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Reverse logistics
Reverse logistics in the in the
pharmaceuticals industry: pharmaceuticals
industry
a systemic analysis
Sushmita A. Narayana 379
Department of Quantitative Methods & Operations Management,
Received 2 August 2012
Indian Institute of Management Kozhikode, Kozhikode, Kerala, India Revised 19 January 2013
Arun A. Elias Accepted 15 July 2013
Department of Operations Management,
Victoria Management School, Victoria University of Wellington,
Wellington, New Zealand, and
Rupesh K. Pati
Department of Quantitative Methods & Operations Management,
Indian Institute of Management Kozhikode, Kozhikode, Kerala, India

Abstract
Purpose – The purpose of this paper is to present a systemic analysis of the complex interaction
of factors affecting the reverse logistics (RL) processes in a pharmaceutical supply chain (PSC).
Design/methodology/approach – This study uses a systems thinking approach. Initial problem
structuring involved the analysis of behavior-over-time of main variables and incorporated stakeholder
analysis. Further, a participative group model building process was used to develop a systems model.
Findings – The model was analysed to identify a set of feedback loops operating in the system
responsible for the complexities of the problem. To address this, the stakeholders identified three
strategic interventions. The first intervention relates to returns avoidance by alleviating market flooding
of medicines, second intervention aims at improving the infrastructure for quality and performance
management and the third targets balanced risk sharing between the main stakeholders involved in the
supply chain. The findings suggest strong linkage between RL network design and key activities in
returns management. The study lays a platform for developing a simulation model.
Research limitations/implications – Data collection was confined to stakeholders belonging to a
PSC based in the South Indian state of Kerala and excluded the participation of doctors due to practical
constraints. The application of systems thinking and modelling was limited to the qualitative phases
of the methodology.
Practical implications – The study illustrates a participative process capable of revealing the
differing viewpoints of multiple stakeholders involved in a PSC.
Originality/value – It provides a holistic approach based on the systems thinking and modelling
methodology for analysing the complexities related to RL in the Indian pharmaceutical industry.
Keywords Systems thinking, Reverse logistics, Indian pharmaceutical industry,
Group model building
Paper type Research paper

