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TAGeX Brands has collaborated with the Rochester Institute of Technology (RIT) and their School of Remanufacturing to develop processes for remanufacturing of Restaurant and Food Service Equipment.
In With the Old
Reconstructed products offer a promising market for many companies. But turning used products into new ones isn't a sure thing.
By JOHN A. PEARCE II
Updated Oct. 20, 2008
Companies looking for new profit opportunities should remember one simple idea: Everything old can be new again.
More than 130,000 companies across the U.S. have gotten into the business of reconstruction -- taking used products and processing them for resale. These products bring in annual sales of more than $300 billion, in categories as varied as plastic bottles, machine tools, medical equipment and furniture, and for many companies they represent a booming business. At Caterpillar Inc., for instance, the remanufacturing operation is one of the fastest-growing divisions in the company.
The profit margins are also compelling. Reconstructed products typically cost 40% to 65% less to make than new ones, meaning much higher margins -- an average of 20% compared with less than 10% for new products. That is true even though reconstructed products often sell for less than new ones. Another plus: Reconstruction lets companies profit multiple times from an initial investment by leveraging existing facilities and expertise.
Despite the impressive performance, there are still many opportunities for growth in reconstruction. U.S. spending on reconstructed products represents less than 2% of gross domestic product, compared with 10% for new manufactured products.
What follows is an overview for companies looking to get into the reconstruction business, drawn from reviewing dozens of corporate initiatives and resulting best practices. I will outline the different types of reconstruction, as well as the types of customers that companies might pursue. I will also examine some caveats companies need to consider.
What Does It Involve?
Reconstruction comes in three forms: recycling, refurbishing and remanufacturing.
In recycling, a used product is broken down into its constituent parts and then used to make a new product, possibly different from the original. Products that are frequently recycled include paper, steel, glass, aluminum, plastic and rubber.
With refurbishing, companies take a product and restore it, aesthetically or mechanically, to its original condition. Typically, this involves a thorough cleaning, followed by the replacement or reconditioning of component parts. Products that are commonly refurbished include medical equipment, office furniture, antiques, electronics and diesel locomotives. Single-use cameras are a particularly good example of the practice: Not only are they cheap to spruce up, they can be rebuilt as many as 10 times after customers drop them off.
Remanufacturing is very much like refurbishing, with one important difference. When the product is rebuilt, it is not just restored to its original condition, it is upgraded with new features or qualities.
For a closer look at the differences between these three processes, consider office workstations. In recycling, a company might strip fabric from the workstation's divider panels and convert it to industrial padding. Refurbishing might involve removing the original fabric and replacing it with new material to make the workstation look as good as new. In remanufacturing, the fabric might be replaced with material that not only looks better but is also flame retardant and stain resistant.
Who Buys the Products?
The customers for reconstructed products fall into six basic types.
Customers who do not want to buy new equipment because it would not fit into their processes. Consider a company that has a complex production line. It might be tough to find new machines that can fit into the existing system precisely; refurbishing or remanufacturing existing machines is often a much simpler course.
Customers who want to avoid red tape. Take municipal transit authorities, which face strict requirements for the motors that power their cars. Getting approval for new designs can be lengthy, complicated and costly. Again, it is easier to go with refurbished or remanufactured gear than to pursue all-new equipment.
Customers who do not have the capital to invest in new equipment, or will not use the equipment enough to make the cost worthwhile. In many -- but not all -- cases, reconstructed goods are cheaper than new ones, which makes them appealing to buyers with limited needs or means. So, farmers with limited acreage, for instance, often prefer remanufactured tractors. Likewise, fire departments in small communities often choose remanufactured fire engines, and corporations whose executives make local flights go for remanufactured airplanes.
Customers who want to extend the useful life of a product that has been discontinued by the original manufacturer. For instance, a customer who is rebuilding an antique car needs parts that are no longer made to the exact specifications needed. However, the customer will often find that the parts are available in "as new" condition as reconstructed products.
Customers who want to extend the useful life of a current product. This, obviously, is one of the broadest categories of customers. People buy a wide range of reconstructed goods that help keep products in good condition at a low cost, including replacement automobile upholstery, kitchen-cabinet refacing, marine compressors, heavy-duty truck transmissions and porcelain-bathtub refinishing.
Customers who are interested in environmentally friendly products. "Buying green" is increasingly popular among corporate purchasing departments, as well as individual consumers. Remanufactured goods are often a perfect fit for these customers, since reconstruction reduces the need to buy and use high levels of energy and virgin materials in creating products.
Customers are showing that they are prepared to shell out higher prices for environmentally sensitive remanufactured goods. Buyers of remanufactured lumber, furniture, flooring and millwork, for instance, are willing to pay an 18% premium over the prices of equivalent new products, and are willing to travel an additional 35 minutes to purchase these products.
The Opportunity: Reconstructed products -- used items that are fixed up for resale -- represent a huge profit opportunity for companies in a broad range of industries.
The Market: There are six basic types of customers who pursue reconstructed products. For instance, many eco-conscious buyers are attracted to reconstructed products because they conserve raw materials and take less energy to make.
The Risks: Companies must consider some caveats before plunging into the field. The biggest: Companies that do the best at rebuilding products are usually the ones that built those products in the first place.
It is not just consumer interest that is driving the growth of this market. State governments across the U.S. are implementing laws and guidelines that benefit companies engaged in product reconstruction. For instance, nearly 30 states have introduced legislation that calls for recycling electronic waste to keep it out of landfills.
What Are the Risks?
The biggest caveat about reconstruction is that some forms require lots of know-how. Indeed, the job is often best suited to companies that already make the products in question. It is very tough for companies to simply plunge into reconstructing products without being intimately familiar with the manufacturing processes that initially created them. Not only that, if a company is new to an industry, it can take lots of sales work to build up a market for reconstructed wares.
Each variety of reconstruction has special challenges. At first glance, recycling seems inviting. Entry barriers can be low; raw materials, for instance, are often cheap. However, the job of collecting those materials and transporting them to a recycling facility can vary greatly in complexity, time requirements, predictability and expense. Companies must have the capability to do the pickup and transport economically -- and they must also have the resources, facilities and personnel for processing the materials.
For example, an estimated 300 billion tires lie discarded in the U.S., with more than 270 million added to the total each year. However, the cost of transporting the raw material is high, as are the costs for plant and equipment and, in the cases of sophisticated recycling, maintaining an educated and skilled work force.
What is more, if many companies plunge into a recycling niche, all those entrants end up competing for market share and resources, while driving up the supply of finished goods and driving down prices and profit margins.
Refurbishing adds another layer of complexity. Because companies are restoring goods to new condition, they must be familiar with the design and features of the original product and must possess the capability to disassemble and reassemble that product. Specialized labeling and packaging may also be necessary.
Remanufacturing is even more complicated, since companies are not only restoring products to new condition but upgrading them. Companies must have experts on hand to re-engineer the given products, and a sound logistics system to acquire and retrieve products and then guide them through the production process -- disassembling, sorting, reassembling, inspecting and testing. For an example of what is involved, once again consider Caterpillar, which remanufactures various diesel engines taken from used earth-moving equipment and medium- and heavy-duty truck engines. The process includes the stripping, dismantling, detailed cleaning and complete reconditioning of all 20,000 engine components.
All engines are remanufactured using Caterpillar parts and produced to meet new engine standards using the latest technology, even if it was not available when the engine was originally manufactured.
—Dr. Pearce is the VSB endowed chair in strategic management and entrepreneurship at the Villanova School of Business at Villanova University. He can be reached email@example.com.