Reverse logistics service providers often struggle to grow sales. Most seem to hit a glass ceiling in terms of total revenue and can’t seem to figure out how to get to that magical next level. Most often, the missing ingredient to the secret sauce is developing and implementing a strategic plan.
Without a well thought out strategic plan, companies do not have focus across their organization, no commitment to invest time and resources in critical areas, and they end up doing the same things getting the same results. Thus, once again they hit ceiling and end up with flat revenue, if they are lucky.
Strategic planning often gets a bad rap, usually from the CEO who thinks the entire exercise is a waist of time. With the wrong approach and the wrong attitude, this will become a self fulfilling prophesy.
However, with the right approach, strategic planning process, implementation plan, and support from the top of the organization, companies can realize unprecedented growth THIS YEAR.
The Right Approach
Strategic planning for reverse logistics must take a different approach in many key areas to be effective. Unlike other companies, reverse 3PLs, liquidators, and repair service providers live in a world where product flow is unknown, requirements change without notice, and investment in capital assets is very risky. Traditional strategic planning tends to force companies to rely on these variable, basing plans on assumptions that could result in disaster. Companies in the reverse logistics space have to build flexibility and contingencies into their strategic plans. They must have identified red flags that will drive action based on real market conditions.
Back in the 1990s there were a number of good sized computer repair companies, for example, that invested a lot of money on capital assets used to diagnose and repair CRT’s. They ignored the market signs and as laptops and flat screens took market share, all their investment in fixed assets and non-transferrable processes resulted in most of them going out of business.
The Strategic Planning Process
There are two types of strategic planning processes. One is high level, very theoretical, and usually results in a very big binder of information that sits on a shelf and is ignored by the entire company until the next strategic planning meeting. The other is very practical and focused on implementation over a three to six month period. This second type of strategic planning focuses on actions and results. Clearly there is only one choice here.
If you use a strategic planning process that is built on theory and not on action, don’t expect any changes to your results. For example, some companies will spend an entire day defining their Mission Statement. Great! Every company has one so every company must need one. I’ve never known a company that made money from their Mission Statement. You might want to spend maybe an hour on this but that’s it. Think about it. Would you make more money focusing on “Mission Statements” or focusing on what your customers are asking for, where their pain is, what is happening in the market, what your competitors are up to, and what you are going to do to take advantage of the real world your people deal with everyday?
The Implementation Plan
Strategic plans can only impact an organization if the plan is implemented. You must have a method to monitor the implementation of the plan. In order to do this effectively, sub-plans must be developed that are measurable and in alignment with the overall strategy. Key management must be directly responsible for developing, executing, and reporting on these sub-plans. The best way to do this is to setup one-on-one update meetings and base a significant part of their incentive or bonus on completing the plans.
Support From The Top
For small to medium size companies to get to the big leagues, the CEO must be driving force behind the strategic plan. CEO’s that do not spend most of their time thinking strategically will never succeed. There have been countless books written about this and management gurus from Peters to Drucker to Covey all agree. The CEO’s job is to focus the company on long term performance, not short term execution. In reality every CEO focuses on a bit of both, but if you show me a company that has had flat revenue for the past few years, I’ll show you a company with a CEO that spends way to much time working on short term issues of the day and not enough time on strategically driving his organization.
The champion of the strategic plan and the implementation process must be the CEO. If at all possible, the CEO should be the person in the organization that meets with sub-plan leaders for monthly one-on-one updates. If the CEO is committed to implementing and driving the strategic plan, it will get done.
One last note on strategic planning. A wise man once said “It’s not a good plan unless it is flexible.” A healthy strategic planning process is one where plans are changed based on real world conditions and what the people responsible for the plans find out during the implementation process. It is not unusual for some parts of the plan to be dropped completely once the team learns more about the topic. Just because something sounded great back in the “Big Strategic Planning Meeting” doesn’t mean it is a good idea once your team digs into details. You must be flexible. Again, this is why the monthly one-on-one meetings with CEO are critical. Issues can be identified and addressed quickly.
The results of a quality Strategic Planning Process will be a turbo charged company with breakout, sustainable results.
