by Tom Andel, chief editor
Ten years ago, Dale Rogers, professor of supply chain management at the University of Nevada, took his class on a field trip to a General Motors parts facility in Reno, Nevada. The class was astounded by what they saw. Instead of watching the manufacture of assemblies, they witnessed the destruction of assemblies. These were perfectly good components that had a slight imperfection. Why were they being scrapped?
"GM didn’t want these parts to get into the secondary market," Rogers explains. "They wanted to sell new parts to their dealers."
Things are different these days. Today a growing number of OEMs, automotive and others, are selling remanufactured and recycled parts. They don’t want this lucrative new cash stream diverted to the dismantlers and refurbishers that are springing up in their industries. Even Hewlett-Packard and Dell are selling reconditioned printers and computers.
A great many manufacturers, however, ignore the opportunity to recycle damaged or outmoded equipment, leaving the door wide open for professional recycling companies like Romac.
"In the electrical industry, manufacturers change the designs of products like circuit breakers and control devices with great frequency," attests Dave Rosenfield, president of Romac and two-time past president of the Professional Electrical Apparatus Recyclers League (PEARL). "Most often they don’t make these products backward compatible with the previous design. So a product that may have a 50-year service life — not uncommon for an electrical product — is obsolete five years after its original manufacture. Five years after that, the manufacturer stops supporting it entirely and a person with the product installed gets no support from the manufacturer. Thanks to that issue, the manufacturers have made a market for me to enter."
Independent recyclers like Romac acquire product through demolitions, plant closures and liquidations, then store it for a number of years until the remaining installed base starts seeing failures. They bank on the fact that the OEMs won’t be able to support those products any more.
The electrical recycling business has grown into a multibillion dollar industry. PEARL has only 40 members but they represent $300 million in business by themselves, according to Rosenfield.
What’s it all about?
Recycling is an example of a closed-loop supply chain in which returned products are reduced to their basic elements and reused. Other activities in this chain include reconditioning, refurbishing, remanufacturing and reselling. According to Rogers, there are more than 73,000 remanufacturing firms in the U.S. They employ 350,000 and have total annual sales of $53 billion.
"More people are willing to buy used stuff today," Rogers believes. "Used items can be more profitable than new to some folks in the supply chain. An auto dealer makes more money selling and servicing used cars than it does with new cars. The college book store makes more money selling used text books than it does new. So there’s a fair amount of money to be made from the refurbishing/remanufacturing market because you can buy very low and sell higher."
Another common outlet for returned or damaged components is the waste stream. Fortunately, recycling efforts are reducing this flow. According to the U.S. Census Bureau, 30 percent of residential and commercial waste generated in municipal collections was recovered in 2000, compared to 16 percent 10 years earlier. The cost of recovery, however, is significant. The logistics costs associated with managing returns has been estimated at four percent of a firm’s total logistics costs. In 2001 this represented $40 billion to the U.S. economy.
Mike O’Donnell, vice president of manufacturing services for Genco, a firm specializing in returns management, says he’s seeing companies migrate from simply accepting returns to comprehensive disposition management. This includes all the nodes just described as part of the reverse supply chain.
"It starts with inbound transportation and the notification that product is coming in on a truck so we can better plan and manage what’s going on in the four walls," he adds. "We can then have a better opportunity to have enhanced quality control, information management, recalls and safety. Then as we continue this migration into asset recovery or liquidation, we’re seeing the returns processing element opening up to include a lot of additional reverse flows and touch points. That’s where we see growth in the reverse area, in taking on additional logistics or supply chain functions."
Where it’s growing
Government business is contributing to the rapid growth of recycling.
"Items that would typically go to a landfill account for 35 percent of our overall volume," says Bill Angrick, CEO of Liquidation.com. "We deal with federal and state government agencies, all of whom are acutely aware of the need to reutilize or remarket items as opposed to disposing of them in a landfill. Most sellers want to get these assets out of their warehouses and supply chains. There are a number of regulatory actions we take on behalf of our clients to deal with these types of assets. In the sale of CPUs resident in laptops and desktops, they have to be wiped clean so that the seller’s proprietary information will not be compromised. Our buyers reutilize the items we sell for parts. Or they will demanufacture the items we sell for the underlying material value. We’re able to tap a professional buyer base, and market forces will determine the value of the goods we offer based on the utility of the asset."
Liquidation.com performs many of the functions that characterize the recycling node of the reverse logistics network. These include warehousing, disassembly, inspection, segregation and testing.
