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Episode 40: Let Your Excess Inventory Advance Your ESG Goals

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Bob Trebilcock: Welcome to The Rebound where we'll explore the issues facing supply chain managers, as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Ashkenazi, CEO of the Association for Supply Chain Management, and Bob Trebilcock, editorial director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments. Now, to today's episode. Welcome to today's episode of The Rebound. Let your excess inventory advance your ESG goals. I'm Bob Trebilcock.

Abe Ashkenazi: I'm Abe Ashkenazi.

Bob: Joining us today is Claudia Freed. Claudia is the president and CEO of EALgreen, a philanthropic organization with supply chain DNA. Claudia welcome.

Claudia Freed: Thank you very much. It's great to be here.

Bob: We're thrilled to have you in this. We'd said earlier, "This is a topic that's really very near and dear to my heart at Supply Chain Management Review and Abe at ASCM. We're looking forward to our conversation. Now, my wife and I owned a retail store for more than 30 years. At the end of every season, we had a problem. What to do with the stuff that we couldn't sell even on sale? I used to say to my wife, "Why do you buy that stuff if you can't sell it?" Every business from mom-and-pop shops like ours to the largest companies on the planet have excess inventory and products that are reaching the end of their lives that they have to do something with.

There are tried and true methods of getting rid of excess inventory from selling it into the secondary market to sending it to the recycler. What if there was another option, one that allowed your organization to get a financial benefit while also advancing your company's ESG goals? That's the concept behind EALgreen, a nearly 40-year-old organization that uses excess inventory to fund scholarships. That's what we're going to talk about today. Claudia set the stage for us. Tell us what EALgreen stands for and what it does.

Claudia: Thank you for that introduction, Bob. When I thought about this answer, first of all, we stand for education and we stand for helping businesses have a positive impact on society and the environment. Now the letters EAL stand for educational assistance limited. We converted to EALgreen in 2016 to emphasize our organization's commitment to the environment and sustainability today that reflects really our commitment to ESG, which as we know, is environment, society, and governance, or the transparency of the work that we do.

Abe: Claudia, a really interesting innovation in terms of identifying excess inventory, which oftentimes is the last thing an organization wants to deal with is excess inventory. As Bob pointed out, either I bought too much or my manufacturing didn't support my sales. Give me a sense of how did you get started? Why focus on excess inventory as a tool for education.

Claudia: Great question. It was the brilliance of two friends who had gone to college, as they like to say, on other people's money. The concept really started with their own desire to give back to society. The brilliance of the idea came from understanding that they were bringing together through this nonprofit organization two sectors. On the one hand, part of the economy, as you said, was generating excess inventory, returns, surplus.

Let's not forget that today, the size of the return market is in the trillions of dollars. This is 40 years ago when that problem was really beginning to show the burden that it created into the supply chain. Then they went across town during their sales calls and they would see that there was another sector of society that was struggling to meet their budgets. That sector of society were the colleges and universities.

The concept of EAL is grounded on the idea that we can use principles of supply chain, both on the inventory management side, as well as on the supply side, and bring together a method of relocating if you will, redistributing the product that normally would've gone to the landfill and give it to those on a college campus that make a small sacrifice. That is, maybe they have to use a product that is not the brand new item on their shop, but by doing that, they're really generating value because that item would no longer need to go to the landfill.

Bob: You and I had a chance to talk a little bit about this before doing the recording, and you used a term “product philanthropy.” I want to ask you two things, actually. One, I know you have a great personal story associated with EALgreen. Can you tell us a little bit first, about how you got involved, but then take over from there and explain the term product philanthropy and what it means?

Claudia: I became involved when this concept of a nonprofit organization was able to secure the first donor. These two friends that I mentioned that founded EALgreen in 1982, were really paying attention to what was happening in the marketplace at that time. In 1981, Congress passed the Economic Recovery Act, which enabled companies to, not only take a tax write-off for being philanthropic in the sense of charitable donations in the form of cash, check, or gift, but also in providing corporations the opportunity to take advantage of the tax law and write-off the value of product that they were wishing to donate.

That was the first idea in terms of, "Can the marketplace provide an opportunity for businesses to donate their excess inventory and receive a tax write-off?" If we think about philanthropy, philos is the word for love to mankind. There was an act of charity that gave them the idea that if corporations could write-off the donated product, then they could take that product and create value. In this case, they said, "What if we could walk into a corporation and ask them to donate their surplus inventory?"

That's what they did with W. W. Grainger. They became the first donor to the EAL organization 40 years ago. Then they said, "What if we could find a sector of the community, in this case, higher education that could use those products in running their buildings, in maintaining their ground, in fixing the pool, in fixing the HVAC equipment with this product that had been donated by the other sector of the economy? By creating this small ecosystem, they generated the opportunity for the first college to say, "Well, we could try this idea," and that was North Park University.

