Posts Tagged ‘third party logistic providers’

Aftermarket Services have been in high demand for a number of years now.  With the explosive growth in consumer electronics and offshoring of many factories, Aftermarket Service providers have seen demand skyrocket.  According to Livingston Partners, the Aftermarket Services sector has grown over 20% since 2006. Furthermore, they expect the Aftermarket Service sector to keep on this growth trajectory for the next five years. While demand for Aftermarket Services has been strong for quite a while, the service providers are still a fragmented lot with no dominate player emerging as the “Go-To” Aftermarket Service provider of choice.

Aftermarket Services traditionally include returns processing, repair and refurbishment services, and end-of-life services that include recall processing and product recycling services. Over the last few years, however, Aftermarket Services have expanded to include warranty management, customer service, and comprehensive reverse logistics programs.

Due to rising costs and pricing pressures retailers, distributors, and OEM’s have looked to outsourcing Aftermarket Services. They outsource because of a general lack of expertise in the services needed and to limit potential liabilities. There are other benefits but for the most part, companies outsource Aftermarket Services because the service providers can provide the services for a net lower cost, with lower capital requirements, and a higher quality result.

The question remains to be “Why hasn’t a dominate Aftermarket Service provider emerged?”

We think the answer is because of the wide variety of services and sectors that would be considered Aftermarket Services. There are a number of 3PL’s that offer returns processing but these services are often no more than gate keeping processes to receive and ship returned goods.

There are many companies that repair and refurbish aftermarket goods, but these companies are usually narrowly focused on a limited number of categories.  Most repair and refurbishing companies operate on a local basis and do not have the infrastructure required to handle the large volumes that come with a comprehensive nation wide program.

Few reverse logistics companies understand end-of-life processes at all, much less have comprehensive solutions they can take to the market.  Going beyond these three basic Aftermarket Services into the newer solutions such as warranty management, customer service, or comprehensive reverse logistics is a bridge to far for the Aftermarket Service providers of today.

There are a number of 3PL’s who are looking to expand their services and develop differentiating services.  The market is looking for a service provider that can provide comprehensive Aftermarket Services.  When the two intersect, growth and prosperity will abound for both. The question is “Is there any provider out there who has the vision and the capability to be the dominate Aftermarket Service provider?”

You’ve just gotten approval to outsource reverse logistics.  The first step is to put together an RFI/RFP and send it out to your evoked list of potential service providers.  When developing this RFP, there are basically two approaches companies can take in selecting a third party logistics provider.  The first approach is the “Commodity Pricing” approach. This is used by companies that, for a number of reasons, are going to base everything solely on price. The lowest, BELIEVABLE price will get the deal. Most of the Commodity Pricing RFP questions concern establishing credibility and position in the market. Of course, the final version will be based on exacting specifications that require a firm price.

Often the final RFP will have a completed contract that has to have pricing filled in and signed when returned for final review and selection by the buying company. Companies that issue Commodity Pricing RFP’s don’t care how much is profit, what the provider’s cost is, or what assumptions were built in by the service provider. They seldom pay attention to critical elements such as yeild rate, scrap, or disposition statistics.  Their only concern is their cost. For some it could be a cost per unit, others look at total dollars out of pocket, and some ask for a monthly dollar amount for fixed expenses and a firm cost per unit based on volume. This approach works great if the solution calls for a “commodity service” that is not customized, and with little or no variation in residual value of goods flowing through the reverse pipeline.

However, if the valuation of returned goods could vary significantly based on how the product is processed, the Commodity Priced approach can end in disaster for both the company and the provider.  Disaster strikes when the condition or make up of the goods returned are not as expected.  And just like when you drop buttered toast on the floor, it ain’t going to be in your favor.  The 3PL ends up either spending a lot more time and money trying to process the goods or they take short cuts to avoid losing their shirts.  Regardless, it is a big problem for both the third party service provider and their customer.

The second approach to developing reverse logistics or reclamation RFP’s is called the “Relationship” approach. If you are going to outsource a reverse logistics that requires flexibility on the part of the provider and the rate of variability is high, you want to select a provider that you trust.  You will need a provider that will work with you and is willing to agree to contract language that will tie the provider’s interest to your interests.  Relationship contracts are often volume based. Many times contacts are cost plus with a budget cap, based on a mutually agreed to set of assumptions. These contracts are much more complicated than a fixed priced agreement but they can result in much better service over the long haul.

Watch out, though, contracts with assumptions and variability require a lot of effort and oversight to ensure everything is on the up and up. If you are outsourcing returns management to an industry expert, you better have an internal expert working for you, otherwise you could be taken to the cleaners.  One client was getting charged $400 per hour for additional software customization, even though the contract clearly stated that systems charges were fixed.  The customer was “confused” because the contract was cost plus so when the system invoices came through they were never questioned.

If your company is going to outsource and you are developing the RFP or you are ready to select the third party provider, 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?
3. How predictable are the basic metrics?
4. What is an acceptable yield rate for repaired & refurbished goods?
5. What is the expected scrap rate for product by category?
6. What kind of additional “value adds” are you looking for the service provider to bring?
7. How long do you anticipate the contract and associated relationship to last?
8. What was the justification used to get approval for the project?
9. What risks can be controlled if included in the contact? Shrinkage, mis-ships, worker’s comp, health insurance increases, union organizing efforts……

For those looking to outsource reverse logistics, take a look at RL Quote on the Reverse Logistics Association’s web site.  This is a great tool and can ensure you get access to the best in class service providers in the field of reverse logistics.  Their members provide reclamation services, refurbish and repair services, software, operations and consulting.  This is the best source to find 3PL’s who specialize in reverse logistics.

The key component in developing an RFP and later, the contract, is to ensure that you have someone on your side of the table that is as knowledgeable as the third party service provider sitting on the other side of the table.  There are many details involved in outsourcing reverse logistics.  Having an experienced negotiator that understands these details can be worth millions over the life of a contract.  If you are equally matched and you end up with a professional service provider that hits it out of the park, the benefits outsourcing will far exceed the expectations.

Today, every 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 comes in 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.

Finally, your WMS system will not work in reverse.  Your WMS provider may tell you it can but you will need Reverse Logistic Software to help manage the 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.  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 that may not see any real profits for eighteen to twenty-four months.

Today, every 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 comes in 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.

Finally, your WMS system will not work in reverse.  Your WMS provider may tell you it can but you will need Reverse Logistic Software to help manage the 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.  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 that may not see any real profits for eighteen to twenty-four months.