1. Introduction
The study and practice of reverse logistics (RL) has increasingly become a unique area
of interest over the last two decades (Tibben-Lembke and Rogers, 2002; Stock and The International Journal of Logistics
Management
Vol. 25 No. 2, 2014
This journal paper is a longer and substantially revised version of a paper presented by the pp. 379-398
r Emerald Group Publishing Limited
authors at the 26th Annual Australian and New Zealand Academy of Management conference 0957-4093
2012, held in Perth, Australia. DOI 10.1108/IJLM-08-2012-0073
IJLM Mulki, 2009). A seminal review work in the field was published in the early 1990s
25,2 by the Council of Logistics Management (Stock, 1992), while Carter and Ellram (1998)
have traced indications of scientific interest in the field to the early 1970s. The generally
accepted definition of RL reveals that it is “the process of planning, implementation and
controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished
goods and related information from the point of consumption to the point of origin for the
380 purpose of recapturing or creating value or proper disposal” (Rogers and Tibben-Lembke,
1999, p. 2).
RL is now practised in many industries, including those producing steel,
commercial aircraft, computers, automobiles, chemicals, appliances and medical items
(Dowlatshahi, 2000). It is considered as one of the means for closing the loop of a
typical forward supply chain (Guide et al., 2003). RL is one of the activities within
the returns management process which is considered an important supply chain
management process (Rogers et al., 2002). By being the means for retrieving
both bad and good products from the environment for safe disposition, RL practices
can enable eco-friendly behaviour of the industries. This facet of RL has been identified
in literature as a significant component of environmentally conscious business
practices like green supply chain management (GSCM) (Sarkis, 1998) or “green
logistics” (Rogers and Tibben-Lembke, 2001). Furthermore, Hervani et al. (2005)
have identified RL as one of the essential components of GSCM, while investment
recovery and eco-design dimensions of GSCM practices are also closely related
to RL (Zhu et al., 2008). Thus, RL is an important linkage between closed-loop
supply chains and green supply chains as well. Typically, competitive, marketing,
economic and environmental reasons are all factors that have been identified as
relevant for the organisational adoption of RL activities and functions (Ravi and
Shanker, 2005).
Although RL plays a pivotal role in supply chain management, it is studied
in an isolated fashion, in terms of the problems studied, the methodologies applied
and the context addressed. There is a greater focus on the study of tactical and
operational problems in production planning and network design (Rubio et al.,
2008). Bernon et al. (2011) also note that previous research has mostly focused
on quantitative studies that focus on parts of the RL process. In order to improve
the theoretical framework for research, Rubio et al. (2008) suggest that research
efforts should move towards the analysis of strategic factors (marketing,
competition, technology, etc.) in RL. Most research efforts also focus on RL in
the automobile, electronic goods, paper recycling, sand recycling and even carpet
recycling industries. These journal articles focus on countries like Netherlands,
Germany and the USA (Rubio et al., 2008). There is ample scope to analyse
the extent, criticality and implications of the RL practices in other industries
and other geographical regions (especially emerging economies) to generate insights
for practice and research.
In this context, this study attempts an exploratory and holistic analysis of prevalent
issues in the RL process in the Indian pharmaceutical industry. A systems model
was developed for this purpose using a participative approach. The findings help in
developing strategic initiatives for improvement of RL in this context while identifying
strong linkage between RL and other critical returns management activities. This
paper presents the essence of this study, including relevant literature, methodology
used, data collected, and a model developed. Implications for practice and future
research avenues are also identified in the concluding section.
2. RL in the pharmaceutical industry Reverse logistics
The pharmaceutical industry refers to the complex of processes, operations and in the
organisations involved in the discovery, development and manufacture of drugs
and medications (Shah, 2004). It is characterised by high R&D investment, high pharmaceuticals
quality constraints, long production times, high waste to product ratios and industry
shortening product cycles, all of which can result in high margins for sales along the
pharmaceutical supply chain (PSC). The high waste to product ratios also explains 381
the focus of research on environmental issues and waste minimisation in the
production stages. However, as most of the inventory management in the PSC is
push-based up till the wholesaler level, the inventory levels tend to be very high
downstream (Shah, 2004). Inventory management systems using just-in-time or
stockless philosophies have been criticised in literature for not being pragmatic,
given the critical nature of medicine availability. Product recovery activities thus
have a scope of reducing the burden on production and being economically beneficial.
Increasing instances of product recalls, such as that of Vioxx by Merck and Johnson
& Johnson’s Tylenol, have the potential to affect the credibility of such companies
among the end consumers. An additional issue affecting the industry is that of
counterfeiting, with the World Health Organisation estimating counterfeit drug sales
to range between $35 and 40 billion per year (8-10 per cent of total sales). There have
been calls for proactive measures in the PSC to prevent extensive damage to the
consumer/environment as well as to safeguard the brand image of the manufacturers
(Ritchie et al., 2000; Kumar et al., 2009). Being high value chemicals, the proper
management of product returns, expired stock and product recalls is necessary
through the implementation of efficient RL systems.
Although there is considerable interest on environmental implications and
waste minimisation concerns of the pharmaceuticals industry, RL research in this
industry is limited in comparison to other industries. Teunter et al. (2003) studied
the recycling activities in the manufacturing process of a pharmaceutical company
and its implications on the production planning operations. Management of product
returns and recovery activities have been studied for their economic implications
in the downstream distribution networks (Amaro and Barbosa-Povoa, 2008, 2009)
or in hospital logistics (Ritchie et al., 2000). There has also been an attempt at
developing performance measures for the RL practices in the pharmaceutical
industry (Kumar et al., 2009). Holistic approaches that include several stakeholders
in the pharmaceutical and healthcare industries are emerging in recent times. Xie and
Breen (2012) discuss the design for a RL network in the PSC in the context of the
UK community PSC and provide a conceptual framework for greening the PSC using
a cross-boundary approach.
Typically, studies on RL in the pharmaceutical industry address issues either at the
level of production or at the levels of distribution and sales. Additionally, product
characteristics (e.g. expiry dates and pricing) and external factors (e.g. regulatory
constraints, market behaviours, impact on consumers and environment, information
systems (ISs) infrastructure) have to be considered in more detail. The focus on RL
activities is from a manufacturer’s perspective. In practice, product returns in this
industry are mostly handled by third party players and distributors who form an
integral part of the RL network. Given the critical value of drugs, the regulation of safe
manufacturing, distribution and sale of medicines is also a priority for the government
authorities. Thus, there is a scope for studying RL activities in the pharmaceuticals
industry at a strategic level.
IJLM 2.1 RL in the Indian pharmaceutical industry
25,2 The Indian pharmaceutical industry is in a state of growth. The domestic sales have
been increasing continuously during the last five years and so is the number of brands.
The industry is estimated to have around 23,000 marketing companies and 60,000
brands in the market (IMS Health, 2011). Similarly, the number of manufacturers in the
industry is around 10,000 and growing (Department of Pharmaceuticals, 2011), with
382 many of them acting as third party manufacturers for bigger players.
Table I displays the annual sales data and number of brands for around 450 top
companies in the industry for the last five years. These companies account for close to
70 per cent of the total domestic market value. There has also been a gradual rise in
prices, as indicated by the wholesale price index for drugs and medicines (Figure 1).
Despite this growth, the availability of essential medicines in the Indian market,
especially in the public sector and rural markets has been as low as 25 per cent
(Kotwani et al., 2007). Growing incidence of product recalls, allegations of spurious

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Total domestic market value (Rs. billion)b 374.1 417.8 496.6 590.2 690.5
Minimum estimated value of returned
medicines (Rs. billion)c 5.61 6.27 7.45 8.85 10.36
Number of FDA Recalls of India-made
drugs in the US marketd; 0 2 2 5 20
Wholesale price index (annual; base year
2004-2005 ¼ 100)e 102.56 108.11 111.41 112.72 114.5
Domestic sales of select players
(Rs. billion)a 279.58 321.62 354.75 418.23 482.39
Number of brands of select playersa 23,056 23,966 24,603 26,279 27,446
Number of select playersa 440 453 450 456 453
Sources: aData obtained from a leading multinational pharmaceutical company which has access
Table I. to market intelligence provided by IMS Health; bDatamonitor (2010); cestimated at 1.5 per cent of
Data for Indian domestic market value; dCollated from US Food and Drug Administration (USFDA) drug recall alerts
pharmaceutical industry maintained at www.fda.gov/Safety/Recalls/default.htm; eOEA to the Government of India Ministry of
(2006-2010) Commerce and Industry

