I don't know the specifics of that tankless, but some of them just don't like recirculation. In fact, on some of them, it voids the warranty. If they do allow recirculation, it takes some fairly specific plumbing and maybe a buffer tank.
Some tankless (and boiler) systems have a safety that will shut them down for a moment if they've been running for some period of time. This would be described in the user's manual. Also, over time, the tankless will become 'limed up' with mineral deposits, and is no longer as efficient on transferring the heat to the water through that caked on buildup. This could affect the sensors as well. They need periodic acid flushes to remove that buildup and maintain proper and efficient operation.
If that dip in temp isn't caused by a safety cutout, then it may be one of two other things: you're running a cooler shower that isn't tripping the flow sensor because you're not using all that much hot water, or the flow sensor is sticky and not tripping properly.
They may have used a 3-zone controller because it was easier to find. The price difference isn't much, and wiring it up is essentially the same, too. And, it gives you a couple of spare relays, should the one you're using crap out.