Posts Tagged ‘supply chain’

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 companies decide they could reap many benefits if they develop their reverse logistics capabilities.  Often, they decide to outsource this.  It isn’t unusual for such a company to suddenly get cold feet, whether it is outsourced or not,  when they see the price tag of the proposed return center.

Unlike transportation or distribution centers, executives often act like developing this  complex part of their supply chain, that currently doesn’t exist, should be very cheap or free.  In fact, often the very executives that would scoff at the notion of requiring a new truck fleet to have a three month pay off, will be the very ones to suggest the same for a returns center. When the internal champions of the return center aren’t willing to agree to such a high bar, they are often left with “proving the concept” prior to fully committing the company to re-engineering their returns processes .  The real question for the executive that requires a proof of concept is “What are you really proving?”

Experience has shown that many companies that set up a pilot to test the “return center concept” end up abandoning the pilot within 12 months.  Why? Return center pilots fail because they require the organization to be fully committed and that won’t happen when you are testing only a small subset of the total company.  Pilots also fail because they must bear all the costs associated with systems design and implementation, building design and implementation, and employee recruitment and training; BUT they get very little of the offsetting saving and revenue from the existing corporate structure.

For example, let’s say you are a major retailer with 1,000 stores and you decide to run a reverse logistics pilot for 25 of them.  Again, why are you running the pilot?  Anyway, the typical ROI Calculation for a retail return center is something like:

ROI = (Increased Vendor Credit + Vendor Fees + Increased Liquidation + Disposal Savings + Reduced Store Wages)     LESS (Added Transportation Costs to the RC + Systems & Building Cost + Labor & Processing Costs)

This ROI could be significant if  all stores went to the program over a 90 day period.  That retailer could expect less than a 12 month payback on their investment and significant contributions to profit the following year.

HOWEVER, with a pilot,  this ROI model breaks down:

• The buyers can’t negotiate the vendor returns fees because neither the vendors nor the buyers want to try to maintain two different systems for crediting returns
• The retailer wont get the liquidation revenue because the salvage buyers won’t invest in a small, short term program and they don’t have enough time to really determine the value of the goods, so their bids are lower
• Transportation costs are inflated due to a lack of volume coming from few stores
• Systems design and implementation costs are basically the same for 25 stores or 1,000 stores
• Store ops will be very hesitant to reduce headcount because they know they will have to fight to add it back if the program gets scrapped and they don’t want to face the battle of sending somebody home for good
• Return centers take 90 to 120 days to get up to productivity levels and establish quality procedures, which drive up per unit costs in the short term
• If the return center is outsourced, the 3PL will struggle getting a fully committed, experienced staff because the better managers will want to stay put and avoid the risk of taking a job that could be eliminated in months

If you are thinking about building out a return center, do your homework.  Look at the industry, the service providers, the volume and the many pro’s and con’s.  Make your decision wisely but don’t waste your time and money on a pilot.  Companies either have a compelling value proposition that they will commit to deliver or they don’t.  Companies should either get committed or save their money they would spend on a pilot.  If a pilot is required, have specific realistic goals that are agreed to by all internal constituents, including the executive leadership team.  These goals should be built upon clear, specific financial expectations.  A “pilot” return center will do little to tell whether your company will benefit from a return center or not, but it will cost a lot of money and help extend your resume’.

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.

In this podcast Curtis Greve talks about how leading retailers and manufacturers leverage their reverse logistics capabilities to maximize sales.

Yes, a return center can help maximize sales.  How?  By leveraging returns processes and capabilities to efficiently pull unsold, guaranteed sales inventory out of the primary sales channel.  This “Recall” process provides the support network needed to ensure companies avoid out of stocks, avoid markdowns, improves relationships, all while maintaining an inventory position that will ensure customers have access to product when they want it.

The Reverse Logistics Podcast

Your host is Curtis Greve.