120
R 2=0.913
WPI(Base 2004-2005=100)

115

110

105

100

95

90
Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Figure 1.
WPI Linear trend for WPI
Monthly wholesale price
index for drugs and
medicines Source: OEA to the Government of India Ministry of Commerce
and Industry
drugs and issues related to expired stock in both the international and domestic Reverse logistics
markets create a cause for concern. The seizure of large quantities of expired drugs in the
being sold under altered labels in early 2010 has raised doubts on the credibility of the
industry and the regulatory control on the supply chain (The Hindu, 2010). Loss due pharmaceuticals
to drug expiry and product recall has also affected the sales of major players such industry
as GlaxoSmithKline (The Hindu Business Line, 2011). Quality issues are also prevalent
in the supply chain, irrespective of the brand of the medicine. While the US 383
Food and Drug Administration reports indicate an increase in the number of recalls of
India-made drugs in the American market (Table I), the same is not clearly documented
on a nation-wide basis in the domestic market.
The availability of poor quality drugs and expired products in a rapidly growing
market is disconcerting as it places the consumer and the environment at risk. This
situation demands the need for effective RL practices so that such drugs are removed
from the market before they are consumed or disposed in an unsafe manner.
To gain deeper insight into the RL and other returns management practices of the
Indian industry, the authors conducted semi-structured interviews with wholesalers,
retailers, drug regulatory authorities and the pharmaceutical companies which operate
in the domestic market (multi-national companies and domestic companies). Figure 2
provides the description of the generic RL network in the Indian pharmaceutical
industry. The interviews revealed that the Indian pharmaceutical industry faces an
aggregate product returns percentage that varies from 1.5 to 15 per cent of annual sales
across the companies. The annual estimated value of these returned medicines
translates to around five billion Indian rupees (Table I). Product returns mainly occur
when the products have expired or there are quality issues with the composition
or packaging of the medicines. The wholesalers and retailers who distribute and sell
products of several companies indicate that the incidence of such returns has always
been prevalent across all product categories. Product returns are transported upstream
from various demand points (retailer, pharmacies and institutional buyers) across the
country to state-level C&FAs. These products are then sent for disposal at centralised
incineration centres after being inspected and sorted at the C&FAs. Expired products
form the major portion of returns from the downstream players to the companies.
Figure 3 indicates the number of cases of Not-of-Standard-Quality (NSQ) drugs that
are regularly identified through inspection by the regulatory authorities in the state
of Kerala. These drugs generally fail tests of assay, disintegration and dissolution.
Regulatory authorities regularly notify supply chain members for removal of such
drugs from the market as their consumption can be detrimental to the patients.

Institutional
Buyers
(Hospitals/Clinics)

State Level
Pharmaceutical Wholesalers End
Carry and
Manufacturers and Consumers
Forwarding
Distributors
Agents (C&FAs)

Retailers/
Pharmacists Figure 2.
Generic structure
Government- of reverse logistics
Approved network in the Indian
Incineration Forword Flow of Finished Goods
Site pharmaceutical industry
Reverse Flow of Product Returns
IJLM 30
25,2
25

Number of NSQ cases

20

384 15

10

0
07

07

08

08

09

09

10

10

11

1
-0

-0

-0

-1

-1
n-

p-

n-

p-

n-

p-

n-

p-

n-
ay

ay

ay

ay

ay
Ja

Se

Ja

Se

Ja

Se

Ja

Se

Ja
M

M
Month

Figure 3.
Number of NSQ cases identified
Trend of “Not-of-Standard-
Quality” cases of Linear trend for number of NSQ cases identified
medicines in the market
identified by government
inspection in Kerala, India Source: Collated from NSQ reports maintained at http://dc.kerala.gov.in/index.php/alerts/
70-substandarddrugs.html

While product returns due to problems with the drugs are a common occurrence, the
stakeholders were also asked about the return of good products, or effective returns,
as a cost-effective practice. None of the stakeholders indicated the voluntary retrieval
of good products from any of the supply chain nodes unless the product had reached
a status of near-expiry, or is a non-selling item.
To summarise the problem situation, though the Indian pharmaceutical market is
thriving in terms of sales and number of brands and products being produced, the
incidence of unusable product returns is still present. In addition to this, the availability
of essential medicines in the public sector and rural markets is low with a near absence
of effective or reusable returns. So, the problem situation related to RL in the Indian
pharmaceutical industry is quite complex. It is complex since there are several factors
affecting this problem, and they are changing with respect to time. A systems thinking
and modelling methodology was hence, used to explore the functioning of the RL
process in the Indian pharmaceutical industry at a strategic level.

