Green SCM and remanufacturing

In this blog, I talked about remanufacturing from a profit perspective, but never cleared the role of remanufacturing in supply chain context. This post will be about remanufacturing’s place in a more broader scope, in green supply chain management. I believe it will be helpful for the readers of this blog, if I cleared the function of remanufacturing in a green supply chain.

Green supply chains first emerged beacuse of sustainability concerns. It was not the “profit” view at the beginning, on the contrary, it was the pressure from environmental groups, the urge to keep up with the trend for building social capital and express corporate social responsibility- but the most important driver was the government legislations and regulations. When you search the web, you most probably find lots of articles on waste reduction by recycling or reducing packaging, energy conservation, etc... However, the real deal in green supply chains began when “reuse” came into the scene. In time, cost view transformed into profit view, but how?

Companies learned reuse of raw materials extracted from end-of-life products or they saw the potantial in reselling returned (in good condition) or defective products by remanufacturing, refurbishing or reconditioning them. Honestly, reuse was not the newest or the most innovative idea in business. The leasing businesses, which deal with life cycle management as a part of their core business did it for decades. However, for instance, companies in consumer goods industry seemed to stay precautious about reuse until recently.

Now, remanufacturing is a part of the bigger effort for keeping the supply chains green. As a process the term “remanufacture” refers to restoring a used product (or a component) to acceptable condition for resale. In a green supply chain context, remanufacturing is a production strategy whose goal is to recover the residual value of unused products. It has more value than recycling because it is not just about recreating a portion of raw materials, although it can do so. It can contribute to the bottom line of the supply chain by (1) keeping it green in a profitable way, (2) providing manufacturing and after sales services with parts extracted from non-usable products, (3) enabling company to gain from end-of-life products, which otherwise end up in disposal or recycling while it still has value in it (4) giving the company the opportunity to resell (and make profits from) the returned (good or defective) products.

Finally, remanufacturing in numbers. Mostly small and medium sized remanufacturing businesses have estimated sales of $53 billion per year and a remanufactured product can cost consumers 50 to 75 percent less than a new product (National Center for Remanufacturing and Resource Recovery, 2006). Besides remanufacturing industry’s remarkable economic consequences, it also has tremendous impact on energy conservation. Annual energy savings resulting from remanufacturing activities worldwide is 120 trillion Btu's, which equals the electricity generated by eight nuclear power plants.

Please check Best Practices in Green Supply Chain presentation by Taylor Wilkerson of LMI, and see how many places you can put reuse activities, especially remanufacturing.

Decision making in remanufacturing: The role of volume uncertainty

About a month ago, I began analyzing the decision making variables and the environment in remanufacturing industry. In a January post, I talked about the importance of strategic assets. Today, I will continue the series with uncertainty. I personally see two kinds of uncertainty in a remanufacturing environment. First and foremost is the volume uncertainty.

We can broadly define volume uncertainty in remanufacturing as the inability to predict the amount of cores returned from the market. While the degree of uncertainty depends on the industry (think about capital goods reman vs. consumer goods reman), in general several consequences may emerge in a high uncertainty environment:

Let's talk about an OEM outsourcing its remanufacturing. Uncertainty urges the OEM to continually update the contracts and causes soaring coordination and renegotiation costs. On the other hand, suppliers can experience high production costs and excess capacity, and OEM can experience stock-outs or excess inventory. I am not going to enumerate all alternatives, but look at this company; there is high uncertainty, coordination (and also operational)costs are high for both parties, both parties are in fact miserable! So in fact, OEM should have owned the product acquisition channel to coordinate return of products more effectively and decrease the costs. As the uncertainty increases the frequency of updating and renegotiating increases and firm seek other means for coordinating these activities in a cost-minimizing manner.

The volume uncertainty has complicating role in remanufacturing times, quality, quantity and material planning. However, don't forget that it is a controllabe decision variable. For instance, Xerox provides lease option to its customers to reduce the uncertainty in copier collection. Moreover, to further reduce uncertainty Xerox Europe provides return services for products they sell or lease and have an approximate return rate of 65%.

Soon, the role of technological uncertainty...

HP vs. Store Brands

An article published in Businessweek (by Steve Hamm) yesterday brings back the debate on cartridge remanufacturing to this blog again.

Mainly, article talks about HP's efforts to phase out store brand inkjet cartridges. There are many claims: HP offers more margin to big office supplies stores. Although Staples does not make a comment on this, they announced that they are going to phase out Staples brand HP replacements while they continue to sell Epson, Canon and Lexmark refills. Office Depot and Best Buy will continue to sell their store brand cartridges, for now...

Some time ago I heard that HP rejects the use of chips in their cartridges. But now, they use a more aggressive marketing strategy to virtually eliminate all alternatives to refill. Consumers are getting smarter, people look at total cost of ownership with printer and copier type of products. OK, they do not like the chips, but what if their long term sales decline because consumers prefer other cheap refill alternatives and buy rival products. I hope all these risks HP taking are calculated risks.

Please read the full article here.

Caterpillar again

Caterpillar recently acquired two more companies. The deal includes Franklin Power Products (FPP)and International Fuel Systems, which are subsidiaries of Remy International. Cat offered 150 million dollars in cash to close the deal. FPP is a leading remanufacturer of on-highway light- and medium-duty truck diesel engines and engine components. International Fuel Systems is a premium provider of remanufactured diesel engine components such as high pressure fuel pumps, fuel injectors and turbochargers.

With the acquistion of these two companies Cat Reman becomes the leading diesel engine remanufacturer in North America. The boss of Cat Reman, Steve Fisher marked the acquistion as follows:

"This acquisition represents an excellent strategic fit between Cat Reman and these two companies. It increases our overall product and service offering, and will provide a platform for future growth opportunities for Cat Reman"