By then in 1982, they had the first donor. They had the first college, and I was selected the first student to benefit from this exchange, which I haven't even described how it works. A company donates the product, and we distribute that to a college or a university. The payment effectively that the college makes is by saying, "You are helping us save in our operating costs. Those savings will become a discount on the tuition waiver or a scholarship for a student." That's how I became involved.

Abe: Claudia, you're sharing a little bit on the operational side. Give me a little bit more. I've got a company; I've got excess inventory. Obviously, you've got your operational side, and you've the philanthropic side. Obviously, you don't take the inventory to the school and say, "Here's the inventory." Obviously, it's financial for the organization, for the school. Give me a sense about your operations and sustainability side of the business. How does that work?

Claudia: To answer that question, I want to go back and make sure that I am very clear in the fact that colleges actually do receive the product aid. The product actually does go to universities. Peeling back a layer in terms of our operations: let me start by describing how we started. I just mentioned, we had one donor, one college, one student. Now, 40 years later, we have two fulfillment centers, one in California, and one in Illinois. We have helped over 21,000 students with scholarships. From an operational perspective, donors that have product that can be damaged, scratched, dented, returns from a customer, an old model that they no longer use, they can make a donation of that product into our organization.

In 2021, we processed over 500 trailer loads of donated materials. Once the product comes in, we actually select it through three different channels, depending on the environmental, and the societal impact, and the governance impact of each of those channels. The first channel is, What can we reuse?" Colleges and universities are like small cities. They cover everything from plumbing, to welding, maintenance, grounds, everything that happens on the envelope of the institution. We actually don't give the product to the colleges for the students. These are products that are mostly industrial in nature.

The product that cannot be reused, it's either repaired or resolved by our community partners. That enables EAL to raise cash to fund the operations. I'll talk to you a little bit more in a minute about what happens to that cash. Then the third and the newest baby in the family is really our green channel or our green revenue. Those are the products that need to be recycled.

Today we recycle packaging. We recycle wood, plastic, and a variety of other odds and ends such as ceiling tiles with the help of Armstrong. Those are the three channels that operationally enable EAL to receive a variety of products from donors, and that then we either convert directly into a scholarship by sending that lawn mower to North Park or by converting it into cash and then funding scholarships in addition to the ones that we funded with the lawn mower.

Bob: Claudia, let me see in a moment a little bit more about the philanthropic side, but I just want to ask you about operations, about one more aspect of what you do which is the sustainability or green side of your own logistics. I know you've done some innovative things around transportation. Can you explain what you did around there, and how you used transportation internally to further your own green initiatives?

Claudia: For almost 37 years, EAL received products donated by companies, and transportation was included. About three years ago, we began to see that donors were looking for conditional support on being able to get that product out of their loading docks. They were generous in giving the product, but we took over the aspect of actually putting in place a transportation solution for them. We did that by going into the industry, working with an expert that was able to put together a plan where, for example, if a donor is bringing in products because they are distributing that in their own operations, we already have equipment sitting in that space, that EAL then could hire on the back haul.

We are eliminating dead miles, where we are actually coming back with product when the truck is going into deliver into the distribution center of the donor. Those are new products. They're coming up empty. We negotiated with them to be able to work with us to bring out on their outbound the donated products. That's one example of how we are optimizing the use of equipment that is so precious today and so expensive.

Another way is that we already use carriers that are committed to smart ways. In any kind of transportation, our number one goal is to reduce the carbon emission, and in fact, to try to look at things like anything over 600 miles, we do use intermodal transportation. Again, with the mindset that these decisions about transportation today really, really impact both environment and our bottom line.

Bob: I'm going to move back to one more sort of nuts and bolts philanthropic question. Talk briefly about, so how does the donor company benefit? What's the tax benefit? Then when an educational institution says, "Okay, I'm going to buy from you," how does that process work on the philanthropic side?

Claudia: Great question. The corporations have a variety of benefits when we look at the philanthropic side of it. Of course, the tax write-off is top of mind in most businesses. In order to get into the tax benefit, we will have to be talking to tax advisors. As a nonprofit, we understand the law, but we highly recommend to anybody looking at making a product donation to really receive advice from their tax team. Let me tell you that what happens is when a product is geared for donation; the benefits to the company are many fold. Number one, yes, there is a tax write-off opportunity.

Again, if a company is donating perishable products, which we do not accept, but let's say you are a food bank, there are rules around the product philanthropy on how the tax law applies to those donations. Beyond the tax write-off, the companies enjoy what we call here at EAL, the halo effect. That means that when a company is perceived with their intent in the community to be mindful that this is product that probably slightly scratch, dented, outmoded, but perfectly good to be reused, they benefit from the enjoyment of how that brand is perceived in the community, and the leadership of that company.

Not only are we talking about philanthropy for the sake of the tax write-off, but also for doing the right thing. We have seen that evolve, with the advent of both corporate social responsibility, CSR, as it is called. Companies are beginning to understand that their product is, not only beneficial to the individuals that buy and consume but also there is a responsibility of what do we do when we have excess material? Product philanthropy is a perfect solution for that problem.

