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.

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.

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.

The ultimate measurement to determine if you are really improving productivity in a returns facility is Inventory Turns. Many companies use different productivity measures. Most calculate some variation on throughput. My personal preferred method for calculating throughput is:

Throughput = Total Units Received ÷ Total Variable Man Hours Paid

When calculating throughput in a distribution center, one typically adds total inbound units with total outbound units. In a return center, adding total outbound units can get problematic when product is destroyed, cannibalized for parts, or all major components are not returned. If the flow was even and predictable throughout the year, this would not cause a problem but for most return center facilities, product flow and resulting disposition can vary a great deal so the only reliable number is inbound units received.

While throughput is key metric a return center should measure and monitor on a daily basis, it does not reflect the impact on cash and inventory movement that tracking inventory turns can provide. A facilities annual inventory turns is calculated using the following formula:

Inventory Turns = (Total Processed – Ending Inv) ÷ Ave Inv

Having your management team focus on a daily throughput goals along with monthly and quarterly inventory turn goals will motivate them to focus on using their time more effectively.

For example, a facility’s throughput numbers could be above goal but their inventory turns below goal because the shipping department is blindly shipping product first in first out. If the shipping supervisor was looking to balance their shipping plan between staying with 24 hours of FIFO but shipping a specific dollar amount of goods to ensure they hit their turn rate, the effort would not be any more but the impact on cash flow and overall cost per unit processed would be significant.

When I was the President of Reverse Logistics for Genco, we began tracking turn rates and setting goals for each facility to improve their turn rate by 15%. With in two years, the average inventory turns for our customers more than doubled. The facilities were not necessarily working harder but they were clearly working smarter.

The impact on our customers was tremendous. Cash flow was significantly increased. Most customers tracked our performance internally based on a percentage of cost to total dollars received after processing. This was referred to in most cases as “sales” for the return center. As you might imagine, as the turn rate went up, the “sales” of the return center went through the roof. The cost per unit were in line with our budgets for the most part, but internally the customers were seeing a significant reduction in return expense percent to “sales”.  Our billings were on target but the credit received for returns was significantly higher because we were managing cash flow by driving inventory turns.

In a return center, there are many key metrics a good management team should track. The one most often left off the list is annual inventory turns. This, when all is said and done, is one of the most important overall indicators of a return facilities performance and clearly it  is the best measure of the facility’s impact on the larger organization.

Understanding “the cost of change” is critical to organizations that are outsourcing or are considering changing service providers. While outsourcing supply chain management continues to grow, competition between third party logistics providers (3PL’s) is increasing as well. Many who have outsourced for years are now seeing the power of competition and use two 3PL’s where they use to use one for their entire networks.  Executives tasked with responsibility for managing 3PL relationships are getting smarter and negotiating tougher terms.

3PL’s find themselves in the unenviable position of having to bid on business they have had for years, knowing that their best case scenario is to retain the business at a lower margin.  Many retailers and manufacturers require an RFP process that often doesn’t recognize any value for past performance or loyalty on the part of the incumbent.  With the proliferation of systems across the spectrum of supply chain functions, more and more providers find their services and the associated value commoditized.  Most 3PL executives see requirements getting tighter, competition getting tougher, and margins getting squeezed.

Today, every 3PL is looking for ways to increase margins and increase the cost of change for their customers.  Increasing the cost of change is really referring to those intangibles costs that a customer must incur if they choose to switch from one service provider to another.

For example, if you were a customer of a bank and used their online services for years and then decided to change banks, there would be an additional cost of change because of the extra time and trouble you would experience in shutting down one account and starting up another. You would have to get set up on the other banks systems, figure out how to use their online features, and set up all of your bills for automatic payment. All of this is already done at your old bank and you may not have considered all of this effort when comparing the price between the two banks and the value you might receive from their programs.

If a 3PL is doing a good job of cultivating customer relations, they will make sure the customer is well aware of the cost of change.  Service providers should point out all indirect, internal customer costs and normal external costs they would pay if they change providers.  If you are a service provider, you owe it to your customer to point out all these different expenses.  I have personally pointed out to customers the costs their systems department incurred during start up and similar internal, under the radar expenses they missed.  Every time I have done this, my customer has thanked me because they hadn’t considered my points prior to my mentioning it to them.

In the world of outsourcing, the cost of switching from one provider to another can be very expensive, and could impact your customer’s customer. Changing service providers isn’t just about the lowest cost per unit.  The soft costs of change can be very expensive and should be carefully considered when deciding whether to go with a new provider or stick with the existing 3PL.  Remember the old saying “It’s the devil you know versus the devil you don’t know.”  Just be sure that you consider all the cost you could incur in either case.

Companies outsource supply chain operations for many reasons. Some need quick expansion and don’t have the manpower nor the infrastructure in place to expand as efficiently as outsourcing. 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 supply chain operations to a qualified third party operator (3PL). However, the key to achieving the goals that justified the decision to outsource is to ensure you have level of service (LOS) measures, budgets, and the other metrics in your contract that will result in the desired financial results. These goals and the strategies used by the 3PL must be in alignment and support the customers goals and strategies. Contracts must be written to ensure that success for the 3PL is success for the customer.

Just about every outsourcing relationship that goes sour, does so because of one of three reasons. Often the relationship fall about because the contract terms were not in alignment with the original RFP and the final response from the winning 3PL. The outsourcing party wakes up one day and their costs are higher and their customer service is worse than before they outsourced. They call up the 3PL and they are told that more can be done, but it is out of scope and will cost more money.

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. These details have to be carefully spelled out along with who will be responsible for the associated costs if the benchmarks are not met.

Another reason outsourcing contracts fail is that the contract was not flexible enough to address the real world market conditions and one of the parties was put in an untenable position as a result. It isn’t a good contract unless it is flexible. Outsourcing agreements should include language addressing how costs will be paid based on a wide range in volume. Many companies use volume bands to calculate variable costs. Some companies use a fixed dollar fee for the provider. There are a variety of tactics one could use based on the individual business. The key is to have contract language that allows for a win/win scenario in a flexible market environment.

Finally, outsourcing relationships fall apart because of poor performance. There are times when the winning bidder just can’t perform at the level you need so you have to fire them. It isn’t like firing a bad employee, it closer to getting a divorce and can be just as painful and costly.

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. 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 and if the shut down process is management right.

There are many reasons to outsource. 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 win/win relationships between the parties. If not done properly, however, outsourcing will end up costing your company a lot of money, and it could ruin your career.