How to avoid costly and deceptive financial pitfalls!
Here are some common differences between “Customer Owned Goods” and Clean Towel or Uniform Rental Business Models from a cost perspective.
Most companies today are fighting to maintain or improve their bottom lines profitably, which is the key factor determining success for many small service businesses. The pressures to reduce costs and boost margins vary from mild to acute or even severe, depending upon the nature of the business in question. Whether you see these costs as variable or fixed depends mainly upon which business model you embrace to provide uniforms, protective apparel, and linens affecting the safety, efficiency, and professional appearance you wish to portray.
Environmental and waste disposal concerns have shifted the market from paper products and disposables to renewable outsourcing alternatives to reduce landfill waste, groundwater contamination, minimize biohazard risks, and reduce greenhouse gases and global warming. OSHA concerns make this more acute, since workplace safety and health issues are balanced against the need for clean, crisp, professional appearances, employee and client protection, and sanitation concerns.
When companies decide to switch from COG (Customer Owned Goods) to Rental arrangements, things can become confusing for staff members that have to switch roles and add another job responsibility into their daily routines. They now encounter increased distractions; and suffer time and productivity loss inherent in monitoring estimated levels versus actual usage, quality control of appearance and malodor issues, and tracking exchange merchandise or credits for “unacceptable or unusable” goods on a weekly basis. Furthermore, new line items or “add-ons” appear on invoices that must be verified by floor staff that used to be handled by purchasing managers or bookkeepers.
Initially, it may appear that the rental arrangement may save money, time, and hassle to management, but let’s take a closer look.
What the rental sales people never tell you-what to anticipate in your contract /invoice!
- Hidden or ancillary charges are added routinely to your base invoice-These are often referred to as service or delivery fees, processing or handling fees, environmental fees or surcharges, biohazard surcharges, gasoline surcharges, etc.; even if you request merchandise changes for a temporary increase or decrease in inventory, or weekly usage patterns. Every rental company seems to have its own terminology for these “add-ons” to your base charges. However, hardly ever are they properly or completely explained during the sales process; yet, they are often in the small print of your contract.
- Automatic price increases-which require no notice to clients whatsoever; which can be rescinded only if the client discovers and challenges the “hidden cost” or “new rates” in the thirty calendar days directly following the magical price adjustment. If it is not caught by you, it is considered “accepted by the client”, and used as the new base price of the contract. This can happen at any time; and as many times during the contractual time period as they wish. Further, this can affect any or all of the line items or add-ons of rental!
- Auto replacement of merchandise-You pay for “damaged or lost goods” IN ADVANCE of actually losing them or ruining them; based upon a projected estimate of service type, merchandise category, or services provided (medical, hospitality, health & wellness, automotive, machine shops, printers, etc.). These range from 1%-5% of the established INVENTORY per week, and not the PAR as one might assume! At that rate, you are paying the rental company to replace their own complete inventory costs at least once per year! And you do not even own or keep the goods after the contract ends; you cannot depreciate or amortize those goods which you have purchased, on your income taxes! Rental companies may promise “credit adjustments” subsequent to their “quarterly inventories”, (which seldom if ever happens; either the physical inventory itself or credit adjustments), unless you insist. In the meantime, they get to hold your money!
- Auto renewal of contracts-Contract cessation or interruption usually requires formal, written notice of termination, tendered by certified or registered mail, often 90-180 days in advance of the “end date”; or the contract (whether termed “trial” or not) self-renews for a “like term” to the original time period . Many new companies get caught in this trap, which results in an endless and irrevocable snare to keep you locked-in; not giving you any legal way to remedy or to switch back to your previous, more advantageous program. Some contracts even specify that the rental company has an opportunity to “rectify the complaint”, often resulting in a 30 day “cooling off” period. Then, the time frame re-sets itself, forcing you to repeat the complaint process again if not satisfied even if the complaint is the same. Subsequently, similar or distinctly different complaints are considered as separate and distinct in their eyes; rather than related or cumulative, denying your right to render the contract null and void.
The Rental Business Model-How Rental Bills for Service
In rental, INVENTORY and PAR (product available to rent) levels control charges for each item, and your overall invoice. Routinely inventories are established by the rental companies themselves, obviously in their best financial interest. The higher the inventory, the higher the pars! These pars are sometimes expressed as a percentage, again in the companies’ best interest. Novice clients have little or no say in the negotiation and are led down the sales trail. The more experienced ask more interactive, intuitive questions, since they are aware “once burned, twice shy”. Inventory levels are usually 2.5-2.7 times the projected pars (often interchanged with “actual weekly usage”), initially suggested to the customer. It is often asked, “Do you know what you currently use”, or “What do you feel you want to have on hand”. Remember, the higher the par, the more the charges, despite the competitive appearance of the “piece rate” being lower than the “per pound rate” of COG processors! In other cases, the rental company may suggest a par amount that makes it convenient, profitable, or easier for them to service the account. Then, they work backwards to the inventory level. There may be more goods on the shelves, but you are actually paying more for that privilege than simply the “piece rates” convey.
