Some years ago, a group of purchasing professionals was having an impromptu conversation at the coffee machine when the subject of steel scrap dealers came up. One thing led to another, and then a comment was made that surprised most of the folks listening. The scrap buyer observed that every scrap dealer he had met in his many years of dealing with scrap dealers drove a new Cadillac. That comment surprised the others in the conversation circle because they had the impression that the dirty business of scrap trading was a low-profit business.
Asset recovery can have a meaningful impact on return on assets, on capital spending and on cash flow.
The conversation grew more interesting as others joined the discussion and noted that used equipment dealers also seemed to prefer (and be able to afford) new Cadillacs in their line of business. There are other examples where a similar pattern emerges: knowledgeable intermediaries in the “used” market profit handsomely from their expert knowledge and their connections, often by focusing in areas that are below the radar screen of professional procurement groups. The question becomes how to manage this activity for better results. Asset recovery can have a meaningful impact on return on assets, on capital spending and on cash flow.
Traditionally, when a plant facility has an idle piece of equipment, someone in the plant declares that equipment “surplus.” It is often subsequently written off for accounting purposes (or written down to some assumed scrap value, and then it is stored somewhere and forgotten. That happens much too often.
In a slightly better scenario, after the write-off occurs, someone in the plant seeks out a scrap dealer or used equipment dealer and asks for a proposal, happy to obtain anything close to the written-down amount left on the books. If the equipment was completely written off, scrap value would often be viewed as an acceptable result.
In either one of these two common scenarios, particularly at a large plant or multi-plant corporation, an amazing phenomenon might be occurring. Someone might be ordering a brand-new piece of equipment, similar to the equipment declared surplus at the first location. The opportunity to avoid an unnecessary capital expenditure
is lost because of a lack of knowledge and the absence of an effective, coordinated management of the equipment process (new and used).
With effective asset recovery, you can sometimes avoid unnecessary “full-dollar” purchase of new equipment by effectively matching internal surplus equipment with the new needs at other locations. If within some reasonable time period there is no match, effective asset recovery shifts its focus to the next step: monetizing the surplus asset in a best-in-class manner. Companies that focus on asset recovery find that it becomes a dependable way to minimize full-dollar capital spending on new equipment, can be a regular source of cash flow (through equipment monetization if there is no internal need), and can assist in the achievement of return
on invested capital objectives as well.
Successful asset recovery programs are built around the following key success factors:
• An accurate and up-to-date database reflecting all idle or surplus plant and equipment (with reasonably detailed descriptions, asset history, and, ideally, photos of the asset from various views)
• Access to that database for all internal users
• A responsible person at each major location (or, at
very large facilities, at each major operation within the facility) who is designated the asset recovery “point person” for that location and who also functions as part of the internal network for asset recovery management
• A professional who is responsible for overseeing the program, the database and the network of internal contacts
• Connection between the asset recovery process and the process for ordering “new” plant and equipment
• Internal policies (management and accounting) that facilitate the fair value transfer of idle equipment among internal company locations
• Access to market expertise for used equipment or idle real estate (often accomplished via a master agreement that was the result of a strategic sourcing effort to select an appropriate service provider)
• Use of the master agreement service provider to detmine fair value for internal transfers and to monetize the asset in a best-in-class manner where no internal transfers are appropriate
Asset recovery may not be one of the sexier topics in modern procurement, but done well, it can be a recurring producer of value for your organization. It is a particularly appropriate topic in today’s world because the drive to manufacturing outsourcing has created significant idle capacity in North America and Europe. Many sophisticated tools and services, many of them Web-based, have been developed to assist in the task.
The above article is a reprint of an entire chapter from a new book by Robert A. Rudzki, Douglas A. Smock, Michael Katzorke, and Shelly Stewart, Jr., titled STRAIGHT TO THE BOTTOM LINE® – An Executive’s Roadmap to World Class Supply Management.
The book can be ordered from jrosspub.com