Posts Tagged ‘Returns Management’

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.

Tis the season to be jolly. Enjoy it because immediately following this jolly time of year is the season for recalls. Roughly 50% of all returns from a retail store in January is product that was never sold. It is being pulled off the market because it was sold under a guarantee sales agreement.

A guaranteed sales agreement is when a retail buyer agrees to buy a lot of product from a vendor but can return unsold product for a full refund. Guaranteed sales agreements helps the retailer minimize their risk and it helps the manufacturer maximize sales. Often the product is pulled from the shelves and sent to the vendor who may repackage the product to remove that Christmas Tree on the side of the box.

After the packaging is complete they will redistribute it to their customers or they may simply hold it for future orders. Some of the more seasonal items will be liquidated on the secondary market. This is especially true for soft lines or product that has a short shelf life.

When negotiating the terms of the recall there are five variables that you need to address.  Below are the five major variables to negotiate followed by a brief explanation of each:

• Item condition requirements for return
• Cost per unit to be used when returned
• Who is responsible for freight from the retailer to the manufacturer
• The consolidation fee for returns being shipped from a return center
• The time window that recalled product will be received

Items conditions usually require each item to be in pristine condition with all price labels and tags removed.  In short, the manufacturer should have the same expectations as the retailer when they received it.  No displays allowed.  Open boxes, damaged items, shrink wrap torn, or any other “violation” results in NO credit being issued for that specific item.

Next, the cost used is to process the return is usually the last cost charged to the retailer.  It is common, especially in some categories to negotiate a percentage of full cost.  An example would be 95% of the last cost, due to wear and tear.  The best advice here is to keep it simple.  The credit equals the number of “pristine” items returned multiplied by the last cost per unit on an invoice.  You don’t have to worry about cash terms as the retailers will simply deduct the amount from the next invoice they owe the manufacturer.

For freight charges, typically the retailer is responsible for freight from the stores to the return center and the manufacturer is responsible for the freight from the return center to their location.  If the product is not going through a return center, split the cost.

For retailers who do use a return center, the norm is to charge a consolidation fee of 1%-2% of the cost of the product to cover the cost of processing the goods and consolidating the shipment at the return center.  However, this often gets negotiated to zero, especially if the retailer is getting full cost credit.  This fee is added to the credit that the retailer will take when they process the total credit for the goods.

Finally, the window of time needs to be established for the goods to be returned.  Keep in mind this is only for returning new goods that were not sold but purchased for the holiday season.  Defective return terms are not impacted by recall terms.  The window of time usually starts on New Years Day and usually runs for 60 to 90 days.  Any product not RECEIVED by the manufacturer during the established time frame will not be accepted and should be returned to the retailer.

Seasonal recalls can be great for both the retailer and the manufacturer but you have to have your terms and conditions clearly spelled out in a written agreement.  Hopefully this Christmas the shelves will be empty due to high sales and there will be little product returned.  Happy Holidays!!

Focusing only on the bottom line is not the best way to improve profitability. That’s the conclusion of recent research conducted by Mary Sully de Luque and Nathan T. Washburn of Thunderbird School of Global Management; David A. Waldman, of Arizona State University West; and Robert J. House, of the University of Pennsylvania, that underscores the risk of single-minded pursuit of profits.

This finding is based on survey data gathered from 520 business organizations in 17 countries designed to test if a CEO’s primary focus on profit maximization resulted in employees developing negative feelings toward the organization. The result? Employees in these companies tend to perceive the CEO as autocratic and focused on the short term, and they report being somewhat less willing to sacrifice for the company. Corporate performance is poorer as a result.

But when the CEO makes it a priority to balance the concerns of customers, employees, and the community while also taking environmental impact into account, employees perceive him or her as visionary and participatory. And they report being more willing to exert extra effort, and corporate results improve.

So does this mean that CEO’s don’t have to worry about profits. No. What it does mean is that if you want a motivated workforce who will support all your goals, including bottom line goals, show them that you have a balanced approach. It also means that taking a balanced, “sustainable” approach is more profitable.

This research also confirms what many progressive companies such as Walmart, P&G, and Dell already know. That is that focusing on sustainability, aka – the triple bottom line, is not only good PR, but is the best strategy to maximize long term bottom line results.

In the supply chain world, turnover is an area that can have a big impact on costs, production, and quality. Many distribution centers live with 33% to 100% turnover per year.

