Remanufacturing: The next great opportunity for boosting US productivity

By Ron Giuntini, Executive Director, OEM Product Services Institute, from an article published by Business Horizons, Nov/Dec 2003.

Remanufacturing begins with the reclamation of used durable products. Typically called “cores,” these products are then disassembled into parts, which are cleaned, inspected, and tested to determine whether they meet acceptable quality standards to be reused. Some parts become waste. Others that do not meet standards can be repaired or reconfigured. These used parts and some new ones are then combined to reassemble the original core from which they were reclaimed, or to build a product with a new identity.

Remanufactured products typically have the same or similar performance characteristics and quality standards as new units. The types of products being remanufactured vary, generally falling into two classes: capital goods and consumer durable goods.

Capital goods can be anything from complex military weapon systems to manufacturing, mining, and agricultural equipment to vending machines. They constitute the majority of remanufacturing expenditures in the United States. Capital goods remanufacturing is also the more mature of the two types, having existed in one form or another for much of the twentieth century.

In the case of consumer durable goods, process costs can often exceed the price of a new product, which has limited their use in many industries. Large-scale remanufacturing of products outside the domain of capital goods is still in its infancy, and time will tell how this opportunity will yet be exploited. There are, however, some prominent examples of successful remanufacturing of consumer durable goods—automotive parts, computers, laser toner cartridges, and single-use cameras are a few.

Of all the material productivity initiatives mentioned so far, capital goods remanufacturing provides the greatest profit opportunity for US businesses. Estimates of the current scope of remanufacturing activity vary, but two comprehensive studies shed light on its impact on the economy. The first was published in 1996 by Robert T. Lund of Boston University and funded by a grant from the Argonne National Laboratory.

Size and scope of remanufacturing activity in the US

Total number of firms 73,000

Total annual industry sales $53 billion

Total direct employment 480,000

Average annual company sales $2.9 million

Average company employment 24

Number of product areas Over 46 major categories

Source: Lund (1996)

Lund’s remanufacturing database, comprising more than 11,000 trade group members, provided a thorough first look at the US remanufacturing industry. His results may be surprising to many. In terms of employment and economic impact, the “industry” rivals such giants as household consumer durable goods, steel mill products, computers and peripherals, and pharmaceuticals.

A more recent study by the OEM Product-Services Institute (OPI) used a slightly different perspective and method in an attempt to fill in some of the gaps in the Lund study. It used the current replacement value (CRV) of products currently in use as the basis for its estimate of remanufacturing expenditures. Experts in each industry then estimated the scope of remanufacturing costs as a percentage of the CRV. Though more reliant on estimates by industry experts than the Lund study, which made extensive use of real data, the OPI study was able to include a much broader range of industries, many of which have no formal trade organizations.

Table 2

Relative size of remanufacturing activity in the US

Industry sector Employment Shipment value

Remanufacturing 480,000 $53 billion

Household consumer durables 495,000 $51 billion

Steel mill products 241,000 $56 billion

Computers & peripherals 200,000 $56 billion

Pharmaceuticals 194,000 $68 billion

Source: Lund (1996)

Although the estimates differ somewhat, the conclusion is clear. Remanufacturing offers tremendous untapped opportunities for American business. According to OPI, the US spends an estimated $47 billion a year on it. Yet although this dollar figure is far from trivial, it represents only 0.4 percent of GDP, compared to 10 percent for new product manufacturing.

The benefits

There are many beneficiaries of remanufacturing. Here we focus on the four most prominent of those: business enterprises, the workforce, consumers, and society.

Business enterprises

The argument for an enterprise to enter the business of remanufacturing products or distributing remanufactured ones is compelling. Original equipment manufacturers (OEMs) like General Electric, Boeing, Caterpillar, Deere, Navistar, Xerox, and Pitney Bowes have created business models in which capital goods remanufacturing is an integral part. They currently lease, remanufacture, and remarket an estimated $130 billion of assets.

In the consumer durable goods case, most automotive OEMs, directly or indirectly, engage in some level of remanufacturing, with the used parts generally sold through the same distributor network used for new ones. Eastman Kodak and Fuji Photo Film have revolutionized photography with their single-use cameras, but most consumers are unaware that the cameras are remanufactured up to 10 times after being returned for film processing.

As far back as the 1930s, when Henry Ford began remanufacturing automobile engines after the Great Depression brought new car sales to a standstill, companies with an eye to the future have recognized and capitalized on this untapped opportunity.

Many enterprises are stakeholders in the successful expansion of remanufacturing. The list below, though by no means all-inclusive, gives some examples:

-- firms that use remanufactured products, enabling them to reduce their capital investment expenditures

--OEMs, which can use the remanufacturing process and the remarketing of the resulting products as a business strategy to increase profits

--manufacturers of specialized equipment used in the process, such as cleaning and test equipment, optical gauges, and so on

--OEM stockholders, who would likely see greater growth and stability in their investments (GE may be the best example of the possibilities that exist when remanufacturing is incorporated into an OEM’s strategic vision)

--information technology suppliers, who would help build the IT infrastructure to support remanufacturing and distribution process activities

--management consultants, who would assist new-condition product manufacturers in incorporating remanufacturing into their business models

--design engineering software suppliers, who would develop design optimization tools for the remanufacturing processes of disassembly and reassembly

--financial service firms, which would finance the capital investment needed for companies to enter the remanufacturing sector

--third-party logistics suppliers, which would experience a large increase in reverse logistics activity

The workforce

A quick read of Ben Hamper’s 1991 bestseller Rivethead or a similar chronicle of life on the factory floor casts light on the monotony faced by the direct labor workforce. Remanufacturing, by comparison, is a much more dynamic and varied production environment. Blue-collar workers require more initial training and skills, with the long-term benefit of a broader skill set and higher work satisfaction.

