Archives for August 2017

Expanding Markets, Innovative Technologies and New Tax Incentive Opportunities for the Material Handling Industry

By Contributing Author | 08/18/2017 | 8:21 AM

By Tracy Lustyan, alliantgroup

The material handling and logistics industry has become one of the fastest growing sectors of the economy. System integrators and other material handling businesses support the manufacturing industry by making its processes more efficient and its fragmented supply chains easier to manage. In the future, there will be an increased need for global supply chains and distribution.  As a result of businesses incorporating new technologies to more efficiently handle and distribute goods, the material handling market will continue to surge as businesses spend more money on logistics systems each year.

Recent data estimates that the consumption of material handling and logistics equipment and systems exceeds $156 billion in the United States alone and employs over 700,000 workers. According to the Council of Supply Chain Management Professionals (CSCMP), the costs of U.S. business logistics were almost $1.5 trillion—or about 8 percent of our country’s GDP—in 2013. Clearly, the numbers point to a booming industry that will be a key driver for broad economic growth in the future.

The material handling sector’s growth could be further accelerated by a powerful tax incentive opportunity known as the Research and Development Tax Credit. Recent regulatory and legislative changes have expanded the number of businesses that can claim this credit as well as the value of the credit itself.

The Research and Development Tax Credit

The name of this tax credit is something of a misnomer. To qualify for the credit, businesses do not have to experiment with beakers and test tubes. Rather, the R&D Tax Credit rewards businesses for keeping technical jobs in the United States. The R&D credit is wage-based, which means the dollar amount of the credit is primarily based on employee and contractor wages in addition to supply costs.

When Congress recently expanded this incentive, its intention was to encourage companies to keep production and distribution in the United States. The credit rewards businesses that use American components in their products or hire American contractors to handle the fabrication, controls and automation of material handling systems. The credit is now permanent and one of the largest incentives offered at the federal level. Many states have their own versions of this federal credit as well.

Any company or contractor that designs, engineers or builds material handling equipment or processes is a great candidate for the R&D credit. To give a real-world example, a conveyor systems solutions provider received over $1 million in federal and state credits for designing a heavy-weight conveyor belt system for a frac sand mining operation. This company tested various conveyor belt designs and also evaluated different substances to build the conveyor belt itself (such as Kevlar, rubber or polyvinyl chloride).

Businesses in the material handling industry are already conducting activities that qualify for the R&D Tax Credit each day. To name a few qualifying activities:

  • Developing, designing, programming, manufacturing, testing or fabricating equipment or material handling systems
  • Performing retrofits or other system modernizations
  • Developing or programming guiding systems software for automatic guided vehicle systems (AVGS) or automated storage / retrieval systems (AS/RS)
  • Designing, developing or programming robotic systems
  • Developing logistics, order fulfillment or tracking software
  • Manufacturing or integrating motion controls or motor systems
  • Developing overhead material handling solutions (i.e. cranes, hoists, monorails)

Recent Changes to the Credit

In 2014, regulatory changes expanded the type of supply costs that are eligible for this credit. Eligible supply costs now include components and material costs consumed in the development of a first article that is delivered to customers. By counting these supply costs, businesses are now finding that their credit amount can be two to ten times the size of their previous credits. If a business that engineers and builds solutions for the material handling industry has examined the credit in the past, this same business could now be eligible for a significantly larger credit.

Beginning in the 2016 tax year, businesses with less than $50 million in gross receipts can now claim this credit against their alternative minimum tax (AMT). Traditionally, the AMT barrier was why many small and mid-sized businesses could not claim the credit. With the AMT turn off, businesses of every size can stand to benefit from this powerful tax incentive.

There have been many other regulatory and legislative changes that have expanded the credit to reward businesses for conducting qualified applied research in the United States. The credit now rewards companies that solve a technical problem on a factory floor or improve an assembly line or distribution process.

These modifications to the credit should not be overlooked. The credit’s expansion combined with the shift towards automated technology means that businesses in this industry will have ample opportunity to claim the credit.

New Technologies, New Opportunities for Growth

As consumers expect goods to be delivered at a moment’s notice, businesses are not only opening more distribution centers but also investing in new equipment and distribution processes. These new innovative technologies are part of a larger automation trend in the manufacturing industry.

A report by Global Industry Analysts, Inc. stated:

Material handling equipment manufacturers are increasingly incorporating advanced technologies, mechanisms and solutions such as robots, and automated guiding vehicles, among others, for enhanced productivity and safety. Technologies that are poised to benefit material handling businesses in the near term include the Internet of Things, cloud computing, data analytics and machine-to-machine (M2M) communications.

The continued adoption of automation systems will create more efficient multichannel distribution and other material handling processes. These shifts to new automated technologies will continue having a significant impact on businesses. For example, a material handling company received $596,000 in federal and state R&D credits for designing improvements to an existing industrial system. This company determined the optimal layout for the automated system by testing different designs and response times. They redesigned existing components to ensure compatibility with the improved system and rewired the communication system.

Material handling businesses will continue to invest in automated solutions to stay competitive in an increasingly technological space. Tax incentive opportunities that can significantly reduce businesses’ tax liabilities such as the R&D Tax Credit will be crucial. At alliantgroup, we highly encourage manufacturers, systems integrators and other material handling businesses to see if they qualify for this credit. The R&D Tax Credit is a great opportunity for this advancing industry.

Tracy Lustyan is a Managing Director based in alliantgroup’s Chicago office. Tracy offers a vast knowledge of government-sponsored programs, with concentrated expertise in the business application of the R&D Tax Credit, IC-DISC, energy credits, and tax controversy services.