It has been estimated that the recruiting, hiring, orientation and training of warehouse workers can cost $4,000 per worker. If you run a facility that has 200 people and have to replace 60 people every year due to turnover, this will cost your company $240,000. Clearly, retaining trained, dependable employees is a great way to increase the bottom line.

If you have a turn over problem in your supply chain, develop relationships and programs to hire disabled people. Disabled people have many advantages over hiring employees off the street, from the general public.

Most disabled people are hired through a non-profit organization. These organizations will provide special job coaches and training classes that you don’t have to pay for. Many will provide on site supervision as well.

Speaking from first hand experience, disabled people are very reliable. They take great pride in their job and follow direction much better than most employees. Once they are trained, you have a dependable employee for life.

In a recent article, Walgreens said they opened a new DC with 40% disabled workers. This is great for the community and really says something about Walgreens. However, Walgreens will see a big win financially as well. While unemployment for the disabled is over 70%, their turnover rate, once trained and oriented, is much better than the average employee workforce.

It has been proven through numerous studies that over time, productivity for the disabled is equal to that of a “non-disabled” workforce. This is true for quality and safety as well. Disabled employees have better attendance and less workplace issues than other employees. This combined with the support, training, and oversight a company gets from the numerous non-profit organizations makes hiring disabled workers a best practice for supply chain managers.

Bottom line – turnover costs business a lot of money. Every manager wants a dependable workforce that is enjoyable to work with. You can dramatically improve your turnover rate by hiring disabled employees without sacrificing productivity, quality or safety. Oh yea, one more thing, you will feel really good about making a huge difference in a disabled person’s life. Now that is really cool.

Over the next couple of weeks, warehouse management teams will clean up their facilities, after the holiday battle is over. A normal byproduct of this is collecting the damaged items left over from the Christmas surge.

Warehouse damage is one of those small things in the supply chain that add up quickly and comes right off your bottom line. A management team’s ability to control this area is a barometer of how well they run their warehouse. Show me facility that doesn’t track and work their damage well and I’ll show you a poorly run warehouse.

There are just a few things you need to do to control damage within your facility. First, you have to track it. What is damaged, where was it damaged and when was it found.

Second, you have to keep up with processing it. Don’t let damage build. Damaged product in a DC is like any damaged item, it doesn’t get better with age. If you don’t process damage in a timely matter, the amount of write offs escalate.

Last, but not least, factor the damage rate as a percent of picks or inventory, into your leadership teams incentive program. Set up a win/win where if the damage rate stays in control, the managers get an incentive. Some companies do this for the employees as well. The point is that you want to reward the behavior you want replicated.

Stuff happens in a distribution center. However, product damage can be minimized simply by getting your team focused on it. Measuring, monitoring and incentivizing your team on the monthly or quarterly dollars written off due to warehouse damage will keep this expense to a minimum.

When transferring into the logistics department at Wal-Mart, the first subject I was taught was Manpower Planning. I remember thinking,”I thought I was going to learn about running a warehouse and managing transportation.” Little did I realize then that manpower planning was the key to everything.

If your warehouse and transportation leadership team has not incorporated manpower planning into their daily rituals, you are spending a lot of money on labor that could be avoided. Every person managing a function or team of people should be planning their work load using some form of the following variables:

1. U = Total Units of work per shift ( labels, cases, cube, or deliveries, etc.)
2. P = Units per hour/shift/day per person or FTE (Full Time Equivalent)
3. H = Number of hours worked per day/shift
4. F = Total Employees or FTE’s needed

Once you have the variables, each manager/supervisor/functional leader uses the following calculation:

• F = U / (PxH)

If you had to pick 8,000 units, in an 8 hour shift, with a standard productivity rate of 100 units per hour the calculation of  the number of workers you need in the area would be:

• 8,000 units / (100 uph x 8 hours/shift) = 10 FTE’s Needed

Each manager/supervisor completes the manpower calculation prior to the start of the shift and brings the numbers to the Staff Meeting each day.  In the Staff Meeting each supervisors reviews their numbers and the number of people they need to complete the workload, based on the standard productivity.  Those that need more people are loaned people from other areas that are overstaffed based on their workload.

If everyone has more work than people, temps are called in or overtime is planned for that day or week, depending on the operation.

