U.S.-based manufacturers and their suppliers face several threats:
• Mediocre financial performance for their investors;
• Dislocations of hourly and professional workers due to downsizing;
• Accelerated governmental intrusions into future product design due to aggressive regulatory standards;
• Market share loss to foreign-based OEMs; and
• Static market size.
But a new business model represents a ray of hope for OEMs and their suppliers: remanufacturing.
This model depends on not-new products having "like-new" condition characteristics like high reliability levels, energy efficiencies, operational capabilities, maintainability, safety and others. The U.S. military serves as a model, having operated vehicle remanufacturing programs for decades.
This new remanufacturing business model is expected to:
• Materially increase the profit margin of a market segment. Remanufactured products typically have profit margins that are 50-100% higher than new products. This data is based on our work with durable goods OEMs with remanufacturing operations (e.g., United Technologies, Oshkosh, Textron, BAE, General Dynamics, Navistar, Timken and others) over a 20-year span.
• Transform OEMs' taxes [PBT] as a percentage of revenues into a PBT of 8-12% for their fleet sales. This aligns with that of the average "healthy" U.S.-based durable goods manufacturer (e.g., Eaton, Parker-Hannifin, and Illinois Tool). Note that the PBT of OEMs is difficult to ascertain due to the massive write-offs they incurred during the recent corporate restructurings.
• Decrease the market share of imported designed-for-manufacturing components employed in the equipment production process. Many foreign parts suppliers have penetrated the U.S. market by designing their parts for manufacturing efficiency. They show little consideration for ease of repair/remanufacturing; it's all about providing the lowest purchase price to the OEM. With a new business model focused on remanufactured equipment, parts designed-for-repair/remanufacturing would become of greater value to the owner of the equipment because they could be used in the remanufacturing process. The designed-for-manufacturing foreign part would have to be discarded.
• Reduce impact of equipment manufacturing on industrial energy consumption and waste generation. The new-condition manufacturing process has many materials and energy inputs, while that of the remanufacturing process boosts employment in disassembly and reassembly activities. A 1996 study by Boston University professors estimated that a remanufactured item uses only 15-20% of the energy required to produce a like-kind new condition product.
• Mitigate the loss of control of equipment design to the Federal Government. A robust remanufacturing process would enable an OEM to partially circumvent the EPA requirements that new-condition equipment must meet governmental standards.
The Business Model
There are nine elements to the remanufacturing business model we propose. Let's use an OEM of material handling equipment as an example. How these nine elements are established and managed will drive the profitability of the new business model.
1. Who is the customer?
The target market for this new business model is MH equipment fleet operators. Currently this segment acquires an estimated 20-25% of all newly manufactured MH equipment in any one year.
The fleet operators are hourly rental subscription service providers (e.g. rental shops), operating leasers (e.g. Hertz Equipment), utilities (e.g. Verizon), governmental agencies (e.g. GSA), capital leasing operators (e.g. Penske), multi-location corporations (e.g. FedEx) and others. The MH OEMs often sell directly to the larger operators, but their dealer networks sell directly to the smaller fleet operators. One point in common for all fleet operators is that the value of their acquisition is reflected on a balance sheet, with a depreciation schedule; there are differences between operating and capital leases.
2. What is the value proposition for the customer?
The objective for a fleet operator is to minimize Total Ownership Cost (TOC), which is driven by the [(acquisition cost minus residual value) + (operating costs) + (product support costs)]. It is estimated that a piece of remanufactured MH equipment could decrease TOC by a weighted 10% to 15% by reducing the [acquisition minus residual] value by 20% to 30%; operating and maintenance costs would be marginally impacted.
The two processes that create remanufactured equipment would be the following:
• Equipment used by a fleet operator would come back to the OEM's production line and be returned in a remanufactured condition. The product retains its original identity/serial number. Note this model was employed by the Checker Cab Mfg. Co. for over 40 years.
• Equipment in a new product manufacturing assembly line would employ remanufactured components co-mingled with new components. The product has a new identity/serial number.
The fleet operators would also be provided with a warranty that is the same as a new-condition piece of equipment.
Fleet owners, who provide short-term rentals or operating leases to the end-users, would be best positioned to obtain the highest value from this new business model. They are accustomed to aggressively managing TOC. This is especially true of daily rental fleets where the primary profit driver is managing the residual value of equipment; rental income is primarily a means for them to cover their depreciation costs.