3. Systems thinking and modelling methodology

Systems approaches have been used to understand the complexities related to managing
supply chains from as early as the mid 1900s (Forrester, 1961). Although majority of the
research efforts focus on forward logistics activities, there is an upcoming interest in its
application in RL. Examples include applications in automobile industry (e.g. Sterman,
2000), paper industry (e.g. Taylor, 1999), electrical and electronics equipment industry
(e.g. Spengler and Schröter, 2003; Georgiadis and Besiou, 2008) where there is a high
amount of product return or where product recovery activities are economically
and environmentally beneficial. Subsequently, the major RL activities studied have been
limited to recycling or remanufacturing, prompting research efforts at a more Reverse logistics
holistic level. There is also scope for utilising systems thinking in research efforts, which in the
also incorporate non-material elements and social aspects in RL.
The methodological approach of this study is based on the systems thinking and pharmaceuticals
modelling methodology (Maani and Cavana, 2007). Specifically, a qualitative approach industry
consisting of two phases was used. These two phases and the associated steps are
shown in Table II. 385
In the first phase, the complex problem related to product returns in the
Indian pharmaceutical industry was structured systemically. For structuring
the problem systemically, first a behaviour-over-time (BOT) chart was developed.
Then a stakeholder analysis was conducted to identify and analyse the stakeholders
of this problem situation.
In the second phase, a causal loop model was developed using a process called
group model building. This is a process in which team members exchange the
perceptions of a problem and explore such questions as what exactly is the problem
we face? How did the problematic situation originate? What might be its underlying
causes? How can the problem be effectively tackled? (Vennix, 1996) An important
characteristic of group model building is that “fact” is separated from “value”. The
primary focus is descriptive and diagnostic, the way the team members think is
a system works is separated from the question on how they would like a system to
work. The goal of group model building is to create a consensus after sufficient
deliberation and contrasting of viewpoints has taken place (Vennix, 1996).
In this qualitative group model building approach, hexagons are used for systems
thinking, based on Hodgson’s (1994) use of hexagons for issue conceptualisation
and Kreutzer’s (1995) FASTbreakTM process for using hexagons to develop causal
loop diagrams.

4. Problem structuring
In the problem structuring phase, first a BOT graph was developed. This was followed
by a systematic stakeholder analysis to get an initial idea about the complexities
related to the RL processes in the Indian pharmaceutical industry.

4.1 BOT graph

Developing a “BOT graph” or demonstrating “reference mode behaviour” is a tool used
in systems thinking to show the patterns of the main variables in a system over an
extended period of time, typically several months to several years. Such patterns can
indicate the variations and trends in the variable of interest, for example, growth,
decline, oscillations or a combination thereof. The important elements captured by a

Phases Steps

Problem structuring Behaviour over time chart development

Stakeholder analysis
Causal loop modelling (using group model building) Hexagon generation
Cluster formation
Variable identification and Table II.
Causal loop model development Methodological
Causal loop model analysis framework
IJLM BOT graph are the overall trends, directions and variations, not the numerical value
25,2 of the variable. Therefore, BOT graphs are usually drawn in a rough sense without
exact numerical values attached (Maani and Cavana, 2007).
In this study, a BOT chart (Figure 4) was drawn to capture the trends of six
variables related to the pharmaceutical industry in India. These variables include
domestic sales, number of brands, price represented by WPI, estimated product
386 returns, number of NSQ cases and effective returns. These trends are based on
data from Table I, Figures 1 and 3 as well as interactions with the stakeholders in
the pharmaceutical industry. In this BOT graph, the industry shows an increase
in sales and number of brands in the market. This positive outlook of the industry is
accompanied by a slow but gradual increase in the prices of medicines as well,
indicating that medicines are getting costlier for the consumer. At the same time, there
seems to be an increase in presence of products of poor quality in the market and an
increase in the value of products that are returning from the market. However, the BOT
graph shows that the voluntary retrieval of good products from the market or effective
returns is quite low.

4.2 Stakeholder map

In the second part of problem structuring, stakeholders related to the problem situation
were identified and analysed. For this purpose, a stakeholder analysis methodology
was used. According to Elias et al. (2002) this methodology consists of nine steps:
(1) developing a stakeholder map of the problem situation;
(2) preparing a chart of specific stakeholders;
(3) identifying the stakes or interests of stakeholders;
(4) preparing a power vs stake grid;
(5) conducting a process level stakeholder analysis;
(6) conducting a transactional-level stakeholder analysis;

6
2006 2010
Figure 4.
Behaviour-over-time
(BOT) graph Notes: 1, Domestic sales; 2, value of returned products; 3, number
of brands; 4, price; 5, number of NSQ cases; 6, effective returns
 (7) determining the stakeholder management capability; Reverse logistics
(8) analysing the salience of stakeholder; and in the
(9) analysing the changing positions and interests of stakeholders. pharmaceuticals
The stakeholder map developed in this study is presented in Figure 5 and includes industry
different members in the PSC. These members have the potential to impact the
performance of the PSC directly or indirectly (Xie and Breen, 2012). The initial 387
interviews with various stakeholders led to an understanding of their involvement
in the reverse supply chain as well. A detailed description of the remaining eight
steps and its illustration is beyond the scope of this paper. However, it is important
to note that such a stakeholder analysis helped in structuring the problem situation by
systematically identifying the stakeholders and their stakes. It also helped in defining
the problem systemically from the perspective of several stakeholders.

5. Group model building

In the second phase of this study, a group model building exercise was conducted
to develop a causal loop model. For this purpose, ten key stakeholders, belonging to the
different categories as identified in the stakeholder map, were brought together to
participate in the group model building exercise (Table III). A purposeful sampling was
carried out where respondents of the initial interviews were contacted to participate
in the. Most of the stakeholders were represented except healthcare providers and
C&FAs.
In this qualitative group model building approach, the following four steps were
used:
. Step 1: hexagon generation;
. Step 2: cluster formation;
. Step 3: variable identification; and
. Step 4: causal loop development.

