By Ron Giuntini, Executive Director, OEM Product Services Institute, from an article published by Business Horizons, Nov/Dec 2003.
Given the size, potential, and benefits of remanufacturing in the US, one would expect firms to be embracing this concept with reckless abandon. But with remanufacturing activities accounting for only 0.4 percent of GDP, this is clearly not the case. What are the various reasons for this poor showing?
When products are designed to be easily disassembled and reassembled, as has traditionally been the case in the defense industry, the remanufacturing process can be both efficient and profitable. Unfortunately, this has not been the case in most manufacturing industries, resulting in high operational costs or high scrap rates, or both, during the process. Such lack of focus creates market conditions in which remanufactured products often do not have a significant price advantage over new-condition products, resulting in relatively low demand for them.
Salespeople are generally not given incentives to handle the sale of remanufactured products as alternative solutions for customers. Historically, they have been programmed to sell new-condition products, viewing remanufactured ones as a threat to their commissions.
Product marketing managers do not usually incorporate remanufactured products into their strategic selling plan. On a tactical basis, remanufacturing is often addressed only in response to individual customer requests. In some cases, OEMs enter into the remanufacturing business only to control the perceived damage incurred to their brand name due to the poor quality of remanufacturing performed by small, independent, unauthorized enterprises.
Production and inventory management
In a traditional manufacturing environment, the exact parts requirements are known for each unit to be assembled. Assembly is generally a straightforward matter as well, since the new parts have already been manufactured to the required tolerance. For remanufacturing, however, the new parts requirements are not known because the used cores are the primary source of supply for parts. The number of usable parts from cores, unfortunately, is not usually known until after the core is disassembled, inspected, and tested. Moreover, the disassembly, test, inspection, and, to a lesser degree, reassembly processes require different skills and equipment than their manufacturing counterparts. These challenges make operationalizing remanufacturing activities difficult.
Workforce skill levels The historical focus on mass production skills in the work force has resulted in worker specialization, rather than the broader technical skills required of the remanufacturing process. Even with the recent trend toward cellular manufacturing and its associated increase in worker skill sets, there are many skills unique to remanufacturing that are not widely available in the workforce. This often creates shortages of skilled technicians.
New product business metrics are often designed to recognize revenue growth, not profit growth. The sale of remanufactured products generates lower revenues, but in absolute terms and as a percentage of sales, profits are often greater. Manufacturing performance metrics are driven by new-condition product labor productivity, even if managers are responsible for the remanufacturing process as well. Thus, little attention is given to reducing remanufacturing process costs. As the saying goes, “You do what you measure,” and currently the measure is of new products.
Tax credits for capital equipment purchases have historically focused only on new-condition products. This trend is reversing, however, as discussed previously.
Product advertising emphasizes obtaining access to the latest or greatest new technology and throwing out the old. “America today remains a throwaway society, and economic motivations are at the root of that pervasive mentality,” explains Dr. Nabil Nasr, Director of the National Center for Remanufacturing and Resource Recovery (NCR3) at the Rochester Institute of Technology. “However, I believe that we can help change that attitude. The market for remanufactured products can flourish once customers are educated that remanufactured can be as good as new” (Judge 2002). Advertising is the key to that end.
Tax depreciation time lines for capital goods are briefer than the physical life of the product, resulting in 40 percent of such balance sheet assets having a zero book value. Financial management often perceives that these assets also have a zero economic value, so expenditures to extend their lives through remanufacturing are often not given budgeting priority, despite the potential avoidance of capital investment in new equipment.
Managerial accounting techniques are in a primitive state when it comes to reporting remanufacturing process activities. The result is often poorly configured balance sheets and income statements for remanufacturers, giving top managers an inaccurate perception of financial performance. As for financial accounting, the FASB has been silent on remanufacturing, providing no guidance in this area.