group Waste to Charity ( wastetocharity.org).
Option 6: Energy generation from waste. Refurbishing
and recycling, of course, is not a viable option for food
products. A more practical option for disposition of food
items is energy generation. Organic waste can be converted
to renewable energy through a process called anaerobic
digestion. This method of decomposition is a good way to
dispose of returned, expired, and recalled food products.
The financial driver for selecting this option would be the
monetary value of energy generated or the utility costs that
can be offset compared with the cost of transportation, handling, administration, and running the waste-to-energy plant.
Nonfinancial drivers for adopting this disposition route
would include compliance with food disposal norms and
regulations and the positive image that a company can
build by highlighting it as a sustainability initiative. Food
and beverage companies are increasingly following this
route.
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Option 7: “Zero returns” policy. Under this unusual policy, a manufacturer does not accept returned goods.
Instead, it incentivizes retailers and distributors with a
“return allowance” and provides guidelines for disposition.
The financial benefit from such a policy is derived when
the cost of handling the returns and disposition exceeds the
return allowance. However, because there is no universally
accepted, objective formula for establishing return
allowances, big retailers may use their buying power to push
for higher allowances and thus reduce or eliminate this cost
advantage.
There are some potential nonfinancial pitfalls associated with this option. Retailers might sell returned goods
through the “A” channel, diluting the products’ brand
image. In addition, under the increasingly widely accepted
Extended Producer Responsibility principle, the manufacturer may incur some legal liability if the retailer improperly disposes of the product.
Option 8: Landfill/incinerate. Landfill disposal is the
simplest option of all but it should be the last resort.
Governments around the world have been discouraging
landfill disposal for a long time. In Europe, certain types of
waste are strictly prohibited in landfills, and companies
have to either find alternate means of disposition or treat
them before disposal. For food items, landfill disposition is
allowed subject to regulatory compliance. Incineration also
typically is subject to regulation.
Since this type of disposal is a last resort, the financial
drivers are immaterial. However, regulatory restrictions
represent a strong nonfinancial driver that discourages
companies from taking the landfill or incineration route for
their returns.
A formal financial framework is imperative if companies
are to make the right choices in the reverse supply chain,
identify areas of improvement, and monitor performance.
But more importantly, a financial analysis that communicates the performance and benefits of reverse supply chain
initiatives is bound to attract the attention and support of
top management.
In order to treat the reverse supply chain as a “profit center” in accounting terms, it is necessary to identify the relevant revenue and cost drivers. These are discussed below.
Revenue drivers
Most of the disposition options mentioned earlier have
revenue or savings attached to them, which can be treated
as revenue sources in a P&L statement.
“Refurbish/repair/remanufacture” provides a direct revenue source in terms of market value or proceeds from selling repaired, refurbished, or remanufactured parts and products. If parts are not sold but instead are used within the
company, then their market value can be considered as revenues. This can amount to a substantial amount of money.
In the case of the “auction or discount sale” option, the
proceeds can be directly considered as revenues. The “
disassemble and recycle” option generally is handled by third-party scrap dealers and recycling plants, which pay a nominal fee for acquiring the scrap. The proceeds from selling
the scrap to these third parties constitute revenues from the
reverse supply chain.
For the “redistribute” option, there are two possible revenue sources. One is the proceeds from products sold at different locations after passing through the reverse supply
chain. The other is the “net asset value” of recovered assets
over a specified minimum percentage. When shifted to the
forward supply chain in usable condition, containers, racks,
pallets, and the like can be classified as recovered assets. The
net asset value at year end of such recovered assets above a
specified threshold may be considered as revenues. The
logic being that if those assets had not been recovered, then
their net asset value would have been written off in the P&L
statement. Avoiding the write-off generated savings by
eliminating the cost of replacing those assets. Historical
average values for recovered assets can be used to fix the
threshold percentage for minimum asset recovery; any
improved performance over the historical recovery rate
counts as revenues.
For the “donate” disposition option, the revenue source
will be tax deductions. Next is “energy generation from
waste.” If the energy generated is sold, then it is a direct revenue source. If used in-house, then the utility costs that
