Given that we're in a global recession that could take years to recover from, many manufacturers are becoming more interested in minimizing the costs of raw materials and supplies. One of the best ways to do this is through “product reconstruction” -- recovering used goods, processing and reselling them.
Product reconstruction, which covers a continuum of activities -- recycling, refurbishing and remanufacturing -- allows companies to sell goods at lower prices than if they were to assemble nearly identical new products. In fact, in most cases, it costs 50% to 75% less to make remanufactured products than new ones. And the average profit margin for product-reconstruction activities is 20%, while margins in the manufacturing industry typically range from 3% to 8%. Further, product reconstruction within a corporation can provide new revenue, allowing a company to profit several times from its initial investment.
In the past, companies rarely designed products with ease of disassembly in mind. As a result, disassembling products is typically time-consuming, expensive and difficult. But product reconstruction has started to improve as more and more manufacturers are beginning or accelerating efforts to reconstruct their own products -- often spurred by their desire to prevent others from doing so and reaping the profit.
Both state and federal governments are promoting this trend, in part through legislation. Meanwhile, organizations are developing both public and private programs. The U.S. Environmental Protection Agency, for instance, is partnering with companies including Best Buy, AT&T Wireless and Sony to encourage and facilitate the reconstruction of used electronics.
The private sector has launched some of its own initiatives. The best known is the Dow Jones Sustainability World Index, which recognizes the top 10% of sustainability-driven companies worldwide, based on assessments of economic, social and environmental criteria. Among 58 industry groups across 24 countries, 318 companies met the standards for listing on the index in 2007-2008.
Let's examine the three types of product reconstruction activities. First, there's recycling, whereby used products are broken down into their constituent parts, which are then used to manufacture new products. Recycling serves two different functions: It reduces raw material costs and can also provide new revenue sources when a company sells the raw materials to other manufacturers. According to recent estimates, the U.S. recycling industry has 56,000 facilities and 1.1 million employees, and reports $236 billion in annual revenue. It can recycle aluminum, glass, paper and rubber, among other things. And certain products, such as batteries and computers, have active recycling operations.
For recyclers to succeed, the companies must be familiar with the manufacturing process that creates the initial product. Consider companies that recycle rubber tires. They must understand the chemical processes that give rubber its characteristics. Then they can scrap tires into the forms needed to produce recycled products. It also helps to have low entry barriers to an industry and copious supplies of material. Finally, companies need to be able to recycle the materials economically: This means having the resources, facilities and personnel for processing the materials.
Second, there is refurbishing, which entails restoring products to their original condition so they can be reused. Refurbished products, which typically undergo a thorough cleaning process followed by replacing or reconditioning component parts, include medical devices, office furniture and industrial electronics, as well as toner cartridges for laser printers. When toner cartridges are spent, for example, people can return them to the manufacturer or a refurbisher, often free of charge. During the refurbishing process, a company will disassemble the cartridges, replace their worn components, clean the sections, add toner and reseal the cartridges. These cartridges are equivalent in performance and print quality to new ones. They meet the standards and specifications of the original, yet they sell for only 40% of the original's price. Moreover, companies can repeat this cycle of refurbishing and reselling several times.
A company that refurbishes products for resale must know a lot about the design and features of the original product, be familiar with the product's market and be able to disassemble, repair and reassemble the product. Successful refurbishers especially need to be able to acquire used items efficiently, which may involve retrieval, customer drop-off or mail-in collection. Conversion also requires that companies refurbish items so that they look and function like a new product, which can be labor-intensive. Finally, a refurbisher has to either establish its own distribution system or contract with wholesalers or retailers.
Third, there's remanufacturing, which entails disassembling used products, repairing or replacing worn or obsolete components and adding enhancements. It includes all aspects of refurbishing but substitutes upgraded components in order to improve products.
Remanufacturing usually requires the most product knowledge and expertise, given that it requires refurbishing the entire product, along with overhauling, replacing and upgrading critical components. A company could rebuild airplanes or machine tools, computers, office equipment or auto parts. Because remanufactured products are both refurbished and enhanced by new technologies, original equipment manufacturers have significant advantages over independent remanufacturers in industries that have high price tags or rapid technological advancements. Xerox Corp., for example, not only saves $200 million annually by remanufacturing copiers returned at the end of their lease contracts, but it also inhibits competition by placing state-of-the-art remanufactured copiers back into service against competitors' higher-cost new models.
This article is adapted from “The Profit-Making Allure of Product Reconstruction,” by John A. Pearce II, which appeared in the Spring 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.