Editors’ Note: This article first appeared in the publication of the Institute of Management Sciences in 1980. It was written by Jim Knap, then the General Manager of the Investment Recovery Department of Union Carbide Corporation.
Looking back over 16 years of investment recovery, there are achievements that provide a perspective of the benefits that result from an organized, continuous Investment Recovery effort. Five such achievements have emerged as most significant at Union Carbide.
1. Relocation For Reuse: The Biggest Plum. Assets no longer needed in the original application generate the most recovery when they are reapplied to some other use within the enterprise. Reuse is the only recovery technique that retains the stockholder’s full equity. Reuse of machinery and equipment is by far the largest single contributor in most Investment Recovery programs. Companies generally use one of four values for reporting their reuse: A) Original cost; B) Undepreciated value (Net Book Value); C) “Fair market” value; or D) Replacement value.
Materials and supplies can be relocated only if the second location normally uses the identical item or equivalent. Effective reuse of materials and supplies requires exposures of the surplus materials to knowledgeable people and encouragement of those people to make all the possible substitutions. The original owner recovers his working capital, and the new user may acquire items with a lower cost than the same item if bought today.
2. Sales Income: Visible Recovery Sometimes Invisible. Cash income is visible and gratifying to all directly involved. However, once the cash flow enters the accounting system to be disbursed to the “owners” of the surplus, it gets obscured. Only the Investment Recovery staff sees the whole picture of sales income, so it is necessary that they develop systems to enhance its visibility.
3. Tax Relief: Hidden Fruits. Avoidance of state and local personal property taxes can result in considerable recovery. This type of tax relief is strictly time related; the disposable must occur before some specific time to avoid the next year’s assessment. It is important to communicate early with the company officials in contact with the tax assessors. We have had several cases where the savings in property taxes for one year were more significant than the sum of reuse, sales income and dismantlement income.
4. Real Estate Recovery: Found Facilities. The Investment Recovery Department works closely with the Real Estate Department to assure that unwanted facilities are in the most attractive condition for them to sell. Sale of properly prepared property can generate substantial capital gains. When structures aren’t flexible or appropriate, leveling them gives real estate for new construction.
5. By-product Merchandising: Good Citizenship With Savings and Income. We spend millions of dollars to remove objectionable materials from effluents to the air and water and attempt to identify and characterize the individual waste streams being sent to pollution abatement facilities. Once the content and nature of the stream are known, marketing studies can begin while the antipollution facility continues to clean it up until a customer is found.
As more experiences are recorded, common practices and general principals will emerge. Therefore, one might predict that the future curricula in Industrial Engineering, Business Economics, Operations Research and Management Science will have a few sessions on estimating residual value, and on recovering it to increase cash flow, lower net assets utilized and raise return on investment. With this impetus, Investment Recovery will hopefully take its place beside those other good management concepts so apparent in a well-run company.
Jim “Doc” Knap, “the father of Investment Recovery,” was instrumental in laying the foundation for the Investment Recovery Association, and was President from 1983-85.