Outsourcing Reverse Logistics

by RLM Staff Contributor

Reverse Logistics Magazine, May/June 2007

OUTSOURCING, everyone is talking about it, some are doing it, but few are doing it well. We’re constantly being asked to do research at the Reverse Logistics Association (RLA) on outsourcing and our findings will surprise you. Here are a couple of questions that we are asked time and time again;

• What percentage of companies have outsourced to third party service providers (3PSPs)?
• What are the main principles to outsourcing your Reverse Logistics (RL) process?

"Traditionally research in RL means collecting data and analyzing in a particular area of concern, such as best practices in spare parts management or the size of the returns market. While the decision to outsource may seem to be more intuitive than analytical, using typical research methodologies is very helpful in determining whether outsourcing is indeed the right solution,” says Steve Huff, Director of Research at RLA.

The most important step for outsourcing any part of your reverse logistics process is to define your company objectives. Objectives should be goal oriented and have metrics to measure the progress of the project. When developing the objectives, you should leave room for creative solutions. Your outsourcing team may discover a new process or technology that might totally change your defined objective. If you treat outsourcing like a research project, then you make a better decision. Outsourcing definitely has benefits, provided it's implemented properly for your organization. Through collection of good data and analysis, you will gain a better understanding of what is best for your organization.

Another area to consider early in the process is whether your company is ready to outsource. Just because "everybody else is doing it," probably is not a good enough reason for you to outsource. But if you can quantify the costs of your present operations, then that could become a crucial piece of information in the process of deciding when to outsource. Make sure you evaluate your real cost. Many times a manufacturer hasn’t included engineering, quality and procurement management as part of their internal cost. As the vendors respond to your future RFQ, you may be surprised that some quotes are higher than the internal costs that you have projected. This is usually because your measurement has not included all of the hidden costs that exist in your present process; items like engineering hours to support your line, assistance from procurement being billed to another department, or parts that you use in your process which transfer at no cost from manufacturing. However, what are the internal organizational and process changes that would have to be implemented for an outsourcing solution?

You’d be surprised how companies make decisions to outsource without taking a course on how to handle an outsourcing operation. All sorts of metrics need to be measured, decision points to overcome, subjective decisions have to be overcome with objective ones and most of all, reaching a clear-cut decision on the type of partner that you want. Many times a manufacturer will select a 3PSP after measuring all the details in their selection process along with detailed weights on each criterion and still make a decision to select a vendor whose score was very low. How can this happen when the selection team has developed a measuring process for selecting a vendor?

The answer is that some sales and marketing teams are able to convince companies that “what they see and measure is not everything that’s important.” In other words, “smoke and mirrors” can get in the way of making good decisions. They have a “gut feeling” that overcomes their intellectual analysis. It’s just called “good old fashion” salesmanship. Don’t be fooled—stick to the facts and you will end up with a good outsourcing experience. We encourage you to take a course on outsourcing. RLA teaches these courses several times each year, look at the www.RLTShows.com event page for the next available course.

Initially, you might want to look at other companies in your market area or even your competitors. Are they outsourcing now? If not, why not? If they are, what are they outsourcing? Do any of these correlate to your own company's practices and processes?

The first step for outsourcing is to prepare a “Request for Information” (RFI) to send to as many potential vendors as possible. Those that respond to your RFI will be the list of vendors that might offer the solution you need. This is where most companies falter—they have a small list of qualified vendors and have no idea of how to find new ones. A large response from many different 3PSPs is more advantageous for potential outsourcing partners. The 3PSPs are out there, you just have to search, search and search. If your database of suppliers consists of only 4 or 5 companies, then you will not have a good chance of successful outsourcing. There are many consultants that specialize in helping companies outsource their reverse logistics. RLA has a searchable database of 3PSPs and consultants. Don’t try to outsource your process if you’ve never done it before—including a consultant who is knowledgeable in the outsourcing process will save you time and money. For companies that need a unique process there is RL Quote (www.RLQuote.com), a tool for RLA members to reach out to those who are presently managing a similar process or one that is identical to yours.

Once you have received the information from the 3PSPs, you should narrow the list to the 4 or 5 best candidates. The company that is outsourcing should have the candidates visit their process where the work is currently being preformed. The 3PSPs should have an opportunity to evaluate the process and give feedback on best practices. While at the site the 3PSPs should help write the statement of work (SOW) during the visit. It will only take these 3PSPs a few hours to write a SOW, where it would normally take you months. The 3PSPs are experts in the RL process, and are the best qualified to write an SOW. Later on you can use the SOW with revisions to meet your objectives. Our RLA research has found that programs are outsourced 6 to 18 months earlier by the manufacturers when this process is used. It saves a great deal of time and money for both the manufacturer and the 3PSP. “Using RL Quote saved us three months off our outsourcing process, and it gave us a much wider selection of companies than we would have had using our own resources,” S. A., The Home Depot, Inc.

Now it is time to determine the cost of using a vendor outside of your company by asking for an RFQ (Request for Quote). After the OEM has approved the written SOW by the 3PSPs, the OEM sends the RFQ to the most qualified 3PSPs. The evaluation criteria should be based on more than the lowest cost; also consider the 3PSPs ability to complete the project, quality of work, and the reputation and recommendations that you receive from professionals in your industry.

The last step is the selection of a vendor and transfer of the process to begin implementation. The 3PSP with best ability to complete the objectives is selected. The OEM and 3PSP begin implementation and the OEM monitors the 3PSP by:

• Setting Measurable Objectives
• Quality Audits
• A Management Structure for handling unexpected problems

In summary, just to recap the most important elements of outsourcing;

• Find as many potential vendors as possible
• Create a method for measuring your findings
• Be sure of your internal process cost
• Stick to the facts—don’t let your feelings overcome your research
• Allow 3PSPs to write your SOW—it saves you 4-6 months of your time
• The 3PSP quote might be higher than your internal costs—you have probably missed something
• Employ a knowledgeable consultant to assist you in your outsourcing process

Reverse Logistics Magazine, May/June 2007