CASE
STUDY on by
Walter R. Stahel Table
of Contents History of the company - a change in
management style The 'nuts and bolts' of the Caterpillar
remanufacturing business The economics of the remanufacturing
business Sustainability impact of remanufacturing Opportunities and innovation in the
remanufacturing business
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EXECUTIVE SUMMARY In
1972, Caterpillar Inc. started remanufacturing diesel engines at the
request of a large client. At the time, the company doubted the economic
feasibility of remanufacturing and was largely unaware of its impact on
the environment – but very few people knew of sustainability in 1972. Today,
Caterpillar is convinced of the economic feasibility of remanufacturing,
and the additional benefits with regards to the quality image of its
products. It all makes good business sense. The environmental advantages
of remanufacturing - in comparison to manufacturing - are perceived but
not yet measured; the even larger positive impacts of remanufacturing on
sustainability are slowly emerging. Manufacturing
and remanufacturing are run as separate activities by Caterpillar, but
engine design priorities are still largely determined by the needs of
the manufacturing process. The managers and workers in the
remanufacturing facility, using quite successfully an approach that
combines intuition with trial and error, are in charge of optimising the
remanufacturing process. However, many of the synergies possible through
an integrated design approach over several life cycles, in the sense
of the concept "Managing and Designing for the Environment",
may be lost. Most
remanufacturing activities, including options such as the technological
upgrading of goods, suffer today from isolation due to an absence of
outside innovation and stimulus that is provided to manufacturing
activities by a large number of outside players (universities,
consultants). Exchanges of experiences between the different companies
with remanufacturing activities are mostly concentrated around the
annual APIC-conferences (American Production and Inventory Control
Systems, an industry organization) and the new research program on EBN,
Environmentally Benign Manufacturing, by NSF, the National Science
Foundation. Quality circle discussions and other exchanges of
experiences between the different departments involved in
manufacturing and remanufacturing activities within a company could
greatly enhance the feasibility of remanufacturing. Remanufacturing
is part of an 'economy in loops', or a sustainable service economy,
which includes an extended producer responsibility 'from cradle back to
cradle' – in the case of Caterpillar on a voluntary basis. Legislation
promoting this new loop economy is coming forward in the European
Union (e.g. the 'take-back' obligation for manufacturers). The economic
thinking supporting these new concepts is, however, still in its
embryonic stage. In order to judge the real success of its
remanufacturing activities, Caterpillar will probably need to develop
specific management and accounting tools which take issues such as
'asset management' and the cost and benefits of extended producer
responsibility into account. HISTORY OF THE COMPANY - A CHANGE IN
MANAGEMENT STYLE The
decision to start the remanufacturing (reman) of diesel engines was
taken by Caterpillar in the early 1970s, in response to the request
from a major new customer (Ford Motor Co.) which selected Caterpillar as
OEM-supplier of diesel engines (the 1100 series) for a new delivery van.
At this time, the remanufacturing of components by OEMs was standard in
the U.S. car and truck business, but not in Caterpillar's core
business of heavy earth moving equipment, where independent local remanufacturers
were active. The
truck diesel engine business was dominated by the Cummins Diesel
Company, which had own remanufacturing plants and even its own trademark
for remanufactured engines. In order to compete in the field for truck
engines, Caterpillar had to adapt its management strategy accordingly.
