Posts Tagged ‘outsourcing’

In today’s Podcast Curtis Greve shares three tips that can help improve returns processing; improve relationships with key vendors, suppliers, and liquidators; and increase the bottom line contribution of your reverse logistics program.

Do you know how to eat an elephant?  One spoonful at a time.  Curtis will share his experiences and time tested best practices that will help you improve, one step at a time.

Like Alan Weiss says “If you improve 1% everyday, in 70 days you will be twice as good.”  Here is three percent to help get you started.

The Reverse Logistics Podcast

Your host is Curtis Greve.

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.

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

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

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

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

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

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

Companies outsource supply chain operations for many reasons. Some need quick expansion and don’t have the manpower nor the infrastructure in place to expand as efficiently as outsourcing. Others are looking to cap exposure to worker comp expenses, inventory shrinkage, or hiring costs when starting up a new operation.

All of this can be done by outsourcing supply chain operations to a qualified third party operator (3PL). However, the key to achieving the goals that justified the decision to outsource is to ensure you have level of service (LOS) measures, budgets, and the other metrics in your contract that will result in the desired financial results. These goals and the strategies used by the 3PL must be in alignment and support the customers goals and strategies. Contracts must be written to ensure that success for the 3PL is success for the customer.

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

Many companies, new to outsourcing, don’t include key metrics in the contract. Often they don’t have good benchmarking data for items such as damage rate, inventory shrinkage, annual inventory turns, and thru put numbers to ensure they are getting what they expected. These details have to be carefully spelled out along with who will be responsible for the associated costs if the benchmarks are not met.

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

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

Many companies that outsource don’t seem to think about the details and what they are going to do if they have to fire the service provider. Make no mistake, terminating a contact with or without cause can cost millions. You need to think about what happens to the inventory, the capital equipment, the building, ongoing worker comp issues, shut down and closing costs. All of these and many more issues need to be considered and you must spell out who is liable for each issue under each scenario. Once you’ve decided to end the relationship, you could save yourself millions if the contract addresses the shut down process correctly and if the shut down process is management right.

There are many reasons to outsource. The key is to have a good contract that will protect everyone’s interest, achieve the original goals that drove the decision to outsource, and ensure win/win relationships between the parties. If not done properly, however, outsourcing will end up costing your company a lot of money, and it could ruin your career.

Many people think that supply chain management has only been around for a few decades. Outsourcing of supply chain managements seems to be an even more recent phenomena. Some think that Napoleon started supply chain management because of his famous quote “an army travels on it’s stomach.” But there is historical records of outsourcing supply chain management functions as far back as 1740 BC. That’s right. 3PL’s have been around for almost 4,000 years. Don’t believe me? Would you believe the Bible?

The first known instance of outsourcing dates back to the book of Genesis, Chapter 38, when a eunuch of Pharaoh, Potiphar, outsourced his back office and support functions to Joseph. This was the first precursor of outsourcing administrative assistance.

After a dispute, Joseph ended up in prison, only to have prisoner management outsourced to him by the keeper. This proved to be a great move as productivity was significantly better than previous years. This was the first time, prison management duties were outsourced. Later, as a result of Joseph’s ability to provide visibility, quality management information, inspired regression analysis, and long term strategic planning, the Pharaoh outsourced warehousing, distribution, and later back office support functions to Joseph. Thus, outsourcing supply chain functions began. Companies around the world have been adapting this strategy ever since. Outsourcing is not only good business for many, you could say it is truly inspired.

For the last 15 years the Third Party Logistics industry (3PL’s) have been growing at an average rate of 15% annually.  More and more companies are outsourcing pieces of their supply chains to 3PL’s.  They do this for three primary reasons:

1. The function outsourced is not the company’s core competency
2. Outsourcing provides speed and flexibility
3. To save money

Often, the structure of the agreement between the customer and their 3PL partner is cost plus.  This can come in a number of tailored formats but for the most part, the 3PL is paid their cost plus a management fee.  While fees vary based on the service provided, costs are suppose to be what the 3PL paid.  Here is where many companies overpay.  For most, this overpayment could be avoided by asking a few questions upfront and checking the bills a little closer  throughout the life of the contract.

