Posts Tagged ‘3PL’

Reverse logistics is a part of the supply chain that is often outsourced to 3PL’s.  Many companies with large sophisticated logistics departments outsource returns management because they do not have any expertise in processing returns and the return center operation can stand on it’s own, outside of normal supply chain operations.

In addition, companies outsource reverse logistics operations for many other reasons. Some need quick expansion and don’t have the manpower nor the infrastructure in place to expand as needed. Others are looking to cap exposure to worker comp expenses, inventory shrinkage, or hiring costs when starting up a new operation.

All of this can be done by outsourcing to a qualified third party logistics organization (3PL). However, to do this successfully the 3PL agreement must clearly articulate the level of service (LOS) goals, budgets, and the other metrics. LOS goals used by the 3PL must be in alignment and support the company’s goals. The incentive systems and payment terms for performance must parallel and support the same financial impact on the outsourcing company.  In other words, contract terms and conditions must incentivize the 3PL to perform the stated duties in a manner that is in the best interest of the company.

Outsourcing return center management to a 3PL usually goes badly for one of four reasons:

1. The level of service requirements and scope defined in the contract are not in alignment with the financial justifications used to outsource initially.
2. The recovery rates on returned inventory, which justified higher 3PL costs and fees, are below expectations.
3. The volume and timing of the flow of returns is much higher and more condensed than anticipated, causing problems with customer service, space, and escalating processing costs.
4. The contract does not provide the flexibility necessary for a reverse logistics operation.

Many companies new to outsourcing don’t include key metrics in the contract. Often they don’t have good benchmarking data for items such as damage rate, inventory shrinkage, annual inventory turns, and thru put numbers to ensure they are getting what they expected from the 3PL returns operation. These details have to be carefully spelled out along with who will be responsible for the associated costs if the LOS goals are not met.

Reverse logistics operations are much different than distribution operations or transportation.  The contract that governs outsourcing to a 3PL must be specifically designed to ensure these differences are addressed.  Many executives new to outsourcing returns to a 3PL make a big mistake by using “the standard outsourcing agreement” used when outsourcing warehouse operations.  Reverse logistics contracts must provide flexibility to the 3PL and that must be reflected in the financial terms and conditions.

Remember, nobody orders returns.  You don’t know what you will get until it shows up at the door.  It isn’t a good contract unless it is flexible. 3PL outsourcing agreements should include language addressing how costs will be paid based on a wide range of unique returns related metrics, the biggest of which is volume. Many companies use volume bands to calculate variable costs. Some companies use a fixed dollar fee for the provider.  Many 3PL contracts are cost plus with a budget cap. All of these methods can work in the right situation, with the appropriate means of adjusting the T’s & C’s built into the contract.

There are two reasons for signing a contract with a 3PL when outsourcing reverse logistics. The first reason is so there are clear terms and conditions for running the operation and billing.  The second reason is to have a framework to dismantle the operations if it fails.

Many companies that outsource don’t seem to think about the details and what they are going to do if they have to fire the service provider. Make no mistake, terminating a contact with or without cause can cost millions. You need to think about what happens to the inventory, the capital equipment, the building, ongoing worker comp issues, shut down and closing costs and what you are going to do after the 3PL is gone. All of these and many more issues need to be considered and you must spell out who is liable for each issue under each scenario. Once you’ve decided to end the relationship, you could save yourself millions if the contract addresses the shut down process correctly. There are many valid reasons to outsource reverse logistics to a 3PL. The key is to have a good contract that will protect everyone’s interest, achieve the original goals that drove the decision to outsource, and ensure a win/win relationships between the parties.

When the manager of a 3PL or aftermarket service provider looks at the logistics world, why on earth would he or she want to get into reverse logistics? It is the opposite of traditional or forward logistics. It is like flushing things up the pipe, not a natural thing to do. Reverse logistics providers deal with unusual problems. Nothing is in a new box. Everything is “broken” or “unwanted”. The service offerings seem unrelated and fragmented. There are no beautifully cubed out truckloads riding on pallets. Yet reverse logistics is becoming an ever more important link in the supply chain. 3PL’s and aftermarket service providers would be wise to think about the possibilities. Some would argue that the changing supply chain landscape makes adding a strong, state of the art, reverse logistics offering a survival move, not just a strategy to add incremental revenue.

