CREATIVE SOLUTIONS FOR REVERSE LOGISTICS NON-PROFIT ORGANIZATIONS AND RETURNS MANAGEMENT UTILIZING

Transcription

1 CREATIVE SOLUTIONS FOR REVERSE LOGISTICS AND RETURNS MANAGEMENT UTILIZING NON-PROFIT ORGANIZATIONS INCREASE COMPANY MARGINS WHILE REDUCING LANDFILL TONNAGE By Gary Schuler Founder/CEO of Gleaning the Fields, LLC

2 BACKGROUND Throughout the United States non-durable goods industries especially food, clothing, textiles and various consumer products there is excess capacity and inventory driven by inaccurate forecasting, lack of demand, obsolescence, and customer returns. Typically, this excess product is destroyed or discarded if it cannot be channeled through the traditional methods of restocking the product or sold to a 3 rd party liquidator. Reverse Logistics/Returns Management costs account for approximately 0.5 of 1% of the total GDP in the United States. According to the National Retail Federation, retailers experience an average return rate of 8% which amounts to over $400 Billion in merchandise. By necessity, Reverse Logistics/Returns Management processes are becoming more streamlined and receiving executive management scrutiny as an integral component to achieving profitability while maintaining competitive position. The secondary market, where excess goods and inventory are re-sold through 3 rd party liquidators, is in itself a $329 billion market. Liberal returns policies and zero waste initiatives have increased the pressure on corporations to effectively deal with the overwhelming volume of returns while decreased options for disposal now exist. ENVIRONMENTAL SUSTAINABILITY UTOPIA VERSUS REALITY According to Waste Management, Inc., the country s largest waste handler, 70 to 80% of Fortune 500 companies have recently launched zero waste policies. Aggressive environmental sustainability goals usually fall short due to a lack of cost-effective, executable solutions. There is often a major disconnect regarding a company s reverse logistics processes; lack of continuity, data, and processes that exist between the corporate office, distribution centers, manufacturing facilities, and retail stores. Employees responsible for reverse logistics, returns management, or environmental sustainability efforts find they are being squeezed from two sides: the new internal policies and externally from new and expected governmental regulations.

3 SOLUTION: INCREASE MARGINS AND REDUCE LANDFILL COSTS BY UTILIZING NON-PROFIT ORGANIZATIONS TAX BENEFITS Utilizing non-profit organizations can offer measurable cost savings and create alternatives to landfilling product, especially in realizing tax advantages that may be available for donating excess product. Under the Internal Revenue Code (IRC), donations of appreciated ordinary income property are deductible when contributed by corporations to charitable organizations. The U.S. Master Tax Guide (2014), 930.Charitable Contributions of Inventory code allows qualified businesses an enhanced tax deduction for one half of the difference between the cost to produce the product and the full market value of the donated product. Sample Calculation Take the sum of one-half of the unrealized appreciation (market value minus cost = appreciation) plus the taxpayer s cost, but not in excess of twice the cost. Example: Selling Price $4.00 Cost $1.00 Gross Profit $3.00 One-half of Gross Profit $1.50 The maximum deduction can never exceed two times the cost ($2.00). Therefore, gross profit is limited to $1.00 Total charitable deduction: $2.00 Many companies are actually paying to landfill product rather than saving money by taking advantage of these tax benefits.

4 CASE STUDY BRANDED CLOTHING In 1997, a major uniform manufacturing and distribution company developed a collaborative program with a 501 (c) (3) non-profit organization located near the company s main distribution center. The non-profit organization specialized in shipping humanitarian aid around the world. Working together, the company and the non-profit organization developed a sorting process utilizing volunteers who inventoried the returned and branded garments. The company was able to capture the enhanced tax deduction by donating these returned products. Since the program was established in 1998 the estimated savings included: $1 billion in product donations $65 million in tax savings 30% reduction in landfill tonnage and cost Over ten million garments avoided landfill and countless people around the world were helped Creating Awareness There may be a number of reasons why more companies don t take advantage of these enhanced tax savings and options including: Lack of knowledge of IRS guidelines Branding concerns Out-dated policies for returns Limited options presented by non-profit organizations Lack of knowledge of IRS guidelines CFO s in larger retail companies may not have a working knowledge of the specifics of tax incentives for donating excess product to non-profit organizations that is behind the latest IRS enhanced tax code. It is rare for a company to have sophisticated tracking in place for donated product and the exact figures for financial impact on the bottom line. The primary focus for a corporation is the FORWARD logistics efforts but limited attention is given to the impact on REVERSE logistics. Determining the best utilization for product disposition is an after-thought or delegated to the individual distribution centers, manufacturing facilities, or brick-and-mortar locations.

