How to unlock the potential value of remanufacturing?

Advies
Programma- en Projectmanagement
New Business
How to unlock the potential value
of remanufacturing?
Project High Tech Remanufacturing Business Development
Business modeling
Final report
Project co-funded by the Logistics Accelerator Program
Marko Vreeswijk
Breda, May 2013
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Content
1. Introduction
2
2. How to unlock the potential value of remanufacturing?
4
2.1 Definition of remanufacturing
4
2.2 Remanufacturing, parts harvesting and recycling
4
2.3 Strategic motives for remanufacturing
5
2.4 Earning potential of remanufacturing
5
2.5 Two basic business models for remanufacturing
6
2.6 Remanufacturing: from opportunity driven to strategy driven
7
2.7 Key obstacles for remanufacturing
7
2.8 How to address these challenges/obstacles
8
3. Conclusion & recommendations for further research
9
Appendix A: Business model framework by Osterwalder
10
Appendix B: Two basic business models (in more detail)
11
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1. Introduction
Remanufacturing (sometimes also called refurbishment) means ‘fixing’ used equipment in order to
give them a second life. The main advantage of remanufacturing is that by extending the economic
lifetime the service period is also extended. This can dramatically increase service revenues due to
a larger installed base (see figure 1). Remanufacturing can also strengthen the sales proposition of
existing products. And it is sustainable: re-use of parts and materials is an element of the ‘circular
economy’. From a development perspective, remanufacturing offers substantial opportunities for
the Brainport region as well as for individual companies in the region to improve their own position.
Figure 1: increased revenue through remanufacturing
The potential value of remanufacturing is currently not fully exploited by OEMs (Original Equipment
Manufacturer) and suppliers in the south of The Netherlands. The project ‘Life Cycle Management II’
provided ample evidence and reasons:
 Remanufacturing is at present not a boardroom priority for most OEMs;
 Investment in remanufacturing conflicts with budgets and production capacity for new
equipment;
 Local suppliers are underutilized with regard to remanufacturing.
Therefore BOM and a number of companies initiated the project: High Tech Remanufacturing Business Development (HTRBD). The purpose of the project was to get a better insight in remanufacturing, the challenges for further development of remanufacturing in the Brainport Region and possibilities for cooperation between OEMs and OEMs & suppliers.
The project was divided in two sub-projects:
 Supplier Base: cooperation in pro-active End-of-Life Management on the level of parts, including the development of a framework for a supplier base. This project was supported by
Recomax;
 Business Modeling of Remanufacturing: development of an integral best-practice business
model for remanufacturing. This project was supported by Mare Advies. ASML, FEI, Océ and
Philips Healthcare were four OEMs that participated in this sub-project.
This report provides the main outcomes of sub-project ‘Business Modeling’. The outcomes are based
on desk research and seven workshops with the OEMs, in which the various business models were
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discussed in order to develop a best-practice business model and to explore possibilities for mutual
cooperation.
The outcomes of this project are relevant for both OEMs and OMMs (Original Module Manufacturer),
but also for policy makers. It provides more insight in remanufacturing, the advantages of remanufacturing and how the potential of remanufacturing can be unlocked for companies in the Brainport
region.
For further questions, please contact Michel Weeda of the BOM or Marko Vreeswijk of Mare Advies:
 Michel Weeda, BOM: 06-52633045, [email protected];
 Marko Vreeswijk, Mare Advies: 06-51075375, [email protected]
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2. How to unlock the potential value of remanufacturing?
2.1 Definition of remanufacturing
Figure 2 shows the definitions used
in this report. The main difference
between an overhaul (which is considered as a service activity) and
refurbishment or remanufacturing is
that the equipment is relocated,
often also with a change in ownership. The main difference between
refurbishment and remanufacturing
is that remanufacturing uses standardized industrial processes (thus, in
a controlled industrial environment).
Figure 2: definition of refurbishment and remanufacturing
The definition of remanufacturing is
based on common definitions used
by a number of remanufacturing associations. It is important to note
that every industry uses (slightly) different definitions.