If you would like more details on strategic planning and how a reverse logistics service provider can develop a plan that will result in dramatically improved sales and profits, contact Greve-Davis.
The biggest challenge most third party service providers face is growing sales. Whether a company is a traditional 3PL, a repair service provider or a liquidator growth is always a challenge. The largest companies always seem to have an advantage and regularly post 10% to 15% growth year after year, while second and third tier companies seem to struggle with simply maintaining their revenue.
Why is this?
Does size really matter to companies that outsource? Do larger 3PLs and service providers have a big advantage simply because of a larger sales force? Is it the software and infrastructure large companies have invested millions into that makes the difference? The answer to these questions is the same – NO.
They key to driving sales in for 3PLs, service providers, and liquidators really has nothing to do with the size of company, the number of sales people on the street, nor the fancy systems or technology used monitor sales efforts. The answer is much simpler and a lot less expensive.
We have worked with several large and small 3PLs for the past five years and we were part of the senior staff of a 3PL that averaged over 10% growth in sales, every year, for 15 years. Looking back, the keys to growth are clear. It comes down to five best practices:
- The Sales Team
You would never pack up your family, get in the car, start driving down the road, and then look at your spouse and ask where they want to go on vacation. However, if you do not have a well develop sales strategy that is exactly what you are doing every day. The best 3PLs have a clearly defined sales strategy that clearly articulates:
- Target markets
- Marketing strategy – speaking, social media, and traditional marketing activities
- Sales growth goals in terms of dollars and percent
- Targeted number of proposals sent to new prospects
- Targeted win rate for proposals sent to new prospects
- Cross selling or customer share expansion strategy
Developing a clear, comprehensive sales strategy is the key to growing a third party service provider.
The Sales Team
For many medium and small companies, the “sales team” is really the owner or CEO. Sometimes they may have a VP of Sales, but in practice this person provides the admin support to the owner so they can go close the deal. Growth in companies where the CEO is the key sales executive is limited to the time and energy available for the CEO to focus on sales.
Companies should look at hiring a strong sales executive as an investment. Depending on the market and the relative sales cycles, it could take six to twelve months for a top sales executive to bring in enough revenue to pay for their expenses. Successful 3PLs know this and invest in top talent, knowing it will pay off in the long run. They also know that there are many “sales executives” that never sell anything. They monitor their individual efforts and results, and cut their loses when it is clear they made a bad hire.
Many companies have a decent strategy and a good sales team but they don’t focus their efforts to ensure they are pursuing the right prospects. If left unchecked, an energetic sales person will go after any business they think they can close quickly. The fact is that the time and money it takes to pursue a prospect worth $300,000 is the same as a prospect worth $15,000,000.
3PLs must provide the oversight and be engaged with their sales team on a daily basis to ensure each sales executive is focused properly. The best sales strategy in the world is worthless if a sales executive is left to go their own way and pursue any prospect that will answer the phone.
Monitoring sales activities is critical to achieving your growth goals. This does not require expensive CRM systems, though a good CRM can help. For years, we had a 20 man sales team and all we used was a simple spreadsheet and email to track their activities.
There are a few metrics you need to establish and these metrics should be used for monitoring purposes as well as incentivized goals for your sales executive. Keep it simple. Use something like:
- Number of leads per month/quarter/year
- Number of proposals per month/quarter/year with annual revenue per proposal
- Track dates of when a proposal was submitted and establish rules on when a proposal that is not won or lost comes off the board
- Number of wins with annual revenue
- Number of losses
A typical 3PL should win about a third of the proposals submitted to a new prospect and about half of the proposals submitted to an existing customer.
Perhaps the most important discipline a service provider or 3PL should have is to make sure that the sales strategy, individual sales goals, incentive programs, and sales reporting metrics are all in alignment. There are many companies that use one set of metrics for long term sales strategies, a different set of metrics for sales activity monitoring, and incentivize the sales team based upon something completely different than any of the above. Everything must be in alignment. Sales executives will focus their activities on what drives their income higher, not on a strategy or a report.