Pharmaceutical
Healthcare companies Wholesalers/
Providers Distributors

Drug Reverse Logistics in the Indian Retailers/

Regulatory pharmaceutical industry Pharmacists
Authorities

End-
Consumers C&F agents Figure 5.
Stakeholder map
IJLM Stakeholder
25,2 (number of participants) Details (all stakeholders are based in Kozhikode, Kerala)
Manufacturer (1) Managing Director (MD) of a pharmaceutical manufacturing company
that manufactures antibiotics, vaccines and medical kits. Current
product returns in the company amount to around 2% of its annual
revenues
388 Manufacturer (1) MD of a pharmaceutical manufacturing company that manufactures
products in the dermatology, gynaecology, orthopaedic and paediatric
segments. Current product returns in the company amount to at least
10% of its annual revenues
Wholesaler (1) Managing Partner of a large wholesale and distribution company in
Table III. the domestic market
Details of stakeholders Distributor (1) MD of a marketing cum distribution company that specializes in
who participated in the procuring products from domestic and international companies
model building session Pharmacist (1) Pharmacist in a Government Hospital
held during March 2011 Drug Regulatory Drug Inspector in the Drug Control Department, Kerala
at the Indian Institute Authority (1)
of Management Customers (3) Adult customers (Two PhD students and a faculty member at IIMK)
Kozhikode (IIMK) Researcher (1) A faculty member in the Operations Management Area of the IIMK

Step 1: hexagon generation

This step consisted of generating hexagons for each issue, opportunity or obstacle
identified by the stakeholders. To help the stakeholders in generating hexagons,
an organising question was used. The organising question was “What are the factors
that affect the product returns in Indian pharmaceutical industry?” This question was
asked keeping in mind that RL is part of the broader returns management process.
During this step, hexagons were used as a facilitation tool. One of the authors
acted as a facilitator and recorded issues, opportunities or obstacles identified by the
participants. The stakeholders who attended this session generated 38 hexagons.
Step 2: cluster formation
In this second step, hexagons that have something in common were identified by the
stakeholders. They grouped such hexagons together to form clusters. Then a descriptive
name was given to each cluster. In this step, the stakeholders made seven such clusters
and provided them with descriptive names (business value for manufacturing, reduction
of all stakeholder risks, ethical medical practice, social obligations, customer awareness
and benefits, third party involvement and new policy initiatives). As an example the
cluster on reduction of all stakeholder risks is presented in Figure 6.
Step 3: variable identification
In this step, the stakeholders identified a few variables associated with each cluster.
Accordingly, thirty variables were identified (Table IV).
Step 4: causal loop development
During this step stakeholders tried to establish possible links between variables.
First they identified any two variables that were related and provided a directed arrow
between them. To generate a directed arrow, they placed a positive ( þ ) sign near the
head of the arrow if an increase (or decrease) in a variable at the tail of an arrow caused
a corresponding increase (or decrease) in a variable at the head of the arrow. If an
increase in the causal variable caused a decrease in the affected variable, a negative ()
sign was placed near the head of the arrow. At the end of the group model building
exercise, a general agreement that this model represented their shared view was
obtained from the stakeholders who participated in this meeting.
 Reverse logistics
in the
pharmaceuticals
32. Incentive
industry
to the traders 28. Risk
to reduce the sharing 389
expiry

9. Need for
product 2. No risk for 3. Lack of
tracking retailer follow up from
systems manufacturer

21. Increase 19. Reduce

margin to price through
compensate retrieval and
loss in expiry relocation

Figure 6.
Example of a cluster –
“reduction of all
stakeholder risks”

Variables

1. Sales 16. Material handling and transport costs

2. Return of disposable products 17. Marketing
3. Reimbursement Claimed 18. Market flooding
4. Reimbursement 19. Incentives to sell price leader
5. Regulatory pressures 20. Incentive to return disposable products
6. Production 21. Incentive to make effective returns
7. Price 22. Effective returns
8. Number of unsold drugs in market 23. Supply of effective returns
9. Number of poor quality drugs 24. Demand-supply gap
10. Number of players 25. Demand
11. Number of “not of standard quality” drugs (NSQs) 26. Damage to company image
12. Number of non-moving drugs 27. Company’s refusal of effective returns Table IV.
13. Number of expired drugs 28. Company’s pressure to liquidate stock Variables identified
14. Number of disposable products 29. Attractiveness of market in the group model
15. Number of brands 30. Sales of other brands building session

6. Analysis of the causal loop model

The causal loop diagram that was developed (Figure 7) revealed nine reinforcing
(R1-R9) and 16 balancing loops (B1-B16) that explain the trends in the BOT chart.
Different loops explain the trends as depicted in Table V.
 25,2

