PROMISE project and closing the information loop

PROMISE (PROduct lifecycle Management and Information tracking using Smart Embedded systems) is an international research project to improve product life cycle management practices and increase the availability of information during product's lifecycle. The objective is to increase access to information and allow firms to transform this information into knowledge for competitive advantage. Within this research network, SAP-Promise research project brings an edge to remanufacturing activities in information flow. Both companies and researchers managed to close the loop with logistics. However, closing the information loop never came. Return rates are uncertain, however, companies achieve to control it to a fair degree. For instance by offering lease option, deposits, or cash-backs in the first purchase, yet condition of the product always remained uncertain. Is a returning product ready for direct reuse, or needs remanufacturing or is it too worn out to be even disassembled? Labor costs associated with disassembling a worn out product that is ready to go recycling burden companies and there are no generic rules for remanufacturing/disposition of products arriving in uncertain condition.

While companies can generate their own algorithms for processing returns in uncertain condition, it will never be the optimum unless they have accurate information on the condition of the returned product. SAP-Promise research comes into the scene at this point. Using sensors, chips, RFID tags and middleware software product communicates with company database. This PLM solution enables firms to track condition and the usage history of the products. Before a product returns, firm has information not only on the condition of the product, but he also has information on how it was used. When a product reached it EOL or EOU firm knows what to do with it. Or in other words, the product tells the company what to do with itself!

I’m just talking about end-of-use and end-of-life implications of the project. Think about this project's potential benefits on preventive maintenance practices, input on the product development process and innovation, and consumer behavior analyses...

Remanufacturing in automotive industry

Beginning second half of 2007, Aftermarket Technology Corp. will be handling remanufacturing of front-wheel drive transmissions for Ford and GM. It seems that it is common among automotive remanufacturers to outsource remanufacturing. For instance, about a year ago Land Rover announced CAT Reman as their preferred global remanufacturing provider. This deal also entails remanufacturing of drive trains. Remanufacturing in automotive industry is a fruitful field. I'll discuss this issue soon.

As a last addition to previous posts on cartridge remanufacturing, please see below graph of refilled cartridge failure rates from a report titled “HP InkJet Cartridges vs. Cartridges Refilled at Refill Shops.” This report was featured in Purchasing B2B magazine last year.

Why OEMs should remanufacture?

Yesterday, I discussed about cartridge remanufacturing and controversial issues related to this topic. Particularly, I end up proposing OEM entry into remanufacturing market and cited Lexmark Prebate program. Today, more details on what I think...

Protect your brand name and IP. These are the strategic assets. Refill cartridges are dominating the market, low print quality is somehow associated with the reliability of the printer and call center is receiving calls blaming the printer or the non-reusable cartridge in the first place. Once people believe that your product quality is deteriorating, you are in trouble. Given that assets and market entry is feasible (will talk on this in a minute) start remanufacturing your cartridges. Prevent the IP leak: third parties break into your products, the chips, the software in the chips-they did in the past.
Make profits. If OEM leaves refill to the third party, the losses should be calculated in an integrated manner: not only is the lost sales problem here. I’ll leave the calculation of the damage on the brand name capital to finance people. Plus, look into the lost sales of toner cartridges. Also consider this: sometimes it is more profitable to remanufacture some product types than to remanufacture others: depending on the investments on the assets required for remanufacturing and profit margins choose the feasible ones. In these cases, I personally believe that leaving low- margin+high-investment products to already competitive third party market is not a bad idea. Then the IP leakage. Years and million dollars of investment to R&D goes to waste.
Please your customers. Extending one more service to your customers. Offering reliability, credibility and also incentives, such as cash-backs, discounts etc.
Entry deterrent strategy. If there is money on the table, sooner or later somebody wants to take his share. If you are not interested, a third party will, or sometimes even a competitor. Deter entry by engaging in remanufacturing activities, defend your market.
Valuable information. Once I had the opportunity to talk to an executive from remanufacturing of power tool manufacturer, who is very dominant in US market. He told me that the information arising from disassembling the products is fed into the product development process to improve the design and functionality.

I am not only talking about cartridge remanufacturing. If you think, these points fit well for many other industries too.

Controversial issues in cartridge remanufacturing

HP claims that remanufactured cartridges cannot keep up to quality of new cartridges- therefore they are collecting them and recycling since 1991. A few years ago Lexmark slammed cartridge remanufacturers with its lawsuit. Being controversial, HP and Epson followed them on the grounds of patent infringement. What happens is that: OEMs put chips in toner cartridges to communicate with the printers and to prevent them from accepting refill cartridges.

