Scrap Goes to School

ISRI and OSU joined forces in July to offer an executive education course on essential management topics. This summary captures the highlights.

For three and a half days in late July, Ohio State University was transformed into Scrap University, as ReMA and OSU teamed up to offer their fourth joint executive management seminar.
   The seminar, held every two years at the OSU campus in Columbus, Ohio, is a custom-designed program for scrap professionals, covering essential management topics such as accounting, finance, marketing, logistics, human resources, and strategic planning. The sessions are taught by OSU professors, all of whom have visited a scrap recycling operation to understand the industry’s unique business dynamics.
   At this year’s seminar, 28 attendees received one-of-a-kind learning opportunities through classroom instruction, teacher/student interaction, problem-solving, and hands-on exercises such as The Beer Game, which illustrated the challenges of supply-chain logistics (more on that later).
   It was a great event. Wish you were there. But since you weren’t, here’s a greatly abridged discussion of the seminar’s sessions.

Mastering Marketing
Scrap recyclers may not think marketing applies to them, but they should.
   Marketing is simply “the matching of organizational strengths with customer needs through a desired benefit package to produce customer satisfaction and loyalty and organizational profit,” noted Leslie Fine, associate professor of marketing.
   While consumer-goods marketing focuses on persuading people to purchase a product or service, scrap industry marketing works in the reverse: It is largely focused on convincing suppliers to sell their scrap materials to one recycler rather than another.
   The first step to successful marketing is determining what your company does well—that is, what are its core strengths, Fine said. In this effort, you should ask: What does the market perceive that you do well? Your goal, she stated, is to listen to the market.
   To illustrate this topic, Fine pointed to McDonald’s, noting that its strength is not serving innovative, tasty food. Its strengths lie instead in fast service, consistent-tasting food, low prices, and convenient locations. When McDonald’s has strayed from these core strengths, it has largely failed, she noted.
   To determine your company’s strengths, consider its status in the following three areas:
   Product/Service Leadership. How much are you focused on offering a continuous stream of state-of-the-art products and relentless pursuit of cutting-edge technology?
   Operational Excellence. Does your company pay particular attention to efficiency and standardization of their operations?
   Customer Intimacy. Do you tailor your services and/or products to meet the specific needs of a customer?
   Your company should at least be superior in one or more of these areas, but it can’t be incompetent in any of them, Fine said.
   After assessing your strengths, the next step in successful marketing is knowing your customers’ needs. All customers don’t want the same things, and marketing works best when it’s focused on customers with similar needs. Marketers identify customers with similar needs through a process called segmentation. Segmentation, Fine explained, involves identifying groups of customers who are similar to each other in meaningful ways but different from other groups. In the scrap industry, segmentation can be based on such variables as the type, volume, and quality of a supplier’s scrap, the type of container the supplier needs, and its proximity to your operations.
   The most beneficial customer segments to your business are usually those that meet five characteristics:
• Measurable—you must be able to identify the basic facts of the customer and its business to ensure their needs match your strengths;
• Accessible—the customer must be accessible to your company in terms of both physical proximity and via communication;
• Substantial—the customer must be worth your time;
• Differentiable—the customer must be unique from other customers in meaningful ways; and
• Actionable—you must be able to deliver the services the customer desires.
   Once you determine your customers’ needs, you must return to the question: Which customer groups can you serve best, especially compared with your competitors? To truly succeed, Fine suggested, your company may have to give up activities that it doesn’t do well. “It’s hard to be all things to all people,” she said, adding that “it’s better to serve some customers at a high level than many at an average level.”
   You’ll know you’ve found a good match between your services and a customer when the match creates customer satisfaction and loyalty, enables your company to avoid or beat the competition, uses your resources efficiently, and avoids high-risk battles for your company.
   The next step is creating a marketing strategy, keeping in mind the following four Ps:
   Product or Service Offering. Remember that you’re selling your company’s services to the customer, so you have to be able to deliver benefits that meet or exceed the customer’s expectations. Those benefits include the tangible and intangible core services your company provides—such as the timely pickup of the customer’s scrap—as well as the “realized benefits” for the customer in dealing with your firm, such as receiving money for their scrap, freeing up space in their operations, and feeling that they’re being environmentally responsible, Fine said. These tangibles and realized benefits provide the basis for your company’s “brand identity”—that is, the factors that distinguish your firm from others in the marketplace, Fine noted.
   Price/Payment. Your marketing strategy must show customers not only the specific price you can offer for their scrap but also your ability to help them realize other cost-related advantages such as saving their personnel time, helping them remain in compliance, and improving their operating efficiency.
   Promotion/Communication. This is where you promote your company and communicate its strengths. You can do this through your staff as well as such vehicles as printed literature, the Internet, advertising, sponsorships, and products bearing your name/logo, Fine explained. It’s also important for you to glean feedback from current and potential customers through your sales/service staff, surveys, observations, and customer panels.
   Place/Distribution. Your strategy must ensure that you can provide your service when and where the customer desires it and in an appropriate form.
   The goal, Fine concluded, is to develop a marketing strategy that meets your customers’ needs, enables your company to make a profit, and is difficult or impossible for your competitors to copy.

