Most of the buy-back contracts we have today look pretty similar to one another. There is a per-tote price, a pickup schedule, a freight arrangement, a quality threshold, and a payment term. The boring stuff is documented and the relationships run themselves. It was not always like this.
The first commercial buy-back contract we ever signed was in May 2010 with a small glycerin distillery west of Denver. It was the deal that taught us how to structure every contract that came after. It was also a bit of a small disaster.
Why the deal made sense on paper
The distillery shipped about 40 totes a month of refined glycerin to soap and cosmetic companies across the southwest. The customers refilled smaller drums from the totes and returned the empties to the distillery. The empties were piling up in the back lot at a rate the distillery could not absorb. They had been paying a junk hauler $18 per tote to take them away.
We offered to take the same totes off their hands for free, and we offered to share the resale revenue with them in the form of a small per-tote credit toward their next purchase from us. On paper this was a win-win. The distillery saved $720 a month in disposal costs. We got 40 totes a month of clean, food-compatible feedstock for our reconditioning bay.
Where it fell apart
Three things, in order. First, the totes did not arrive at the rate we expected. The distillery would let them pile up for six weeks, then call us and ask us to take 240 at once. We did not have the bay capacity to absorb that kind of pulse, and we ended up renting a temporary parking yard down the road to hold the overflow.
Second, the totes were not as clean as the prior-contents documentation suggested. Glycerin is genuinely easy to wash out, but the distillery had sometimes used the totes for other products in between glycerin runs and had not always documented those secondary uses. About 15% of the totes we received required extra wash cycles or got rejected outright.
Third — and this is the one that hurt — the freight arrangement was based on a per-mile rate that turned out to be way too low for the actual distance and the actual rate of pickup we needed to maintain. We were losing money on every load, and the credit-toward-next-purchase structure meant the distillery had no real cash incentive to fix any of the issues, because they were getting the value as a future discount instead of a check.
How it ended
After eight months, I sat down at a coffee shop with the operations manager from the distillery and we walked through the situation honestly. They were happy with the disposal cost savings but did not have a strong incentive to clean up the documentation problem. We were happy with the feedstock supply but were losing money on the freight. We agreed to wind down the contract, settle the credit balance, and part ways. We are still on friendly terms — they buy a few new totes from us every spring.
What we changed
After that contract ended, we rewrote our buy-back template. The new template has four things the old one did not. First, a maximum batch size — we will not pick up more than 60 totes at one time, period, no matter how many have piled up. Second, a documentation requirement — the customer must provide prior-contents records for each batch. Third, a per-mile freight schedule that scales with distance and accounts for fuel surcharges quarterly. Fourth, payment in cash by ACH instead of credit, so the customer has a real incentive to keep the documentation tight (because dirty totes get downgraded prices in writing).
The 2010 contract is the one that taught us those four things. I keep a printed copy in my desk drawer. I look at it once a year as a reminder that the math has to work for both sides or the relationship will not last.
— Aldo Ramírez, IBC Denver