Case 1. The Salvation Army in Dallas: The Supply Chain Challenges of a Non-Profit Organization¹

¹ This case was developed solely for the purpose of classroom discussion. Some details of the case, including names of the organizations, have been disguised. This case is not intended to serve as endorsements, sources of academic or business data, or illustrations of effective or ineffective management of the personnel or organization.

Arunachalam Narayanan^†

^† University of Houston, Houston, Texas, USA; [email protected]

In October 2011, Major Carl Earp of the Salvation Army Adult Rehabilitation center was discussing the goals for the upcoming fiscal year with his advisory council. His goal was to generate enough revenue from the Salvation Army’s family and thrift stores to pay for the religious mission at their facility and send about 31% of the revenue generated to their head office in Atlanta for strategic initiatives. The director of finance, Roderic Horton, was also present at the meeting. He provided the advisory council with the updated financial statements for the last two years and, at present, they could afford to send only 14% of the revenue to the head office. To add to this burden, in the previous month, they lost one of their stores to a freak accident, when a DART bus ran through the store after being hit by a wrong-way driver. Unfortunately, the driver of the wrong way vehicle was under insured and they lost a store which generated $40,000 in monthly sales. The Major and Roderic were looking to their advisors for some innovative ways to increase revenue or reduce their expenses to reach their goals.

² About Salvation Army, http://www.salvationarmysouth.org/about.htm

³ History of Salvation Army, http://www.salvationarmyusa.org/

Today, the Army has a presence in 124 countries with more than 15,000 churches or corps, and is managed by the international headquarters in London.⁴ The international leader holds the rank of the General and is based at the headquarters in London. He or she is elected by a group of senior Salvation Army officers (called the High Council) for a term of five years or until their 68^th birthday is reached after which he or she must retire. The General is assisted in policy making by an Advisory Council. To manage the governance of the Army, the international movement is divided into 50 territories. Each territory’s command is led by a territorial commander. Territories are then divided into divisions, with a divisional commander leading a team of administrative officers in each one. Each division encompasses a number of corps and other Salvation Army centers. Operations of The Army are supervised by trained commissioned officers. Officer candidates undergo two year training at one of the resident Salvation Army colleges which include theory and practice in field work. After candidates are commissioned their promotion is based on length of service, character, efficiency, capacity for increased responsibility, and devotion to duty. The ranks are lieutenant, captain, major, lieutenant colonel, colonel, and commissioner. Lay members who subscribe to the doctrines of The Salvation Army are called soldiers. Along with officers, they are known as Salvationists.⁵

⁴ Statistics of Salvation Army, http://www.salvationarmy.org/ihq/www_sa.nsf

⁵ People of Salvation Army, http://www.uss.salvationarmy.org/uss/www_uss.nsf/

In the United States, the origins of Salvation Army dates back to 1879, when Lieutenant Eliza Shirley left England to join her parents who had migrated to America earlier in search of work. She held the first meeting of The Salvation Army in America in Philadelphia in 1879. Soon, the Salvationists were received enthusiastically. In 1880, reports of the work in Philadelphia convinced Booth to send an official group to pioneer the work in the United States. Three years later, the official group was able to expand its operation into California, Connecticut, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Missouri, New Jersey, New York, Ohio, and Pennsylvania. Today, the Salvation Army in United States is divided into four territories, Western, Southern, Eastern, and Central territory. The national commander and national chief secretary coordinate the activities of each territory, while each territory is governed by a territorial commander. As the general case, the territories are divided into divisions led by a divisional commander. In the United States, the operations in major metropolitan areas are administered by an area commander. Under his command, there may be a number of Salvation Army officers commanding corps, community centers, and social service centers.⁶

⁶ History of Salvation Army, http://www.salvationarmyusa.org/

The corps community center is the local Salvation Army center of operations seen in most towns and cities across a country. Each week, a variety of people will meet at the corps community center for worship, cross-cultural services, fellowship, musical activities, and other events. There may also be a variety of community outreach activities, as well as character building activities for youth and adults. Emergency relief, emergency shelter, and other social services may also be available at the corps community center. Some of the large social services centers, senior citizens’ housing, domestic violence and children’s shelters, camps and rehabilitation centers are administered directly by divisional headquarters or by territorial headquarters.⁷ The revenue for running these operations are raised through donations received from both individuals and corporations. In the U.S., most of these donations are in used items, which are in turn sold through their network of family and thrift stores. The Salvation Army has a history of free rehabilitation from alcohol and drug abuse. Thrift stores also provide the revenue to run these Adult Rehabilitation Centers known as ARCs.

