Using reverse logistics to boost asset recovery AND environmental sustainability practices.
by John Yuva, senior writer for Inside Supply Management®
 
With social responsibility and sustainability issues facing industry executives, the disposition of assets is a critical matter. More importantly, it’s an opportunity to improve the environment and the enterprise. One could argue that asset and investment recovery practices formed the beginnings of the “green movement” before the term came into popular use. 
The reverse logistics process enables companies to take materials and products that have depreciated over their life cycle, and ultimately dispose of them once they no longer serve a core function in the enterprise.

 
As product changes occur and as technology becomes obsolete and facilities face closures, companies that fail to engage in asset and investment recovery initiatives are overlooking a marketplace that is full of potential.
 

Supply management executives who properly implement asset and investment recovery initiatives can significantly boost their companies’ profit. From office gear to factories or office buildings, proper supply management plays a substantial role in their disposition and investment recovery.

 
What is the process for the recovery and disposition of assets?
 
David E. Rupert, J.D., LL.M., manager, asset recovery for American Electric Power in Gahanna, Ohio, and benchmark chair and member of the board of directors for the Investment Recovery Association, believes that while the function always has been part of the “green” fabric, the importance of asset and investment recovery is now on the global stage as companies’ disposition activities are closely scrutinized by the public and regulators.
 

This is leading many supply management executives to evaluate suppliers beyond the first tier. Consider the case of IT equipment, which has a life cycle of about three years. Rupert says in the past, obsolete IT equipment would often be turned over to a third party or, worse yet, be sent to a landfill because nothing was viewed as recyclable or usable beyond donating it. However, things are changing for the better. “Today, companies ensure that a source secures the hard-drive data by wiping it clean prior to disposition,” says Rupert. “The equipment is then recycled into new plastic, glass and metals.” And it’s all being done in a responsible way. Companies are now tracking where their assets are going to help prevent equipment from being shipped to third world countries, where residuals could contaminate a community stream or canal, explains Rupert. “Many recyclers are now being proactive to ensure that assets don’t leave the United States until they are inert and converted back into a raw glass or metal,” he says. “Thus, it prevents any reprocessing activities taking place overseas.”

 

Critical partnership: Supply management and investment recovery

While many Fortune 1,000 companies have investment recovery groups to oversee and facilitate asset and investment recovery activities, a partnership with supply management must exist for these initiatives to be successful on a global scale. With its intricate relationships with global suppliers, supply management plays a substantial role in asset and investment recovery. Rupert says that often the investment recovery group will inform supply management of any surplus within the corporation.
 

Supply managers then evaluate the assets and determine if any can be redeployed within the enterprise before requesting a new replacement. By redeploying surplus assets, supply management achieves cost-avoidance goals and avoids unnecessary consumption of natural resources. “Supply 
management is absolutely critical in reducing the amount of surplus assets that a corporation may ultimately have to disposition,” says Rupert.

 

How else is supply management adding value to investment recovery initiatives? The following are areas where the partnership between supply management and investment recovery can have the greatest impact.

 
Structuring contracts.
Supply management helps to eliminate surplus assets altogether by including provisions in supplier contracts that preclude any surplus, says Rupert. For example, on a new construction project, if there’s an overabundance of components that don’t get installed because too many were specified by the engineer or too many sent to the site, it’s imperative that supply management incorporate into their contracts that the original equipment manufacturer (OEM) take possession of those assets. “Companies must include appropriate contract language for indemnity,” says Rupert. “In many cases, the genesis of surplus assets is traced back to contracts.”
 
Valuing assets.
When an asset surplus exists, there’s the potential for a new revenue stream from the secondary market. Dale S. Rogers, Ph.D., chair of the Reverse Logistics Executive Council for the Center for Logistics Management at the University of Nevada, Reno, in Reno, Nevada, believes that the secondary market can be more profitable than markets for first-quality goods. “Corporations should have supply management evaluate the cost trade-offs associated with surplus and recovered assets,” says Rogers. “As the organization involved in developing the specifications, as well as the one closest to the supplier, supply management is most qualified to place a value on secondary market assets.”
 

However, Rogers adds that companies are overlooking the importance of asset recovery and the secondary market. “I think too often, the secondary market is an afterthought,” he says. “Senior management must communicate asset and investment recovery as a priority in corporations.” Rogers concedes that challenges exist in managing redeployed inventory; however, the secondary market is a profit stream that should not be ignored, nor should supply management’s ability to evaluate an asset’s value.

 
Practicing environmental stewardship.
Equally as important as profitability is the environmental impact associated with asset and investment recovery. With supply management executives increasingly involved in product design initiatives, they are able to offer recommendations regarding the sustainability of the materials and parts prior to production.
 
Asset and investment recovery is yet another opportunity to broaden their environmental scope. Patrick Penfield, director, supply chain executive management programs at Syracuse University in Syracuse, New York, says in the future, companies will be further required to take responsibility for the disposal of all produced assets at the end of their life cycle. In the European Union, for example, the Waste Electrical and Electronic Equipment Directive (WEEE Directive) is legislation requiring companies to have an end-of-life plan for all of their products.
 

A similar directive is Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) — controversial legislation involving the production and use of chemical substances in electronics and other products. “While we’re starting to see similar legislation in the United States, many U.S. companies are embracing the concept of sustainability,” says Penfield. “Interface, Inc., a floor-covering company, established a mission to eliminate any negative impact it may have on the environment by 2020. And BP, a petroleum company, invested $20 million to reduce carbon emissions and generated a savings of $1.5 billion as a result of its efforts.” Thus, supply management can have a positive influence from the beginning to the end of an asset’s life cycle.

 

With a partnership established between supply management and investment recovery, the two groups can apply their core competencies toward the recovery and disposition of company assets. While an internal partnership is critical, there is also a unique opportunity within asset and investment recovery to collaborate with customers, suppliers and even competitors. Consider the following examples:

  • Obsolete IT equipment and used office furniture can be offered to internal customers at a reduced cost.
  • Suppliers may be willing to recover end-of-life assets or contribute to the cost of recycling in order to use the raw materials in future production processes. In the case of metals, for example, it may be more cost-effective to use recovered metals from the recycling process than purchasing directly from a raw materials supplier.
  • For industries with assets in large volume, such as utilities and construction, collaborating with competitors on disposition strategies can be a win-win for all. For example, at American Electric Power, Rupert says the company was engaged in the disposition of large (6-feet-by-3-feetby- 5-feet) 4,000-pound modules used for scrubbing the exhaust gases from the company’s power plants. “In the past, our environmental group landfilled the modules because they could not find a method to remove the ceramic materials from the metals in the modules,” says Rupert. “When our asset recovery group evaluated the problem, we located buyers that could reuse some of the modules.
  • For the nonusable modules, a car-shredding facility safely and environmentally shredded and removed the ceramic materials from the ferrous and nonferrous metals, which allowed for future recycling.” Rupert adds that not only was this an exercise in sustainability, it generated a significant cost savings. In the last year, American Electric Power avoided approximately $240,000 in landfill costs and generated nearly $400,000 in revenue.
 
Asset and investment recovery is obviously a corporate discipline with substantial cost and environmental implications. Companies that are not utilizing their reverse supply chain to recover and reutilize assets face a difficult road as global environmental standards and regulations are enacted and implemented across industries. Supply management, in partnership with the organization’s investment recovery group, is the leader of change in this new era of environmental awareness
and stewardship.
 

Reprinted from ASSET 2.0, the Investment Recovery Business Journal, Vol. 2, 2007
© The Investment Recovery Association