For manufacturers of seasonal goods, the biggest challenge when it comes to processing returns is dealing with seasonal peaks in volume.  Companies that provide seasonal products can get as much as 80% of their returns within a 30 to 60 day window.  Many online retailers and catalogers face the same challenge.  High seasonal sales means high return rates in a compressed period of time.

When designing a returns processing facility, the size of the facility and fixed assets employed is setup to accommodate roughly 80% of peak volume.  While this works well for most companies that have small spikes in their rate of return, for manufacturers of seasonal products, online retailers, specialty retailers, and catalogers this approach would result in having a lot of excess space and equipment for nine or ten months out of the year.  The annual costs would be prohibitive and a waste of money.

For companies that must process big spikes in returns volume, there are two options that will be much more cost effective.  The first option is to outsource part or all of the processing during the peak returns period.  If you are thinking about this option, there are a few things to keep in mind:

• Ensure processing requirements are documented in detail and given to the third party processor prior to any pricing or contract development
• The documented processes should become part of the contract as a defined scope of work
• The scope of the project must be clearly defined with estimated inbound volumes, outbound volumes by processing category, pricing, approval processes, start and end dates
• The third party must guarantee a minimum amount of processing space and storage space at a specific location
• Pricing should be a flat monthly rate for fixed expenses such as rent, utilities, etc, plus a cost per unit for each disposition – scrap, refurbished, new, clean, or what ever the various conditions of the goods you expect to receive
• Expectations for “A stock”, “B stock”, “Scrap”, and overall yield rates should be clearly stated and pricing should be based on these expectations
• Startup costs and decommission costs should be clearly specified
• Productivity incentives and penalties based based on volume adjusted budgets should be included in the contract
• A clear change order process must be documented to address any unanticipated processing requirements that may be outside of the scope of the agreement
• Ensure appropriate insurance coverage is in place for the inventory that will be processed
• Avoid any lean provisions that might impact how processed inventory is handled, this includes specifically baring the third party from holding merchandise over payment disputes etc.
• Develop a communications plan that will provide direction to customers, vendors, suppliers, and internal team members

The second option to consider is to set up and operate temporary return centers yourself.   In order to seriously consider setting up a temporary facility and operating it internally, you must have the infrastructure to support the operation and the management that can focus exclusively on the temporary operation.  Once you determine you have the internal support needed and the leadership, you will want to ensure you keep the following in mind:

• Define capital assets and personnel that will be required for each week the temporary facility will be open
• Define lead times and availability for both, in detail
• Identify sources for fixed assets and facility labor
• Develop contingency plans for space, equipment, temporary employees and management in case volumes are significantly higher than anticipated
• Identify SPOC (single point of contact) to plan, oversee and report on the project
• Ensure lead times for identification and contracting of temporary space, equipment, and employees are sufficient
• Identify mile stones from the start of planning to decommissioning
• Establish weekly meetings/calls to communicate progress in planning, startup, processing, and decommissioning of the temporary facility
• Define “Red Flag” process that will be used to communicate issues during the event
• Develop a communications plan that will provide direction to customers, vendors, suppliers, and internal team members

Whether you choose to outsource seasonal returns’ processing or set up a temporary solution and manage it yourself, one of the best things you can do is to conduct an “After Action Review” within 30 days after decommissioning.  This meeting should include everyone who had anything to do with the temporary facility and notes should be taken and sent to everyone to ensure they improve the process the following year.  Whether you are going to outsource or do it yourself, the key to handling seasonal returns processing successfully is to “Plan Your Work and Work Your Plan.”

The third party logistics business is nothing if not unique.  Providing third party reverse logistics services is an even stranger world to live in.  For some reason, companies don’t view outsourcing reverse logistics services like they do any other supply chain function.  Don’t believe me?  When was the last time you knew somebody who had trouble with a carrier, fired them and swore “Never to outsource transportation again!” 

But in the world of reverse logistics, there are plenty of people who tried outsourcing returns once and got burned so the company just reverted to the old process and never looked back.  There are a number of companies that tried outsourcing reverse logistics but either picked the wrong third party or the wrong manager to set up the internal support systems.  In both cases, everyone found themselves in a bad position and were happy to go back to the old way of processing returns.  When it comes to returns, failure often means never trying it again.