Accounting Basics, Plus Jokes
A company has called in three accountants to interview for a job. The first one comes in, and the president asks him, “How much is 1 + 1?” The candidate confidently answers, “1 + 1 equals 2.” The president thanks him and calls in the second interviewee. Again, he asks, “How much is 1 + 1?” The woman responds, “1 + 1 is 2, of course.” The president thanks her, then calls in the final candidate. Again, the same question—“What is 1 + 1?” The person considers for a moment, then asks, “What did you have in mind?”
   With that joke, Ray Krasniewski, associate professor of accounting, drove home the point that accounting is not an immutable science but rather an art form, one that can be used in different ways to tell a company’s financial story. The story that’s told depends on the accounting methods used.
   To illustrate this point, Krasniewski offered the simple example of a merchandiser with five products to sell. The company sells one item. Using different accounting methods—such as specific identification, first-in last-out (FIFO), last-in first-out (LIFO), and average cost—he showed how the merchandiser’s gross margin and gross margin ratio vary substantially on the sale of that one item.
   His point was that all four accounting methods are correct. Each one simply paints a different financial picture.
   Accounting, Krasniewski noted, is “the process of identifying, measuring, recording, and communicating economic information about an organization’s activities to permit informed decisions by users of the information.” Accounting measurements should be relevant, reliable, consistent and comparable, material, efficient, and understandable, he said. In general, he added, accounting has a preference that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets.
   Krasniewski also discussed the entity concept, which suggests that the affairs and resources of an accounting entity must be separated from the personal affairs and resources of its owners and creditors and from the affairs and resources of other organizations. This helps ensure that the accounting information is as objective and reliable as possible.
   Reviewing other aspects of basic accounting, Krasniewski noted that a balance sheet can be expressed by the basic equation A = L + E in which a company’s assets equal its liabilities plus equity. Assets include a list of the resources owned or controlled by the company and the cost of each resource, covering cash, long-term investments, operating assets, intangibles such as goodwill and receivables, and deferred charges. Liabilities include a list of current and long-term creditors’ claims against the assets (also called debts) and the amount of each claim. Equity includes a list of owners’ claims against the assets—including capital stock and retained earnings—and the amount of the claims.
   There are at least four ways to determine asset values for financial statements, Krasniewski pointed out: historical costs; current market value, which can be based on replacement cost or current disposal value; constant dollar, which is historical cost adjusted for inflation; and net realizable value, which is the estimated cash to be collected.
   Krasniewski’s crash-course in accounting also included a review of the DuPont profit model, the interaction of direct, indirect, and fixed costs, the concept of generally accepted accounting practices, and the relation between financial and operating cycles.