390
IJLM

Figure 7.
Causal loop diagram
Demand-
R1 Supply Gap
+
Price + –
Demand

No. of
+ players
+
Attractiveness of + –
+
market R2 Supply of effective
No. of brands + Production
+ returns
Marketing +
+
efforts R9 B1 B2
+
R6
+
B15
+ Company's pressure
Incentives to sell to liquidate stock R7
price leader + +
B12 + + + R8 + Company's refusal – Effective
B13 No. of unsold B10 returns
Sales B16 – of effective returns
Sales of other – drugs in market +
– – – + brands –
B14 –
+ Incentive to make
+ – effective returns
R4 No. of disposable –
products Market –
R3
Damage to + flooding B9
+ No. of + B7
Company Image +
non-moving drugs
R5 No. of NSQs
+ +
++ +
Regulatory No. of expired + + Reimbursement
pressures +
drugs Claimed
B4 Material Handling and
No. of poor + + –
B5 Return of Transport Costs
quality drugs B11
disposable products
+ +
B3 Reimbursement
B6

+ +
+ Incentive to return
–
disposable products
– B8
Loops Trends explained
Reverse logistics
in the
Demand- sales loop (R1)
Market attractiveness loops (R2 and R9)
Increasing sales, prices and brands
Increasing incidence of expired and bad quality
pharmaceuticals
Uneven marketing efforts loop (R8) products industry
Market flooding of disposable medicines loop Increasing return of expired and NSQ products
(R3, R4 and R5) Low effective returns
Market flooding delayed alleviation loops
391
(B12, B13 and B15)
Encouragement loops for return of disposable
products (B3, B4 and B5)
Reverse Logistics costs loop (B6)
Reimbursement claims loops (B8 and B11) Table V.
Distributor’s reluctance for making effective Loops from the causal
returns (B10) model that explain trends
Company’s reluctance for effective returns (R7) in the BOT chart

6.1 Increasing sales, prices and brands

The increasing trends for sales, prices and brands of drugs are closely interrelated
and provide the context for this study. These trends are explained by the loops
that depict the demand-sales interactions and the attractiveness of the market to the
pharmaceutical industry.
Demand-sales loop (R1). Product sales are a function of the demand volume,
the price of the drugs and marketing efforts of the industry. In the reinforcing
loop R1, an increase in sales reduces the stock available for sale, which triggers
the demand-supply gap to widen, thus, raising the prices of medicines and their sales.
As noted in the trend of the Wholesale Price Index (WPI), the price increase is not
very large.
Market attractiveness loops (R2 and R9). With increasing sales, the Indian market
has become attractive for new players, thus, increasing the total number of players and
hence, the cumulative production. Greater production triggers the introduction of more
brands (R2) and more products in the market (R9), causing the industry to increase its
marketing efforts (R2). These marketing efforts are directed towards the health
providers who decide what medicines the consumer buys. Thus, the sales in the Indian
market increase through push-based efforts of the industry.

6.2. Increasing incidence of expired and bad quality products

With an increase in products in the market (R9), the industry pushes the sale of excess
stock by increasing marketing efforts (balancing loops B15 and B16). However,
the excess stock comprises expired and poor quality products that cannot be sold.
The increasing incidence of these products is explained by uneven marketing efforts
and sales across brands, which eventually results in market flooding of unwanted and
disposable products.
Uneven marketing efforts loop (R8). Increase in marketing efforts provides high
incentives to sell the medicines of price-leading brands. However, due to this, other
brands of the same drug remain unsold, adding to the quantity of unsold drugs. This is
characteristic of the Indian market, wherein competition exists within therapeutic
segments that have a few market leaders, thus, causing an oligopoly. Hence, the market
has an excess stock of unwanted but usable medicines, which cannot compete with
price-leading brands.
IJLM Market flooding of disposable medicines loop (R3, R4 and R5). Due to excess
25,2 stock, there is an increasing occurrence of quality issues, resulting in NSQ products.
Non-moving drugs also expire, adding to the number of disposable products in the
system. When a company is known for non-moving drugs and disposable products, its
image is tarnished. Moreover, when end consumers and regulatory authorities become
aware of this situation, it adversely affects sales (loops R3, R4 and R5). However, as the
392 medicines are being handled by several players, it is difficult to track quality issues.
Subsequently, the effects of disposable medicines are usually visible only after a
delay, i.e., generally after the sale. Similarly, detection of poor quality products by the
government authorities also takes place after a certain delay. This delay has been
attributed to factors such as lack of drug inspectors and lack of proactive regulatory
infrastructure. Due to all these reasons, the products remain in the chain for a longer
period causing further market flooding.
Market flooding delayed alleviation loops (B12, B13 and B15). The increasing
presence of poor quality products adversely affects sales, market attractiveness (B15)
and production (B12, B13 and B15). Subsequent market flooding due to new products is
controlled. However, delayed detection of quality issues results in a delayed response to
market flooding as well, during which more such products enter the market.

6.3 Increasing return of expired and NSQ products

The return of expired and NSQ products occurs in response to market flooding.
The business environment encourages the return of disposable products.
Encouragement loops for return of disposable products (B3, B4 and B5). As the
market is flooded with disposable products, there is increasing incentive for retailers to
claim full reimbursement (B3), for companies to protect their image (B4) and to comply
with regulatory pressures (B5). Subsequently, current business practices encourage
the return of disposable medicines. Additionally, continuous market flooding ensures
that there is an increasing return of such products.
While these loops explain the continuous return of products, logistics costs and
delayed reimbursement slow it down (but do not stop it).
RL costs loop (B6). Ordinarily, the return of disposable products increases the costs
for material handling and transportation, which is borne by the distribution sector.
These costs discourage the frequent return of disposable products
Reimbursement claims loops (B8 and B11). Each player claims reimbursement from
the companies for loss in revenues incurred with disposable products (B8). However,
these claims are reimbursed after a delay, due to which the return of the products is
also done after the reimbursement of previous returns (B11). This delay is not consistent
among companies, varying from a few days to a few months. The piling up of such
claims further delays the return of disposable products.