Going backwards seems to be too often the norm when it comes to returns.  However, if at first your don’t succeed, companies should ask themselves – “Why did we fail?”  Experience has shown there are usually a few things that both third party service providers and the executives did not do that could have made the difference.

First, the company outsourcing returns must realize there is one big difference between a returns processing center and a distribution center.  In a distribution center, you know what your are going to get, how much is going to come in, when it is coming and when it is going to ship.  In a returns center, nobody knows what your are going to get, how much is going to come in, when it is going to get there or what condition it is going to be in when you get it.  Nobody in the company can accurately predict asset returns nor can any third party service provider, at least to any reliable degree.  Because of these unknowns, third party return center agreements must be structured in a manner that is flexible. Inflexible plans, budgets and pricing will lead to trouble.  The structure of a reverse logistics outsourcing contract must be flexible.  The contact should provide a basis to adjust costs and pricing based on variability of unit volume, item condition, and preferred disposition.

The second tip to avoid conflict between the service provider and the outsourcing company is to clearly define all the assumptions made when developing budgets, pricing, incentives, physical facility attributes, and manpower plans.  In addition to detailing out these variables, there must be clear language about what is to happen if these assumptions are incorrect.  One thing you can be sure of is that the assumptions will be incorrect. The parties must agree on the tolerance level for each assumption and the process to make any adjustments in pricing, cost, or other areas that might be impacted.  It is for this reason that having a clearly defined change order process is critical.

If an organization outsources reverse logistics services to a third party logistics company, they may not see cost per unit they were expecting, but they will have an agreement that focuses on customer satisfaction and that promotes maximizing the value of goods flowing through the reverse logistics pipeline.  In the end, this is the most valuable contribution a returns process can make to an organization.

Today, every 3PL is looking for ways to increase margins and increase the cost of change for their customers.  They want to figure out ways for their customers to be as loyal to them as they are  to their customers.  One way is to develop additional services and many consider developing reverse logistics capability.

If you are a 3PL executive who is considering this, there are a few things you need to keep in mind.  First, the priorities in returns are completely different than normal forward logistics.  Timing is not as critical but having the ability to profile each individual SKU as it comes in is much more critical.  Every item can be handled one of six ways and you must know how to determine the disposition and what characteristics drive that disposition.

Returns processing could require a basic understanding of repair techniques, parts management, liquidation, and recycling.  The degree of each required depends on your customer and the category of product you will handle.

Finally, your WMS system will not work in reverse.  Your WMS provider may tell you it can but you will need Reverse Logistic Software to help manage the product flow and disposition.

It is possible to put together a virtual reverse logistics solution for your customers but your customers will expect a certain amount of expertise.  Time has shown that companies that simply offer to be the 4PL manager without any real value additive services are quickly by passed by the “real” service providers.

Does the development of reverse logistics capabilities make financial sense for most 3PL’s?  It depends on the 3PL.  For the most part, fees in the reverse world can be twenty to forty percent hire than traditional distribution and transportation.  It really comes down to the needs of your customer base, internal capacity to take on developing new services and your appetite for investing in a development process that may not see any real profits for eighteen to twenty-four months.

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.

There are many reasons for product recalls. Bad buying decisions are a big one reason for recalls. Regulator’s orders is another. Every year for the past twenty years, for example, the FDA has ordered between 200 and 300 pharmaceuticals off the market. Most of these recalls go unnoticed and were recalled for reasons other than any adverse effects on people who may have taken the drugs.

You have probably heard of many of the famous Rx recalls for serious adverse effects such as death, or other serious health problems. However, the vast majority of Rx recalls are for reasons such as a microscopic variance in the chemical compound, or some quality issue with packaging or an issue with the labels and inserts. There are other recalls driven by other regulatory agencies that find an issue with manufacturing of products. Often these recalls are ordered after a significant number of accidents. Recalls for products such as infant products, cars parts, desk lamps, and items such as computer batteries are all good examples of regulator driven recalls.

“Stuff” happens and product recalls are a  fact of life for retailers and manufacturers.  Therefore, it is critical to have a complete recall procedure in place to deal with these unfortunate yet inevitable events.  Having a comprehensive plan of action in place will remove the threat from the public and avoid or at least minimize the liabilities associated with the recalled item.