As stated earlier, cost plus contracts are set up to charge the customer for actual costs paid for goods and services plus a fee, which is ideally the profit for the 3PL.  There are four areas that companies should consider, both when negotiating the agreement with the 3PL and when paying the 3PL’s invoices.

The first area to focus on is benefits.  Unless specified in the contract, benefits charged on wages should be the actual cost of the benefits.  That means that rebates that the 3PL  gets on health insurance and workers comp should be credited to the customer.  If you are charged a “standard percentage” and you don’t ever get a rebate, but the language in the contract says nothing other than cost plus, you are being over charged.

If, however, the contract stipulates that there is to be a standard percentage applied to wages for these categories, then the charge would simply be the percentage applied to actual wages.  Remember, in many operations hourly wages can be as much as 40% to 55% of total operations costs.  If you are charged a couple of extra points over cost of benefits, that could be a lot of money during the life of the contract.

The next area to consider is temporary labor charges.  Many temp agencies offer rebates to 3PL’s based on volume over  the quarter or year.  As the customer, you have the right to see the agreements and call the temp agency to discuss the specific arrangements.  If there is a rebate from a temp agency, or from any supplier for that matter, in a cost plus arrangement, you have the right to your share of the rebate.

Many operators also provide systems and systems support.  While support typically is based on a percentage of software license cost, the actual systems license costs are much less direct, and in reality are in large part profit.  You will hear arguments that the license costs have to cover a lot of R&D, overhead, and other indirect costs you, the customer will never see.  Truth is it is profit.  You should not pay management fee on this. This is one of those areas that should be addressed up front.  If it isn’t spelled out or included as a line item on a budget, you should not be charged a management fee.

The last point to look into is corporate allocation or charges for overhead.  Like some of the topics above, unless this amount is clearly defined as a percentage of total costs or something similar, it should be the actual costs.  The big mistake that many make, however, is that they pay a management fee on top of a corporate allocation / overhead.  In effect, you are compounding the fee paid to your provider.

Most experienced supply chain executives throw out charges associated with corporate allocation / overhead right from the start.  You should have one fee to negotiate.  Don’t allow yourself to be put in the position of negotiating two, three or four fees depending on the activity.  This is a tactic used by some 3PL’s to simply make more profit.

There are many areas that companies must watch out for when negotiating and managing their 3PL agreements.  Hopefully you have these four critical components in control.  If you aren’t sure, at least you know where to start looking.

Many times Asian manufacturers find more than a few issues to overcome when expanding into the United States. There are the obvious issues to overcome such as getting work visa’s in order, understanding the laws, and figuring out all the intricacies of having a “national” live in the US.  These “setup” costs are minimal compared to other issues that can end up costing much more money.  One of the bigger challenges is to set up a supply chain and reverse logistics services for their customers.  Most Asian firms outsource most or all supply chain and reverse logistic functions in North America.  How this important network is setup can determine whether the manufacturer will make a profit or not.

Selecting the right partner to outsource is often the most critical decision that a company can make.  For manufacturers from other countries coming to the US, this decision is perhaps the most important one they will make from an infrastructure standpoint.  Many Asian firms often struggle developing a short list of best-of-breed service providers that can provide the network and capabilities necessary to support their customer’s needs.  There are many resources on the web that can help provide a list of supply chain solution providers.  However, in the US supply chain companies typically specialize in one of three solutions.

1. Distribution Center Operations – specialize in operating warehouse facilities
2. Transportation – specialize in moving product via road and rail
3. Niche services – provide specialized solutions, such as returns processing or call centers

When determining which service provider should be on your list, the buyer must do their homework.  Every service provider will try to sell “non-core” services to a prospect, even if they aren’t very good at providing the service.  The company specializing in warehouse operations will push the value of one stop shopping and try to get you to buy their transportation services.  The niche service provider will talk about their capabilities DC operations and transportation, and so forth.  The buyer must realize that if they buy all the services from one provider they will most likely pay more money for poorer results from the “non-core” solutions the provider has talked you into buying.

Supply chain solution buyers beware.  Many companies make the wrong selection and end up with a service provider that cannot “deliver” the promised solution.  There is a large “cost of change” even when your service provider is bad.  This cost of change will drive companies to live with inferior service for months, and in some cases years, even when the service provided is driving away their customers.

