Tuesday, December 09, 2008

Cisco going green with Scrap

Turning “Scrap” into Profit

By Maryann Jones Thompson

The leader of Cisco‘s thriving Reverse Logistics business speaks with The EcoInnovator about how he sustainably transformed the program from a cost center to a growing revenue stream.

When Dan Gilbert joined Cisco Systems, the well-being of the technology company’s Reverse Logistics program was gauged in tons of scrap produced per year. Three years later, the VP of Supply Chain Field Operations measures the success of his business in bottom-line impact.

The impressive results of Cisco’s Reverse Logistics turnaround have been recognized as a model for reuse and sustainability in other Global 500 enterprises. The EcoInnovator spoke with the Corporate Eco Forum Leadership Council member and Reverse Logistics leader about how he reduced scrap to less than 1 percent of product returns and contributed $100 million to Cisco’s bottom line in the process.

The EcoInnovator: Can you describe how the rebirth of Cisco’s Reverse Logistics program began?

Dan Gilbert: When I joined Cisco in 2005, the performance of the Reverse Logistics function was essentially summed up in one metric: how many tons of scrap we recycled every year. So it’s probably not surprising that returned product was generating about 6 million pounds of scrap every year. That’s the equivalent of 12 football fields filled knee-deep with product that was declared essentially dead.

Now, scrap is basically the lowest value you can recover from a product. Shifting our strategy toward finding maximum value from returns required us to make two key changes in our approach. First, we had to be willing to challenge traditional assumptions about product returns. Then — as a result of Cisco’s intensified focus on environmental responsibility — we had to take a closer look at our recycling. We realized we were missing a trick by making “Recycle” our default setting. While it was green to recycle, it was actually better and greener to reuse product as much as possible before having it responsibly recycled.

The EcoI: At what point did you realize the potential opportunity of the project?

DG: First we had to invest effort in rolling up our sleeves and digging into every detail of the reverse logistics process. This process tends to be complex, but well worth the effort to understand and evaluate. We physically traveled to our warehouses, opened boxes of trade-ins and ran them through the same suite of tests that would apply to a customer return.

What we found ran counter to the conventional wisdom. The assumption had been that product trade-ins were defective and only good as scrap. But we found that upwards of 80% of product was in good working condition, needing at most a software upgrade or cosmetic work. This told us that the product still had a lot of life in it – a second or even third career, if you will. All we needed to do was match the product with internal Cisco functions that had a need for refurbished product.

The EcoI: As the project progressed, did you encounter challenges that you didn’t expect?

DG: The greatest challenge was convincing our colleagues that refurbished product could meet their needs as reliably as new product. Demonstrating that refurbished gear had passed the same quality and compliance checks required of new product was critical for gaining acceptance for product reuse.

I’m very pleased to say that we’ve largely overcome early hesitation about internal product reuse at Cisco. Whether for engineering labs, customer demos, spare parts or philanthropic purposes, Cisco’s reuse of returned product is growing very rapidly. We’re currently reusing about 44% of product returns and we’re targeting further increases in reuse every year.

The EcoI: How did your supply chain react to the new initiative?

DG: As the business case for reusing returned product quickly spoke for itself, we’ve enjoyed strong support across our extended supply chain.

We did realize we needed to make the returns process easier. We needed to help enable customers, and our distribution partners, to bring no-longer-needed products back to Cisco. This would increase the pool of product we could potentially reuse, as well as help us ensure that any excess or obsolete products were disposed of in an environmentally responsible manner.

As an example, we launched the Cisco TakeBack and Recycle Program to enable customers to contact Cisco and arrange for pick up and recycling of product, even if it doesn’t qualify for warranty replacement or our trade-in program.

The EcoI: What were the specific goals of the new program and how were they measured?

DG: We had two objectives: Drive profitable growth for Cisco and help Cisco deliver on its commitment to environmental responsibility throughout its operations and supply chain.

In 2005, the Reverse Logistics function of receiving and processing returned product cost Cisco over $8 million a year. I’m very pleased that today this same function is making a net contribution of over $100 million a year to Cisco and its shareholders for our fiscal year ending July 2008. We calculate this figure using a virtual P&L to monitor our bottom-line results.

We use several metrics to understand how we’re minimizing Cisco’s environmental impact. One is the percentage of product returns we’re able to put back to use, up to 44% as of July compared with less than 5% three years ago. Another metric looks at waste avoidance. Currently less than 1% of all Cisco product returns end up as scrap. In other words 99%+ is reused or recycled.

The EcoI: Do you have any advice or best practices to share with other executives on how to retool their Reverse Logistics programs for maximum sustainability?

DG: In our experience, cultivating new sources of growth requires an ability to open the aperture and take a broad view of the opportunity. Operations teams can tend to focus on driving efficiencies and squeezing out excess. That’s essential, but if that’s your only focus, you may miss the bigger win – the chance not just to shave costs, but to really drive value and growth.

A second piece of advice would be to run your operations, as much as possible, like a true business with P&L responsibility. For us that meant two major themes. One was working closely with Finance to be very rigorous and conservative in how we calculated value and how we monitored and reported on our performance.

The other was adopting a Sales-inspired approach that focused on making a market based on meeting customer needs. We identified other Cisco functions as potential customers, developed solutions to address their specific pain points and assigned “Sales” teams with quotas and stretch targets. This was the transformational part of our story – the most difficult, but also the most rewarding.

As traditional Sales teams do, we’re focusing on keeping our customers happy and we’re setting the bar higher every year.

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