In addition, retired and laid-off factory workers would be in high demand, providing the experience in disassembling and reassembling products that they helped build years before.

Consumers

Remanufacturing brings lower prices to the consumer, typically on the order of 30 to 40 percent less than similar new products. It also means more consumer choice, especially for discontinued products that are still available in mint condition, which is currently the case in such industries as retail auto parts.

Society

Society is arguably the greatest beneficiary of remanufacturing. As a material productivity initiative, the process has an intrinsic societal benefit in that it reduces the volume of energy and natural resources required to produce the goods we value. Remanufactured products incur costs that are typically 40 to 65 percent less than those incurred in the delivery of new products. This is because most of the raw materials already exist in their final form and thus require only a fraction of the material processing required of new products.

In terms of energy consumption, remanufacturing a product requires only about 15 percent of the energy used to make the product from scratch. The estimated worldwide energy savings of current remanufacturing in lieu of building new products is an incredible 400 trillion BTUs of energy annually. To put that figure into perspective, it is the equivalent of about 16 million barrels of crude oil (about 350 tankers), or enough gasoline to run 6 million cars for a year.

As a direct result of the energy savings, remanufacturing is also extremely effective in reducing greenhouse gas emissions. A weighted average of 140 pounds of CO2 is emitted for every million BTUs of energy consumed (burning coal is higher, hydroelectric and nuclear lower). Based on its estimated savings of 400 trillion BTUs per year, remanufacturing avoids the generation of about 28 million tons of CO2 annually, roughly the output of ten 500-megawatt coal-burning electrical plants.

The estimated savings in raw materials is equally compelling—the materials saved would fill 155,000 railway cars in a train spanning 1,100 miles. While recycling has a similar effect in terms of conserving natural resources, it requires that the parts be returned to their raw state (which requires energy), at which point the manufacturing process must be repeated just as if virgin raw materials were used (which also requires energy).

All these energy savings are only the tip of the iceberg. OPI has estimated that if capital goods OEMs and automakers delivered 20 and 10 percent of their product output, respectively, in a remanufactured rather than new condition, remanufacturing activity in the United States would increase by 200 percent. That equates to an estimated 5 to 10 percent drop in waste and energy consumption throughout the entire US manufacturing supply chain. Government officials have already begun to recognize and favor remanufacturing’s environmental benefits, and are pursuing the legislative means to encourage it, albeit cautiously.

Their counterparts in Europe have taken a more aggressive stance. As of 2002, for example, no more than 15 percent of a scrap vehicle can be discarded in Europe, with that percentage dropping to 5 percent by 2015, coupled with the mandate that a percentage of automobiles sold each year must be remanufactured. The German Packaging Order and the German Recycling and Waste Control Act are models of how to establish green legislation to drive remanufacturing.

Recent executive and legislative efforts indicate that the US is moving in the same direction. In May 1998, the Federal Trade Commission formally began allowing remanufacturers to label their products as “recycled” and “remanufactured in the USA.” Although seemingly semantic, the FTC’s ruling will raise the public awareness of remanufacturing to the level that recycling has attained in the past 30 years.

State governments have begun to follow suit. New York passed a remanufacturing bill in June 1998 (by a vote of 146–1) mandating that purchase requests for durable equipment consider remade goods first. It also mandates that “products purchased by the commissioner or other state agencies shall be recycled or remanufactured products… provided the cost…does not exceed a cost premium of ten percent.” Finally, it prohibits state agencies from purchasing commodities from OEMs that place restrictions on remanufacturing, such as Lexmark with its “Prebate” program.

The following year, Texas, Connecticut, and California passed similar laws. In 2000, New York added to its landmark legislation by passing a tax credit to benefit remanufacturing firms.

Since 2000, Congress has been considering a 20 percent tax credit for businesses on the purchase of remanufacturing and recycling equipment. The bill has enjoyed enormous support, with nearly 60 co-sponsors in Congress.

Although the legislation became moot when Congress passed changes to the tax law providing 20 percent tax breaks for investment in all forms of capital equipment, the number of co-sponsors was a strong indication of the level of support that such legislation will likely receive in the future. Efforts by remanufacturing proponents like William Gager, President and CEO of the Automotive Parts Rebuilders Association (APRA), will ensure that remanufacturing remains of interest to Congress. As Business Week’s Janet Ginsburg (2001) suggests, “If US companies want to stay competitive, they may want to start thinking green sooner rather than later.”

Part 2 will appear in the next Material Handling Management newsletter.

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