The cost of fuel and the lack of qualified commercial drivers are causing the buyers of 3PL and aftermarket services to include reverse logistics more and more into their planning. The rise of sustainability initiatives and the confusing morass of state level end-of-life regulations for Consumer Electronic manufacturers are a big cause for concern.

These are all important factors. However, in the future the largest driver behind the need for reverse logistics and the least understood, is the coming shortage of rare earth minerals. This shortage will force manufacturers to examine their entire supply chain to uncover ways to reclaim, not only the parts, but the minerals and metals as well. This process will compact and shorten the supply chain and those 3PL’s and aftermarket service providers who can’t provide this service in an integrated way run the risk of becoming as extinct as dinosaurs.

 

Minerals – Years of Reserves Left

Hafnium – 5 to 10 years of supply

Indium – 5 to 10 years of supply

Platinum – 10 to 15 years of supply

Silver – 15 to 20 years of supply

Antimony – 15 to 20 years of supply

Tantalum – 20 to 30 years of supply

“Earth Audit” by David Cohen – New Scientist – May 2007

In the future, we believe, we will see many more distribution centers that have reverse logistics centers co-located within them. These facilities will handle the reverse logistics function of maximizing the value of the returned product through product disposition management. Cleaning, parts and raw material harvesting, refurbishing, product liquidation, recycling, repackaging, repair and remanufacturing will all occur alongside the much less complicated process of shipping products to customers.  These high end, technically complex processes will command a higher margin than simply shipping pristine cases to customers.

Todays distribution and reverse logistics network was built on the foundation of fuel prices at $2.00 per gallon and on the concept of unlimited natural resources. We now know that foundation was built on shifting sand. Fewer miles must be driven and raw materials must be recovered and reused at a much higher rate in order to provide electronics at an affordable price. The challenge for 3PL’s and aftermarket service providers is to understand what these changes mean to their customers and how they can develop their capabilities in order to deliver cost effective services that will meet the future demands of their customers.

Aftermarket Services have been in high demand for a number of years now.  With the explosive growth in consumer electronics and offshoring of many factories, Aftermarket Service providers have seen demand skyrocket.  According to Livingston Partners, the Aftermarket Services sector has grown over 20% since 2006. Furthermore, they expect the Aftermarket Service sector to keep on this growth trajectory for the next five years. While demand for Aftermarket Services has been strong for quite a while, the service providers are still a fragmented lot with no dominate player emerging as the “Go-To” Aftermarket Service provider of choice.

Aftermarket Services traditionally include returns processing, repair and refurbishment services, and end-of-life services that include recall processing and product recycling services. Over the last few years, however, Aftermarket Services have expanded to include warranty management, customer service, and comprehensive reverse logistics programs.

Due to rising costs and pricing pressures retailers, distributors, and OEM’s have looked to outsourcing Aftermarket Services. They outsource because of a general lack of expertise in the services needed and to limit potential liabilities. There are other benefits but for the most part, companies outsource Aftermarket Services because the service providers can provide the services for a net lower cost, with lower capital requirements, and a higher quality result.

The question remains to be “Why hasn’t a dominate Aftermarket Service provider emerged?”

We think the answer is because of the wide variety of services and sectors that would be considered Aftermarket Services. There are a number of 3PL’s that offer returns processing but these services are often no more than gate keeping processes to receive and ship returned goods.

There are many companies that repair and refurbish aftermarket goods, but these companies are usually narrowly focused on a limited number of categories.  Most repair and refurbishing companies operate on a local basis and do not have the infrastructure required to handle the large volumes that come with a comprehensive nation wide program.

Few reverse logistics companies understand end-of-life processes at all, much less have comprehensive solutions they can take to the market.  Going beyond these three basic Aftermarket Services into the newer solutions such as warranty management, customer service, or comprehensive reverse logistics is a bridge to far for the Aftermarket Service providers of today.

