. Reverse Logistics Processes, source: De Brito and Dekker (2002)

Forward logistics are becoming ever more efficient and flows within them have a strict schedule

at which they operate. Opposite to that are reverse logistics, because they usually don’t have

such timesheets that they have to follow. The reason for this is the variability of the returning

process which can make planning reverse flows difficult. The returns can be done by the general

public, municipal waste disposal and companies. The return flows would often get picked up

from various small collection sites, such as recycling bins in front of a building, and then end up

in a centralized collection site. Those sites can be municipal recycling plants, third party

recyclers or the original manufacturer of the product. The goods then have to go through a

process to value their quality and economic value. This process consists of inspecting the

deterioration and shape of the product, selection of the valuable ones and then a sorting process

is done to prepare the goods for the different types of recovery.

There are several types of recovery, which consist in part of the processes presented in the two

parts of the pyramid in Figure 2. The highest value can be obtained by engaging in product

recovery called direct recovery in the figure. At this point a product would need very little, to

none, maintenance to be put directly back into the market. Some countries have legislation which

19

forces the manufacturer to show that this good is not brand new, which would lower the price. In

this case a secondary market can be more desirable.

When a product has sustained damage, or deterioration, to some parts and cannot be reused in its

full capacity component recovery should be exercised. In this process the good gets dismantled

and only the parts that can be reused, and have economic value, gets extracted. After that those

same parts can be used in remanufacturing or for the creation of a new product.

If none of the above processes can be done then material recovery would lead to the highest

economic value. At this point a product gets grinded down and the end product gets sorted. After

the sorting a treatment is being done in order to get the right quality/purity of a material, in order

to be sold or reused in the future products. In modern recycling plants this process can be done

automatically with many different materials, even the previously difficult plastics

(arstechnica.com, 2015).

There are products that cannot go through these stages and the only use that they have is for them

to get burned and to capture the released heat. This is called energy recovery and it is popular

option, especially in Scandinavia, because there is some benefit from the products. This

popularity has stemmed from the increase of prices for landfilling which makes it an undesirable

action which is preferred to be avoided.

The conclusion for this part is that there are different types of recovery covering the different

products and their varying levels of reuse.

2.9 Obstacles with remanufacturing and recycling

The paper so far has covered mostly the basics of reverse logistics, how it works and the value

associated with reverse flows. There has been very few mentioned problems which could be

encountered, except for some brief explanations when needed to explain the subject matter at

hand. This section will be divided into two parts. The first one will be presenting the obstacles

that come up during remanufacturing and the second in recycling.

The paper of Beullens (2004) has divided the obstacles into two parts- one is product

remanufacturing and the other is product recycling. This section will follow the same structure

and present the findings from the paper. A reoccurring theme when talking about reverse

logistics is the uncertainty of the characteristics of the products. Uncertainty can be attributed to

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various assets of a product like the quality, quantity, timing and variety of a good. These can be

said for both product remanufacturing and recycling, but they have a different impact on the

supply chain. Remanufacturing needs products that are in good condition in order to be able to

work. If there are a lot of products of inferior quality then they would end up for component

recovery. These two issues cover quantity and quality. Variety would not have such an impact if

a company is remanufacturing only one product, but if that is not the case then receiving only

one product can definitely be an issue. Timing also plays a crucial part for product

remanufacturing, because the uncertainty in delivery would most likely lead to high stock, so it

can react to increased demand. High stocks are undesirable because they are costly for the

manufacturer. Another big obstacle is the need for a reverse supply chain that can take away the

unnecessary items and only collect the valuable items, which would be used for remanufacturing.

This can be done during the inspection phase by third parties. When that is the case the

efficiency of the process increases and there is less of a need for workers that inspect the items

that are coming in.

As mentioned above, product recycling has the same uncertainties as remanufacturing, but the

implications are different. In this case the quality of the product doesn’t have such a big impact

on the process, because recycling is geared towards material recovery. For this case, the quality

of the product doesn’t have that much importance, what is more important are the impurity levels

achieved from the end materials. This is especially important because specialized processors

have allowances for the levels of impurity of a material, the less the impurities the higher the

economic return. Quantity is also important, because the processors have a level of material that

the recycler has to achieve in order for them to buy. One of the biggest problems for recyclers

has to be the price volatility of materials. A good example of that would be the price of copper,

which in the middle of 2000’s has had yearly fluctuations in the magnitude of a several times

higher, or lower, price than the year previous. This can easily increase or completely destroy the

profit margins for the recyclers. Price margins are often times small and for that reason

transportation can also be a big expense. This is especially the case when products have to be

recycled due to legislation and they have little to no value afterwards. The proper placement of

recycling centers can help to keep these costs low.

