How to Increase Profitability by Managing Surplus Assets

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Abstract. With the current pressure on companies to maximize revenue, many purchasing
professionals are being tasked with uncovering new areas of “savings”. Within many
organizations, Surplus Assets is a commodity category that does not receive the attention it deserves. In many cases, the revenue generated from competitively selling assets can
significantly affect a company’s bottom line. This session will explore the ways to realize such savings and implement a successful asset recovery program supported by a case study from the State of Pennsylvania.

The Opportunity. A professional asset recovery program provides an opportunity to realize
value in surplus capital equipment and enhance the organization’s reputation for operational excellence. In many cases the best answer may be surplus asset recovery outsourcing.

Assigning the work to an external vendor can provide access to specialized knowledge in
identifying surplus assets, equipment refurbishment and surplus asset marketing expertise.

Asset recovery outsourcing can reduce risk and free the enterprise to focus on its core
business. This leads to two critical questions: What are the characteristics of a successful
asset recovery program?; and How does an organization select the appropriate external
vendor?

Successful Asset Recovery Programs. People are certainly familiar with eBay, and many
knew of FreeMarkets online sourcing tools. Buying and selling over the Internet is no longer a phenomenon. Rather it is a standard way of doing business. Indeed, the efficiencies of the Internet are being applied to effectively sell surplus industrial assets and construction equipment. Regardless of the industry, effectively using online tools can increase the return on asset recovery programs.

The first step in establishing a successful asset recovery program is to garner the support of senior management. Experience dictates that the best approach is to promote to the financial impact of the new program. A good place to start is with the following financial metric:

Return on Assets (ROA)

Return on Assets (ROA)

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To see the significance of this metric, a numerical example is poignant. Assume a diversified manufacturer has Total Assets of $125 Million, and $10 million in annual Net Income. Based upon industry experience this manufacturer could conservatively generate $1 million in surplus asset sales. By establishing a successful asset recovery program, the ROA would increase from 8.00% to 8.87% representing an increase of 10.89%. This impact cannot be ignored.

A second advantage of a comprehensive asset recovery program is compliance with the
Sarbanes-Oxley Act of 2002. Section 404 – assessment of internal control sets for
requirements for an external auditor to evaluate the controls over the safeguarding of assets. If capital assets are being sold independently at the facility level, these controls may not be up to current standards.

Environmental concerns and “Green” initiatives provide further support for asset recovery plan implementation. The most valuable option for surplus assets is to reuse them within the organization. Many companies have instituted redeployment programs through internal websites or email distribution lists. In many cases these plans have been unsuccessful.

Surplus asset redeployment plans are not like baseball in “Field of Dreams”. If you build it,
they will NOT come. Successful redeployment plans must be actively managed by a program manager, technology is not the whole solution.

The following flow chart provides an example of a comprehensive asset recovery plan:

Asset Disposition Decision Tree

Asset Disposition Decision Tree

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Consistent Program Management is a Key to Success Upon determination that an asset is no longer needed within the organization, the focus of the program should be turned to the secondary markets. In contrast to traditional onsite equipment auctions, the online format is far more convenient for the seller and reaches a much broader audience. As an alternative to transporting assets to an auction site or attempting to manage hundreds of buyers assembled at a given location, virtual auctions allow buyers from around the globe to assemble and view asset photos and descriptions and place their bids online. By using this method to broaden the exposure of the assets, market prices are less susceptible to negative local or regional economic influences.

Additionally, the turn around time of an online auction is much shorter. In most cases, the
entire online auction process is completed in less than 30 days. Sellers no longer have to
delay their sale due to the auctioneer’s event schedule, concerns about weather, travel, etc.
Online auctions allow sellers to manage their own timelines.

A properly managed asset recovery plan will generate positive cash flow for an organization without any upfront fees. Additionally, an organization’s staff will be able to return the focus to its core business initiatives. This requires the proper selection of an asset recovery vendor.

Selecting the Right Vendor. With issues of legal, regulatory, environmental, security,
economic and business importance riding on the outcome – not to mention your organization’s reputation – choosing a contractor to manage the asset recovery process becomes a critical step. You will want to choose carefully, and select a vendor with a brand name and a reputation for trust and integrity – a partner who will share the risk. You should feel comfortable in explaining why you selected a particular partner. Indeed, if an incident occurs, you may have to explain your decision – to clients, to shareholders and possibly even to the courts.

The biggest mistake made by many organizations is to select a vendor based on price. If the vendor’s margin is squeezed, the seller is hurt. One key to a successful asset sale is an
effective marketing campaign. When commissions are reduced, the vendor will spend less in advertising, thus producing lower sales prices. This can be illustrated by looking at the State of Pennsylvania and their decision on selecting a vendor.

State of Pennsylvania - Case Study

State of Pennsylvania - Case Study

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When selecting a vendor the following questions / issues should be considered:
• Ability to develop and write a comprehensive internal asset redeployment program
• Electronic data collection
• Depth of marketing campaign administration
• Ability to reduce seller risk through utilization of Surplus Property Sales Agreements and
Insurance Requirements
• Reporting in accordance with internal accounting requirements
• Ability to handle all aspects of the financial transaction including, deposits, refunds, and
sale reconciliation in a timely manner
• Ethics and reputation of the vendor
• Commission rates

CleanBayArea continues reposting interesting articles about hi-tech, startups and new technologies to draw your attention to the importance of e-waste recycling of used computers, lab, R&D, biotech, test equipment and unwanted data center equipment. Please ask your facility and IT manager to stop disposing of used equipment into a dumpster. Ask them to call 650-307-7553 and recycle used equipment with CleanBayArea for Free. Thank you for helping us protect the environment.

REFERENCES

Book reference:
Turban, Efraim, David King, Dennis Viehland and Jae Lee. Electronic Commerce: A
Managerial Perspective, Pearson Education, Inc., Upper Saddle River, NJ, 2006
McCaag, Brin, The Essential Guide to Selling Surplus Assets, TradeOut, Valhalla, NY 2000

Web site references:
Grant Thornton LLP, COSO: Guidance on Monitoring Internal Control Systems,
http://www.coso.org/Publications/COSO_Monitoring_discussiondoc.pdf, September 2007
Knowledge@W.P. Carey, The Best Tool for the Job: Selecting and Implementing E-Tools,
http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1494#, October 24, 2007
HP Financial Solutions, Asset Recovery: Balancing Risk and Opportunity White Paper,
http://www.computerworlduk.com/cmsdata/whitepapers/4619/4AA1-0139ENW.pdf, January
2007

By Shawn D. Allen
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