There are a number of 3PL’s who are looking to expand their services and develop differentiating services.  The market is looking for a service provider that can provide comprehensive Aftermarket Services.  When the two intersect, growth and prosperity will abound for both. The question is “Is there any provider out there who has the vision and the capability to be the dominate Aftermarket Service provider?”

Reverse logistics is the part of the supply chain that is often outsourced to third party service providers (3PL’s).  Many companies that have best-in-class supply chain functions outsource reverse logistics.  If these industry leaders can run very complex global distribution networks, why don’t they operate their own return centers?  For the last two decades, we have worked with Fortune 500 Companies who have outsourced their reverse logistics to 3PL’s and we have found they do so for one of three reasons:

1. To get reverse logistics expertise quickly and with less risk
2. To achieve greater flexibility and faster speed to market
3. To create a protective barrier against outside forces and limit potential liabilities

Many companies outsource reverse logistics because they do not have the expertise within their management ranks to run the area, or they don’t want to use these resources on the function under consideration.  Retailers, for example, want their top executives working on ways to improve traditional core supply chain functions, or store operations, or merchandising systems.  Manufacturers want their top talent running manufacturing plants, working with customers, managing imports, managing parts or just about anything other than focusing on returns.

Reverse logistics is more often treated like the red headed stepchild of the supply chain.  No one wants to deal with returns.  When I first got involved with returns, Lee Scott, now retired Walmart CEO and then VP of Logistics had to promise me that I would not have to spend any more than two years running reverse logistics for Walmart before I would agree to take the position. That was over 25 years ago and for me it became a career.  The point is that reverse logistics is outsourced because there is no internal expertise and/or the company is unwilling to invest in the team and technology needed to develop reverse logistics.

This is the main reason why retailers and manufacturers outsource their returns processing functions.  A qualified 3PL can have a significant impact on a company simply because of their experience in returns.  They can also help leap frog the competition by leveraging systems, liquidation networks, and by sharing best operations practices that will reduce the processing costs.

The key, however, is to outsource to a firm that is experienced and has a broad view of the issues.   Many 3PL’s claim they “process returns”, few actually do and fewer still have any idea about what happens upstream or downstream from the actual returns processing function and how they must be coordinated to achieve maximum results.

When you are selecting a 3PL, it is important to do your homework and select a provider that has real experience providing reverse logistics services in your market.  Can they help you improve the product flow upstream so you can process more efficiently and maximize the value of the returned assets downstream?  Do they understand the impact of returns on customers, suppliers, stores, DC’s, and how they effect the financial well being of the company?  Do they have existing operations repairing product that is similar to your returned items.

WARNING: Watch out for the 3PL who wants you to be the first.  Often 3PL’s who repair phones will spin their experience and try to convince a TV manufacturer that they really can process, test and repair TV’s because they have been in the consumer electronics repair business for years.  In reality, they have never fixed anything other than cell phones and they are looking for a customer to fund their technical development.  Buyer be ware.

Lack of on point experience is often why companies outsource reverse logistics, but speed and flexibility also drive many to outsource.  Companies outsource reverse supply chain functions not because they don’t have the leadership or experience but because they need a solution fast and going to a 3PL with the focus, motivation, experience, existing technology, capital resources and staff can get things up and running much faster than the company could do it on their own. A quality 3PL will be able to start up a new reverse logistics operations within six months.  Most companies who decide to develop reverse logistics internally will take at least twice that long.

The third reason companies outsource supply chain functions, including reverse logistics, is to have a layer of protection and minimize their risk.  Many companies outsource operations to avoid unwanted attention from labor unions. It is against the law for companies to fire employees who attempt to organize a labor union, however, a company can fire a 3PL and replace them with another if the 3PL doesn’t meet performance metrics.  This is true even if the 3PL did not achieve it’s goals because of a strike or other union activities.

Companies also outsource to cap and control other risks and liabilities such as inventory shrinkage, workers compensation expenses, medical benefit costs and other “non-controllable” expenses.  Companies protect themselves by either negotiating a fixed fee arrangement for multiple years or with some form of variable pricing.  This enables companies to limit these risks by negotiating caps within their outsourcing agreement.