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3. Network designThe previous parts have built up the knowledge about reverse logistics, with information about

the basics of reverse flows, the products, how they operate and the value/obstacles which are

present. This is going to be used as a stepping stone for the subsequent parts of the paper which

will consist of the network design, a formulation of a model and the obstacles in doing so. The

following parts will present the designing of the product recovery network and the collection

system.

3.1 Product recovery network design

The differentiating factor of reverse logistics is that there has to be a product recovery system in

order to be able to deal with the goods that are coming back at the end of their lifecycle. It is

essentially a bridge between the market for reused items and disposed ones. To connect them

there is a need for additional infrastructure that can deal with the recovered goods and the

processes leading after that, shown in Figure 2. This would require the construction of new

buildings that would have good transportation from the collection site, to the recovery points and

then back to the market again. Such activities require an investment from the companies wanting

to engage in reverse flows. The research done by Fleischmann et al.(2001) is showing that this

can be done in two ways. Their research would serve as the basis for the following presentation

of the two different ways in which reverse logistics can be set up and the characteristics of

recovery networks.

Investing in a new supply chain dedicated to reverse flows can be expensive and time

consuming. Often times that would not be needed and a company can use the existing supply

chain, where reverse flows would be implemented. This would have a smaller economic impact,

because there is no need for big changes in the production- distribution network. For most

companies this would be the preferred way of doing things, because big investment can lower

their returns to shareholders. However exogenous factors, such as higher disposal costs or

production costs saving, can offer a big enough economic difference that implementing in the

existing network wouldn’t be as profitable.

When the above scenario isn’t profitable a company may choose to invest into a separate reverse

logistics network. The company wouldn’t have to redesign their existing forward network and

thus there would be lower coordination and restructuring costs. The case study done in

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Fleischmann et al. (2001) shows that the use of a deterministic modelling approach can result in

a good fit for recovery network designs. Other findings were that supply uncertainty, which has

been seen as a big obstacle for reverse logistics, has a limited effect on the network design. This

is an opposite observation than the expected result, where uncertainty in quantity may lead to

high stock, which in turn might require bigger warehousing.

No matter the choice of a product recovery network, there are some characteristics that they have

to follow in order to work properly and be efficient. First of all it is important to get the

coordination of the goods coming in and the products coming out. When this happens on the

same market that is considered a closed loop flow and when it doesn’t it is an open loop. In a

closed loop supply chain there would have to be coordination on both side for the amount

coming in and then coming out. In open loop supply chains the remanufacturer/recycler would

have to coordinate with one market for the goods coming in and another for the finished

products. This can pose problems when, for example, there isn’t enough products received, then

the output would be lower. That is why coordination has to play a big role in order for the

reverse flows to work smoothly.

The second characteristic is highly connected with the first one and that is supply uncertainty.

This was mentioned in the section about obstacles for reverse logistics and here it is again

stressed. Bad quality items or a mismatch in supply and demand can cause significant problems

for the output of a remanufacturer or recycler.

The last characteristic is tied to supply uncertainty, which is inspection, separation and choice of

treatment. Having the proper system in place can help with increasing the yields of the products

and that can lead to more economic benefits. However if the goods supplied are of inferior

quality then the whole system becomes less efficient. At this point the economic returns on every

product is lower or non-existent.

The conclusion for this part is that a company can choose if they want to create separate reverse

logistics flows or implement them in the existing forward flows. This is all down to the

economic drivers in their situation, which is based on the assumption that companies are cost

minimizers.

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3.2 Design of the collection system

The collection system has up until now been only mentioned, but never expanded upon. Its

design plays an integral part in reverse logistics, because often times it can be the difference

between making a profit and not. A big part of this is that collection uses a lot of transport, which

has been mentioned to incur significant costs. The structure and basis for this part would follow

the paper of Beullens (2004).

3.2.1 Collection system design considerations

The collection system seems relatively simple for the uninitiated- there are the former users of a

product which has to be deposited in a collection site, from where it gets picked up and sent up

the supply chain. That is an accurate picture, but there are some consideration that have to be

taken into account for all of this to work. On the side of the former user, they have to be willing

to do the effort of depositing their products and also to do it consistently with the right products.

In order for that to happen the process has to be convenient for people and there has to be good

service. A system that has proven to be accepted by former users is curbside collection, because

of its consistency and relative little effort required. This type of collection can also be the lowest

cost alternative when it comes to households and small businesses.