As the first quarter of 2010 comes to a close, it is time to review where your reverse logistics program stands.  By now, the “Christmas Season” for returns should be finished and whether your returns operation is going to make budget this year has been determined.  For the vast majority of reverse logistics operations, over half volume and processing expenses hit the books in the first three months of the calendar year.  If an operation didn’t perform well during that time, it will be next to impossible to make up for it over the remaining nine months of the year.  However, steps can be taken to make the most of the rest of the year and document learnings to help make next year a success.

Over the next two weeks, organizations should conduct a reverse logistics first quarter review.  This review should take a look back at the first quarter results, record lessons learned, make note of where the operation is at the moment, and plan for the next three months activities.  A best practice approach to this would to complete an SF-SWOT analysis.  The following outlines the basic steps to a good analysis and first quarter review:

• Gather data for the following, the best you can.  Do not wait until you have absolutely everything and estimates are acceptable. It’s like the old saying goes “If you wait until you are 100% ready you’ll never be ready.”  Close is good enough but get all the details you can.
• Pull together a team to help gather and review components.
• Conduct the SF-SWOT analysis as follows:
  • S – Successes:  For the previous 90 – 120 days, document what went well, what you got right, what you want to make sure you repeat next year
  • F – Failures: For the previous 90-120 days, document what went badly, what problems occured that you want to avoid next year, what actions do you NOT want to replicate next year
  • S – Strengths: Looking at your current state, document where are you in great shape, what are the best things about your operations, what can you leverage going forward to build on to achieve your goals the rest of the year
  • W – Weaknesses: Looking at your current state, record what gaps exist in your programs, what short falls should be corrected in order to avoid catastrophe the rest of the year
  • O – Opportunities: Looking at the rest of year, note what is happening internally and externally that you can leverage to improve results and what actions you will take to ensure you make the most of the opportunity
  • T – Threats: Looking at the rest of the year, analyze major events that will take place must prepared for, what internal threats to performance and results do you see, what external threats are out there that you need to act to avoid over the next few weeks
• Once the SF-SWOT analysis is complete, publish the results and conduct strategic planning meetings with the purpose of developing action plans to address the findings outlined in the analysis.

While the first quarter is the critical season for the majority of reverse logistics programs, taking time to review what happened, document lessons learned, and plan the rest of the year are critical disciplines that every reveres logistics executive must follow to ensure asset values and bottom line contributions are maximized.  A goal without a plan is nothing more than a wish and hope is not a strategy.  There are many things that are unknown when planning for returns but there are many opportunities that can be leveraged, threats that can be avoided, and lessons that can be learned if you take the time and put the effort into it.

Reverse logistics, or returns management, is often an overlooked link in a company’s supply chain. For the majority of supply chain executives, the returns processing department is that dirty, disorganized part of the warehouse that they don’t even like to walk by, much less do anything about. It is difficult to get excited about reverse logistics because returns aren’t pretty and the impact on the company is not clear.   It is hard to overcome “ugly and confusing” without a significant reason to do so.

However, according to a February 2010 study by The Aberdeen Group, companies that were considered best-in-class in returns processing averaged a 93% customer satisfaction rating. This was 12% higher than the lower 80% of companies surveyed.

The lesson is clear. Focusing on returns processing, aka reverse logistics, pays off in better customer satisfaction and that will directly increase earnings.

The National Retail Federation reported the rate of return for 2009 was over 8% of total sales. That same survey reported that 58% of retailers that participate used a manual system to track returns.  For manufacturers, the picture isn’t any better.  Again, the 2010 study by The Aberdeen Group reported that the cost of processing returns for hard goods manufacturers can range from 9.0% to 14.6% of sales.  Just like their retail counterparts, over 60% of the companies had no tracking system and called out the need for visibility as the major gap in their reverse logistics program.  Both retailers and manufacturers rated returns management as “very important”, yet in many companies, reverse logistics is virtually ignored.

Look at the implications of these two studies from the  reverse point of view.  Returns average over 8% of total sales, cost anywhere from 9% to 15% of sales to process, impacts customer satisfaction by as much as 12%, yet virtually ignored by executive management around the world. The question is “Why?”