"We detail the manifest of items, make a representation on the condition of the items, capture weights and dimensions, and photograph the items," Angrick explains. "We’ll even dismantle items to separate more valuable components. Everything we handle we will sell. There is a buyer in the global market for any type, quality or condition of asset if you spend the time before the sale to inspect, test and manifest the items."
Angrick adds that these will be mandatory skills for manufacturers in the future for both environmental and security reasons.
"The Environmental Protection Agency [EPA] will require that level of documentation, and on the government side you’re seeing that already," he concludes. "There’s a higher level of sensitivity to where product goes and for products that could be considered a potential threat in the hands of bad actors, the government wants to know where those components went and whom they were sold to. We cross reference against banned buyer lists."
Big business potential
The biggest bucks in recycling can be made from remarketing items coming off of operating leases, according to Ron Giuntini, executive director, OEM Product-Services Institute. He says in an average year $150 billion worth of material is returned that has to be remarketed. That includes computers, copiers, even lift trucks that come off leases after a few years.
In addition to equipment coming off leases, he cites several other drivers of recycling: trade-ins, equipment exchange programs and recalls. There are still relatively few OEMS getting directly involved in these programs, Giuntini says.
"They don’t see it as part of their strategic plan," he adds. "To me that’s insane, considering you then expose your brand name to a secondary market, which can’t control its reliability. Five to 10 percent of capital investment in the U.S. is for not-new product, according to the U.S. Census Bureau. That could be a bigger trend if the OEMs decided to get serious about selling their used products."
He points to Caterpillar as a success story in recycling. It certifies its used products and sells them through its distributors.
"Caterpillar makes 25 percent of its profit from its financial arm, which is mostly leases," Giuntini explains. "But recycling is a very complex field with independent players. The OEMs view it as beneath them, but there are a lot of companies making a lot of money and laughing all the way to the bank."
Dave Rosenfield of Romac concludes that the private sector will be driven to recycling, both for profit and for public relations purposes.
"I have no doubt that every industrial product will be subject to recycling and remanufacturing," he says. "At some level, state or federal, guidelines will be established to influence people to do it. The environmental political capital achieved by pressing on recycling issues can’t be ignored. Politically it’s hot to support recycling." MHM
Putting a Stop to Perfumed Landfills
Scents are hard to characterize. What smells sweet and refreshing to one person might make another person retch. That’s why there’s always some perfume that goes unsold on the retailer’s shelf. Eventually the perfume is returned to the manufacturer, but what happens next? It’s considered hazardous material and must be recycled before disposal. That’s the business of firms like MXI Environmental Services — and business is getting big.
MXI recently announced that the ethanol recycling program at its material recovery facility (MRF) in Abingdon, Virginia, is now fully permitted by the Bureau of Alcohol, Tobacco and Firearms (ATF) to distill ethanol for industrial use. This allows MXI to work with companies and third-party logistics providers to recover the value of ethanol from returned consumer packaged goods like perfumes in an environmentally friendly way. Take Coty, for example.
This manufacturer of fragrances discovered a considerable amount of inventory had been returned and was mispacked and mislabeled. Almost all its products are perfume based, and most contain ethanol. Coty was facing a considerable cost to dispose of those products as hazardous waste. As a large-quantity hazmat generator, a good portion of that cost was associated with reporting.
"By our recovering the ethanol from those products and recycling it, that exempts a whole stream of commodities from hazardous waste reporting requirements," explains Ron Potter, MXI president. "We can do that for half the cost of disposing of it as a hazardous waste."
That’s a waste stream that tends to run faster and deeper after holidays like Valentine’s Day and Mothers’ Day. Routing these streams to landfills or treating them as hazardous waste are alternatives that are becoming less attractive to companies implementing planned returns programs. Instead, MXI receives these products in drums and palletized loads at its recovery facility for distillation.
"For large quantity generators, participating in our program earns them recycling credits and is cheaper than having the waste ethanol burned," Potter concludes. "This is a natural extension of our depacking of consumer goods. A lot of the waste we handle includes cardboard, and it’s much better for everybody to recycle that as well."
Center for Logistics Management, University of Nevada, www.unr.edu
Liquidation.com, www. liquidation.com
MXI Maumee Express Inc., www.mxiinc.com
OEM Product-Services Institute, www.oemservices.org
Professional Electrical Apparatus Recyclers League, www.pearl1.org
Raymond Communications (experts in global recycling policy), www.raymond.com
Reverse Logistics Executive Council, www.rlec.org