On the side of the collector there are more considerations. The collection system has to be both

effective at collecting the products, but also efficient at doing so. Transportation is a big part of

the collection process and this means that it has to be cost-efficient. There are several

considerations that have to be taken into account for transportation. First of all is balancing the

load in such a way that uses the least amount of vehicles, which for industrial firms means to

create different sectors and to minimize the variable routing costs. This is achieved by having

days assigned to different sectors to balance the workload and in that way the least amount trucks

would be needed. For household and small business, the considerations are if drop-off sites or

curbside collection should be used and if there is source separation. In the case of source

separation, smaller vehicles can be used to pick up certain products on different days,

alternatively all is collected at the same time and bigger vehicles are used, but in fewer days.

Another consideration is if there would be an integration of deliveries and collection. In forward

flows a truck would start from its location fully loaded and come back empty. When reverse

logistics is concerned, if there is any integration the truck might start getting filled after doing a

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certain amount of deliveries. This can potentially lead to cost savings due to better utilization of

vehicles. This is not as straight forward as it sounds, because vehicle routing would have to take

into account the strict schedules of forward flows, but also allow some more time at the point

where collection is also happening. On top of that single compartment, back loaded, trucks are

the most used, which are not ideal when you have to deliver and collect at the same time. Also

some items might not be allowed to be collected together, because of dirt from collected items or

them being hazardous materials. Vehicle related problems will be expanded upon further on.

The conclusion for this part is that there are different vehicle routing considerations for different

types of customers. Also collection has to be done efficiently and effectively, with the least

amount of hassle and effort for the former users.

3.2.2 Collection design aspects

The collection design has to take into consideration the following aspects which has followed the

structure of Beullens et al. (2004)

The first main aspect of any logistics system is the infrastructure, which for reverse flows has to

be set up in a different way. This has been touched upon in the previous part and it has to do with

the way the products are collected from their former users. There are three different collection

types, which will be presented in order of convenience for the customer. The first is on-site

collection, which offers to take the products directly from the user or from curbside collection. In

this way the former user has to do the least amount of effort, which leads to a higher capture rate.

Also when it is done efficiently it can be the lowest cost alternative. The second type is the use of

unmanned drop-off sites. These can be recycling bins in front of residential buildings or

designated places to recycle, usually placed outside the city. The products collected in such a

way would be usually glass, paper and textiles, but can also include bigger items for the latter

case. The last type of collection infrastructure are the staffed and smart drop-off sites. With the

help of manual laborers only the relevant products can be sent back up the reverse supply chain.

This helps to decrease the costs of separation upstream and increase the quality of products

accepted. Smart drop-off sites are most commonly used for collection of homogenous products

like bottles, which can also be programmed to accept only a certain type. This would decrease

the collection of unwanted materials. The bottom line is that if all of the above mentioned types

of infrastructure gets used simultaneously the capture rate increases, so do costs.

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The second main aspect is the collection policy, which deals with the timing of collection. The

first type uses a static schedule, where the dates for the collectors are pre-determined. These are

called periodic schedules and they can be efficient when there is a similar output of products and

little uncertainty. A different approach is to use just-in-time collection, which is done by the

implementation of a computer logging system. When there is a certain amount of products

collection can come. This is also called a dynamic route-planning model. The next type is similar

to the previous one, but instead of using a computer system, a call by the personnel has to be

done when a certain quantity has been reached. The last type is a schedule that has implemented

forward and reverse flows. In this way when distribution takes place the collection also occurs.

This leads to the highest utilization rate for the vehicles, but some products might not be suitable

to be collected in the same truck. The last point is that the standard practice is to take all products

and separation to be done later.

The third aspect to be looked at is the combination of products and materials in the truck, if any.

In times where there is either an abundance of one good or it requires special care, separate

routing can be used. This can be employed also with the just-in-time visits, from above, where

the collector knows that they can have good vehicle utilization. The opposite way of doing things

is to collect similar resources in the same vehicle, which can lead to better vehicle utilization,

when the return rates of a certain good are not high enough. The integration of forward and

reverse flows can be done in three ways. The first way is to get mixed flows, which is to do the

deliveries and collection at the same time. As mentioned previously, there may be laws that

would stop the mixing of some new and end-of-life products. At that point the forward flows

take priority and collection is done at a different time. However mixing is made difficult with the

use of the one compartment and rear loaded trucks. To try and offset that one can use partial

mixing. The difference is that mixing starts after a certain amount of the truck has been emptied,

due to deliveries. On the other end of the spectrum is backhauling, which does all the deliveries

first and then starts collecting. The integration of reverse and forward flows has been stated in

the paper as reducing the total distance travelled by half and routing costs by 10% in the best

case scenario.