The Importance of Free Shipping and How to Afford It

By Contributing Author | 08/04/2017 | 9:40 AM

By Jake Rheude, Red Stag Fulfillment

It’s hard to find a website that doesn’t offer some sort of free shipping these days. Most put it up as a default to protect themselves against ecommerce giants like Amazon, and the default posture works well for some but harms the business of others.

It’s a difficult balancing act, but it’s one that almost every business will need to make in order to stay competitive. Let’s take a quick look into why it is a requirement from the customer standpoint and how to see if your business can make the practice affordable and fruitful.

Why Is Free Shipping Necessary?

There are studies from Invesp that point to 90% of online purchases saying that free shipping is their no. 1 incentive to shop online, orders with free shipping are 30% higher than the average order, and 61% of people claim they are “somewhat likely” to cancel an order if the shipping isn’t free.

There is a lot of similar data, and while the effectiveness has a range of about 15% — typically 75% to 90% of people desire free shipping — the bigger number that you should be aware of is how many Amazon Prime members there are: the latest data suggests between 80 and 85 million in the U.S.

These are people willing to pay $99 per year predominantly for “free” two-day shipping. Their desire for free shipping is so great that they are willing to pay an upfront fee just to ensure that they have access to free shipping on the goods they want.

Here’s an informal study of one that you can do to see how powerful this free shipping desire is. Think of a recent Amazon search you made (pretending you’re a Prime member if you aren’t already). Did you even look at non-Prime items or did you automatically click the search results filter that excluded them before digging into products?

Free shipping has become such a powerful force, and arguable an ecommerce norm, that we are actively filtering out potential purchases that don’t fit.

Who Can Pay for It, Reasonably?

Almost any business can afford to offer free shipping on most, if not all, of its sales. The trick is to find a value in the free shipping offer that makes it worthwhile and cost-effective.

As we noted earlier, orders where the customer knows ahead of time that shipping is free tend to be 30% larger than a store’s average order. For high-value goods, that 30% increase in the aggregate can offset the costs you incur when eating shipping fees.

When you’re working with lower-cost goods, it’s important to look for other value and offer free shipping when you can take advantage of that value. Here are a few common areas where you can reasonably make a trade:

  • Provide free shipping in exchange for a customer creating a profile and agreeing to receive marketing messages from you. The goal here is to create repeat sale and up-sell opportunities as well as generate overall customer data and insight.
  • Time free-shipping offers to beat abandonment. If a customer starts to abandon a shopping cart, especially if this is done right after filling out the shipping details and getting the price, offer a one-time coupon to eliminate those costs. You’re working to encourage the first purchase and establish a relationship.
  • Go a step further and offer free shipping to all first-time customers. It’s a more direct approach and can take advantage of the first two items in this list.
  • Set deals so that free shipping applies only if some specific items are in a cart. This is more about moving inventory and establishing a new market for goods.

Tie your free shipping to a larger business objective and it will feel like something you can afford and use to grow your company. Stick to metrics that are easy to define and you’ll feel more comfortable both with starting the initiative and with your ROI.

Okay, So How Can I Find the Money for It?

The plan to implement a free-shipping offer is great, but often you need to have a way to capitalize on potential to make it an affordable long-term prospect. Start by considering ways you can save on the shipping itself, areas where you can impact order and its value, and methods to turn data into direct revenue.

Most business start with cost-reduction techniques. These options can include moving to standard-sized boxes with minimal branding and fuss. Amazon provides a fitting example with boxes that now tend to have very little information or branding on them, but with tape that notes deals, special days, and more. The experience inside the box is minimal, as items usually sit near brown paper and plastic bags of air.

Unless your selling specifically on the experience of opening the box, customers are going to care most that the products they receive are not damaged.

You can also look to negotiate rates directly with carriers if you have a high-volume operation. If your volume is too low, many 3PLs and private warehouses can meet volume requirements and may offer you an overall savings if you move your warehouse operations to their facilities.

Impacting order value comes at the problem from the other side, before the order is finalized. You can look to generate specific order value by increasing the amount required to receive free shipping — A/B testing is recommended here to see how much your average customer is willing to spend to get free shipping.

Essentially, you’re setting conditions around the “free” aspect. These can be minimum costs, select items, promotional weekends, or limiting what you offer as free. Make slower delivery times free while offering paid options for faster delivery.

Or, you have the option of trying to make customer data work for you. This is the trickiest option because it’s success isn’t guaranteed. You’re looking to convert information into actionable, profitable intelligence.

Exchanging free shipping for a customer profile and information will allow you to deliver marketing and promotional information to them. However, there is no guarantee that read it.

You also may require a social action, such as sharing their purchase online across social media to get their shipping costs refunded. Those messages may generate some awareness, but are only helpful if your shopper’s friends are also in your target market.

If you trade free shipping for an online review, will customers trust the veracity of these reviews? In many cases, it’s “yes, they will,” but you have no guarantee of that.

At the end of the day, your free-shipping offer must generate value. Where you find that value and how you execute on it depends on the rest of your operations, your technical capabilities, and the time you have to invest in this aspect of growing your business.

You can offer it and you can afford it. How you best capitalize on it is the primary question to answer.



Jake Rheude is the Director of Business Development for Red Stag Fulfillment, an ecommerce fulfillment warehouse that was born out of ecommerce. He has years of experience in ecommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others. 

The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About One-Off Sound-Off

Welcome to "One-Off Sound-Off," a blog page devoted to guest commentary on all things supply chain. This is a space where industry leaders can share their opinions and expertise with the logistics and supply chain community. If you have an article or commentary you'd like to share, please consider sending a guest blog proposal to feedback@dcvelocity.com.


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