Aligning sales strategy with sales executive goals and incentives, along with a simple monitoring process will establish a self correcting system that will help ensure your company achieves both long term and short term growth goals. This will also help the 3PL leadership team efficiently use their time.
If you have any questions or would like to learn more about how to drive sales and monitor your sales team, contact Greve-Davis.
Third party service providers (3PLs) have a tough job. They have a customer who hired them primarily because they couldn’t do the job themselves. They have to worry about keeping the parties upstream and downstream happy and inline. They are held to high standards and act as a surrogate insurance provider, protecting their customer from issues with inventory shrink, damage, workers comp, and productivity.
If things go wrong, the 3PL pays. If things go right, everybody is happy and the 3PL makes a profit. My 15 years working for a 3PL taught me that there are many things that can go wrong and there are a few things that must go right to make money. Over time we had to develop some key disciplines to make sure we kept our customers happy and to made money.
When I started with Genco, our revenue was about $34 million per year and when I left it was over $850 million. However, if you charted our success it wouldn’t be a straight line. In fact, it would look more like a saw tooth. The one thing we were good at was learning from our mistakes and putting in controls and disciplines that helped prevent us from making similar mistakes in the future. There were 5 key disciplines we put in place that enabled us to be successful and retain our customers over time.
The 5 keys to running a sustainable, profitable 3PL are:
1. Contract Terms: For a 3PL, the contract with the customer is the most critical document. Get the contract right and you have a chance to succeed. Get it wrong and you are doomed. When negotiating, I broke down the contract into two categories. On the one hand, there will be service level agreement (SLAs) that protect the customer and sets the standards of performance for the 3PL. Often customers will try to set SLAs extraordinarily high. The 3PL must be realistic and agree to terms they know they can achieve. The key here is to have data and experience in hand. Don’t guess and if you make assumptions be sure those are included in the contact and a mechanism for SLA adjustments are included. This is critical especially for key metrics such as volume, timing, and product condition.
On the other hand, there are other various terms that provide for other factors that will have a financial impact on either the customer or the 3PL. Thing such as gain sharing, health insurance increases, building maintenance expenses, out of scope work, and other non-operational events can cost a 3PL big time or provide for nice profits if properly addressed. One key point to remember is to build in flexibility for anything the 3PL cannot control, and there are many.
2. Key Indicators: One of the keys to our success was when we established key operating indicators for each operation. As the adage goes, you can’t manage it if you don’t measure it. You need to track key metrics that are in alignment with the contract. This needs to be tracked on a daily, weekly, monthly, quarterly, and yearly basis. You must track the critical metrics, not just the contracted SLA’s. Every operation has problems. The key to being a successful 3PL is to have a mechanism in place that recognizes there is problem before it is to late.
3. Customer Communication: 3PLs should have a formal communications plan with their customers. Typically, this means meeting with their customer on a quarterly basis. You must have a standard agenda for these meetings that focuses on the SLAs, what happened in the previous quarter, the plan for the next quarter, and a year to date financial review. This should be an interactive discussion with plenty of time for open discussion.
You should also have a significant amount of informal communications. This includes regular email updates, week calls to check in, and coordinating facility visits when the customer is going to be in the facility.
4. After Action Reviews: The best way to build excellence across every facility is to get into the habit of conducting After Action Reviews. Every time there is a major event, such as peak season, a major recall, or a major incident in the facility, immediately after the 3PL team sits down and talks about what went right, what went wrong, and what should be done differently the next time. Notes should be taken and sent to key team members across the company. This often results in changing policies, setting up hotlines, or adding a metric to the Key Indicator report. The key for conducting After Action Reviews properly is to make sure you get all the right people in the room and the review is held as soon as possible after the event.
5. Cross Selling: There is an old saying that “Happy Customers Buy More Stuff.” This is a key growth strategy for a 3PL. In practice, it is simple. Anytime you have a “good meeting” with your customer, ask them what else is going on in the company and how you can help. You’d be amazed how many times I met with customers and when I asked this I was told about an opportunity that resulted in new business. I’ve been in a number of meetings where my customer said “You know, I didn’t even think about talking to you about that. I’ll make sure you get to bid on that.”