Outsourcing reverse logistics is often the best way to develop returns processing capabilities for many manufacturers and retailers.  You will need to employ experienced resources to help select the 3PL and negotiate an acceptable contract. However, with in six months you will have a best-in-class reverse logistics process that maximizes the value of returned assets, with limited risks and controllable costs.

If you work for a 3PL or you are considering outsourcing to a 3PL you are probably  thinking about issuing an RFP or responding to an RFP.  RFP’s and RFQ’s are a way of life for many involved in the reverse logistics world.  Most companies come up with a long list of providers to include in the first round, with hopes of culling the list down to the top three or four for the next round.

There are basically two approaches companies can take in selecting a third party to provide reverse  logistics services.  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, with low amount of variations in the 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.

The second approach to developing supply chain 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, one that will work with you and is willing to agree to contract language that will ensure the providers interest are in alignment with 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. VP’s of Procurement often hate “Relationship” RFP’s and the resulting contracts because they are “fuzzy” and require a significant amount of subject matter expertise. Procurement folks also don’t like the RFP’s for “Relationship” providers because they usually have to ask a lot of questions about culture, customer experience, references, intellectual capacity, questions that get to the depth and breadth of the 3PL but don’t say much about how much it will cost.

Selecting a provider with the idea of building the proverbial Win / Win relationship usually comes down to the two senior guys getting along. The senior decision maker basically hires the senior solution provider based on trust that is developed during the vetting process. So, if your company is going to outsource this year and you are putting together an RFP, you need to carefully think about what kind of service are you outsourcing.

You should begin with the end in mind and 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……

This short list of questions should help get the gray matter working. The one important component in developing an RFP and later, a contract is to ensure that you have someone on your side of the table that is as knowledgeable as the supply chain solution provider sitting on the other side of the table. If you are equally matched and you end up with a professional service provider that hits it out of the park, you will come to see outsourcing as a career building step second to none. But remember, it all starts with the RFP.

Whether you are a retailer or manufacturer, Christmas returns are on the way  and executives responsible for handling these returns should get prepared.  The 31 Point Christmas Returns Checklist below will help ensure that all preparations have been made for processing Christmas returns.  There is something to do for every day in December.

The Christmas Returns Checklist

1. Update defective returns based on sales since Thanksgiving
2. Update seasonal recall volumes by SKU and vendor / OEM / ODM
3. Review existing processed inventory waiting to ship
4. Prioritize shipments by value and cube to reduce inventory and create space
5. Contact primary and secondary temp agencies and review requirements
6. Review management staffing and organization chart for the first quarter
7. Review volume estimates and plans for outbound shipping with carriers
8. Contact the provider of storage trailers and ensure adequate supply will be available
9. Inspect temporary space that will be used during peak season
10. Review plans for temporary space and storage trailers with Loss Prevention
11. Contact top 20 vendors / ODM’s to review plans and estimates
12. Review manpower plans for quality assurance and inventory control
13. Review plans with Systems to ensure NO major systems changes are planned during peak season or with any systems that directly interface with the RMS
14. Review plans for leasing temporary fork lifts and other power equipment
15. Review all parts supplies and ensure procurement plans and sourcing is ready
16. If additional shift are anticipated, procure addition lift batteries if needed
17. Review shipping plans and requirements with top salvage buyers
18. Review inbound sortation plans and shipping plans with internal Liquidation Department
19. Test all risers, security systems, and emergency procedures immediately
20. Schedule preventative maintenance ASAP for all equipment and conveyor systems prior to January
21. Review first quarter manpower plans by function, by shift
22. Review plans & volumes with recyclers and with waste management companies
23. Send any special instructions to all stores, branches, etc.
24. Notify all stores, branches, customers, and/or vendors contact information during peak
25. Review plans of all outsourced repair vendors,
26. Get reports of existing  backlogs for all repair vendors or outsourced support areas
27. Review weekly communications plans with key internal and external teams
28. Review aged files for any claims or disputes to clear up prior to year end
29. Meet with financial support systems management and review plans
30. Contact high volume vendors and ask if they have any plans to shut down during the first quarter for retooling
31. Have a merry Christmas! – Enjoy your family while you can!