2.2 Remanufacturing, parts harvesting and recycling
In figure 3 the green area shows the
type of equipment for which remanufacturing could be interesting. Important drivers are the value of the
equipment
and
the
technical
lifespan. Other important drivers
are the technical complexity of the
equipment, market characteristics
and the environment in which the
equipment is used. Another important driver is the number of
products; for large numbers remanufacturing could be very interesting,
for example in the automotive inFigure 3: potential of remanufacturing determined by value & lifespan
dustry (on parts/module level) is
remanufacturing already a mature
business. The figure provides a generic way of thinking, but the real remanufacturing potential varies by equipment.
Recycling is economically viable for all types of equipment, especially as the earning potential of
recycling has increased in the last decade. Service parts harvesting (recovering service parts from
used equipment) is also profitable for most equipment types.
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2.3 Strategic motives for remanufacturing
Most OEMs have to deal with a certain return flow, both for service purposes and used equipment.
Used equipment is mostly sold or moved to a broker (preferably certified). An important disadvantage of using brokers is that the OEM loses control of the equipment. The OEM also loses the opportunity to develop an additional source of income. What are additional strategic motives for an
OEM to start with remanufacturing?
Remanufacturing is profitable business: remanufacturing by itself is an additional source of income.
But by increasing the installed base, the OEM is likely to sell more service, more parts, more upgrades, and – if applicable – more consumables. Furthermore, selling remanufactured products can
strengthen the sales proposition in current markets, but also unlock new customer segments and
markets. And those new customers might buy new products in the future!
Remanufacturing shows commitment to the customer: extending the life of the product by providing
a second life raises the residual value for equipment and helps to reduce cost. It thereby contributes
to the profitability of customers. Moreover, by showing trust in your own equipment over a longer
period of time, the quality perception of the OEM equipment improves.
Remanufacturing protects the brand: OEMs invest significant sums to create a solid and trustworthy
brand. The customer experience is thus very important, especially for a repurchase. Therefore, it
becomes increasingly important to maintain a firm grip on the use and handling of the branded
product, also in its second or third usage period. In general, other companies (like brokers) cannot
offer the quality of an OEM (this depends amongst others on the complexity of the product). Furthermore, the OEM gains insight in the use of their products. Knowledge that can be used to develop
new products. Last but not least, the OEM gets access to spare parts.
Remanufacturing helps the environment: remanufacturing is also ‘green’ business. The environmental costs of remanufacturing are much lower than for producing new equipment. The same applies
for the re-use of parts. So, remanufacturing is a corporate responsibility and clients will increasingly
demand this type of behavior; for the government it becomes a condition to do business. Finally,
remanufacturing can be a valuable source of rare materials which will become increasingly scarce in
the coming decade.
2.4 Earning potential of
remanufacturing
Figure 4 shows the earning potential
(integral margin) of remanufacturing. The percentages shown are indicative, based on high-tech equipment. Margins will vary by industry,
market position of the OEM and
technical developments.
The total margin of remanufacturing
consists of three key components:
Figure 4: earning potential of remanufacturing
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(a) The trade transaction can be profitable. This depends of course on the estimate of the
trade-in price of the machine at that specific moment. Buying a used machine may be risky
if there is no buyer yet. In that case, the financing risk rests with the OEM until the machine
is resold. But financial companies seem to be willing to play a role in financing the transaction, which will of course impact the potential margin of the OEM. The benefit to the OEM is
that he does not have to finance the deal, decreasing capital requirements;
(b) The remanufacturing activity can be profitable. Refurbishing the core, replace or upgrade
parts or even remanufacturing the whole equipment is basically a profitable activity. In general, the device is restored so that it can be sold as ‘as good as new' or ‘almost new’. The
sales price will therefore approach the price of a new one. The (cost of) activities in the remanufacturing process need(s) to be in line with the expected sales price;
(c) The 2nd-life service can be profitable. If the equipment gets a second life, it is also an opportunity to sell a service contract. An important advantage of remanufacturing is that it
should increase the total installed base and thus also the earning potential of the OEM. Traditionally, margins of after-sales activities (service, upgrades, consultancy, service parts)
are much higher than for selling the equipment. This margin component is expected to be
the largest.
2.5 Two basic business models for remanufacturing
Based on the different business models of the four OEMs involved in this project, we developed two
basic business models for remanufacturing (see figure 5). The business model framework of Osterwalder (see appendix A) is used to present the two models.
Figure 5: two basic business models for remanufacturing
More details of the two basic business models can be found in appendix B.
