Do you want to sell the Circular Economy to a CEO or CFO?

Think money, think of his bonus! Resource savings ok, they also save money, don’t talk
about job creation (it costs money), nor saving the environment or waste (it costs money).

Talk about the superior profitability of the Circular Economy compared to manufacturing
(Apple never manufactured iPhones (Foxconn did) and is now number one worldwide in
selling his smartphones second-hand) – a typical trader of the commodity smartphone.

My following case study on remanufacturing diesel engines is the old school, it omits a key
ECONOMIC issue, namely that “the ROI (return of investment) of a remanufacturing plant of
an object achieves five times the ROI of a plant manufacturing the same object”.

His poses the question: Why are faculties and professors of ECONOMICS still analysing and
teaching “production” and mostly ignoring the competitive advantages of the Circular
Industrial ECONOMY ?
The Harvard Business School published in 1995 its first case study on the PERFORMANCE
ECONOMY, an analysis of XEROX and its slogan “selling customer satisfaction” (today we
would call it “documents as a Service”) but missed out economics and the ROI. Yet the
economic survey of suppliers of new and remanufactured automotive engines showed a
consumer price difference of between 30 and 53 per cent in favour of the remanufactured
engine.
In my case study CATERPILLAR Remanufactured Diesel Engines from 1995, which follows
below, I focused on engineering issues, obstacles and innovation – my field of experience –
and only partly highlighted money, as you will see in the following:
Quote: “Remanufacturing Caterpillar diesel engines. In 1972, the US’ Caterpillar Inc., a
global heavy machinery and engine manufacturer, started remanufacturing its truck diesel
engines supplied to a major OEM at the request of this client. At the time, engine
remanufacturing was standard practice in trucking but Caterpillar doubted its economic
feasibility and was largely unaware of its impact on the environment. Today, Caterpillar is
sold on the economic feasibility of remanufacturing, which it feels has improved the quality
image of its products. Economically, it makes good business sense. The environmental and
social advantages of remanufacturing – versus manufacturing – are perceived but not yet
measured.
Manufacturing and remanufacturing are run as separate activities by Caterpillar, with engine
design priorities still largely determined by the needs of the manufacturing process.
Technically, Caterpillar’s objective is to produce remanufactured parts of the highest quality,
as good as new. In the process, the old engines lose their identity. After disassembly,
components continue independently through an initial quality check and cleaning process
onto the remanufacturing operation, which is done in batches of similar or identical
components, in parallel lines. Remanufactured and new parts are then assembled into
engines, each of which receives a new number and the same guarantee as a newly
manufactured one. Compared to the remanufacturing of individual engines, this process is
more efficient, enables the multiple remanufacturing of parts and components to the highest
quality and allows adapting engines in the first loop to facilitate future remanufacturing.
An average of 14 large truckloads of used engines and parts are delivered every working day
to the Caterpillar plant at Corinth, Mississippi. The same trucks leave with remanufactured
parts and engines, avoiding empty truckloads.
Commercially, Caterpillar had to optimise the return logistics of used engines. In the
beginning, old engines were bought back at scrap value and in competition with independent
engine remanufacturers, and the remanufactured engines were sold at a discount. This
provided no incentive to the owners of the used engines to return the engines to Caterpillar,
nor to include all aggregates and in the best condition. Yet, the profitability of
remanufacturing depends on a return of all aggregates and parts”. End of Quote.
Today, a used engine is bought back for a price of up to 40 per cent of its original value,
depending on its condition. Remanufactured engines are technologically upgraded and sold
at the same price as new ones, under the condition that a used engine is traded in by the
buyer.
The Caterpillar example has proven that the combination of manufacturing and
remanufacturing does enable a company to develop an extended, or even comprehensive,
stewardship for its products. Remanufactured engines and parts are sold exclusively through
its parts distribution network (Caterpillar dealers). In exchange for this exclusivity, Caterpillar
offers its dealers a variety of innovative product take-back incentives, ensuring that they
return a large majority of its parts. These incentives include:
• a buy-back guarantee for unused (unsold) parts inventory,
• a deposit scheme on remanufactured parts and engines (a core deposit fee) as an incentive
for dealers to return used parts to Caterpillar and
• a voluntary take-back of surplus used products at a price above the scrap value.
Caterpillar thus applies a policy of an extended producer responsibility to parts and engines
that goes beyond ‘from grave to cradle’. These voluntary, market-driven solutions also go far
beyond any of the take-back legislation imposed by the European Union for used vehicles.
Whereas the EU directive focuses on limiting environmental damage, the Caterpillar strategy
maximises wealth! The next step might well be to sell performance instead of engines.
The managers and workers of the remanufacturing facility in charge of optimising the
process have successfully used an approach that combines intuition with trial and error. But
there is room to further exploit many of the synergies possible through an integrated design
approach over several life cycles, following the concept of ‘Managing and Designing for the
Environment’. Caterpillar also has a policy of preferred procurement from suppliers that
remanufacture their products, to encourage other component suppliers to also remanufacture
their products – it is walking the talk!
Caterpillar plans to develop specific management and accounting tools that take into
consideration ‘physical asset management’ and the cost and benefits of extended producer
responsibility.”
(Excerpt from Stahel, Walter R. (2010) The Performance Economy, Palgrave Macmillan, p.
231-2. This books details 300 examples of producing, selling and maintaining performance
over time.)