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Joint Venture Warrants a Long, Hard Look (Part 3 of 4)

Another institution in our area is proposing a joint venture on a new laundry facility to serve both of our institutions and perhaps some smaller outside accounts. Where should I begin in identifying the pros and cons of such a venture, and how can I estimate the impact that a joint facility could have on my overall operation?TECHNICAL SUPPORT: Jim Mitchell, principal technical support specialist for Ecolab, Eagan, Minn., is a 25-year company veteran. He's currently its OPL lead in providing technical support to field associates. He edits Ecolab's Institutional Technical Digest, a monthly publication reaching 2,800 employees.
There are many details to consider prior to any commitments to a joint venture/new-laundry “partnership.” Depending on the status of your present operation, the change can be positive. However, it can also create a number of unanticipated financial and quality issues.
Contact businesses that have already made similar commitments. If possible, contact individuals who have made a positive transition and those who have experienced “issues.”
If your goal is a laundry partnership, contact “outsource” laundries near your proposed operation but outside of your business/geographic area. Laundry managers in your immediate area might be a little hesitant to provide accurate information if they feel you will end up being their competitor.
What are your current operating costs? What is the status of your equipment? Will the change alter your daily flow of linen? A fine-tuned laundry with quality equipment and good operating costs may not benefit from this type of venture. A laundry operation with major issues in these areas may prosper from outsourcing.
Calculating your cost per pound of processing linen isn’t easy, but taking the time to do it long before signing any agreements can help protect you against those unanticipated financial issues.
Include everything that impacts these costs, calculated against the pounds of linen you wash per month/year. Costs that affect your operating cost per pound today include:Labor. This should include all monthly laundry employee benefits: base payroll, medical and dental insurance, disability, etc.Sewer and water charges. You pay for water used in your laundry twice: incoming (to fill the machines) and waste dumped to drain per month.Utilities. This includes the costs for heating water (gas, steam or electric) as well as operating dryers and/or ironers, laundry machines, etc. Dryers not only consume energy to dry the linen, but they also draw in large amounts of air-conditioned air from the main building in the summer and heated air in the winter for make-up air. The cubic feet/minute rating (cfm) of your dryers is a good indication of the air consumed.Linen replacement costs. Add all linen purchased over one year. Subtract this cost from the value of the linen currently in stock (par).Chemical costs. Add all chemicals purchased over one year. Include all machine products, as well as stain removal products, dryer treatment products and any employee care products.Depreciation. Include any laundry machine depreciation costs over a year’s time. Calculate this into a monthly rate.Insurance. Ask your insurance company how much your insurance rate will drop if the laundry operation is shut down. Calculate this into a monthly rate.Repairs. Add all costs related to equipment repair in the laundry operation over a year’s time. Calculate this into a monthly rate.
All of these values should be added to calculate an average cost of linen production per month.
You then need to determine how many loads are washed per washer per month. Some machines have load counters. If not, your chemical dispensing system should have a counter. If not, have your employees track all loads washed per washer for a full month. This should also include any home-style machines used for small loads.
A calculation must then be made on the average pounds of linen loaded into each washer. Do your employees overload or underload?
Loading a 50-pound machine in a nursing home with 50 pounds of sheets, followed by 50 pounds of badly soiled pads and diapers, will create two completely different load sizes. The machine loaded with pads and diapers will probably be significantly underloaded.
A good (average) rule of thumb is to take the rated poundage of a machine and reduce that number by 10-15%. If a machine is rated for 100 pounds of dry linen, use 85-90 pounds, for example.
Multiply this figure by the number of loads washed per month to determine the total poundage washed, then take the total average monthly costs and divide this by the total poundage to get your average cost per pound. This is vitally important, since outsourcing is usually a cost-per-pound charge.
The average cost per pound varies depending on the laundry’s type or market (hospitality vs. healthcare) as well as its efficiency. I’ve seen it range from 20 cents per pound to more than 50 cents. A survey conducted by an outside agency for Ecolab estimated the generic average for a standard on-premise laundry is at about 43 cents per pound. Costs are generally lower for high-volume facilities.
Old and worn equipment can cause issues in three ways: high maintenance costs, high energy consumption and production flow headaches when they break down. Purchasing new equipment is expensive and may not fit into the budget, especially when the purchase is unexpected. Outsourcing may solve this issue.
If your equipment is relatively new or in good working condition, what percentage of its value will be retained if it’s sold or traded in? Could you transfer your equipment to the new laundry for use? Possibly, but your new laundry would more than likely require high-volume machinery. Your smaller machines may not fit its needs.
How will new equipment be purchased? How will the other operating expenses be paid for? Without contracting with outside accounts for added monthly revenue, how will you and your partner offset these costs without dramatically escalating your cost per pound?
During your analysis, you may find that your par stock is more than adequate. Sometimes, being forced to increase your par stock is a good thing. It’s an added expense but it may surprise you and improve the overall flow of your linen, which is a positive thing.
With your present OPL, the turnaround time of soiled to clean linen is controlled by your laundry, which means par stock can be kept to a minimum. This may not be the case when outsourcing. Once linen is removed from rooms, it’s bagged and prepared for shipment. You’re now at the mercy of the time from pickup to delivery. Do you increase your par stock? Be prepared! Problems will arise from time to time with deliveries, plant employee issues and/or plant equipment breakdowns.
Controlling the quality of your linen can be a challenge at times. Old and/or worn equipment, water conditions, poor employee procedures, ineffective chemical mix and insufficient temperatures can all lead to issues that may be difficult to resolve. Outsourcing may help provide a solution.
Laundry “plants” have one basic goal in production: clean, fresh, cost-effective linen with one pass through the machines. Most of these facilities take a great deal of pride in achieving this goal for their customers.
However, I’ve also seen the opposite occur. So, do you keep your laundry intact? For how long? In my 26 years with Ecolab, I’ve seen a number of facilities close their OPLs completely and sell or “junk” their machinery shortly after signing the contract. In a couple of cases, they wished they hadn’t.
You may want to leave your laundry operation intact for a time while you judge the effects. Negotiate a performance clause in the contract. Leave yourself an “out.”
You may want to avoid outsourcing with a plant that is or will be operating at maximum or near-maximum production levels.
Whether outsourcing or running a partnership, a well-planned operation should have a safety factor in place for unexpected equipment breakdowns. The older the equipment on hand, the more breakdowns are likely. Increasing your par stock can help to offset such breakdowns but only briefly.
Will linen be picked up every day? Five days per week? Linen that’s not picked up daily may force an increase in par stock. It can also result in odor issues as well as mold/mildew problems.
It’s never easy to let employees go. But, after all, that’s one of the reasons you’re considering out-sourcing, to save on labor costs. Aid valued employees in finding other jobs. Start this process as soon as the decision to outsource is made. This will send a positive message to other employees.
To summarize, take the time and do your homework. Contact businesses and laundry managers that have already made this transition. This can help determine whether such a change will be “pro” or “con” for you.
 

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