The reverse logistics 3PL industry is tough and competitive. Once you get a customer to say yes, you can’t afford to fail. If you focus on these 5 key best practices, you will be successful and grow your business. If you have any questions or would like to find out how Greve-Davis can your company grow and succeed contact us here.
Consumer electronics manufacturers and retailers take note. The EPA has developed a program called “The Sustainable Materials Management (SMM) Electronics Challenge.” If you are a OEM / ODM, Retailer, 3PL, or Repair Service Provider, you need to learn about this program. According to Walter Alcorn from the Consumer Electronics Association, the US Government is starting to look into the what happens to consumer electronics returns and product end of life issues. This program is just the beginning.
The following is from the EPA’s Website on “SMM Electronics Challenge”:
Where do your used electronics go? Rethink! Join Now
Today, the average American household uses about 24 electronic products like personal computers, mobile phones, televisions, and e-readers. With an ever increasing supply of new electronic gadgets, Americans discard more than 2 million tons of obsolete electronic products annually. Learn more
One way EPA is addressing this growing number of discarded electronics is through the Sustainable Materials Management Electronics Challenge. By participating in the Challenge, original equipment manufacturers and retailers are promoting responsible electronics recycling. They are increasing the number of electronics being collected, sending 100 percent of their used electronics to a recognized third-partycertified recycler by the third year of your participation, and publicly reporting this information.
Who can Participate?
The SMM Electronics Challenge is open to original equipment manufacturers (OEMs) and retailers.
- Demonstrate leadership by using third-party certified recyclers.
- Ensure responsible management of used electronics.
- Take advantage of EPA’s technical assistance and resources.
- Receive recognition for your achievements.
SMM Electronics Challenge Participants
|Best Buy Company||South Richfield, MN||5|
|Dell, Incorporated||Round Rock, TX||5|
|LG Electronics USA, Inc.||Englewood Cliffs, NJ||2|
|Nokia Corporation||Sunnyvale, CA||9|
|Panasonic Corporation of North America||Secaucus, NJ||2|
|Samsung Electronics Company||Ridgefield Park, NJ||2|
|Sharp Electronics Corporation||Mahwah, NJ||2|
|Sony Electronics, Incorporated||San Diego, CA||9|
|Sprint Nextel Corporation||Overland Park, KS||7|
|Staples, Incorporated||Framingham, MA||1|
For more information on this program go to the EPA’s Website.
Today, every third party service provider (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 is received into a facility 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. While a basic understanding is needed, many 3PLs outsource some of the more complex internal services, such as electronics repair and testing, recycling, and transportation. Your customers only want one throat to choke but, depending on the customer and the product being processed, they may not care if you outsource some of the minor functions. Be careful, however, the customer will hold you liable if there are any problems with a sub-contracted service provider.
Finally, your WMS system will not work in reverse. WMS systems are built to move boxes for the most part. A reverse logistics system is built to disposition returned goods and is guides operations through a very complex system. Your WMS provider may tell you it can do the job when it comes to processing returns, but do your homework and make sure it can handle all the complexities of product disposition management. In all likelihood you will need specialized reverse logistic software to manage the process, 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 profit levels. 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. However, if you are currently serving a customer who needs help processing returns, you are half way home and should consider developing your company’s reverse logistics capabilities.
One of the biggest challenges reverse logistics third party service providers (3PLs) have is growing their business beyond what the CEO can do by themselves. Most small business are started by a brave entrepreneur who has a passion for the business, understands the value he can deliver and is capable of developing relationships that turn into customers.
After a while, however, the demands of the business grow and the CEO has less and less time to develop sales and growth comes to a halt, or they see revenue drop as the customers leave because they are not getting the TLC they did in the early years because the CEO is always chasing prospects. Companies like this often find the business plateaued and the CEO is struggling to deal with everything on their plate with no time to worry about developing a sales pipeline.