In essence, billing is based on a predetermined amount of rentable linen, uniforms, or protective garments being “made available” to the client in any one given time period (usually per week). You are charged for the “availability” of linen whether you use it or not! It is not based upon actual linen used or processed as with the COG model. Although garments are priced by the piece, the same logic applies to them. If they go unused, you are still charged for a percentage of the available inventory each week!
Rental sales people routinely use the car rental analogy to justify their inequitable business approach. They will say “think about renting a car. It is rented for a period of time regardless of its being driven or parked”. They will go on to further explain “Linen rental works the same way; the customer has that linen, for their exclusive use, for a period of time. On a set schedule, the linen soiled is replaced with clean linen as needed”. However, they fail to point out that if 100 pieces are rented on Week 1 and only 50 pieces are used, a clean 50 pieces are dropped off on Week 2 to bring the total back to 100 pieces of clean linen available. However, the client is charged for renting the entire 100 pieces each service period. The more frequent the service days (i.e. multiple day service frequency), the more lost value experienced versus the COG model. In our example, that would result in an actual 50% loss of value; or in other words, your costs are actually twice what the piece rates actually reflect! In addition, that loss of value is actually compounded when too high of a PAR or INVENTORY is suggested by the rental company! A good practice is to ask for a “sample invoice” in advance of the contract signing or first delivery. Compare the bottom line totals of the invoices, instead of the much promoted “per piece rates” in determining overall cost savings, which could be seriously misleading!
Today, there are no more “route counts” (on-site direct counting of soil with an even exchange); rather that process has been replaced by “plant counts” (automated estimation using electronic eyes and conveyor belts with a one-delivery-delay exchange) or “shelf counts”. This is supposedly for accuracy and reliability as explained by the rental company. In reality, nothing could be further from the truth. Clumped up wads of soiled linen (napkins, wash cloths, a variety of small towels, sheets, patient gowns, etc.) are often mistaken for a single piece, when they are actually multiple items. This can lead to erroneous, inaccurate soil counts, which can falsely increase the appearance of “lost” merchandise, resulting in an inflated bill. In reality, poorly trained or inattentive service representatives may shortcut or evade the plant count by substituting a “shelf count”. In this aberration of the soil exchange process, the rep gains access to a customer’s business storage and “shelf counts” the difference between the pre-set PARS or INVENTORIES on the invoice, and what he assumes is the soil or product used; only delivering the DIFFERENCE between the two numbers. If the business owner is not aware, or if they store product in multiple places unavailable or unknown to the rep, erratic or artificially reduced soil counts (increased L & R charges)can result.
The Rental Business model-Lost and Ruined charges as a positive revenue stream
As previously mentioned, it may be cost prohibitive for a large commercial or industrial rental operation to physically count incoming soil from a client, or grade the quality of each piece of soil during the service visit, so they estimate a “mutually agreed upon percentage” (at their discretion) of the INVENTORY as “lost or ruined”. This “add on” charge is levied every delivery as a percentage of the PAR amounts in most cases. In other words, you are paying for “unusual wear and tear” or “abusive use” BEFORE it actually occurs (if it ever does!). It has been known for rental companies to charge for blood stains on sheets as “ruined”, since this soil requires extra labor and materials to process. Instead of segregating, pre-spotting, and applying extra skill to address this common stain, it is easier and more profitable to charge you for it. Their rationale is that it is “common knowledge” that things inevitably get lost, damaged by client negligence or abuse, or “thrown out with the trash” during a normal business day. Therefore, they justify L & R charges as a “cost of doing business”. That is a fallacy of logic, only designed to justify another “add on” cost to your weekly bill. They cannot prove this rationale, since they do not dump and count soil manually. How do they know what you lost or ruined, when they do not physically verify counts or conditions of soil? They rarely, if ever, actually SHOW you for what you are paying. The piece in question often simply gets thrown out or re-graded! Ironically, these stained items are often “salvage washed” in an aggressive reclaiming formula; and either have their quality rating redefined or sold as “rags” to other customers for “one time use” or disposable items. These pieces are not really “lost” to the system, but rather re-purposed for re-use or re-sale. This is yet another positive revenue stream for the rental company. There is little credibility at all for L & R!!
If you point out that you do not move inventory physically within or between facilities, so lost items are a very remote possibility (almost impossible), they respond that they will credit you any difference between “lost and ruined charges” or actual shrinkage at a pre-determined inventory time (held at their discretion). Practically, this almost never happens! They spread out their merchandise costs across the “customer pool” by selecting various “risk factors” (different client service categories and mixes of merchandise), and assigning various percentages of L & R rates, from 1%-5%, as the client will accept. It is yet another positive revenue stream for them.