It did not take too long for cartridge manufacturers to put chips that can trick the printers to accept the aftermarket cartridges. Printers, especially he inkjet ones, are awfully cheap and the strategy is selling a stream of cartridges though the product’s lifecycle as complementary product. Environmentally concerned EU passed a law banning chip three years ago, effective last September. It is really a big revenue loss for the OEMs. Some people who used refill toner cartridge in the past talk about quality problems too. On the other hand, when it comes to intellectual property rights, putting alternate chips to trick printers is really a violation, in my opinion. However, there is a huge amount of money, employment and waste management opportunity out there.

OEMs have the opportunity to enter the remanufacturing market, at least to remanufacture returning products and have a portion of the revenue they make selling a new cartridge instead of losing all refill job to third party. Protect your brand name and IP, make profits, please your customers, and deter entry of third party remanufacturers. Lexmark’s Prebate program is a good example. However, it is not that easy I see: some sources report the return rates for Lexmark range about 30%, and remaining goes to waste. I searched for more recent and accurate data on the return rates. No luck right now, but I will update you as soon as I have it.

On China's remanufacturing efforts

In the previous post I told you about the letter of intent Chinese government and Caterpillar has just signed. First, this letter reportedly motivated by the Chinese government attempts to create an environmentally sustainable industry. It is long expected since the hazardous computer waste has been residing in rural areas, and causing, god knows, how many different diseases, dolphins got extinct because of the heavy water pollution…

However, is it really that? Pleasing environmental groups and actually attempting to “sustain” is a small part of this whole act. Now let’s speak some numbers. In a previous post, I talked about cost breakdown of remanufactured vs. new products and in addition to tha,t we know everyday raw material and oil prices climb up. A remanufactured product cost about 30% of a new one and 40% of the total cost is materials while 60% is labor. A new product 70% is material and 30% is labor. You do the math: Besides labor cost advantages of manufacturing in China add the raw material cost advantage, then add the “socially responsible” manufacturer image and positive environmental impact. We will all see in the long run what a competitive advantage remanufacturing will turn out to be for China.

If you’d like to learn more about pollution in China, please click here.

Some numbers and CAT

Last summer, a Wall Street article reported some numbers on Caterpillar’s (CAT) remanufacturing activities. 1.5 billion in a total of $36 billion revenue. Moreover, CAT expects this market to grow about 15-20% annually. According to this article whole remanufacturing market values to $100 billion*.

More numbers from another article*: in 2005, Caterpillar received 135 million pounds of components. 70% or 2.2 million units processed into remanufactured products. Remaining 30%, certainly, did not go to waste, but recycled.

CAT is one of the most popular companies featured in press with its remanufacturing activities. Capital goods industry provides a natural growing field for remanufacturing and CAT is not hesitant to take initiatives to reap more from this opportunity: First, the announcement of remanufacturing division, then the acquisition of Progress Rail and recently, their cooperation agreement with China to help develop Chinese remanufacturing industry. I will talk about the latter in another post but... Go CAT!


* December 2005 Commerce Department
**September 2006

Entrepreneurs in reverse logistics

Cycleon is a Netherlands based third party reverse logistics provider. Founded by an MBA graduate from Insead, Cycleon serve consumer goods companies with mailable size products. It seems that they have quite coverage in Europe through different postal providers. Their business model provides an excellent fit for companies who cannot justify large investments in reverse logistics. They use postal carriers (not the express carriers and hence have the cost advantage) and let consumers drop the returned products to the postal office in prepaid boxes.

Moreover, the company takes into account the inherent need for information in processing returns and they provide data on condition, return reason, how much time spent in the return process etc... I believe the integration of returns from a number of countries by such a third party provider could substantially help firms plan their product returns accurately by reducing uncertainty.

Everything old is new again!

Recently, BusinessWeek published a feature article (by Brian Hindo and Michael Arndt) recognizing the profitable interface of product recovery activities. Although, both business and sustainability aspects were around for more two decades, sustainability was somehow always dominant.

Article emphasizes the profit motive in the face of increasing prices of resources and authors take us for a virtual tour in Caterpillar Reman operations. For companies ignoring the potential in remanufacturing, this article can act as a wake-up call. Average cost breakdown of new vs. remanufactured products revealed by a Boston University study speaks for itself (see below graph).

A short excerpt on the hidden potential:


“...the fuel injector case, a little groove-headed piece of metal that helps spray fuel into a diesel engine's combustion chamber. The cases would usually come back into the reman facility pretty beaten up, the grooves worn down after half a million miles of use. "For years we just threw them in the scrap bin," says Fisher. "The part costs about $3." But engineers found a way to reconstitute the groove to like-new condition. Fisher explains: "We actually take a laser [and use it to] put metal inside that groove, and then remachine it. It costs us 50 cents. And we're doing about a million of these a year.”