5 Branding Concerns Product branding is a valid reason for companies not donating overstocked or returned product to a non-profit organization. Why would a customer go to their regular retail store and pay the Retail Value of a product if they could purchase the same branded product at one of the national retail modeled non-profit thrift stores? A flood of donated branded product may conflict with agreements and protocol in the retail channels. Out-Dated Corporate Returns Policies Historically, limited evaluation is directed on the optimal disposition methods for returns, manufacturing overruns, and defective packaging or products. Continuous Quality Improvement Processes or Six Sigma Initiatives will often be directed toward eliminating manufacturing process defects or improving product flow in the FORWARD logistics process, but limited focus is given on the best financial options and environmental sustainability impact of returned or overstocked product. A simple walk-through of a company s distribution centers, manufacturing facilities, and retail store locations will often yield variations in this product disposition process. A formal financial evaluation based on disposition options including donating product may yield immediate cost savings. Limited options presented by Non-Profit Organizations Historically, non-profit organizations have failed to understand the possible negative impact that donating large amounts of product has on a company. Non-profit organizations have not been proactive in finding solutions to the following concerns: a. Product Branding Removal Consumable products like soap, lotion, food, etc., can qualify for enhanced tax deductions although existing packaging may need to be removed or modified. Non-profit organizations will need to provide re-branding or brand removal services if they are to be on the receiving end of certain products. b. Domestic Re-Sale of Product Certain products may only be used for humanitarian aid outside of the U.S. limiting the number of available nonprofit organizations that can manage international shipping. Receiving the donated product may also require end-destination contacts to ensure the proper use of the donated product.

6 c. Logistics Cost It is unlikely that a company will consistently ship excess products across the country or even regionally if there are more cost-effective options including landfill available. The best solution is to utilize non-profit organizations in close proximity that have the ability to pick up the donated product at the company s location. d. Time and Labor Most manufacturing, distribution centers, 3 rd party logistics companies, and individual retail locations have restrictive hourly labor budgets. Non-profit organizations will need to simplify the product pick-up and absorb the added time and labor cost. Budgeting for this process on the part of the donating company is unlikely especially if there are fluctuations in the amount of qualified products to be donated. e. Liability and End Destination for Product Corporate attorneys who are responsible for mitigating risk and limiting the company s liability may be reluctant to consider donating products to a charity. Non-Profit organizations need to familiarize themselves with Chain of Custody documents and other required documentation in the product logistics flow. Selling products to the secondary market Selling returned or overstocked products for cash is always the preferred financial option, however, these products are often sold far below the product cost basis. Donating the product to qualified 501(c)(3) organizations may provide a better financial return. Financial analysis is often omitted to determine the optimal sell versus donate price point on returned products. Alternatives to Landfill Non-profit organizations can be used as viable solutions for product recycle, repurpose, or re-manufacturing. Non-profit organizations have a different financial cost structure which may provide a low-cost alternative. Using a non-profit organization may also create much-needed jobs for those in the local community. These creative solutions pay added dividends for the company s social responsibility and environmental sustainability initiatives.

7 CASE STUDY USED CLOTHING FROM A UNIFORM RENTAL COMPANY The Problem A typical uniform processing facility throws away an average of 39 tons of used clothing each year. With over 1,000 uniform rental processing facilities in the United States, that equates to more than 39,000 tons of clothing added to landfills each year. The average cost of disposal of these used garments ranges from $0.06 per pound to $0.085 per pound. Each week, a uniform rental company may produce up to 3 full dumpsters of used clothing. Recycling these garments for the fabric has been considered, however, the expense of shipping these used garments to a fabric recycler would cost an average of $0.45 to over $0.85 per pound. A Possible Solution One pilot program being tested involves one of the largest uniform rental companies which produces over 10,000 tons of landfilled clothing a year. A non-profit organization is working to capture the value of the garments by selling the used garments on the secondary market overseas. The revenue created would off-set the logistics cost to pick up the used garments from the various uniform companies and provide a net revenue to support the non-profit organization s mission of clean water projects and orphan care in the affected areas around the world. Value Offering to the Corporation Estimated $1.8 Million in landfill cost 60% reduction in waste tonnage (estimated 30,000,000 pounds) Reduced plant labor and improved safety Improved security and brand protection over existing landfill Value to the Non-Profit Organization All profits after paying logistics cost would go directly to their non-profit mission. The estimated profits will support 10,000 orphans a year with food, clothing, education, medical, and shelter.

8 EXECUTIVE SUMMARY In summary, there are no off the shelf solutions for utilizing non-profit organizations. This is where GTF can help by creating a customized solution for each company. Individual distribution centers, manufacturing, and even retail locations may need to establish a unique process with a qualified non-profit organization. There are many upside benefits including cost savings, landfill reduction, and brand control. Added benefits include the environmental and social implications. The upfront work in establishing the necessary processes and controls with have an immediate ROI which can pay dividends for years. Thank you for your consideration. I would welcome the opportunity to meet with you to discuss the potential benefits of this innovative solution! FOR MORE INFORMATION CONTACT: GARY SCHULER [email protected]