At this point, most CEO’s choose one of three options:
- Hire a sales professional and teach them the business
- Promote an existing employee and teach them how to sell
- Hire service reps familiar with the industry and teach them about the company
The risk with all of these options is that each options requires a significant amount of the CEO’s time up front and a lot of follow up from that point on to ensure the person is actually getting it and they are actively pursuing legitimate sales leads. Worse yet, these strategies all require the company to put all their chips on one person. If it is the right person, great! The company could be off to the races. If it is the wrong person, the company will not only waste a lot of time and money, they will chase off potential customers forever.
Business development in the world of reverse logistics is different from selling products, or software, or even supply chain services. Often the sales person has to convince prospects they have a problem and could realize significant profit improvement if they solve the problem. Only after a prospects understands this point, can you really start selling them on why your solution has the best value proposition. The second big differentiator for reverse logistics services is that the value of reverse logistics services to a prospect spans across many functional areas within an organization. Business development pros must understand how reverse logistics services can impact the company up stream and down stream from the process the 3PL is looking to provide. Many times entrepreneurs know these important finer points instinctively but they don’t have the strategy nor training programs in place to teach would be sales executives about these important topics.
To break out of the yoke of CEO driven sales, 3PLs should focus on developing three key strategies:
- Develop a sales and marketing plan. This should include developing or revising the companies web site, social network, and collateral marketing materials. It should also include sales growth plan and a staffing and training plan.
- Develop a business development tool box. This should include detailed information on topics such as “the elevator pitch”, standard presentation templates, company overview, customer overview, testimonials, case studies, facility tour description, software demo materials and services overview.
- Develop a sales training program. This does not have to be overly complicated and should include a multi-layered sales pursuit plan where a mentor travels with the new sales person.
Hiring outside sales reps can help in many cases but they usually only work if the service sold is a simple straight forward service that is targeting a small market in which the sales rep is deeply immersed. Keep in mind, with the traditional sales rep, the best you can really expect is to get a qualified sales lead. Most companies will not buy from a sales rep without meeting with the company and for most smaller 3PLs this means the CEO so plan accordingly.
An effective business development process should result in a close rate of 30% to 33%. With a good plan and a well trained business development team, growth then becomes a matter doing the math. Figuring this out comes down to figuring out answers to the following:
- How much do you want to grow your revenue over the next three years?
- What is the average revenue per customer?
- How much business do you plan to lose every year? (Plan for it, it will happen. When in doubt use 5% of revenue.)
- How much do you expect a sales person to sell on an annual basis? (For RL 3PLs this is usually $2 mm to $5 mm per year)
- What is the average lead time from the first meeting to closing the sale?
- What is the lead time to train a business development executive? (depending on experience this could range from 2 to 6 months)
Using these factors, you can determine how many business development executives you need, when you need to bring them on board and when you can expect to see revenues from their efforts flow into the company. When it comes to business development and really optimizing your growth opportunities, it is all in the planning, training and putting the right team in place. Once this is done, monitoring, measuring and compensating your sales team will become a primary focus of the CEO instead of traveling out to do initial sales calls and wondering how you are going to keep your company running while you are out of the office.
If you would like more information on how to grow your business you can contact Greve-Davis at 412-759-4356 or click on this link.
As economies and bottom-lines shrink, it becomes crucial for companies to reduce costs and maintain their competitive advantage. In this scenario, coupled with stringent EU environmental laws and regulations, a strategically effective Reverse Logistic function can secure your supply chain’s ‘backward loop’ and make significant cost savings for the company.
RLCON 2013: ADVANCED REVERSE LOGISTICS STRATEGIES WORKSHOP & CONFERENCE, organized by QuaDimension Events with key focus on EMEA region, will provide innovative strategies and solutions for pertinent RL issues.
The Workshop on 10th April 2013, conducted by Mr. Curtis Greve, renowned RL expert, author and Managing Partner of Greve-Davis – The Reverse Logistics Experts, will focus on how consumer electronics manufacturers and retailers can find hidden profits by maximizing the value of product returns.
The Conference will provide valuable insights on implementation of cost effective reverse logistic process for optimal ROI. The focus will also be on identifying and sharing best practices on measurement systems to drive and achieve operational excellence through continuous improvement in Reverse Logistics.