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2.6 Remanufacturing: from opportunity driven to strategy driven
In most organizations remanufacturing is opportunity driven: it starts with a request from a customer
when the OEM sells him a new
product to replace the current
one. Trade-in is the most common solution, selling the used
equipment either to other customers or brokers.
When remanufacturing has a
clear position within the organization and its strategy, this
changes the way business decisions are made. The focus of
the organization changes from
selling new products to increasing the profitability of the current and future installed base,
in which remanufacturing has an
Figure 6: stages of maturity
important role. Life cycle management becomes crucial. The
OEM starts to manage his installed base pro-actively and gets more grip on customer satisfaction
throughout the whole lifetime of the product. Then even a change in business model could be considered: from selling equipment to selling the use of the equipment (pay per use). .From experience
we learned that profit contribution of remanufacturing increases when OEMs reach a higher level of
maturity (see figure 7 with four stages of remanufacturing maturity).
2.7 Key obstacles for remanufacturing
Remanufacturing processes are quite different from the regular processes to develop and sell new
products. It requires another mindset, which is not easy to combine with the traditional emphasis on
new products. All efforts, management attention, and processes (including ICT) focus on developing
and selling new products and, increasingly, on service. And that is understandable, as this is the lifeline for the continuity of the organization. As a consequence, remanufacturing is not a priority.
In this context it is a challenge to develop a remanufacturing business. It is often difficult to meet
the internal financial targets (margin %), especially if remanufacturing costs are visible and income
is not. The additional income of remanufactured equipment in service, consumables and spare parts
is often registered in other business units. Overhead often adds little value to remanufacturing, but
the surcharge puts a drag on profitability.
The reward system of sales stimulates the sale of new products, but does not help to sell used (remanufactured) products. Furthermore, OEMs often regard the sale of used equipment as cannibalization of new product sales. Within the organization remanufacturing is often seen to disturb the regular controlled processes and procedures. It is then difficult to get priority and capacity for remanufacturing.
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Moreover, the knowledge of the older products has often evaporated, particularly if the information
has not been adequately stored. But even if the information is available, the (best) engineers focus
on the development of the next generation of products, not on re-engineering old products.
Last but certainly not least, remanufacturing is complex and has specific operational challenges, like
trade-in management, configuration (management), end-of-life parts, and knowledge management
of the older products. Remanufacturing requires dedicated processes, like the assessment of (the
value of) the old equipment, the return process and the remanufacturing process itself.
2.8 How to address these challenges/obstacles
The question is how to address these obstacles and challenges and whether they can be addressed
within the own organization. A number of companies show it is possible, but it remains a struggle to
get enough attention for remanufacturing. A change
in the board often leads to renewed discussions
about the value and sense of remanufacturing. The
growing attention for sustainability helps in these
discussions.
It is not necessary to organize remanufacturing within the company. OEMs can also create another entity
for the remanufacturing business, outside the corporate borders. The advantage is that remanufacturing
is core business for this new entity and all processes
can be designed specifically for remanufacturing.
Figure 7: 4 different business models
The two basic business models apply to both the internal and the external solution (see figure 7).
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3. Conclusion & recommendations for further research
The main conclusions are:
 Remanufacturing is profitable business;
 Remanufacturing can strengthen the current and future position of OEM’s/OMMs in the market;
 Remanufacturing is ‘green’ and fits in the ‘circular economy’;
 Remanufacturing is difficult to develop within the own organization.
The critical question drawn from the main conclusions is therefore: how to unlock the potentially
large value of remanufacturing? Figure 8 shows a roadmap for how to unlock the value, but it is possible to create value within each stage. The end stage is called ‘Reman BV’, which is a working title.
This Reman BV can either work exclusively for one OEM, but also for multiple OEM’s. We have identified multiple opportunities for cooperation that could be developed if Reman BV would be working
for more than one OEM:
 Sharing field service engineers;
 Sharing a supplier network;
 Scale in Operational processes;
 Scale in Logistical processes;
 Knowledge management
processes.
Based on the outcomes of this project we have the following recommendations:
 Assess whether the ideas
and models developed in
this project can also be
applied to other businesses
Figure 8: Roadmap
and equipment. For which
OEMs and OMMs would remanufacturing be interesting?
 Determine additional steps that are needed to develop the potential of remanufacturing for
Southern Netherlands in line with the roadmap shown in figure 8.
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Appendix A: Business model framework by Osterwalder
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Appendix B: Two basic business models (in more detail)
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