For many recalls, the liability and the risk to human life is too great not have a well defined recall procedure in place, before it is needed. If a you wait until you need it, the costs and the additional liability could literally put your company out of business.

Recalls can increase exposure to many different risks. There are the obvious potential liabilities such as law suits from customers, clean up costs, and fines from regulatory agencies. But, there could also be significant risks, costs, and exposure caused not by the recalled product itself but how your organization handles the recall. These risks include the impact on long term customer attitudes and satisfaction because of bad press; stockholder concerns and related lawsuits; and the impact from negative employee morale. In order to minimize these risks companies must have a buttoned up recall procedure that addresses the following five key areas:

1. Internal communications procedure

2. External communications procedure

3. Physical process of removing the recalled goods

4. Product sorting, accounting and disposal process

5. Data gathering, reporting and record keeping

Communications is the most critical component of any recall process. This post is the first of a two part series on recalls. The rest of this post will focus on communications and the second post will go into more detail are the physical movement, processing, and reporting of regulated recalls.

The internal communications procedure for a mandatory recall must include emergency communications chain. Who has to be notified and each person must know what their roll is in the recall. Speed is critical. There must be a clear line of communications and the internal communications must be fast. The first hours after being notified of a recall will determine if the rest of the plan has a shot at succeeding. The internal communications process is the start gun to the race to get the recalled goods off the market. This is also where you decide who is going to speak for the company, what they are going to say and who they are going to say it to.

Regardless of what anyone may say, it is always better to be completely honest with every communications. External communications is probably the most critical component to minimize the impact of a recall on customers, employees, and shareholders. Again, honest is the best policy. It is actually the only option. Even companies that try to spin the facts or dodge the truth always end up telling the truth. It is only a matter of time and in some cases that means jail time.

Employees will want to hear from the CEO directly. They will want regular updates and they will want closure when it is over. Remember, employees have families so you must arm with enough information so they can tell their children why their mommy and daddy are good people working for a good company. Many organizations underestimate the impact of bad press and lack of any credible communication will have on employees. It is a big deal to them and can cost a company more than just money for years to come, if not addressed properly.

Shareholders have similar concerns and they have a legal right to know about potential liabilities and actions that could impact the value of their investment. There have been a number of companies that never recovered because management lost the faith of their investors because of their poor communications on negative events.

Talking to the press can be very tricky when dealing with recalls as well. A key thing to remember is that journalists are there to get a story. They aren’t necessarily concerned with right and wrong, or giving your company a fair shake. A professional PR person can be worth their weight in gold during a major recall or any negative event. In the middle of a major recall is not the time to try to your hand at press relations. You will have plenty to keep you busy.

The last group to address in you external communications plan are the regulators. There are two ways management teams can deal with regulators. One way is to treat them as adversaries. Don’t offer any help. Answer only the exact question asked. Make them get a court order for everything, etc. This is a terrible way to deal with people who decide the size of the fine and the scope of the investigation.

The other way to deal with regulators is to politely cooperate with them. This means be polite, escort them around, ask if they need help. This means politely saying things like “Sir, I was told to get you a cup of coffee and set you up in my office until our Vice President of Loss Prevention gets here. This is a big deal and we want to cooperate fully. We want our best and brightest here to assist you with your needs so please bear with us for a few minutes until they arrive.” While you are waiting, talk to them like the intelligent professionals they are.

This is the only way to deal with any kind of public authority figure. You must ensure that your entire staff is trained to be respectful and cooperative. They must have a clear idea of what they can and cannot say, as well. They must know the difference between being cooperative and saying things that will can cause your company harm. Training your staff on who is authorized to speak to regulators, along with what, how, and when to speak to regulators is a prudent, operational best practice.  Don’t leave this up to your staff to figure out on their own. Train your management team.

This training should address both verbal and written communications guidelines. Emails have become law firms favorite hunting grounds. As the team at Goldman Sachs will attest, written communications can cause significant damage in a number of ways, even if you did really do anything illegal.

Recalls are a fact of life and every company must have a well defined recall process that is focused on doing the right thing, communicating the right message, and minimizing all the liabilities and costs associated with every recall. Your recall plan of action must clearly and directly address internal and external communications in order to minimize the damage caused by the recall.

In part 2 of Five Components to a Recall Action Plan, I will discuss the best practices and steps to be taken to properly remove, process, and record physical products that have been recalled.