⁷ About Salvation Army, http://www.salvationarmysouth.org/about.htm

To support their rehabilitation efforts in the Dallas region, the SA solicits donations from individuals, business, and organizations. Most of the donations are in terms of goods, which are then sold primarily at one of their seven stores (as shown in Exhibit 1-1). The proceeds from these sales are used to support their mission in Dallas.

Exhibit 1-1. Stores of SA–Dallas ARC.

⁸ http://dallas.satruck.org/donation-value-guide

Individuals: An individual can donate goods by either bringing them to the collection points of SA or by calling the collection warehouse to set up an appointment for pickup from their home or offices. The general donations include clothing, books, bric-à-brac, toys, furniture, beds, electronics, appliances, and sometimes even vehicles. They do donate food, but it is never resold in their stores.

Organization: Several organizations around the city may donate their used furniture, appliances, and electronics. Sometimes these organizations will run some campaigns to collect specific seasonal items to donate to SA, like a Christmas toy drive.

Businesses: They also donate used furniture and electronics to SA on a regular basis, but they are known for making occasional bulk donations. For example, a leading insurance firm donated a truckload of past football championship jerseys. These jerseys cannot be sold in the open market, as they have the wrong team names or they are way past its sales period. Another company donated a truckload of unique plastic flowers which it could not sell in its business. In 2008, Major Carl Earp established a significant relationship with a local transportation company⁹ for their unclaimed items and lost baggage. The items left in the airline seat-back pockets and gate area like books, cell phones, mp3 players, CDs, jackets, and luggage that circle the carousel for hours without being claimed by the owners are kept at each airport facility for five days in hopes of being claimed by their owners. After that, the airline company sends the unclaimed items to their central baggage facility in Dallas. In 2008, the company began to give its items, not claimed within a certain period of time of arriving at the central baggage facility in Dallas, to SA in Dallas. Millions of coats, books, cell phones, gloves, and various other items are hauled off monthly by SA Employees and sold in local Dallas/Fort Worth SA facilities. In the last three years, this has turned out to be a sizeable revenue generator for SA–Dallas.

⁹ http://www.uss.salvationarmy.org/uss/www_uss_dallasac.nsf/vw-news/22007BD3E2FB27568525744B005A9AA2?opendocument

Not all donations are easily resold by SA, but they do not want to turn away these donors, as it may deter them from making future contributions. All these groups also donate monetarily, but that is usually less than 2–3% of SA–Dallas ARC’s operating budget.

Reclamation of clothing items: Clothing is by far the biggest donation in terms of number of items. They are also one of the top two revenue generators at their stores. SA stocks the clothing donations in a pile at their central warehouse facility and sort it manually. The employee visually inspects the clothes and sorts them as good, acceptable, and bad. The good clothes are in turn sorted in plastic drums (see Exhibit 1-2). Each plastic drum represents a certain dollar value, for example $1.99, $2.99, $5.99, $8.99, $10.99, or boutiques. Boutiques are high-end clothing like fur coats and wedding dresses and are sold at a reasonable price (up to $499.99) at their stores. The acceptable ones are later reamed and sold to exporters. Sorted reams are sold at $0.26/lb., while the unsorted reams are sold at $0.35/lb. In the sorted reams, there are no good clothes; SA has already taken the best ones to the store. The unsorted reams are priced a little high as there may be good clothing; SA didn’t have the time to sort through all the clothing (because of high volume during holiday seasons). The remaining bad ones are generally sold in the daily “as-is” auction at the central warehouse; the leftovers after the auction are sent to trash. The entire process is depicted in Exhibit 1-2 and Exhibit 1-3.

2-A: Salvation Army employee sorting the donated clothes.

2-B: Unsorted pile of clothes.

2-C: Ream of clothes.

Exhibit 1-2. Clothing sort process.

Exhibit 1-3. Reclamation process for clothing donations.