With a good plan for peak returns season, and working through the 31 point Christmas Checklist, you can be assured the reverse logistics function is well prepared for this most critical time of the year.

In this final installment of our four part series on components of a state of the art reverse logistics system (RMS), we will discuss critical reports and visibility requirements. The prior three parts of this series have described capabilities an RMS must have to receive, process, verify, and ship assets that flow through a company’s reverse logistics pipeline.

Before we go too much farther, it should be pointed out that there are two basic infrastructures used to process returns. One we will call the “Direct” model and the other we will refer to as the “Centralized” model. The Direct model is simply processing returns directly from the field to it’s final destination. This is a decentralized design that relies on people in the field or store to prepare and ship goods. A good example are small, mall based retailers that take back returns and sends the goods directly to the vendor or OEM. The second infrastructure is the Centralized model. This model revolves around a central location where all returned goods are shipped to from the field. Goods are then received, prepped, consolidated by final destination/disposition, and shipped. The vast majority of large retail chains use a centralized model to process returns.

Whether an organization should use the Direct model or the Centralized model depends on a number of factors. These include:

• Volume of returns
• Disposition of returned assets
• Residual value of returns
• Number of field or store locations
• Amount of labor required to process returns in the field vs centralized processing costs
• Risk from processing errors
• Regulatory risks
• Existing field systems
• Cost of centralized facilities
• Transportation costs
• Corporate infrastructure

Whether a company has a centralized model that relies on an RMS for processing and visibility or if they use a direct model that relies on a point of sale system or some other back office application to process returns, the visibility requirements are the same.  The following is list of reports or visibility requirements broken down by functions:

Receiving

• Advanced shipment notification – receipts in transit by date, store/field/customer, carrier
• Receipts by store/field location/customer - by receiving, RMA, month, quarter, year
• Returns by SKU/Category/OEM – by RMA, month, quarter, year
• All reports will need to show quantity and value per unit and in total

Processing

• Total units processed – by day, week, month, quarter, year
• Units received and processed by disposition – Return to OEM, liquidated, repaired, restocked, donated, recycled, destroyed – by day, week, month, quarter, year
• Manpower reports showing hours worked within each function
• Thru Put – In returns facilities thru put is typically calculated as follows:

Total Units Received / Total Variable Hours

Shipping

• Shipments waiting for return authorization – by date, value, quantity
• Pick tickets outstanding
• Hazardous material manifests ready for shipment – by class
• Manifests – by date, OEM, liquidator, recycler, charity

Quality Assurance

• Inbound receipt verification
• Cycle inventory
• Physical inventory – in total, by OEM, category, dollar, units
• Process verification – by function, employee, month, quarter, year
• Location verification – by type of location: bulk, rack, flow rack, shelf, security, etc, day, week, month, quarter year
• Outbound verification – by OEM, liquidator, hazardous shipments, recalled/regulated shipments, random manifest

When it comes to visibility there are endless variations for each type of report listed above. The first RMS put in Walmart’s returns center in 1988 had a total of 26 reports.  Today, the average RMS has over 100 reports out of the box and many now incorporate an easy to use report writer.

Best in class reverse logistics systems today offer all reports via the net and can be accessed from anywhere in the world.  As with all reporting, however, executives responsible for RMS report development should be careful not to get too caught up in developing new reports or constant reformatting of existing reports.  Visibility is only valuable when decisions are being made that impact the business in a positive manner.

Over the next five years, every company will have to rethink their existing reverse logistics network, infrastructure, and systems.  As the cost of transportation continues to escalate, the cost of processing will drive dramatic changes in disposition.  The decisions around these changes must rely on quality data that comes from an organization’s reverse logistics system.  This system will be your only source for the accurate data needed to revise existing returns networks and will be critical in maximizing the value of returned assets and minimizing associated risks in the future.