Posts Tagged ‘Third Party Logistics’

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.

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 third part of our four-part series on state of the art reverse logistics systems (RMS), we will cover critical elements required to properly cutoff, pick, and ship product out of a returns facility. As you will remember, in the first part of our series we discussed the receiving process. In the second part of our series we talked about disposition management, repair processes, and work-in-process (WIP) features of the reverse logistics system. The final phase of processing goods through a central returns facility is the shipping process. This is literally where the cash register rings in the reverse logistics process.

Perhaps the most important metric in a return center is inventory turns.  The shipping process determines the number of inventory turns a return center can achieve.  A good benchmark for return center inventory turns is between 20 and 30 turns per year. This is only possible however, if your RMS is structured to monitor inventory, process return authorizations, pick items and ship the returns properly and in a timely manner.

Shipping product out of a reverse logistics processing center is quite different from shipping product out of the distribution center. In a distribution center orders are received, picked,  and prepared for shipment. The outbound process is fairly uniform and is controlled by the order picking process and the transportation preparation requirements.  However in a return center, shipping is quite different. Items are cutoff based on vendor agreement terms and conditions, not “shipping orders” or transportation requirements.   Because of the importance of this cutoff  criteria, a reverse logistics system must have several additional features that typically do not exist in a  traditional warehouse management system.

The triggering mechanism to pick and ship goods in an RMS is the cut off criteria.  Remember, upstream in the returns processing functions,  items have been segregated based on item condition and “return point”.   Each of these return points  will have its’ own “cutoff criteria”.  By “cutoff”, we mean segregate sorted goods into shippable quantities.  There are three basic methods to cutoff returned or recalled items in a state-of-the-art RMS: By quantity of items, cases or pallets; by “cap” which establishes a percentage of sales by time period; by value of goods that is to be shipped; or time that the oldest item has been processed within the returns facility.

Each return point can have a unique cutoff.  In addition to this unique cutoff a “global cutoff” should be set as well.  The global cutoff will usually be something like “ship every 30 days or $10,000.”  The RMS shipping process will be set up to run through a hierarchy that looks to the individual return point cutoff criteria first and then to the global cutoff.  Once one of these are reached, the return authorization (RMA) must be processed.

Return authorization is the process of “getting permission” from the company you are going to send the returns.  This notifies the receiving party of the quantity and make up of the returns and it establishes the basis for the financial transaction that will be processed upon shipment.  There are 4 types of returns authorization (RA or RMA):

• Call for RA – A phone call must be made to get an RA number that will be used to track the return
• Fax or Email for RA – Same as calling for an RA but processed automatically by the RMS
• Standing RA – An RA number is used by the sender but no advanced notice or approval is needed to ship
• No RA Needed – no tracking number, advanced notice, or permission needed

Often the RA process is used by the receiving parties to delay shipment and the resulting claim.  Because of this, an RMS must have a number of RA reports that can track RA aging, RA dollars outstanding, etc.  The RA process and RA monitoring reports are critical to keep return product flowing through a returns facility.  This part of the RMS must be very robust and flexible to ensure product is shipped and the financial claims are filed in a timely manner.

As I said earlier, the shipping modules of an RMS is literally where the cash register rings in the returns process.  Up to the point of shipping, the returns process has only cost money.  You’ve collected a lot of broken stuff and stuff that has been recalled but it is still your stuff.  The shipping process cuts it off, ships it out, and charges to the receiving party for the shipment.  In order to do this effectively, the RMS must have a flexible return point cutoff process, aging reports, picking logic, manifest capabilities, verification processes, and financial transaction processes built into the shipping module.

Be sure to check back with us for our forth and final segment on The State of the Art Reverse Logistics System.  In the final segment we will discuss key reverse logistics reports and systems visibility capabilities that a state of the art RMS must have.

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

Your host is Curtis Greve.

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

Your host is Curtis Greve.

If you are in the market for either a third party repair company to outsource to, or if you are considering investing in reverse logistics software for your return center, with product repair capabilities, there are a few key features that clearly separate the contenders from the pretenders.  Purchasing a software package that has the required features and is installed by experienced reverse logistics professionals will pay big dividends.  In fact, if you buy software that doesn’t have the right functionality in production, you are wasting your money and most likely financing the development of a new module for the software vendor or service provider you’ve selected.

If you are not a system guru, and the typical decision maker for buying reverse logistics isn’t, how will you know if you the software or process includes the components you will need to maximize the value of the hi tech, hi value assets that will be processed?  If you ask your software provider or third party processor to explain the following, you will be able to separate the best-in-class from the jokers-in-class when it comes to reverse logistics software:

1. Explain the process flow of goods and what happens to goods after they are received.
2. Show me the report for units that are scrapped.
3. Show the process for scrapping a unit and how you capture and track parts that will be used to repair other units.
4. How does your system account for the parts inventory that is used to repair product?
5. Can your system re-disposition parts that are not needed?
6. Does your system facilitate parts harvesting / liquidation?
7. Can your system track separate inventories of units that have different owners?
8. How are Bill Of Materials (BOM) stored in the system?
9. Can your system support more than one BOM per model?
10. How does your system support warranty returns and related repairs?
11. How many classifications of repaired units do you have and how are is the inventory valued?
12. Show me the productivity reports for receiving, repacking, repair techs, picking processes, and shipping.
13. Can you re-designate finished goods as liquidation, A, B, or C stock goods?
14. When do you designate how and where to ship goods, can you add change shipment status from LTL to Small Package, or Truckload?
15. Show me how your system supports selling refurbished goods directly to the customer or B2B?
16. Does your system provide sustainability reports that provide an audit trail for carbon footprint reporting purposes?
17. Can your system process credit back to the customer based on condition at time of receiving and based on diagnostic results?
18. How does your systems track and process consolidation fees and transportation fees for both inbound and outbound processes?
19. Demonstrate how your system processes advanced service parts orders and other similar transactions?
20. Are all your reports available on the web and do you provide a report writer as part of your standard system?

If you ask a reverse logistics software provider these twenty questions along with the follow up questions that will naturally come up during the software demo, you will quickly be able to tell the wanna-be’s from the best-in-class providers.  The last and most important step in purchasing reverse logistics software or hiring a third party processor is to ask for references of other customers that have the same requirements you have.  Insist on touring most, if not all of the reference locations to see the process and software in action.

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

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

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

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

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

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

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

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

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