May 2002 | Commentary | Viewpoint

Raking in the Trash

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"It's only trash."

That's how supply chain managers often refer to the mountains of packing material, broken pallets, paper, and other trash that clutters distribution facilities. For most companies, disposal is an expense item, with additional costs for compactors, waste bins, carting, landfill use, and myriad other variables.

With a little of the same skill logistics managers use to manage silos within the supply chain, most companies can reduce their waste disposal costs by 25 percent or more. How? By converting much of this waste to recycled, revenue-producing raw materials that have real value for other companies.

Checks and Balances

Logistics managers are the first to argue that the lowest price in one link of the supply chain does not guarantee the lowest cost once all the numbers are in. They easily understand that working with the vendor next door may not be as cost effective as working with the vendor a few miles away, or in another state or country. Yet, plant managers will send their recycled corrugated waste to a local packer/processor rather than send it to a paper mill where revenue could be quadrupled.

Do the math: A recycling mill pays its wholesaler $100 for a quantity of product. The wholesaler, working on a 100-percent profit margin, only pays its regional brokers $50 for that load. The regional brokers pay $25 to the local carting company, which in turn pays about $12, or worse, actually receives money from the supplier to remove the product.

Logistics professionals know that costs easily spin out of control without the proper checks and constant vigilance. The need to monitor costs in supply chain management has built an industry of third-party experts who check for vendor compliance, billing at pre-approved rates, duplicate billing, and dozens of other details that would otherwise artificially inflate supply chain costs. Technology-savvy managers have even taken the freight audit one step further with error-eliminating software that automatically drives information through the supply chain.

Recycling Trash for Cash

Unfortunately, organizations tend to overlook the logistics opportunities in managing their supply chain byproducts, and many have not integrated their waste and recycling functions. The logistics of waste removal and recycling requires the same vigilance as other logistics functions. Organizations that ignore these opportunities not only miss out on a great profit opportunity but also set themselves up for gross overcharges.

Costs get out of control in many ways. No logistics manager will agree to give full payment to a carrier that only fills his truck halfway, or that returns for a second load while the truck is still half full from the first load. However, inadequate pressure on a waste compactor, for example, will indicate a full load is ready for pickup when the container is only partially filled. It is rare for companies to include compactor inspection in their routine maintenance.

Even more uncommon is finding a company's operations manager physically looking inside emptied waste bins to verify that they are, in fact, fully emptied. Some companies actually pay for the same waste to be removed over and over again.

The real crime is that much of what is considered waste actually is some other company's raw material. Instead of paying for material to be removed, companies should look for products in their waste stream that they can source as a new revenue stream.

For example, the least controlled and most vulnerable product that logistics companies overlook is paper. Paper products are by far the largest byproduct—and most wasted—of every supply chain.

Buried Treasure

The truth is most distribution companies simply don't know what in the waste stream could be producing revenue. Here are some examples of byproducts that are potential revenue caches:

  • Instead of paying for removal and landfill charges, sell shrink-wrap for recycling. When the price of oil is high, this waste is valuable.
  • A new process overseas is currently in the pilot stage for consumption of waxed cardboard, an item that was thought to be unrecyclable.
  • Packing plastics and wood scraps from broken pallets are also recyclable and likely a valuable raw material for another company.

Crunching Numbers

Purchasing departments correctly follow the corporate mandate to always find the lowest price. Recycling managers, however, often misconstrue this mandate, and create two equally sub-optimal solutions. First, they mistakenly translate the purchasing department order to buy low to mean selling recyclable materials at a low cost.

Second, under pressure to dispose of recyclable materials quickly, recycling managers set low prices to placate the purchasing department. The result is a gross undervaluation of potential new revenue. This is not just a tradeoff between making a dollar and saving a dollar. For a 250,000-square-foot distribution facility, the average yearly waste removal bill is about $36,000. Recycling income, if any, can average about $25,000, or a net waste/recycling expense of $11,000. By applying the 25-percent rule easily gained through better logistics management of the waste removal process, companies can reduce their average yearly waste removal bill from $36,000 to $27,000 for a net expense of $2,000 ($27,000 less $25,000). The $27,000 an organization pays to cart away waste materials can decrease significantly if new revenue sources are located. Then, factoring in the additional resale value of the raw materials, the revenue side of the equation will increase. The obvious effect is a new and substantial profit center.

Recycling Barriers

The obvious question is: why do so many organizations continue to throw away money? The answer is that logistics managers, operations managers, and other supply chain professionals are usually hemmed in by real and perceived constraints that prevent them from maximizing the revenue potential of a combined waste and recycling opportunity. Often they don't know where to begin an audit of their waste disposal functions—from hauling costs and equipment efficiency to supplies and potential value of recyclable materials.

The principles of effective supply chain management cry out for managers to integrate the core competencies of their company's logistics. In good times, organizations may look the other way as some profits find their way to the warehouse waste bins.

But waste materials are also products of every supply chain. Companies should monitor monthly waste removal bills as closely as monthly freight bills. Just as a company might outsource freight bill management to a third-party provider, it may be worthwhile to use an outside partner to manage waste removal and eliminate overcharges.

Throwing Away Profit

Whether a company outsources or not, one thing is certain: paying special attention to waste bills, looking for possible overcharges, and taking proactive steps to optimize recycling and waste removal can generate new and profitable revenue streams.

This is not just an environmental issue; this is plain and simple business sense, because the success of any business is determined by its understanding of the products it makes and its relationship to the markets it serves. By ignoring this area, companies are throwing away profit just as surely as if they were shredding bags of money.

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