The last aspect is the vehicle types and how to combine them with the different collection types.

Most trucks in forward logistics have one compartment and are rear loaded. This would pose

26

problems when an integration between forward and reverse flows wants to be done. Then multi

compartment vehicles, which can offer side loading, should be prioritized in order to maximize

the amount of mixing done and lower the time needed to do so.

The conclusion for this part is that combination of products can be done, if that is necessary,

depends on the situation. Also traditional vehicles are presenting challenges when mixing has to

be done.

3.2.3 Features of vehicle routing models for product recovery

The implementation of vehicle routing models for product recovery has to take into account all

the aspects, problems and opportunities from the chapters above. After doing so a list of features

are presented, which would be needed for the formulation of the model. The following is based

on Beullens (2004).

Forward and reverse logistics share quite a bit of similarities, but some of the aspects of reverse

flows have to be handled differently. One of the major differences that has to be implemented in

a routing model is that there are less strict time windows to work with and some collections may

be postponed. This is because of the low profit margins on some product flows and if a vehicles

isn’t utilized to its potential then there could be a loss. Another reason for that is the supply

uncertainty, which can make the prediction of the timing of products difficult. In order to

accommodate that multi-period vehicles routing problems get utilized. The goal of these models

is to minimize the fixed costs and since transportation is such a big expense, the models might be

geared towards minimizing the vehicles purchased and utilized. In that sense in times of high

demand, renting extra trucks would be considered a better investment than a purchase. This

minimizing of costs would also reflect on the vehicle routing model, in the sense that they would

emphasize the combination and mixing of products if that can lower the costs.

There are other differentiating factors for reverse and forward logistics, aside from costs. A big

differentiator is that when handling reverse flows, split collection is allowed. This means that a

collection can happen in two days, on the condition that the accumulation capacity of the

infrastructure has been taken into account. Also in order to keep the costs down, a higher

freedom in negotiations between generators and collectors is allowed. Lastly the vehicles routing

model has to take into account the vehicle to utilize in different situations. This is because in

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reverse logistics there can be more than one type of vehicle, with different loading capabilities,

compartment numbers and capacity.

The conclusion is that there are several differences in the way vehicle routing models have to be

formulated, between product recover and regular distribution.

3.3 The environmental perspective

One of the main drivers for creating a reverse logistics network is to capture the value of the

products after their useful life for the consumer. However legislation is putting a bigger emphasis

on the environmental aspect of reverse flows, thus this section would cover that. This part uses

information from Daniel et al. (2004)

The impact on the environment is split all across the supply chain and capturing some of the

disposed items and reusing them can help lower the need for virgin materials. This is why the

design for disassembly strategy can help with producing a cleaner production, but also increase

the efficiency of the processes in reverse logistics. A production like this also has to take into

consideration all of the life-cycle stages of a product, in order to implement ideas which can end

up being more sustainable. There are two internationally accepted standards that can be used as a

template for environmental performance- ISO 14000 and EMAS. They can help with the

implementation of environmental protection measures. A tool, which can be used to evaluate the

environmental impact of a reverse logistics networks and then help keep track of their

performance, are environmental management systems (EMS). In order to use them one has to

have precise environmental impact data on their product and be able to continuously follow the

changes, or to do new studies when there is a significant change warranting another evaluation.

The most commonly used quantitative tool used for predicting environmental impacts is life-

cycle analysis (LCA). It provides a comprehensive overview of the life cycle of the product and

the impacts coming from the forward and reverse supply chain. However a complete LCA is

time consuming, because it has to look into data from raw materials, logistics processes and

everything in between.

The conclusion for this part is that companies can choose to investigate the impact of their

products and use environmental standards such as ISO 14000 and EMAS as a guideline.

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4. Danish Deposit lawReverse logistics can be used for various different industries with varying levels of complexity

and types of implementation. More complex reverse flows are needed when the products on offer

have many different parts and materials, such as the car and electronics industries. More straight-

forward systems are those that have specialized in dealing with one or few materials. Such

reverse networks can often be seen with municipal recycling schemes. Those would usually

include glass, paper, wood and metals. Constructing a reverse logistics network for the latter case

is easier, because it has to deal with fewer types of flows, which would often originate from a

certain region. Also there wouldn’t be a need to follow so many different kinds of legislation and

less infrastructure would be have to be taken into account. For these reasons the formulation of

the model, in the next chapter, is going to be based on the Danish system for recycling and

reusing beverage containers made of glass. From now on it would be referred to as the Danish

deposit law. The data used has been taken from

http://anker-andersen.dk/deposit-laws/denmark.aspx , unless otherwise specified.