To avoid this, there are a few basic guidelines to keep in mind:

1. Think about supply chain solution providers in terms of operations, transportation, IT, and niche services. Few providers can do two or more of these services well or at a best-in-market price.  This means you will need to plan on selecting and negotiating agreements with two, three or four different companies.  This is more time consuming and trickier to manage but this is a best practice that US based manufacturers use.
2. Hire a US industry expert to help you write and negotiate supply chain agreements.  Many customs, expectations and assumptions in Asian countries are different in than US norms.  An attorney will not know these specific industry practices.
3. Build in flexibility and scalability into your supply chain network and the underlying agreements.  Many Asian firms will build an initial supply chain network for Walmart or Home Depot or Costco, only to find out later that a completely different program has to be developed for the rest of their US customers.  Companies must build in a flexible supply chain to ensure they can meet customer demand at a reasonable cost.  Similarly, you must think about scalability as well.  If your service provider owns all their buildings, they will be slower to adjust their network as demand shifts.
4. Do not outsource WMS or IT solutions to the same company providing distribution center operations or transportation services.  Keep control of the software and hire your own staff to support it.  Outsourcing software to the service provider will prevent you from changing either IT or service providers if they don’t work out.  The exception to this might be the niche solution providers that provide smaller more focused solutions.

More Chinese, Japanese, and Korean companies are selling products in the US.  With the growth of outsource solution providers, it is easy for a company to quickly develop a supply chain that can accommodate their customers needs.  The scale, however, is different than what many are use to.  The US may be the richest market in the world but it is spread over 9.6 million square kilometers, or 3.7 million square miles.  Scales, times, costs, and customs are different.  Success of foreign firms depends on their ability to adapt to these changes.

Many Third Party Logistics Companies (3PL’s) churn through customers, repeating the same expensive customer churning cycle, year after year, customer after customer.  For these 3PL’s it is like Hyde says “One day you’re in, and the next day you’re out.”  There are companies that have the reputation in the market of changing their supply chain service provider every two or three years, when the contract expires.  Churning through providers is bad for companies and 3PL’s alike.  Anyone involved in this churn cycle will agree there are costs to changing providers and it is usually painful for everyone involved.

So what do some 3PL’s do that enable them to keep their customers for decades, while others can’t seem to keep their customers for more than a two or three year contract term?  So, why does it happen? Obviously there are some 3PL that just do a bad job and deserve to get fired.  However, there are many 3PL’s that do a great job, only to get an RFP package in the mail from their customer.  Why?

Answer: Communication

There is a three stage cycle of communications that a company and their 3PL repeatedly go through that determines whether their relationship will continue or if a bid package will be sent out.  If the cycle is recognized and acted upon, a 3PL could have extended relations with a company for years to come.  If any part of this cycle is ignored, it will eventually result in a change in operators.

The first stage is “Setting Expectations”.  In a new operation this is when the company outsourcing clearly expresses their goals and expectations to the 3PL.  Likewise, the 3PL makes commitment on the service that is to be provided, typically supported with level of service metrics, and other measurable performance data.  In the beginning of the relationship, these terms are captured in a contract.  Ongoing however, as exceptions, special projects and changes occur, each party must ensure both expectations and deliverables are communicated verbally and in writing.  The expectations and deliverables must be mutually understood and agreed to prior to any substantive action taking place.

The second stage of communications is “Ongoing Updates”.  Again, this is a dialogue of sorts between the solutions provider and the company that has outsourced to them.  It is not simply reporting metrics.  This is where many 3PL’s drop the ball.  This is where you have ongoing communications about what is going on in the operations on a day to day basis.  At a tactical level, there is generally a manager talking to a single point of contact every day about operational issues.  Just as important, there is a strategic conversation that must take place, at least monthly, between a senior executive from the 3PL and the executive decision maker.  These strategic discussions will ensure alignment between the two entities and it will also ensure expectations are clearly understood and performance is explained.