The Six Financial Tradeoffs
There are two types of financial decisions: investment decisions, such as whether you should buy a new baler or acquire another company, and financing decisions, which focus on how you plan to pay for your investment decisions, said Ralph Walkling, professor of finance.
   When it comes to finance, there are six important tradeoffs to keep in mind:
   Action vs. Reaction. This tradeoff is all about the benefits of planning. While it may be difficult to do financial planning, such planning enables you to assess where you are, determine where you want to go, and reach your goal, Walkling said.
   To determine your company’s financial status, you can conduct a “top-down” analysis, starting with an analysis of the economy, followed by an analysis of the industry, then an analysis of your firm.
   You also need to conduct a financial analysis of your company, reviewing such factors as your firm’s balance sheet, which portrays its financial position at a specific point in time, and its income statement, which depicts the results of your firm’s operations over a period of time such as a quarter or a year. The two main problems with balance sheets, Walkling noted, are that they express costs in terms of historic rather than current value, and they don’t adequately reflect the value of the company’s human resources.
   You can also determine your company’s financial status through different types of financial ratios such as liquidity ratios, which assess the amount of cash or equivalents the company has; leverage ratios, which determine the firm’s debt-to-assets level; activity or operating ratios, which look at inventory turn compared with the average collection period; and profitability ratios.
   Liquidity vs. Profitability. In this tradeoff, the goal is to have enough cash to meet current needs and invest the rest at higher rates of return, Walkling noted. 
   Debt vs. Equity. The challenge here is to determine the right amount of debt in relation to equity. On the one hand, debt—or “other people’s money,” as Walkling put it—is good because it gives you an interest writeoff, allows you to conserve your own money or spend it elsewhere, and enables you to “accelerate consumption” such as purchasing a new piece of equipment, Walkling explained. On the other hand, debt imposes repayment obligations on your company and can create financial problems if allowed to get out of proportion. Every company must determine how much debt is too much for itself.
   Now vs. Later. In this tradeoff, you must decide whether to spend money now or invest it for future profit—that is, do you want to enjoy the profits now or expand the business to enjoy potentially greater returns later? If you decide to invest, you should use capital budgeting to make sure you pursue projects that will be worth more than they cost, Walkling advised. You can use one of three types of capital budgeting methods to determine a project’s worth:
• Payback Method—this calculation simply determines the number of years it will take to get your money back from an investment, but it ignores the potential for cash flow beyond the payback period and doesn’t consider the “time value” of money—that is, the future value of money based on certain rates of return.
• Internal Rate of Return—this looks at the percent of return you expect on the project. This method does consider the time value of money as well as all cash flows in your company. You could proceed with a project if its internal rate of return exceeds the rate you could earn through alternative investments.
• Net Present Value—this method, which tells you the dollar return you can expect on a project, also considers the time value of money and all cash flows. You could accept a project if its net present value is positive.
   Risk vs. Return. The general rule in investing is: The higher the risk, the higher the return. Risk is not a four-letter word, Walkling stated, though he added that you should only accept the risks for which you are adequately rewarded.
   Diversification vs. Concentration. Walkling focused his remarks in this area on mergers and acquisitions, examining different ways to valuate a company, including discounted cash flows, comparables, and multiples of earnings, book value, sales, square footage, and other factors.

The All-Important Human Resources
People truly are your company’s most valuable resource, and only by hiring, retaining, and motivating the best people can your company achieve its greatest success. Unfortunately, that’s easier said than done.
   First, there’s the recruitment challenge. You can recruit employees in many ways and through a variety of media, including employment ads in newspapers, magazines, radio, and the Internet; referrals from current employees; temporary and public employment agencies; family ties; on-campus recruitment; personal networking, and more, noted Jill Ellingson, assistant professor in the department of management and human resources.
   To decide which recruitment method to use, consider the following criteria, Ellingson suggested:
   Consider the Target Audience—that is, who are you trying to reach? You must be specific about this because some recruitment methods will be more appropriate for your target audience than others.
   Evaluate the Cost—you need to balance the cost of the recruitment method with its impact. This doesn’t always mean choosing the method that reaches the most people for the lowest cost, Ellingson noted. For instance, the more important the position you’re seeking to fill, the more you may want to spend to get the right person. Also, if you have a small company, it’s important to recruit wisely since all jobs are more critical.
   Consider the Time Frame—how fast you need to fill the position will influence which recruitment methods you use. In general, the faster the recruitment method, the more expensive it is, Ellingson said.
   Evaluate Yield Ratios—this ratio expresses the percentage of applicants from a recruitment source who make it to the next stage of the selection process. For example, a method that attracts 50 resumes and yields five hires has a yield ration of 1:10. Similarly, a method that draws 100 resumes and yields five hires has a yield ratio of 1:20.
   Your recruitment ads should be designed to attract attention, generate interest (by telling what’s interesting or different about the job), create desire (by noting the job’s benefits and other attractive features), and stimulate action (by describing what the person must do to apply and when), Ellingson said. When describing a job, make sure you’re realistic, noting both the desirable and undesirable aspects of the job. “The more frank you are, the more likely the employee is to be satisfied, stay longer, and be more productive,” she noted.
   It’s also essential to make sure your recruitment approach complies with all equal-employment opportunity rules, such as steering clear of issues related to ethnicity, race, national origin, age, disability status, religion, and so on, Ellingson urged.
   Once you’ve received some applications or resumes for a job, the next step is to interview the most-promising candidates. The interview process can pose challenges, however, due to problems related to the interviewer and problems related to the questions the interviewer asks. Common interviewer mistakes include:
• making snap judgments about the candidate;
• overemphasizing any negative aspects of the person;
• making “contrast errors” based on the order in which candidates are interviewed. For instance, a bad candidate will look worse if interviewed after a good candidate than if interviewed before the good candidate;
• being overly influenced by nonverbal behavior;
• falling prey to “telegraphing” in which the interviewer encourages a candidate to continue on a certain topic through their own body gestures; and
• making the “similar-to-me” error in which the interviewer gives higher marks to a candidate who has something in common with them.
   Interviewers also make common mistakes in the questions they ask, such as asking different questions to different applicants, asking inappropriate questions, asking questions unrelated to the job, being nondirective (that is, allowing the applicant to direct the course of the interview), and lacking standards for evaluating applicants’ responses, Ellingson said.
   After hiring a new employee, the challenge then becomes how to get the best performance out of that person. That involves first giving the employee the knowledge they need to do the job—a “can do” issue—and then motivating the person to apply that knowledge and execute the job—a “will do” issue, Ellingson explained.
   To succeed at the “can do” training level, it’s important to have a consistent training approach, which could mean developing a training manual. On-the-job training is at its worst when it’s haphazard and at its best when it’s standardized and part of current employees’ job descriptions, Ellingson said. For best results, use a credible trainer such as a senior skilled employee and incorporate practice, feedback, and reinforcement into the training process.
   To get the best performance from the employee—the “will do” component—establish pay rates that are equitable; provide flexible benefits (perhaps even offering a cafeteria-type plan in which employees can choose the benefits that best suit their needs); invest in the employee through training, promotion, and ongoing education; listen to their comments and respond to them; and include motivational features in their job such as the freedom to make decisions, the chance to see a task through to completion, and rewards, Ellingson recommended.