4.1 History

Denmark has had a system to reuse refillable bottles for decades and during that time the use of

aluminum cans was prohibited, while non-refillable bottles were not popular. The infrastructure

was already in place and working, with reverse vending machines in place. However the

restriction that were imposed were in violation of European Union legislation, so changes were

made to make it follow the new rules. In 2000 the Danish Deposit law was passed through

parliament and that lead to the creation of the Dansk Retursystem A/S (DR A/S) by the Ministry

of the Environment. The purpose behind this company was to operate the deposit and refund

system that was put in place by the new laws. The goals set by the legislation was to have

recycling rates of glass at 95% by the 1st of January 2008. The Danish Deposit law has been

amended up until 2007 with changes to targets and ways of implementation.

4.2 How it works

Dansk Retursystem A/S is the sole entity dealing with the recycling and reusing of glass in

Denmark. This makes it a centralized solution which should make it straight forward to

implement and easy for producers to deal with. When a producer or importer is planning on

selling drinks that are using glass containers they have to register with DR A/S. They have to pay

29

a deposit tax monthly and the price difference is already included in the price for the consumer.

After the intended use of the glass container has passed and it has been returned to one of the

collection sites, they get transported to one of the two counting centers of DR A/S. There are 28

high-speed counting and sorting machines in total in these centers. The shipping and handling,

up until the counting centers, has been done by the collectors (shops and supermarkets) and after

that they get refunded for the amount of bottles that they have sent.

Not all beverage containers end up in the vending machines and reused, some of them get

disposed of in the trash. At that point Dansk Retursystem A/S does not get to recycle or use them

and they get a “lost sale”. Instead of them getting the loss in profit, the deposit tax that was

collected doesn’t get returned. This money gets used up in two ways- one is to pay for the

maintenance and improving of efficiency of the reverse vending machines at the shops. The

other is to spend the money in promoting environmental behavior or on various different social

programs.

When a company wants to produce or import beverage containers in Denmark they are forced by

law to register with Dansk Retursystem A/S. There are 4 different types of fees that have to be

paid to register. First one is a once per product signing up fee, unless the container gets changed

and then a new fee should be paid. The next two fees deal with the transportation and collection,

in other words the logistics costs. There is one more fee, which is not regulated by DR A/S, and

that is a packaging fee, which serves the purpose of an environmental tax.

After the counting and sorting of the glass, the beverage containers either get cleaned and reused

or they get crushed and melted into new glass canisters. At that point a smaller part of the bottles

stay in Denmark and then the rest get exported to other countries. This and other statistics about

glass consumption can be seen in figure 3.

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Figure 3. Consumption of glass packaging, ‘000 tons, source: Statistik for genanvendelse af

emballageaffald 2004

This figure above shows a 70% recycling rate, but that is including the tins and jars from food

products. The actual rate for beverage containers was 84% for 2005.

Dansk Retursystem A/S is an economically profitable organization, as mentioned in the

introduction, but there still are faults with the system. First of all is that the target of 95% by

2008 was not going to be met and there was a revision of the target in 2006. The relevant data if

it has been met could not be found. Also importers have stated that these taxes are infringing on

EU law, because they are adding an import barrier, which is in turn limiting the amount of

foreign beer in Denmark. However the results are different as stated by http://anker-

andersen.dk/deposit-laws/denmark.aspx:

“• The amount of imported beer increased from 4 million litres to 13 million litres.

• The number of producers and importers increased from 269 to 343.

• The total number of products (different EAN numbers) increased from 2050 to 4918.”

To conclude, the reverse logistics network created by Dansk Retursystem A/S has shown to be

profitable and having a high capture rate.

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5. Basic facility modelLogistics networks of forward supply chains are presented as an asset of very high importance in

companies (Chopra and Meindl (2001)). One might say that they have an even bigger importance

in reverse logistics, because the efficiency, or lack thereof, can help with becoming profitable or

lose money. Reverse flows have to be implemented in a good logistics infrastructure, in order to

have the transformation of an unwanted product to one that can be resold, in a way that value is

created for the actors in the supply chain. Additionally facilities have to be built in such a way

that the transportation between former users to recovery to the reuse market has to be minimized.