The Rental Business Model-Common Pool Philosophy
The first two deliveries are brand new goods to establish the appearance and customer expectation that all goods and service will be highly professional and of highest quality. After the initial deliveries of inventory, goods are not segregated in the soil process. You are not guaranteed to get the same goods (nor grades of goods) as you sent in as “soil”. Rather, your delivery is pulled from the common pool of clean inventory at the plant. This does not allow for strict quality control as in the COG goods processing model. You get a mix of new (A), like-new (B), general (C), and pre-rag out (D) grades of merchandise as the most common grading procedures in large processing facilities. This grading is guided according to a quick, visual inspection of the original item less thinning, holes, tears, and stained merchandise which were not restored to “acceptable” quality levels during bulk or batch processing. This grading is often done by use of a conveyor belt with inspectors stationed every so often. As is the case in most mass manufacturing environments, the later in the day or week, the more likely things are missed or allowed to move through the line unchallenged; reducing the quality control and overall appearance for the client.
Further, the time lag between soil arriving at a rental plant and its actual processing can be upwards of 3-5 days depending upon the mix of their business and inventory demand in their merchandise pool. This can start to breed cross contamination and potentially spread disease. This could be opening you up to other potentially serious risks. No industrial laundry process entirely removes the risk of blood borne pathogens and other bacterial/viral contamination. In an industrial rental process, the same linens are rented to a variety of hospitality, healthcare, fitness and wellness, and personal service vendors without prejudice. Then, they process all items the same way, in large batches, with one wash formula, without distinction. Their approach is a “one size fits all” philosophy that rarely varies in terms of formula makeup, pre-treatment chemicals, or machine processing specs.
The COG Processing Business Model
COG laundering is more straightforward. Vendor’s staff does all the work, and eliminates the need for your staff to become linen managers. When any business makes the choice to purchase and maintain their own goods, they take control of their profitability by reducing hidden and add-on costs of rental. There are no hidden or ancillary charges, no covert automatic price increases, nor any automatic replacement of undocumented merchandise (L & R). There are rarely any contracts to auto-renew. The savings are evident over the course of the year. This puts the COG processor on the cutting edge of service every day, directly responsible for and responsive to the client’s specific needs and circumstances.
The client purchases the inventory of merchandise and the vendor maintains it. In most cases, this inventory amount is markedly lower versus amounts suggested by rental companies, since a COG goods processor has more direct control over the turnaround time between service visits; usually three to five days. In addition, this upfront purchase cost of merchandise can be more manageable than one might suspect; since some COG processors may even help mitigate those costs through a “lease and maintenance” agreement where they help provide inventory for an amortized cost each week or month, and charge for processed soil by the pound or piece! At worst, they can advise the client what is necessary versus what is overkill, and suggest a specific schedule of introducing new merchandise based upon normal life expectancy standards of various textiles published by the Dry Cleaners & Laundry Institute’s Professional Standards Guide.
COG processing is more cost effective, since it is based upon linen actually used and delivered each service day. The laundry picks up soiled linen, counts or weighs, washes, packages, and drops it off; charging only for each pound of incoming soil or item cleaned. The quality is higher, since COG processors have more control over the individualized process including professional spotting of stains, inspection of quality of goods both incoming and outgoing, and can customize wash formulas according to type of garment or textile by type, soil category, and care label.
Further, the time lag between soil arriving and being processed is virtually eliminated as it is routinely done the next day! This immediate processing virtually eliminates cross contamination and the potential risk of the spread of disease. That is why a commercial COG process is more healthy and advantageous, due to the nature of the individualized, special attention of the spotting, pre-soaking, and customized chemical and mechanical formulas that can be applied to each unique load. For example, massage therapists use oils and fragrances that are not adequately or completely removed in water borne processing; it takes a dry cleaning fluid to break the complex oils, fats, and fragrances to avoid a residual sour malodor due to the inevitable decay of these solids and proteins over successive usages. Owning and processing your COG merchandise allows you to be confident from where they come, and specifically how they are handled with unique attention to detail.
And always remember your “3 day right of refusal” on any retail contract to give yourself time to completely assess and consider all the facts and consequences in this complicated process! In most states you have up to the date of the first installation of merchandise to stop the process without penalty. Check with your attorney for clarification.
Timothy Wolf-Lewis is a former Branch Manager for F. W. Means Svcs. /ARAMARK; former Chicago Regional Service Manager for American Linen Svc. /ALSCO; and former Director of Clinical Services for Hospital Laundry Systems, Inc., a Chicago Healthcare Linen Cooperative encompassing all major area hospitals and their affiliated clinics. Tim’s personal credentials are highlighted on LinkedIn.