6.4 Low effective returns

In the reinforcing loop, R6, it can be observed that the presence of more products in the
market enables effective returns, thus making the process a self-sufficient supplier
of effective returns into the market. When there is an increase in the demand-supply
gap, the supply of effective returns helps in providing good quality products into the
market, thus, supplementing for the production loop, B1, as depicted in the balancing
loop, B2.
While loops B2 and R6 encourage effective returns, the problem structuring phase
revealed that there is low or negligible amount of return of good quality products.
Similar to the return of disposable products, increasing logistics costs (loop B7) and Reverse logistics
delayed reimbursement (loops B9 and B11) slow down effective returns. Additionally, in the
prevention of effective returns occurs at two levels, one being at the level of the
distribution and sale, and the other occurring at the level of the company. pharmaceuticals
Distributor’s reluctance for making effective returns (B10). Making effective returns industry
are a disincentive for the distributors and retailers as they reduce the stock available
for sale. These players would rather wait till expiry to return them for complete 393
reimbursement from the company, hence, reducing the effective returns.
Company’s reluctance for effective returns (R7). Perhaps, the biggest factor preventing
effective returns is the company policies. Companies increase their marketing efforts to
sell excess stock and to make way for new batches of drugs and newer brands.
Subsequently, they do not allow the return of good quality products between any of the
supply chain nodes until near expiry. The prevention of effective returns through this
reinforcing loop also aids market flooding.

7. Discussion
The structure of the system, captured using the causal loop model, explains the
behaviour of the system, as shown in the BOT graph (Sterman, 2000). After the group
building exercise, the stakeholders identified a few plausible initiatives to address the
problem at a system-wide level.
Returns avoidance through the alleviation of market flooding of medicines emerged
as an important strategy. Returns avoidance is a critical activity needed to reduce
returns requests independently of the RL activity (Rogers et al., 2002). Currently
market flooding occurs due to the combined action of several loops and greatly
contributes to increasing return of disposable drugs (Section 6). The attractiveness
of the Indian pharmaceutical market causes more players to enter the market and
produce several “me-too” drugs through unbalanced marketing efforts across brands.
Flooding can also been attributed to a stringent but low-coverage pricing policy that
encourages players to produce several other innovative but “unnecessary” drugs that
are not under price control (Sakthivel and Nabar, 2010). Companies need to adopt a “sell
right, not more” approach, utilising a more functionally integrated organisational
approach, to enable the firm to better meet customer orders and returns requirements
(Mollenkopf et al., 2011). Current mechanisms for alleviation of market flooding present
a reactive approach which calls for the following remedial measures that address the
behaviour of the pharmaceutical industry:
(1) the industry should improve its understanding of the market needs in order
to prevent a glut of unnecessary medicines;
(2) policy makers should design price-controls with the aim of promoting production
of useful medicines, while maintaining competition and efficient sale of low-cost
drugs in the market; and
(3) marketing efforts should promote other therapeutically equivalent brands by
ethically educating healthcare providers and consumers about them. This also
allows for judicious utilisation of healthcare budgets.
Some radical initiatives that were suggested include the “merging” of brands and the
marketing of products only in their generic names. This strategy is similar to the “Jan
Aushadhi” programme initiated by the Department of Pharmaceuticals in India,
wherein public procurement of non-branded generic equivalents eases access to affordable
IJLM medicines. Such an initiative could reduce the price-leading behaviour of companies
25,2 and promote competition based on therapeutic value. Hence, while returns avoidance has
been noted as an important strategy at an organisational level (Mollenkopf et al., 2007),
this exercise depicted its importance at an industry-wide level as well.
The infrastructure for quality and performance management in the industry was
identified as the second area of improvement. Unlike forward logistics, incoming RL
394 product is not tracked extensively, because of the lack of the IS resources necessary to
do this (Tibben-Lembke and Rogers, 2002). Typically, product tracking, inspection
and sorting are manual operations in the Indian PSC, wherein returns processing
are heavily centralized. Such systems prevent the identification and timely removal of
undesirable products, as observed in the process of market flooding of disposable
medicines and the attempted alleviation of the same (Section 6). Additionally,
interactions with the stakeholders revealed that there is low awareness among supply
chain partners with regard to material handling practices in the case of disposable
products. Lack of IS resources and a general lack of recognition of the importance of RL
are two of the largest barriers RL executives face (Rogers and Tibben-Lembke, 2001).
There is also a need to reduce delays in the system because of reasons such as lack
of drug inspection personnel, poor accessibility to the point-of-sale, etc. Thus, there is a
strong requirement in the industry to:
(1) Adopt systematic means to identify and publish data of poor quality products,
including details of the manufacturer and batch codes, at a national level.
Such systems are already in place in international markets governed by the
policies of agencies like the FDA.
(2) Analyse the scope for implementing sophisticated tools and ISs
(e.g. radio-frequency identification) in the supply network, to aid reliable
pharmaceutical data management and product tracking.
(3) Explore the implementation of early inspection in the RL system.
(4) Revisit and revamp present government regulations and resources that are
used for quality control in the industry.
Finally, participants also indicated the scope for redesign of current RL network into a
more collaborative structure. Downstream players are reluctant to return good products
(loop B10), while company policies prevent backward movement of the same (loop R7).
Product retrieval in the PSC is generally done for the purpose of disposal and not for
reuse (Xie and Breen, 2012). However, in the current scenario, the absence of a system for
voluntary retrieval and redistribution of good quality drugs from the market aids market
flooding of products in the long run. This suggests that current means of returns
avoidance encourage returns. As the RL network is heavily centralised, there is also
an imbalance in risk sharing among stakeholders, which is further complicated by
the power dynamics between the distribution and manufacturing industries. The
management of returns is considered as an additional cost burden for downstream
players due to increasing RL costs and procedural delays in reimbursement. Xie and
Breen (2012) also raise concern over who should pay for the costs incurred in GSCM in
this industry. Subsequently, there is a need to assess and analyse the:
(1) Role of the effective returns in RL design and the scope for product retrieval as
a part of socially responsible initiatives, which can protect the environment and
provide needy sections of the society with low-cost and good quality drugs.
 (2) Causes for procedural delays and hence, rectify them in order to streamline the Reverse logistics
returns process, while improving the levels of trust and satisfaction within in the
the distribution and retail sectors.
pharmaceuticals
(3) Incorporation of cost-sharing, among the supply chain members, with respect
to managing product returns and logistics costs.
industry
(4) Scope for a more responsive reverse supply chain involving third party players 395
in returns management and early disposition, under well-developed government
regulations.