There are different processes that have to be implemented in the reverse supply chain which have

to all work together. On top of that the collection and inspection has to be implemented in such a

way that the unnecessary scrap gets disposed of. These are some of the considerations for a

reverse logistics network, which would be used for formulating the basic facility model. The

following information, before the model and for it, is based on the work of Fleischmann (2001).

Some of the information would coincide with the general information under 3. Network Design,

and especially 3.1 Product recovery network design, but the following considerations are

specifically for creating a reverse logistics network, with the help of a basic facility model, for

beverage containers collection.

5.1 Structure of the reverse logistics network

The logistics network for beverage containers is connecting two markets- the first one produces

the supply of used refillable containers and the other one demanding them. In doing so the

logistics infrastructure has to collect and transport the goods to the counting and sorting

locations, after which they end up in the recovery facilities. There the beverage containers get

cleaned and some small repairs may be done to them. After that the goods go to where the

demand is, which would be the local producers, or foreign markets. The last part doesn’t fall into

the scope of the paper. The interactions from above can be seen in Figure 4.

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Figure 4. Adaptation of Reverse logistics network structure from Fleischmann (2003)

The network presented above can handle more than one company, which can manage and

implement all the interactions from Figure 4. Different flows can be done by third party

companies and in that way the responsibilities can be split to more than one entity. Also the

implementation of the network structure following this model has shown deviations concerning

the involvement of the entities, the centralization of the network structure and the number of

levels of recovery. However in this context the most appropriate structure would be that of a

closed loop supply chain.

Different network structures presented by Fleischmann et al. (2004) are: 1. Networks for

mandated take-back, 2. OEM networks for value added recovery, 3. Dedicated remanufacturing

networks, 4. Recycling networks for material recovery and 5. Networks for refillable containers.

The chosen structure that this paper is going to follow is the last one – networks for refillable

containers.

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5.2 Characteristics of a network for refillable containers

The network structure for refillable containers has a special aspect, which is that the products in

the supply chain can be reused without much recovery. This means that they can be in and out of

the reverse flows quite fast. After collection the glass containers would go to counting and

sorting, this is done usually by an automated system. This process is done at the remanufacturing

plant, because it is more efficient than having specialized workers or machines in all of the

collection sites. During that phase the broken or unusable containers would be cleared out of the

system and sent for melting or other type of reuse of the material. In the next stage mostly

cleaning is done and possibly small repairs, if applicable. With such relative ease of reusability

of the products a company’s pool of containers may be characterized as an asset (Fleischmann

(2001)).

With this in mind, a top priority for the logistics network is to work in such a way that it would

have an effective acquisition process. One part of that is to promote the return of the beverage

containers by the use of promotional programs and the deposit system that people have gotten

used to in Denmark. This should increase the capture rate and to deal with this the network has to

be able to deal with the containers efficiently. The process has to collect as many containers that

are ready for reuse, limit the breakage and leakage due to competitors or inefficiency in the

supply chain. Having this scope of one type of product is potentially allowing mixing of forward

and reverse flows. Best case scenario is using a dual compartment vehicle, which would limit the

amount of transportation, but also help with organizing and planning routing, due to the lower

amount of vehicles deployed. Also there would be better vehicle utilization, which would

increase the value gathered per trip. In this structure forward and reverse flows are going to have

the same importance. The reason for this is that the output is so dependent on the inputs that

putting higher priority on one over the other would lead to a bottleneck on the other end, thus

making the network inefficient.

The conclusion for this part is that the logistics network has to get the highest capture rates

possible while still being efficient and effective. Also there shouldn’t be any prioritization for

either forward or reverse flows, because that would lead to a bottleneck on the other side of the

network.

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5.3 Mixed integer linear programming (MILP)

The importance of logistics networks for forward supply chains has already been stressed,

because they can add a lot of value for a company. Thus there has been a lot of research done on

the topic and certain trends have appeared. When it comes to facility locations models, in

logistics network design, the most used one is mixed integer linear programming (MILP). The

research for reverse logistics networks has not come up with a better model for the same

problem. There has only been additions that deal with flow constraints and also implementing

the supply restrictions, coming from the supply uncertainties. Other diverging points are the

potential interactions between different products form the forward and reverse supply chains. For

this reason a lot of the models are using multi-commodity flow formulations (Dekker et al.

2004). Aside from that the mathematical formulation between the MILP for forward and reverse

logistics are quite similar.

5.4 Mathematical formulation of a basic facility location model

The model in Figure 4, from 5.1, shows the whole logistics structure with the forward and

reverse flows. Figure 5 shows a structure only for the reverse flows. The model is tailored for a

use of a certain type of product and presents the different stages this good has to go through. It

takes into consideration the three different levels of facilities and also the types of recovery,

which are bundled up into the term recovery, the rest is disposal. An important point to make is

that this model puts a maximum yield on the facilities, after which a new facility has to be made.