Abe: Oh, yes. Really interesting when you're talking about the efficiency of taking what had been either landfill or waste and getting it back into the system. Oftentimes we measure an organization's performance on the percentage of money that goes into the philanthropic versus the operations. Give me a sense of what that looks like for EAL.

Claudia: Wonderful. We run between 83% and 87% of every dollar that comes in, goes out on the programs. How does that mean? It means that in 2021, we had operational or functional expenses of about $5 million. Almost $4.5 million of that money went back out to colleges and universities in two forms. We actually give the colleges and universities a cash gift at the end of the year. Let me take you back to the operations. Remember that I mentioned that we have three different channels. Each of them create some value. The colleges and universities pay a small handling fee for the products that they receive.

Small amount of our budget comes from the colleges and universities paying this modest handling fee to receive the lawn mower. The second channel is where we have the community partners that help EAL raise money from the product that may be too damaged to be reused. Then the third channel is the recycling channel. We started out with making a couple of $100 a year from green recycling. Now, that is rising in importance in the organization.

The three channels that generate revenue first go to fund the operational needs of EAL. Those are the lights, my salary, the team salary, the fulfillment centers. In addition to that, we put in reserve six months for a rainy day, so that's our small reserve. Anything above and beyond, every penny of it gets turned over to the colleges and universities that believe in this program, to begin with. We give them a gift at the end of each year in the form of a cash scholarship gift directly to their financial aid.

Those are real dollars that are going out to colleges and universities. Again, 10 years ago, we started out with $64,000. That was all that we could afford to give. Today, in 2022, our budget for giving back to the universities the cash gifts is $1,255,000. Over almost 10 years, we are approaching now $8 million in cash that we have been able to return back to the colleges in the form of direct financial scholarship for the students.

Abe: Just an extraordinary story, Claudia. If I'm a company, and I want to get involved with EALgreen, how do I do that? Then also from the school side, did they tell you what they're looking for as well, so you can go out and look for particular products, or is this on an "if-come"? We only get X amount of products, so this is what you're stuck with. Give me a sense from each side, from the company side, and from the education side?

Claudia: So happy you asked that question because as supply chain executives and leaders, we know, and your audience will know the complexity of returns. Returns come in a variety of stages. They're broken. They have rocks inside the box. It's a very interesting world that we live in right now. Our model directly to your question, for colleges and universities, we have a model that is not based on demand planning. We don't have back orders. We don't have, "Please send me 10,000 widgets." We receive whatever the companies need to move out of their loading dock, and away from the landfill. You can imagine the wide range of things that we receive.

Therefore, our system is first-come, first-serve. Colleges and universities receive a little email every Tuesday and every Friday, and these are the physical plan. Physical plan operations receive an email that says, "This week we have lawn mowers. Next week we have hard hats. Next week we have tools. The colleges and universities know that this is first-come, first-serve based, because we may just only get that lawn mower or snow blower that one time and never again, because that donor isn't really fulfilling an order for us. They're moving whatever is down there in the way.

Colleges and universities come on to a platform that we have online. They look at what products we're able to receive from the donors. They constantly come in to look at what is new, what they need. The beautiful thing is that they only order what they need. They don't have minimum orders. They don't have to be a member to be able to access the product that we make available to them. From perspective of a company, it's easier for me to tell you the five things that we don't accept, the categories that do not accept perishable products. We do not accept donations of cars, anything with a license, real estate.

We don't accept hazardous materials that includes now, as you can imagine, things including sanitizer or things that have alcohol or things of that nature. We have worked with companies, and we have been able to collaborate with other nonprofits around the country and around the world to find solution for those items. Then the final one is speaking of the world, if a donor has products stored offshore or in a facility outside of the United States, we are not a broker. We will need to make a referral to organizations overseas that can help donors bring the product or solution in their country of origin because we don't bring down inside the United States.

For the colleges is really, "Go hunt, go find what you can get from EAL," because it will save you a ton of money. Then you can give the students financial aid to keep them enrolled and to get them to receive their degree and their education, which is why we do what we do. From a donor is a way to have an easy solution where you are not required to cherry-pick when you are required to simply establish the supply chain distribution to say, "Okay, these are the EAL donated products. Their truck is going to come in or we have a truck on site. We fill it and off it goes." We have become much more of a supply chain partner in that regard.

Abe: Claudia, what an extraordinary innovation to use supply chain for a force for good. I can't think of a better way to, not only address circularity but to use the output of supply chains both positive as well as the access to fund education, which is the core for, not only supply chain professionals but for almost every industry. Wonderful news. That is all the time that we have for today. Claudia, I want to thank you from EALgreen for all the information you provided and wish you continued success. Finally, a special thanks to all of you for joining us today. We hope you'll be back for our next episode. For The Rebound, I'm Abe Ashkenazi.

Bob: I'm Bob Trebilcock.

Abe: All the best everyone. Take care.

Claudia: Thank you.

Bob: The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.

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