Outsourcing Reverse Logistics
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:
- To get reverse logistics expertise quickly and with less risk
- To achieve greater flexibility and faster speed to market
- 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.
Manufacturer Returns: Risk or Reward
Returns are a fact of life for just about every manufacturer in the world. Some see it as a necessary evil, while other see it as an opportunity to improve customer relations and improve their bottom line. The facts are that returns cost manufacturers on average 9% to 14% of sales. Manufacturers, however, are often hesitant to invest in their reverse logistics programs. This is often because the senior leadership team does not understand the actual cost and associated risks. Once they understand how much they are really spending and the risks of short changing the process, it is not difficult to get support for resources to focus on the reverse logistics pipeline.
In addition to the financial impact of returns, there can be an even bigger impact on customer satisfaction. In fact, a study completed by the Aberdeen Group in February of 2010 found that manufacturers that were rated best-in-class in reverse logistics had, on average, a 12% advantage in customer satisfaction over their competition. Another study published in the spring 2010 MIT Sloan Management Review found that focusing efforts to improve and manage customer returns actually increased overall profits, even during tough economic times. When we say “manage returns” we do not mean reject returns or make it harder for customer to return goods. This same study found that a lenient return policy actually increased total sales and profits, while a more restrictive policy has a detrimental impact on both the top and bottom lines.
Case in point, during the 2010 Christmas season Best Buy Stores revised their return policies, making it easier to return products and eliminating most restocking fees. The result was a surge in sales and profits for December. While Best Buy is not a manufacturer, this shows the impact managing returns can have on a company’s sales and earnings.
In addition to customer returns, product recalls can have dramatic impact on a manufacturer as well. For a manufacturer to have a comprehensive reverse logistics program, the program must include a robust recall process. In 2009 the Consumer Product Safety Commission ordered 465 product recalls and 433 recalls in 2010. You can expect more product recalls from this point on as well. The first piece of legislation passed by Congress after the election in November was to give broader authority to order more manufacturer recalls.
So what does all this mean for manufacturers? Simply put, the question is not if one of your products is going to be recalled but when and how many products will be recalled. Because of the very real possibility of being forced to recall product from the market and the potential for financial liability and damage to your reputation, manufacturers must have a sound plan in place to ensure they have a means to process recalls on very short notice. Johnson & Johnson can certain testify about how recalls can hurt a company. Between April and September of 2010 the value of J&J stock dropped over 13.5% due to product recalls and the way J&J handled those recalls.
Reverse logistics will have a significant impact on every manufacturer. The question is whether returns will have a negative impact or if it will provide a competitive advantage. Developing and investing in your company’s reverse logistics processes can improve sales, reduce risks, and increase profits. It takes a long term dedicated commitment to be best-in-class and proper resources but in the end it will be well worth it.
Podcast #11 – Future Trends in Reverse Logistics
Reverse Logistics Podcast #11 – Future Trends in Reverse Logistics
This podcast is a recording of a presentation given by Curtis Greve to the DRS Customer Symposium on September 9, 2010. The subject of Curtis’ presentation covered four external drivers that will impact every reclamation center and reverse logistics process in the world between now and 2015.
This presentation was directed toward CPG manufacturers but the drivers behind the future changes in the reverse logistics ecosystem will impact every retailer and wholesaler as well.
The DRS Customer Symposium was a great event with a lot of take home value for all attendees. It was attended by over 40 manufacturers who are customers of DRS. For more information on this symposium or about DRS services and solutions visit DRSReturns.com.
The Reverse Logistics Podcast
New Ad Campaign From UPS Logistics
UPS is launching a global ad campaign touting their global logistics capabilities. Their jingle for the campaign does a great job of explaining what logistics is and how it can benefit companies when done correctly. The next time my mom asks me what I do I think I will just play the new UPS Logistics jingle.
Well done UPS.
The Reverse Logistics Podcast
How To Develop a Reverse Logistics RFP
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 fina
l 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:
- What type of RFP and contract is typical for the industry?
- How much variability occurs that is out of our control?
- How predictable are the basic metrics?
- What is an acceptable yield rate for repaired & refurbished goods?
- What is the expected scrap rate for product by category?
- What kind of additional “value adds” are you looking for the service provider to bring?
- How long do you anticipate the contract and associated relationship to last?
- What was the justification used to get approval for the project?
- 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.
What 3PL’s Need to Know About Reverse Logistics
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.
Part 1 – Five Components to a Recall Action Plan
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 reca
lls.
“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.
Sharehold
ers 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.
Reverse Logistics Best Practice: Inventory Turns
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.
Introducing Greve Consulting – Same Guy, Different Name
Today I am launching my new web site under the new company name of Greve Consulting, formerly known as Metreks. The focus of my practice is to help companies develop their returns management, aka reverse logistics capabilities. Viewers will find a lot of useful information on returns including the Reverse Logistics Podcast, which will feature industry leaders from the world of reverse logistics, and my blog which is packed with articles and information to help service providers, manufacturers, retailers, and liquidators make more money.
Register to get the blogs sent to your desktop automatically or save www.GreveConsulting.com as a favorite on your browser. Your comments, questions, suggestions and feedback are encouraged. I will use your feedback to improve the value delivered from the site.
Check in from time to time to see what is new. For example, you might want to check out The Cost of Doing Nothing. This is a form you can fill out to find out how much opportunity you and your company have in developing your reverse logistics capabilities.
Whether you call it returns management or reverse logistics, it’s all about improving returns and maximizing profits. I hope you enjoy the new site and get a lot of value out of GreveConsulting.com.
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