This model is made in Fleischmann et al.(2001).

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Figure 5. Reverse logistics network structure, Source: Fleischmann et al.(2001)

The mathematical formulation is as follows:

Figure 6. Mathematical formulation, Source: Fleischmann et al.(2001)

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Figure 7. Mathematical formulation, Source: Fleischmann et al.(2001)

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Figure 8. Mathematical formulation, Source: Fleischmann et al.(2001)

5.5 Explanation of the model

The mathematical formulation of the MILP is presented in Figures 6-8. As mentioned in the

delimitations the structure of the model would not be expanded upon. What is going to be

explained are the parts which are number from 4.1-11. These are most interesting, because they

are the basis for the formulation of the model and are showing the interactions needed in a

reverse logistics network design model.

The equation in 4.1 is following the assumption that was made earlier, that companies are cost

minimizers. In this context the model can be divided into 3 parts- 1st is the top level of the

equation, which is the sum of the different costs for opening a plant, warehouse and test center,

which are multiplied by their respective handling costs. The second is the multiplications outside

the bracket, which deal with the sum of transportation and handling costs from one place to

another. The third part is the equations in the brackets, which deal with the penalty for not

serving a customer and storage costs. Thus the equation minimizes the costs connected to the

facilities, transportation, handling and penalties for missed demand.

The minimization equation is the one that would present an answer to the model. To have

accurate results there have to be constraints, to guide the answer of the minimization problem.

Those constraints are presented below, the notation from 4.2-11.

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Equations 4.2 and 4.3 is making the model take into consideration the customer demand and

returns.

Equations 4.4-4.6 present a loop of constraints that are all dealing with balancing out the flows

going from the warehouses, plants and test centers. This way there wouldn’t be a bottleneck

somewhere in the system and an overproduction somewhere else, which would lead to

inefficiency in the supply chain. An example for this is if the plant produces more than the

warehouse can store.

Equations 4.7-4.9 are dealing with the problem of when there is a need for a new plant,

warehouse and test center to be opened, respectively. If the product flow overwhelms the

capacity of one of the facilities, then a new facility has to be made.

Equations 4.10 makes the indicator, for a new facility, to be binary. If there is no need it is 0, if

there is a need the indicator is 1.

Equation 4.11 is a typical non-negativity constraint for the flows.

5.6 Extensions to the model

The model presented can be implemented in various different situations and that makes it a good

fit for this logistics network structure. In order to do so some extensions can be added to make it

a better fit for the needed conditions. The currently needed structure is one that covers a closed-

loop supply chain, to have that implemented the annual demand and the annual return of a

certain customer has to be above 0. This would be presented by dk*uk>0.

The model above can be extended in two ways to follow the reverse network structure design,

which have been mentioned above. First one is the need to allow multiple recovery options. It

was stated above that the model uses only disposal and recovery as the two available actions. If

there is availability for allowing a differentiation between reuse and material recovery, the model

can evaluate which is the lower cost alternative. This would require the formulation of a multi-

commodity problem. Another missing aspect of the model is that it does not allow for mixing in

transport. If that is implemented, the theoretical benefits from mixing, mentioned in the text

above can be seen in the model.

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The conclusion for this part is that there are ways to improve upon the model from above to

make it more precise in the answers that it gives. Having that would increase the usability of the

model in a real life situation, but it would also be time consuming and quite ambitious.

5.7 Relevant data for the model

The mixed integer linear programming models are designed by teams in a company with the

purpose of solving a complex problem. The answer that the model provides them with can then

be used to improve, or create, systems and processes. However the accuracy and usefulness

depend on two basic assumptions- the model used is the right one and the data that has been used

is relevant and accurate. For the latter case an overabundance of data can make the linear

equation harder to calculate, but it can also make the answers invalid. The other major problem is

to get the information that you need, because there could be restrictions or the data that is needed

is not publicly available. The following part would deal with the obstacles in data collection.

5.8 Uncertainty with data collection

The problem that affects reverse logistics the most is uncertainty in demand, quality, timing and

quantity. The same trend can be seen during the formulation of the basic facility model and the

data related to it. The following part would follow the structure of Kokkinaki et al. (2004) and

would relate it to the model at hand.