A Logistical Challenge
The scrap industry is filled with logistical challenges—from scheduling pickups at industrial suppliers to arranging for scrap deliveries via truck, rail, barge, or ship. Managing such logistics well is a key factor in a recycler’s customer-service and profit equations. It’s essential, therefore, for scrap processors to have a solid understanding of logistics.
   According to the Council of Logistics Management, logistics is “that part of the supply chain process that plans, implements and controls the efficient flow and storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.”
   Stated another way, the five “rights” of logistics focus on getting the right items to the right place at the right time in the right condition and at the right cost, noted Keely Croxton, assistant professor of logistics.
   In the United States, businesses spend almost $900 billion annually on logistics, she reported. In fact, logistics account for a larger share of U.S. gross domestic product—10.5 percent in 1996—than health care, Social Security, or defense. Also, logistics costs account for nearly 30 percent of each sales dollar in the United States, Croxton reported.
   Logistics has become a hot topic for many reasons, including the increasing focus on customer service, globalization, the emergence of such trends a just-in-time delivery, and greater emphasis on controlling costs all along the supply chain. Today, in fact, effective management of logistics is seen as a potential competitive advantage, Croxton noted.
   Logistics encompasses a broad array of activities such as demand forecasting, material handling, order processing, packaging, procurement, parts and service support, transportation, warehousing, inventory management, and customer service. On that last point, Croxton offered a quote from Fundamentals of Logistics Management, noting that “a product or service provides customer satisfaction only if it is available to the customer when and where it is needed.”
   When handled well, logistics can help companies reduce their costs related to materials, freight, and inventory as well as boost their customer service levels.
   Handling logistics well is no easy feat, however, as the seminar’s attendees learned by playing The Beer Game. In this hands-on game, teams of five students managed a beer supply chain, with four of them assuming the roles of the factory, wholesaler, distributor, and retailer and the remaining person serving as the game’s overseer. It quickly became apparent how difficult it is to anticipate and respond to demand down the supply chain and manage the logistics of getting a product to market.
   At the end of the game, students made graphs of their inventory levels and orders. The graphs clearly illustrated the “bullwhip effect,” which shows how distortions increase as you move along the supply chain. •

The Importance of Strategy
“Strategy is the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.”
   So pronounced Sun Tzu in The Art of Strategy: A New Translation of Sun Tzu’s Classic “The Art of War.” And the study of strategy was indeed not neglected at the ISRI/OSU program, with Michael Leiblein—assistant professor in the department of management and human resources—leading a review of strategic management.
   Strategy is simply defined as a pattern of resource allocations that enables a firm to maintain or improve its performance, Leiblein noted. Typically, these resource allocations will require tradeoffs or investments that are difficult to reverse. Good strategies, he said, are those that will enable a company to create unique competitive positions.
   As part of his session, Leiblein offered a case study of Marks and Spencer Ltd.—the well-known U.K. merchandiser—to illustrate how a company can create a successful business model, or “value proposition,” that’s difficult to copy.