| Winter 2006 |
Manufacturing/Distribution Advisor
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Lighting System Installation Opportunities
The Energy Bill (Energy Tax Incentives Act of 2005) passed by
Congress last August contains several energy conservation incentives
that benefit businesses. One of these is a deduction for capital
improvements to commercial buildings' interior lighting systems. There
is also a deduction for major energy-savings improvements to commercial
buildings but the technical details are not yet available. The technical
details and benefits available for lighting system improvements are
available now.
Basically, up to $.60 per square foot of lighting system capital improvements
can be expensed for tax purposes in the year of purchase. Normally these
expenditures need to be capitalized and depreciated over a long period of time,
typically 39 years. To qualify, the lighting systems need to meet certain
technical energy benchmarks. The property must be placed in service between Jan.
1, 2006 and Dec. 31, 2007 to qualify. The building need not be new to get the
deduction.
A deduction can be generated for any lighting system plan that reduces
lighting power density by at least 25% from the minimum standards set in
Standard 90.1-2001 of The American Society of Heating, Refrigeration and Air
Conditioning Engineers and the Illuminating Engineering Society of North America
(ASHRAE/IESNA) in table 9.3.1.1 or table 9.3.1.2. A 40% reduction in lighting
power density is required for the full $.60 per square foot deduction. Lesser
reductions get a prorated benefit. The lighting systems still need to meet
minimum lighting levels set forth in the IESNA Lighting Handbook, Performance
and Application, 9th Edition, 2000.
There are other energy incentives in the Act that may benefit your business
as well. The heating and cooling improvements deduction will have details soon,
but regulations have not yet been issued by the IRS. There is also a credit for
energy efficient residential home construction.
Should You Offer Drop-Ship Service?
Many distributors and some manufacturers are gaining experience in
direct-to-customer shipping, in which orders are filled directly from
the source without recourse to a middleman. The Internet has accelerated
this trend, and Dell Computer, with its phenomenal sales of $13 billion,
provides the most successful example.
Drop-ship services are gaining popularity, too. In this model, the
manufacturer still ships goods directly to the end customer, but relies on
partners to market, sell and take orders.
For Some, a Competitive Advantage
For some products, especially those with wide consumer appeal, a
manufacturer's offer to drop-ship can provide real value to its wholesale
customers and make the manufacturer more attractive than its competition.
Consider a printer who supplies a publisher. For many years the printer has
taken newly printed books off the press, stacked them onto a pallet, loaded them
into a truck and sent them to the publisher, who sold them to its customers.
Now the printer offers to drop-ship—that is, to take on the publisher's
order fulfillment functions. This shift eliminates a significant transport cost
(the printer-to-publisher leg). It also relieves the publisher of the expense of
inventory and shipping operations. This printer may have earned more future work
than another who relies upon traditional shipping methods.
Meanwhile, the publisher continues its sales, marketing and customer service
functions. The end customer may never know a drop-ship arrangement was in play.
More Channels, More Sales
But wait—why bring in a drop-ship middleman at all? Why not go with
direct-to-customer shipping?
The answer is marketing. A manufacturer's drop-ship partners, in the
aggregate, may be able to tap more channels and a broader market than the
manufacturer itself can. Depending on these intermediaries' penetration of their
markets, they may be able to reach many more buyers.
A drop-ship arrangement essentially constitutes a redivision of labor. The
manufacturer takes over fulfillment, while its drop-ship partner covers
marketing and related tasks. Such a trade may not be an even swap, of course,
and the parties must construct a deal that resolves the new benefits and
expenses that accrue to each.
Retail Shipping: A Different Animal
Manufacturers considering either drop-ship or direct-to-customer operations
must think through new challenges.
It's one thing to ship wholesale: Take an order, run a lot, load a truck. But
are you ready to organize a pick-and-pack operation that ships to large numbers
of individual customers every day? Will you use different carriers and let the
customer choose? If these functions are new to you, headaches may lurk.
Your inventory situation will change, too. You'll need more space, of course.
And inventory is harder to plan when you're shipping retail—you really don't
know when these items will move.
Will the game be worth the prize? Will the benefits justify the new expenses?
The answers to these questions can be found through expert analysis.
If you'd like to explore drop-ship or direct-to-customer services more fully,
we can help you size up the costs and advantages of each.
Editor's Note: Bober, Markey, Fedorovich
& Company frequently works with clients on matters such as
this. Please call your partner / manager contact if you would like assistance in this area.
Manufacturing/Distribution Advisor is produced quarterly by Bober, Markey, Fedorovich & Company's
Manufacturing/Distribution
Services Team. If you would like additional information about the services that we can provide to manufacturers and wholesale distributors, please call or email our team leader, James E. Merklin, CPA, M.Acc. at (330) 762-9785 or
jimm@bobermarkey.com.
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