Why would top leaders, captains of industry, ignore a function that could improve customer satisfaction by 12% or more. Why would companies known for their controls and discipline allow 8% of their inventory go to waste and fall off the grid? Why would corporations known for their ability to focus their team and execute strategy ignore a process that costs 9% to 15% of sales?

The answer is perspective and resources. Perspective can be difficult because few look at returns process or think reverse logistics pipeline. A CEO may see that their return rate is up from 8% to 10% during Christmas, but few have visibility to the total cost of processing those returns.  Every senior executive understands the importance of communications when interacting with customers who are returning a product but few look at the return policies and associated procedures to see if they are causing customer dissatisfaction or creating trouble with their suppliers.  Often when companies do take a look at the reverse pipeline, they are reluctant to commit resources to improve the processes.  Even if they did focus their talent and resources on returns, most companies don’t know where to begin or have the valuable experience to address the issues with improvements that will put money on the bottom line.  For many, the result is that reverse logistics gets ignored and neglected.

If your company hasn’t examined their reverse logistics processes in over the last couple of years, or if you are a senior executive asking yourself basic questions like “I wonder how we handle returns?” you have a big opportunity to increase customer satisfaction, reduce expenses and drive profitability sitting right under your nose.

There is a common mistake that many companies make that costs them additional transportation dollars, that could easily be avoided.  That mistake is that they use UPS, FedEx, or other expense shipping options to get product back from their customer and/ or send returned goods back to their suppliers.  This usually happens because nobody really thought about the mode of transportation used for returns.

Many companies will ship product back using the same mode of transportation that was used to deliver the product.  This is especially true for e-commerce and catalog retailers.  If the shipping requirements for outbound orders are first class, overnight, or similar forms of special delivery, many companies instruct their customers to return product using the same mode of transportation.  The majority of the time this is a big waste of money.

There is a big difference between outbound orders and returns. The difference is that nobody cares how long it takes for returns to get FROM the customer back to the company.  If an item that is returned takes two or three extra days, nobody cares.  Unless there are special handling requirement due to the type of item that is returned, set up transportation using the cheapest method available.

Of course, like everything else, one size doesn’t fit all.  Many will have some SKU’s that should be shipped back using the more expensive options.  However, for the majority of SKU’s, the cheaper transportation options will do just fine.   Retailers, distributors and manufacturers should all have systems that can tailor transportation directions based on SKU.  This is usually a fairly easy thing to do but can result in significant transportation savings.

According to a study conducted by The Aberdeen Group, companies whose reverse logistics capabilities  rank in the top twenty percentile are realizing more than four times the decrease in year-over-year costs per return, compared to the lower eighty percentile.  In short, the best keep getting the better and the rest are falling farther and farther behind.

At first blush, this seem counter-intuitive.  Shouldn’t those with the highest cost per unit be able to reduce cost more then those that are best-in-class?  So what is the key to reducing the costs of processing returns?

There are two best practices that will enable your company to significantly reduce the cost of processing returns starting this week.  (This is assuming you are in the bottom 80%.) That’s right, you could start saving money this week.

First, you must have a dedicated, talented, executive permanently assigned to manage your companies reverse logistics pipeline.  I told a client this one time and he said “We don’t have a reverse logistics pipeline.”  I replied, “You do, you just aren’t managing it.  It is managing you.”

Today, the total cost of returns can cost from 9% of sales to 15% of sales.  A function that can impact your corporate financial to this degree deserves the dedicated focus.  Whether you assign a top talent internally or you outsource the oversight and management, make returns somebody’s job and you will see instant payback.  If they need to get educated on reverse logistics, get them trained.  If they are trained but aren’t making an impact, make a change.  The point is to get the right leader dedicated to driving improvements that will put your company in the top twenty percentile.

