You’ve just gotten approval to outsource reverse logistics.  The first step is to put together an RFI/RFP and send it out to your evoked list of potential service providers.  When developing this RFP, there are basically two approaches companies can take in selecting a third party logistics provider.  The first approach is the “Commodity Pricing” approach. This is used by companies that, for a number of reasons, are going to base everything solely on price. The lowest, BELIEVABLE price will get the deal. Most of the Commodity Pricing RFP questions concern establishing credibility and position in the market. Of course, the final version will be based on exacting specifications that require a firm price.

Often the final RFP will have a completed contract that has to have pricing filled in and signed when returned for final review and selection by the buying company. Companies that issue Commodity Pricing RFP’s don’t care how much is profit, what the provider’s cost is, or what assumptions were built in by the service provider. They seldom pay attention to critical elements such as yeild rate, scrap, or disposition statistics.  Their only concern is their cost. For some it could be a cost per unit, others look at total dollars out of pocket, and some ask for a monthly dollar amount for fixed expenses and a firm cost per unit based on volume. This approach works great if the solution calls for a “commodity service” that is not customized, and with little or no variation in residual value of goods flowing through the reverse pipeline.

However, if the valuation of returned goods could vary significantly based on how the product is processed, the Commodity Priced approach can end in disaster for both the company and the provider.  Disaster strikes when the condition or make up of the goods returned are not as expected.  And just like when you drop buttered toast on the floor, it ain’t going to be in your favor.  The 3PL ends up either spending a lot more time and money trying to process the goods or they take short cuts to avoid losing their shirts.  Regardless, it is a big problem for both the third party service provider and their customer.

The second approach to developing reverse logistics or reclamation RFP’s is called the “Relationship” approach. If you are going to outsource a reverse logistics that requires flexibility on the part of the provider and the rate of variability is high, you want to select a provider that you trust.  You will need a provider that will work with you and is willing to agree to contract language that will tie the provider’s interest to your interests.  Relationship contracts are often volume based. Many times contacts are cost plus with a budget cap, based on a mutually agreed to set of assumptions. These contracts are much more complicated than a fixed priced agreement but they can result in much better service over the long haul.

Watch out, though, contracts with assumptions and variability require a lot of effort and oversight to ensure everything is on the up and up. If you are outsourcing returns management to an industry expert, you better have an internal expert working for you, otherwise you could be taken to the cleaners.  One client was getting charged $400 per hour for additional software customization, even though the contract clearly stated that systems charges were fixed.  The customer was “confused” because the contract was cost plus so when the system invoices came through they were never questioned.

If your company is going to outsource and you are developing the RFP or you are ready to select the third party provider, ask yourself the following questions:

1. What type of RFP and contract is typical for the industry?
2. How much variability occurs that is out of our control?
3. How predictable are the basic metrics?
4. What is an acceptable yield rate for repaired & refurbished goods?
5. What is the expected scrap rate for product by category?
6. What kind of additional “value adds” are you looking for the service provider to bring?
7. How long do you anticipate the contract and associated relationship to last?
8. What was the justification used to get approval for the project?
9. What risks can be controlled if included in the contact? Shrinkage, mis-ships, worker’s comp, health insurance increases, union organizing efforts……

For those looking to outsource reverse logistics, take a look at RL Quote on the Reverse Logistics Association’s web site.  This is a great tool and can ensure you get access to the best in class service providers in the field of reverse logistics.  Their members provide reclamation services, refurbish and repair services, software, operations and consulting.  This is the best source to find 3PL’s who specialize in reverse logistics.

The key component in developing an RFP and later, the contract, is to ensure that you have someone on your side of the table that is as knowledgeable as the third party service provider sitting on the other side of the table.  There are many details involved in outsourcing reverse logistics.  Having an experienced negotiator that understands these details can be worth millions over the life of a contract.  If you are equally matched and you end up with a professional service provider that hits it out of the park, the benefits outsourcing will far exceed the expectations.