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:
- 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……
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.