The above mentioned paper presents three sources of uncertainty for reverse logistics and those

are product data, processes facilitation and market place consolidation. First to be presented is

the product data, because it can have the biggest effect on the profitability of a company. The

biggest obstacle to gathering accurate data about the costs related to the products, and inputting

them in the model, is that the quality of the beverage containers would vary. A glass container

which is ready to be reused adds more value and has less costs than the one that has to be sent for

materials recovery. Also having different sizes may reduce the overall profits, because bigger

containers might have higher profit margins. They can also require more vehicles to transport

them which would in turn increase the transportation costs. This is how uncertainty in product

data is making gathering and inputting data about costs into a model for reverse logistics more

difficult than its forward counterpart.

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The next source of uncertainty are the logistics processes, which are influencing the product

flows from the customer to the internal processes and then the reuse market. The biggest problem

is that consumers have to be willing to return the beverage containers and that means that the

timing and the quantity of the returns can be sporadic. This can make it difficult to input data

into the model, because times, or places, of high return rates might show that there is a need for a

new plant. But in times of low returns the model can underestimate the demand. Then there

would be penalties for unmet demand and that could potentially lower the margins. Also the

quality of the beverage containers can influence the product flows between the different

facilities, because a product that can be immediately shipped for reuse wouldn’t require the

transport to a material recovery plant. These two main issues in this part add more uncertainty to

the return volumes that have to be put into the model.

Marketplace consolidation has a significant effect on the annual demand and prices for the

reused beverage containers. First off all the prices for reusable materials have shown to be very

volatile, with prices going up and down all the time. An increase in the price of glass can make

the current reverse logistics network more profitable and maybe lead to an investment in a new

plant. However these high prices may lead to a drop in consumption of beverages from glass

canisters, because their price would be higher. In the long-term this could be a problem. This

shows the integral part of the consumer in reverse logistics and how their behavior can lead to

uncertainty.

This uncertainty in prices, costs and demand shows that there are obstacles, which make it

difficult to collect up-to date data and use it in a model. This makes the job of making these

models time consuming and costly.

6. Conclusion

Logistics networks are a very important asset for many companies and they keep on increasing

their reach and scope. The increased public awareness of the environment has paved the way for

a creation of reverse logistics networks, which have the purpose of taking some of the products

from the former user and recover them. This is a further increase in scope and it has mandated a

change in view of the previously landfilled goods and a creation of reverse flows to handle them.

This market driven approach has been successful for the companies implementing reverse

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networks, but the implementation has not been very popular. Legislation was created to force the

increase of reuse of some products and begin the reusing others. This with the help of more

literature on the subject has increased the number of industries implementing reverse logistics

flows.

In the introduction a problem statement was created, which goes as follows: “Formulation of a

basic facility model, based on the Danish Deposit Law, and the challenges in doing so” In order

to investigate that an extensive review of the literature was presented. The knowledge gained

from the presented papers has helped create a solid framework for the basics of reverse logistics,

the factors for creating such a network, the value and the obstacles present. With this information

at hand a review of the returned products and the types of recovery was made. The theory review

continued with a presentation of the network design for reverse logistics and all the relevant

aspects. Following that an overview of a working system was presented in the form of the

recycling network of Dansk Retursystem A/S.

With all that information the basic facility model could be formulated, in order to work on the

problem statement. Before reaching that point a structure for the refillable containers in Denmark

was presented, which showed that a closed-loop supply chain can work in that situation. Also the

system should be efficient and effective, while achieving high capture rates. The formulation of

the basic facility model was done, using the theoretic structure by Fleischmann et al. (2001). An

explanation was then made of the model, which had a general structure resembling that of

forward logistics cost minimization models. What sets it apart was the implementation of

variables and parameters dealing with the recovery yield, demand for used products and penalties

for not collecting and not delivering to customers. The following paragraph presented that this

particular model can have certain extensions, which can make the model fit even better to the

current situation, but that would require a big increase in workload and complexity of the model.

Lastly a presentation was made for the uncertainty in the data and how that can affect the process

of formulating a basic facility model for a reverse logistics network design. That part concluded

that price and demand changes in reverse logistics make creating an accurate model difficult and

for it to have accurate results, these models have to be kept up to date.

A general conclusion for this paper is that there is an increasing amount of literature concerning

reverse logistics and that should affect the implementation rate in companies. Legislation also

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helps in this regard, but there is a potential for the law makers to work with companies to create

laws that can have a broader scope and increase profitability. Also reverse logistics has a big

potential, but the working cases are few and far between which makes generalization hard.

Having a more market driven system can help with increasing the popularity, due to the

attractiveness of the higher profitability. To conclude one can be cautiously optimistic about

reverse logistics, but the general industry is still hesitant about the implementation.

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