The third stage of communication is “Exception Management”.  This is often the most important stage in communications between a company and the 3PL.  Remember, companies outsource either because they don’t have the internal core competency required or because they want to focus their energies and resources on other critical parts of their business, or both.  Put simply, companies pay 3PL’s to lose sleep over their operations so the company’s executives don’t have to.  3PL’s get paid provide a level of expertise, identify issues before they get out of control and to do a really good job of managing the exceptions and minimizing the impact of operational issues.

In any complex operations “stuff” is going to happen.  It is how a 3PL deals with these irregularities that  separate best in class from the rest of the crowd.  A top quality service provider will be the one who identifies the issue or problem and informs the customer.  Not only are they the first to tell the customer, they do so with a plan in their pocket and recommendations for action at the ready.  Solution providers should be expected to act as a red flag mechanism, supported by a proactive team that will take steps to minimize risk and maximize profits.

Communications is key.  In the market place, a solutions provider is only as good as their ability to communicate in each of the three stages of communications.

January and February is the time of year when companies send out RFP’s (Request For Proposal) to solution providers. 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. Many companies target awarding the business in the first quarter so they they can get things up and going by the end of the second quarter, which will ensure they will be fully operational in the third quarter.

There are basically two approaches companies can take in selecting a third party to provide supply chain management functions. 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 presents 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. 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, such as moving full trailers from one location to another. However, if customization is called for or if there is going to be significant variability based on uncontrollable conditions, 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 what we will call the “Relationship” approach. If you are going to outsource a supply chain function 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, contacts with assumptions and variability require a lot of effort and oversight to ensure everything is on the up and up. If you are outsourcing a function 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? How predictable are the basic metrics?
3. How complex is the supply chain function that you are outsourcing?
4. Why are you outsourcing this function?  Flexibility? Lack of knowledge internally?  Tight resources?
5. What kind of additional “value adds” are you looking for the service provider to bring?
6. How long do you anticipate the contract and associated relationship to last?
7. What was the justification used to get approval for the project?
8. 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.

Now is that time of year when your return centers, especially retail return centers, should be figuring out how they are going to process returns during the peak season. What’s the plan for January, February, and March?

Returns start picking up the first week in December but shipping slows dramatically between Christmas and New Years. This year, New Years falls on a Friday so nothing is going to really start moving until January 6. Adding five days to flow product into the facility, means most retail return centers need to be fully staffed and ready to rumble on or about Monday January 11.

If you run a manufacturing return center, you can add about two weeks, depending on your customer’s requirements and how much is going directly from the consumer vs through another return center. This means that for most manufacturers, they won’t be seeing peak inbound volumes until week of January 25.

So what should you be looking at between now and then? There are a few critical things every return center should consider when planning how to handle the additional volume of peak season.

First, how much additional labor will you need. Generally this is temp labor. Don’t forget, however, that if you are going to add shift you will need to get some of your trained hourly workers to move to the other shifts to help with training and processing. If you are going to add a shift, you need to ensure you have the management needed to run that shift as well.

You can generally count on your normal day shift to handle 50% of the volume, second shift 30% and third 20% or less. Productivity on weekends and during mandatory over time periods will drop by about 20%, so don’t expect to hit the productivity level you see today.

The next thing you need to think about is temporary space. There are two kinds of temp space to consider. Will you need a temporary building or storage trailers. What you will need depends on what your going to put in the building or on the trailer, for how long, and where is that product going from there. Are you going to store inbound freight, in process inventory, or finish goods ready for shipping, or some combination. Volume of each of these and the dwell time will drive how much space you need for how long.

Really think about how fast your will see product coming in, being processed, and shipping out. While you don’t want to go crazy, it is better to have more space than you need lined up than to not have enough. Full buildings lead to lost product, damaged goods, and accidents so don’t be conservative with the space requirement.

Once you have your volume estimates, labor & leadership plan, and your space needs defined, you are ready for the wave of returns and recall goods. The planning for all of this need to start happening now.

You will need to identify lead time requirement for recruiting, training and hiring both hourly employees and management. Temporary space takes times find the space and negotiate the lease terms. Storage trailers are easy once you find a provider with the equipment you need. In both cases, don’t forget plan for any additional security you may need.

Finally, remember that returns volumes, condition, and handling are always off significantly from plan so build in flexibility. It’s like my mentor Jerry Davis always said “It isn’t a good plan unless it’s flexible.”