Effective returns and parts management strategies to identify current gaps and reducing costs will be another area under the spotlight during RLCON 2013. Further, the relevant factors to consider while choosing the right 3PL partners and the gains of developing joint RL initiatives will be explored at the conference.
This Quadference will be a unique opportunity to compare warranty, inventory management, and aftermarket services and support performance with industry peers and experts. From an evolving new concepts perspective, RLCON 2013 will delve into upcoming trends and benchmarking in closed loop chains, going green, waste disposal strategies and related legal complexities
Curtis Greve and Jerry Davis have been providing reverse logistics and liquidation services for over 25 years and they have written a book to help business people around the world make more money by improving their reverse logistics processes. Jerry and Curtis have captured key lessons learned about designing and running reverse logistics networks for companies such as Walmart, Target, Macy’s, Unilever, Dell, HP, Best Buy and many other Fortune 500 companies and third party service providers.
The goal of this book is to provide valuable insight to executives looking for ways to improve their return management capabilities and maximize profits on goods flowing through their reverse logistics pipeline. Whether you are thinking about buying reverse logistics software, negotiating better return agreements, improving return center operations, or updating your company’s customer returns policy, this book is for you. This book will explain reverse logistics best practices, current trends, future change drivers and much more. Like the title says, this is an executive’s guide to reverse logistics that will show you how to increase your company’s profits by managing returns.
In today’s economy every business executive is looking for ways to reduce costs and improve customer satisfaction. Most of the usual steps, like cutting payroll, reducing expenses, and negotiating better deals, have been exhausted. Business leaders are now looking for new ideas to achieve their goals.
In many organizations, reverse logistics is an area of untapped opportunity that can have a positive impact on both customers and earnings. It takes leadership and resources in order to take advantage of these opportunities but the payback can be significant. If you are new to the world of returns management, the question is “How do you find hidden profits in reverse logistics?”
“An Executive’s Guide To Reverse Logistics” has the answers. If you are a supply chain executive who needs to understand more about reverse logistics, or if you are a CEO or CFO looking for ways to reduce the financial impact of product recalls and customer returns, this book is for you.
“An Executive’s Guide To Reverse Logistics” is filled with explanations, facts, process flows, diagrams, tools, and best practices developed over the authors’ combined 40 years of hands-on experience. Simply put, this book is a roadmap that will help you find hidden profits by managing returns.
The Consumer Product Safety Commission (“CPSC”) announced a revised version of its Recall Handbook and new Guidelines for Retailers and Reverse Logistics Providers. The Recall Handbook contains a number of changes including the following:
- Companies should file Section 15(b) Reports through the CPSC’s website (saferproducts.gov), rather than by mail or phone. The staff repeated that preference at this week’s annual meeting of the International Consumer Product Health and Safety Organization.
- When announcing a recall, companies should consider use of their social media presence, including Facebook, Google+, YouTube, Twitter, and company blogs.
- Companies should consider the use of mobile scanners to obtain information on recalls from mobile devices. The recall poster should include a QR code or other mobile scanning code to let consumers act on the recall immediately.
- Companies conducting a recall should develop a plan regarding disposition of the returned product
The Recall Handbook also clarifies the following:
- In addition to the factors identified for determining whether a risk of injury could make a product defective, the CPSC will also consider whether the risk was obvious to the consumer; whether there were adequate warnings and instructions to mitigate the risk; and whether the risk of injury was the result of consumer misuse and, if so, whether the misuse was foreseeable.
- For the Fast Track Product Recall Program, if a corrective action plan is not approved within 20 working days, the staff typically will not make a preliminary hazard determination if the company has provided the required information, but the staff has not been able to review it within the time period.
Manufacturers and 3PL’s that process recalls should review this document closely. Now that the CPSC has the ability to level fines and penalties, the importance of complying with these guidelines is greater than ever. Please read the revised recall guidelines for further details and information.
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.
- The level of service requirements and scope defined in the contract are not in alignment with the financial justifications used to outsource initially.
- The recovery rates on returned inventory, which justified higher 3PL costs and fees, are below expectations.
- 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.
- 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.