Note that fleet operators could tout the fact that their remanufactured equipment is "green." This can often create a positive image for their organization.
3. What are the channels employed to deliver the value proposition to the customer?
A new dealer network for fleet operators would be established, both large and small, under a marquee such as "OEM-Reman." OEM dealers would be invited to join, but participation would be limited. The driver for this exclusivity would be the importance of focusing on the management of the forward and reverse supply chain of the remanufactured equipment; too many dealer participants will increase the complexity of this effort. For example, Caterpillar has been very successful in segmenting their markets for remanufactured products.
4. How are relationships established and maintained with the customer?
Reduced TOC will be the primary value proposed to the customer, but other value propositions could also be delivered. For example, a sophisticated internet portal interface for the delivery of a series of enhanced fleet monitoring tools could be exclusively provided to the remanufactured equipment fleet operators.
5. What are the revenue streams?
The new business model revenue would begin slowly and require a 10 to 12 year time frame to be fully implemented. Driving the timeframe would be setting-up the dealer network, re-engineering production lines, delivering a compelling story to the fleet operators and obtaining "cores" (components inducted into the remanufacturing process) to drive the component remanufacturing process.
6. What are the key processes that deliver a value proposition?
There are three critical processes required for this business model:
1. The process of sourcing "cores" from any of the following:
- Permanently impaired equipment.
- Warranty component pools.
- Like-Kind Exchange [LKE] component pools.
- Surplus assets.
2. The efficiency and effectiveness of the remanufacturing process, driven by:
- What tasks are to be performed that provide the value expected by the customer.
- What is the configuration of the remanufactured
product delivered that will provide a "like-new" product.
- What design-for-remanufacturing elements have been incorporated into the item for optimizing the cost of material recovery and labor.
3. Managerial cost accounting. This process is much more complex than the managerial accounting required for new product manufacturing. This is because:
- Multiple conditions of the same part number used in the remanufacturing process, each with their own cost: new, used, repaired and remanufactured.
- Multiple configurations of the same part number, each with their own cost.
- Multiple transactions for a part number, each with their own cost: sale, exchange, loaner and renew-and-return.
- Multiple ownership of the same part number through out the remanufacturing enterprise requiring a robust management of the accuracy of the balance sheet: end-user owned, lessor-owned, OEM owned, dealer-owned and OEM-supplier owned.
7. What key resources are required to be employed in the processes?
The following are three key resources required for success in managing the remanufacturing process:
• Forward and Reverse Supply Chain Management [SCM] professionals. These individuals are very hard to find. Few professionals have been formally trained in forward SCM and virtually none have formal training in reverse SCM. Highly honed planning and acquisition skills are critical to ensure the management of the business model.
• Process engineers. There is no professional degree such as "Remanufacturing Engineer." The skill sets required to creatively design the tasks for a remanufacturing process are only obtained through "real world" experience.
• IT infrastructure. A large-scale remanufacturing enterprise could not function without it. Emphasis should be on application/backroom software. Again, because remanufacturing is a nascent discipline, little Commercial-Off-The-Shelf [COTS] application software is available.
8. What are the key sources-of-resources employed in the process?
Because the remanufacturing business model is so different from the current build-new-and-sell business model, OEMs should create a remanufacturing enterprise using many sources-of-resources other than their internal capabilities. The key sources-of-resources would be:
• The organization that disassembles and reassembles equipment; this could be done by a low volume production organization, such as Magna International.
• The organization that remanufactures repairable components; this could be performed by the largest equipment dealers or OEM-suppliers who currently perform remanufacturing processes such as Caterpillar's remanufacturing division.
• The physical movement of cores; this could be performed by UPS or FedEx.
9. What is the cost structure?
The cost structure is focused on maximizing the retention of the value-added content of materials used in the remanufacturing process and minimizing the direct labor content related to it. Direct labor costs will be reasonably predictable, but the cost structure of materials will be highly variable; prices of cores and the residual value of equipment could vary dramatically from year to year due to multiple supply and demand issues. As a result of this volatility, a robust accrual accounting system will be required to "smooth" the impact of fluctuating material costs on the income statement and balance sheet. Revenue recognition issues will be extremely important in the construct of financial statements.
The business model described here can help manufacturers evolve into limited providers of remanufactured equipment. The transition will not be easy, but the rewards could benefit your business environment—and contribute to environmental sustainability.
Ron Giuntini is a consultant and principal of Giuntini & Co., Inc. and a member of MH&L's Editorial Advisory Board.