This simple, quick exercise will ensure that your supply chain operates efficiently and this will ensure you avoid having people standing around in one area while other areas fall behind.  This will ultimately save you money, improve moral, and help ensure productivity targets are achieved.  This requires NO technology or additional reporting, just basic numbers and disciplined leadership.

While Washington seems concerned only with “health care reform”, Obama continues to do for the economy what he did for world peace, and unemployment is still too high, there is some good news.

The market is over 10,000 and Apple showed that if you make products that people want to buy, they will. In addition, PNC Business Banking sent out the following which is encouraging:

The Great Recession of 2008 to mid-2009 appeared to end in the summer quarter. The third quarter’s real GDP growth rate was close to 3% annualized, thus putting an end to the longest U.S. recession since the Great Depression. Third quarter GDP was supported by an end to the huge inventory drawdown of the past three quarters, the resumption of the new “normal” production at GM and Chrysler, consumer spending on automobiles motivated by the Cash-for-Clunkers program, and increasing government spending as more fiscal stimulus dollars were engaged.

After pessimism of small and mid-sized business owners rose last Spring to an all-time high in the history of the PNC Economic Outlook survey, owners are now more cautiously optimistic, still waiting for a boost from the federal stimulus program. The new Fall findings support PNC’s forecast that the U.S. economy has started a moderate U-shaped recovery in the latter half of this year that will continue throughout at least 2010. The PNC survey, which began in 2003, gauges the mood and sentiment among small and mid-sized business owners, who represent the bedrock of the American economy.

Now, if Obama and gang can keep from killing us with regulations and taxes (direct or indirect), and focus on job creation, 2010 might be a pretty decent year. As John Lennon would say “Come on Mr. President, give growth a chance.”

A company’s supply chain can either be one of it’s greatest competitive advantages or a huge disadvantage it struggles to overcome. Market leaders typically enjoy significant advantages over their competition because of their supply chain. Another characteristic that market leaders share is that the vast majority outsource some or all of their supply chain. Coincidence? Hardly.

Why do leading businesses outsource? The reasons are as varied as the companies themselves. However, it usually boils down to three primary reasons: Need for flexibility, the need for speed, or improving profits.

Walmart has one of the best supply chain networks in the world. However, due to the volatile nature of imports, the cost of real estate around major ports, and the expertise needed to meet customs requirements, they outsource most of their import warehousing.

Some of the leading manufacturers also outsource pieces of the distribution networks. Today Atlanta is one of the biggest supply chain hubs in the world. That wasn’t the case 25 years ago. Milwaukee use to be the center of all things beer related, including supply chain. That isn’t the case today.

The point is that companies realize that great supply chain solutions for today may be a major problem years from now if they are stuck with a building in the wrong location. This could result in a major competitive disadvantage to competitors who built flexibility into their networks.

Often, companies will outsource to 3PL’s to minimize the risk of these major demographic changes. Outsourcing has other advantages also.

Outsourcing requires less up front capital costs and agreements can be structured to avoid impacting bank covenants.

Outsourcing a new operation is usually much faster than building facilities. Companies leverage 3PL’s infrastructure to provide geographic coverage much quicker than they would be able to if they had to go through the building and development process.

Companies often outsource to limit certain liabilities. For example if a company with a non-union workforce needs operations in a highly unionized area, they will outsource to provide protection from their other operations. In addition, issues with health insurance, worker’s compensation, and shrinkage can be limited by outsourcing.

In the right situation, outsourcing can provide a cost effective solution, fast. The result will be a more flexible, more secure, more profitable supply chain.

According to a new Proofpoint study of 220 leaders at American companies with over 1,000 employees, 38% employ staff to read or otherwise analyze the content of outgoing email, compared to 29% last year. Why the big increase in surveillance? 34% said their businesses had been affected by the exposure of sensitive or embarrassing information, up from 23% in 2008.

ON a related note, the NLRB reversed a ruling that said employers could consider internal emails encouraging unionism as an abuse of the company property. With this reversal, employees are now protected if they use company email to encourage unionism. The message is that we all should be careful what is put in emails and we should not spy on employees to see if they are promoting a union by reading their emails.

Treat your team with respect and treat them like you would like to be treated. Do you let them read your emails? Then don’t read theirs. If you do that and you have a positive uplifting culture, you won’t have to worry about what your people are saying about you, NLRB violations, or union organizers.