Reclamation of furniture and appliances: The other common types of items donated by all groups are furniture, electronics, and appliances. They are the highest revenue generator among the stores, but at the same time they occupy the largest floor space in both the stores and warehouses. Furniture, appliances, and electronics go through a similar reclamation process as depicted in Exhibit 1-4. A SA employee tests and inspects the product. If the product is in working condition it is sent to the store for sale in the next available shipment. If it can be repaired and if they have capable personnel in the warehouse, the product is refurbished and sent to the store. If not, it is sold along with the poor and obsolete inventory in the daily “as-is” auction at the central warehouse. The leftovers after the auction are sent to trash. Cell phones, music players, computer accessories all go through the same process.

Exhibit 1-4. Reclamation process for electronics and appliances.

Reclamation of shoes: Shoes are sorted in the same way as clothing, but the only difference here is not all shoes are donated in pairs. The good pairs are sold in the stores, but a lot of the single shoes are bought out by third-party buyers in a separate auction.

Reclamation of books: Most of the donated books are classified as either paperback or hard cover. Paperback are sold at $0.99, while hardback are sold at $2.99 and up. One interesting aspect about the books is the ones donated by the airlines. They are usually the new bestsellers misplaced and unclaimed by the busy passengers at the airport. These are tagged with orange dots and stocked in the book racks of Store #1 and #2. They are generally the most desired books at these stores. With the advent of e-books, these opportunities may decline in future, but right now it doesn’t seem to have affected the supply.

Reclamation of bric-à-brac: Bric-à-brac is collectibles and seasonal items such as vases, ornaments, and decorative objects usually displayed on the mantelpiece, on walls, or in cabinets. These are usually donated by individuals during a holiday or spring season when they clean their homes and offices. A seasoned SA employee inspects these items and selects the good ones for stores. The rest are sent to the daily auction site or trash. To attract customers to the stores during specific seasons, like Christmas and Easter, these items are sometimes stocked at the central warehouse for the right season to display at the store. For example, the Christmas items are usually displayed in the stores between early November and January. In this way, SA ensures maximum revenue from these donated items.

Table 1-1. Store Sales by Item Type in 2010 and 2011

To encourage inventory movement and customer traffic in the store, SA–Dallas follows a unique discounting strategy. Furniture is sold at a 25% discount after the product has been on floor for over 15 days, then at a 50% discount after 30 days and marked down to a 75% discount after 40 days or more. Very few furniture may remain after being marked off at 75%, those few items are ragged out and sold at their daily auction at the central warehouse. Clothing, electronics, bric-a-brac and shoes are color tagged to indicate the week of the month. After the first week, they are sold at 25% off; followed by 50% off after two weeks. After four weeks of being in the store, the product is taken (ragged) out of the store. If the ragged out item is still good, it may go to other stores; otherwise, it is sold at their daily auction. Therefore, one could safely assume the average inventory turn at these SA thrift stores is at least 12. This rapid change of inventory promotes repeat visit among shoppers who visit these thrift stores. Regular customers also know a lot about special deals at these stores, such as all clothing sold at 50% off every Wednesday or books from the lost luggage group being tagged with orange dots. Usually, these books are in pristine condition and generally fly off the shelves within a couple of weeks.

As-is auction: At the central warehouse, every morning at 10 a.m. during the week days, the items that are not sent to stores are sold at an open auction in “as-is” condition. Usually, furniture, electronics, and appliances are the top pick in this auction. This type of auction generally raises about $60,000 in revenue every month. The items are sold at this type of auction mainly because there is no obvious market for them in the thrift store or the items are beyond repair. Sometimes items are also sent to this auction because there is no storage space in the warehouse or SA facilities. The items that are returned from the stores are sold in a separate auction either at the store or warehouse.

Junk and surplus: The items left after the open auction are pooled in a junk cart (Exhibit 1-5) and sold to the highest bidder. The buyers pay a price for every lb. (weight) of item in the cart. In the last few months, the team in SA–Dallas has started to recycle the metal (mainly aluminum) and cardboard in the junk. This new venture is providing them an additional source of $30,000 in revenue per month.

Exhibit 1-5. Junk cart being lined up for daily auction.

Secondhand vehicle sales: Some individuals also donate their old vehicles to SA. Every Thursday, SA runs a secondhand vehicle sale in “as-is” condition. This sale usually raises about $20,000 in revenue every month.