8. Conclusion
This study explains how a systems thinking and modelling approach could be used for
analysing the complex interaction of factors related to RL in the Indian pharmaceutical
industry. The causal model and the strategies developed provide insights into the
linkage between RL network design and critical returns management processes such
as returns avoidance, disposition, credit rules, etc. It also lays a platform for building a
system dynamics simulation model, capable of developing and evaluating different
strategic options for improving RL processes in the Indian pharmaceutical industry.
This study is of interest to practitioners who want to explore the complexities of RL
practices at an industry-wide level.
Future research efforts need to study external factors (regulatory pressures,
competitive forces and stakeholder involvement) at a more operational level in the context
of RL. The pharmaceuticals industry is one of the few industries where government
regulation applies to most stages of value addition (manufacturing, distribution, product
pricing, disposal, etc.). Hence, it is necessary to study how these regulations can be
coordinated effectively to improve the RL practices. Srivastava and Srivastava (2006)
suggest that lack of incentives/disincentives from regulatory authorities and lack of
customer pressures on manufacturers inhibit the implementation of RL practices in India.
Typically, there is also a need to study issues of enforcement versus compliance in the RL
practices in the Indian PSC. Competitive pressures need to be studied further in the
context of their impact on the marketing and returns management strategies. Stakeholder
involvement in terms of power dynamics between the distribution and manufacturing
sectors depict the need to study the design of RL networks with respect to contractual
obligations and B2B relationships. Furthermore, there is a need to study the involvement
of the end customer who is not only a consumer of medication/healthcare service, but
is also as an actor who reduces unneeded medication and returns unwanted medication
(Xie and Breen, 2012).
This study was limited by the paucity of empirical data at a national level in the
industry and hence calls for more empirical research in the PSC with respect to RL and
GSCM. Additionally, the lack of participation of certain stakeholders, such as doctors,
provides limited insights into returns management between institutional buyers and
the pharmaceutical industry. Given the exploratory nature of the study, disposition
options addressed only include redistribution and disposal. There is also scope for the
study of implementation of GSCM practices in the Indian pharmaceutical industry
which comprises of internal environmental management, external GSCM, investment
recovery and eco-design or design for environment practices (Zhu et al., 2008).
The viewpoints of other stakeholders within organisations could also provide better
insights into cross-functional integration in the RL network, which is important for
value creation (Mollenkopf et al., 2011). Nevertheless, it adds to the emerging interest
IJLM in qualitative research (e.g. Knemeyer et al., 2002; Mollenkopf et al., 2007; Bernon et al.,
25,2 2011, etc.) that is capable of studying RL at a holistic level.

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About the authors

Sushmita A. Narayana is a Doctoral Student at the Indian Institute of Management Kozhikode.
Her research interests include reverse logistics, pharmaceutical supply chains and the system
dynamics methodology. Sushmita A. Narayana is the corresponding author and can be contacted
at: sushmita.narayana@gmail.com
Dr Arun A. Elias is a Faculty Member at the Victoria Management School, Victoria
University of Wellington, New Zealand. He is also a Visiting Faculty at the Indian Institute of
Management Kozhikode. He has published in journals like R& D Management, International
Transactions of Operational Research, Energy Policy, and Journal of Environmental Planning
and Management.
Dr Rupesh K. Pati is a Faculty Member in the area of Operations Management and
Quantitative Methods at the Indian Institute of Management Kozhikode. He has published
research papers in journals like Omega: International Journal of Management Science, International
Journal of Production Economics, International Journal of Value Chain Management, International
Journal of Business Process Management, International Journal of Environment and Waste
Management, and Productivity.

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