Next, develop metrics so you can measure what you’ve received, how much is in process, how much you’ve shipped, and quality of the process.  Avoid falling into the trap of “we don’t have a system.”  Sure a system would be better, but you can save a lot of money by tracking it the old fashion way.  You don’t need a system to measure performance and you don’t need to let any excuses stop you from doing some level of measurement.  You don’t measure it, you don’t manage it.  You measure it, you manage it, the costs decrease.

If your company is not doing anything to improve returns and you don’t have the budget to invest in systems or facilities, simply putting a smart executive in charge and having them develop basic metrics will put significant dollars on your bottom line.

In this podcast, Curtis Greve covers recent studies that show the impact of reverse logistics on customer satisfaction.  Did you know that companies that are considered in the top 20% in terms of reverse logistics capabilities have, on average, a 12% higher rating in customer satisfaction than the lower 80% of companies?

Also, according to a study conducted by Harvard Business Review, for each 1.3% improvement in customer satisfaction, sale increase by 0.5%.  Extrapolated, this gives companies that are considered best-in-class in reverse logistics programs almost a 5% increase in sales.

Listen to today’s podcast and learn the four key areas that companies need to develop to improve their reverse logistics program and how that will lead to improved customer satisfaction and sales.

The Reverse Logistics Podcast

Your host is Curtis Greve.

The Reverse Logistics Podcast

Your host is Curtis Greve.

Reverse logistics was born from the desire to improve customer satisfaction. As competition increased and the living standard improved after World War II, customers demanded better quality and service.  As a result, people started to return items at a greater rate.  Retailers and manufacturers, seeing an opportunity to gain or keep market share eased their return policies.  For many companies, such as Wal-Mart, this was way to differentiate themselves to the customer.

In the mid 1980′s, when I was responsible for Walmart’s reverse logistics operations, I received a call from Sam Walton’s office.  Mr. Sam wanted a returned item that was an outrageous example of an item that had been returned and money refunded to a customer.  He was going to use it at an upcoming store manager’s meeting.   I went out on the floor and found a Stanley Thermos that we had recently processed from a store. On the bottom of the thermos there was a date stamped showing the date of manufacture – 1954. The first Walmart store didn’t open until 1962.  I grabbed the thermos and the store return tag and sent it over to Mr. Sam’s office.

A few weeks later, at the Wal-Mart Store Manager’s meeting, Mr. Sam held the thermos up and asked the store manager that had given the refund to come up on stage. The nervous manager walked up on stage and stood beside  Mr. Sam.  Mr. Sam shook his hand, thanked him for doing a great job and then praised him for providing such great customer service.  This guy understood that taking back a return wasn’t about a $20 thermos, that had clearly not been bought at Walmart.  It was about customer satisfaction.

All the managers in the attendance got the message.  Over the next few months, the volume of Wal-Mart’s returns increased significantly, as did sales, earnings, and market share, all which were the result of keeping customers happy, one return at a time.  By the way, that same Stanley Thermos is now on display in the Walmart’s Visitors’ Center in Bentonville Arkansas.  The message lives on.

Reverse logistics is all about customer satisfaction.  In a study published by the Aberdeen Group in February 2010, out of the 160 enterprises examined, those companies rated in the top 20% in terms of quality of reverse logistics program had an average customer satisfaction rating of 93% compared to the other firms ranked in the lower 80%, whose average customer satisfaction rating was 81%.

In other words, companies that had well developed reverse logistics programs were ranked significantly  higher in customer satisfaction.  Interestingly, the same study found that for both, the top 20% and the lower 80%, the cost of reverse logistics, as a percent of total service operations costs, were within 1%.  The point being, it isn’t about spending more money to process returns.  The difference is in how and where you spend the money you invest in your reverse logistics program.

Every executive understands the positive impact of improving customer satisfaction.  Sales grow, customer turnover decreases, over all moral improves and earning go up.   This study proves that there is a direct relationship between customer satisfaction and reverse logistics.  Reverse logistics can help both top line and bottom line results through processes  that improve customer satisfaction.