Specialty bulk item sales: Occasionally, big businesses around the city of Dallas donate items in bulk—for instance, truckloads of old sports championship T-shirts, plastic flowers, and misprinted company souvenirs. Many of these cannot be sold at their thrift stores and SA–Dallas has to find specific buyers for these products. Their retired colonel recently found an exporter to purchase 100 sports championship sports jackets at $4 each. They still have at least another 10,000 of these in their warehouse.

Managing peak periods: The donations from the individuals usually peak at the holiday season. This creates a huge bottleneck, both at their inbound and warehouse operations. They may not have enough vehicles to pick goods from the neighborhood, nor do they have enough labor to sort through all the donated goods. At these peak times, many goods will be sold in an “as-is” auction because of the lack of labor, space, and time to sort through the items.

Repair men: Lately, it’s been difficult for the team to find repairmen to fix broken appliances and furniture (see Exhibit 1-6). Because of the lack of storage space, these items are sent to the daily auction place where it might fetch a lower value than what they could have earned by selling it at their thrift stores.

Exhibit 1-6. Appliances in the warehouse waiting for repair or to be sold in “as-is” auction.

Unsold items: SA–Dallas ARC has two warehouses, both located close to store #1. Both these warehouses still house a lot of unsold goods. These items have not been sent to trash because there is an obvious value to them; at the same time, the team is looking for new avenues to sell them at places other than their thrift stores. Some examples of valuable surplus items include electronics like computer printers, monitors, copiers, and cell phones. These items are not sorted at the thrift stores and are sold mostly in the “as-is” auction site at their central facility.

Cost of dump fees: The central warehouse disposes about 700,000 lbs. of trash every month and they pay an average of $21 per ton for dumping it. Around 20% of donations are sent to trash and another 10% are recycled. The remaining are either sent to store or sold at their daily auction in “as-is”/junk status. As the amount of trash increased in the last few years, the central warehouse spent $160,000 to build a trash compactor in-house to reduce the volume of trash before loading on to the dump trucks. All these infrastructure and monthly payments are made from the revenue generated from the business model without any subsidies.

Store #4 accident: In July, they lost a store to an unfortunate incident with a DART bus and an uninsured wrong way driver. Luckily, it was early in the morning, so no employees or customers were there at the time of the incident. The store was severely damaged (see Exhibit 1-7), and it was not economically viable for SA to repair and insure the shop for future use. They not only lost a store with $40,000 in monthly sales, but also lost a storage/display place for their items. The items that would have been sold at Store #4 would either lay idle in the warehouse or would get sold at the “as-is” auction site because of lack of storage space in their operation.

Joel Prince/The Dallas Morning News—Reprinted with permission.

Exhibit 1-7. Salvation Army store damaged by an accident in July 2011.

Soliciting needed items: The SA team in Dallas generally knows from experience the kind of items that gets sold in their stores during every season. But, they have very little control on the timing of the donations of these items. They do their best to stock these items and display them at the right season subject to their inventory flow and space constraints. They are still looking at innovative ways to solicit the items at the time of their needs. Recently, they have run campaigns in local newspapers soliciting car donations and general donations at their stores.

Surplus target: Every year in the U.S., SA southern territory headquarters provide a surplus target for its member regions. This year, they want the regional missions to generate enough revenue to support their local activities as well as send about 31% of the revenue back to the headquarters. This a voluntary target, and every mission strives to do its best. Last year, SA–Dallas ARC managed to send about 17% of their revenue to their office in Atlanta, Georgia.

Exhibit 1-8. Advisory Council Meeting Notes

Table 1-2. Revenue of the Dallas ARC in 2010 and 2011

Table 1-3a. Salvation Army—Dallas ARC Financial Statements: Assets and Liabilities

Table 1-3b. Salvation Army—Dallas ARC Financial Statements: Income Statement

Table 1-3c. Salvation Army—Dallas ARC Financial Statements: Expense Statement

2. Comment on the donation, reclamation, and selling process of the different items. Are there any ch anges you would recommend to improve the effectiveness of reclamation? If so, explain them.

3. In your opinion, which of the current operations is the most efficient, and which one is the most expensive?