It started remanufacturing in a manufacturing plant in Bettendorf, Iowa,
in 1972, near its Peoria headquarters. The plant was to remanufacture
the 1100 series engines as part of its product support programme. After
first experience in the OEM business with the 1100 series engine, Caterpillar
commissioned 1979 a strategic study on the North American truck market
and, as a result, decided to expand into the truck diesel engine market,
as well as to expand its remanufacturing activities to the engines of
its earth moving equipment. Caterpillar's strategy to diversify into the
truck engine business and to continuously improve its remanufacturing
capabilities enabled it, by 1995, to gain a substantial share of the
U.S. market - within a period of only 15 years and against strong
competition. In
1982, ten years after its first steps into remanufacturing, Caterpillar
moved its remanufacturing activities from the pilot plant in Bettendorf,
Iowa, to a new facility in Corinth, MS, dedicated exclusively to
remanufacturing. This facility was set up in a disused (empty) factory
building. In 1985, Caterpillar opened its third plant dedicated
exclusively to the remanufacturing of engine parts and engines. The
main reason for the reluctance observed with many manufacturing
companies to start the remanufacturing of their products is twofold:
Firstly, the economic fear to reduce the volume and hence the economy of
scale in their existing, highly productive but capital intensive
(automated) production lines. Secondly, the fact that remanufacturing
is a regional activity and necessitates a decentralization of the
business, as well as the fear that remanufacturing may correspond to an
'export of jobs and know-how' - both of which are in contrast to what
most management gurus tell you to do The
Caterpillar remanufacturing plant in Corinth has proved that the first
argument is wrong, as independent remanufacturers will do the
remanufacturing anyway, simply because there is a demand in the market
for cheaper alternatives! But OEMs (Original Equipment Manufacturers)
have a substantial advantage over many independent remanufacturers, as
OEMs are best placed to guarantee the highest possible quality levels
for the reman products. The quality standards of remanufactured parts
can be exceptionally high for a reason inherent in remanufacturing:
every part is checked for quality defaults, whereas only sample checks
are made in manufacturing processes. Remanufacturing therefore increases
a company's market share, even if it may diminish its (new)
manufacturing volume and slightly reduce its economy of scale in
manufacturing. And it may also increase a companies reputation for
quality products. The
Caterpillar example has also proven that the combination of
manufacturing and remanufacturing does enable a company to develop an
extended, or even comprehensive, stewardship for its products. Engines
and parts remanufactured by Caterpillar are sold exclusively through the
Caterpillar parts distribution network (Caterpillar dealers). In
exchange for this exclusivity, Caterpillar offers its dealers a variety
of innovative product take-back incentives, ensuring that the large
majority of its parts are returned by the dealers to Caterpillar. 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, -
- a
voluntary take-back of surplus used products at a price above the scrap
value. This
means that Caterpillar already applies a policy of an extended producer
responsibility, 'from cradle back to cradle', to parts and engines. The
sum of these (voluntary, market driven) take-back solutions goes beyond
any of the take-back legislations proposed by some European
governments (notably Germany) and the European Commission in Brussels.
This concept by Caterpillar should therefore by of a considerable
interest to these authorities. An
average of 14 large truckloads of old engine parts are delivered every
working day to the Corinth facility. The same trucks leave with
remanufactured parts and engines, thus largely avoiding the problem of
empty truckloads. THE 'NUTS AND BOLTS' OF THE REMANUFACTURING
BUSINESS Caterpillar's
decision for Corinth, a location at a considerable distance from the company's
headquarter in Illinois, had several reasons. Land is inexpensive in
this area, and remanufacturing needs more space and storage area than
manufacturing (see economics). Corinth is on the border of Mississippi
with Tennessee, and therefore a more central location for the North
American market, which means doubly reduced transport costs (in
take-back and redistribution). Labour costs are lower in Mississippi
than in Iowa. And finally, Caterpillar with over 700 employees is a
major employer in the Corinth area (population of 12'000, relatively
high availability of labour of all qualifications) and can thus
contribute substantially to the local economy. The
area of Corinth also has space for expansion. And expansion of the
remanufacturing business is impressive: A second remanufacturing
facility was opened by Caterpillar in 1989 in Mexico, specialized on
the remanufacturing of fuel nozzles. And a new Caterpillar plant
dedicated to the remanufacturing of diesel engines was opened at the
end of 1995, twenty miles from Corinth, adding 30% to the
remanufacturing capacity of Caterpillar. A
hidden advantage of the area of Corinth may be the fact that it is
situated in the 'Bible belt' of the U.S. - an area where traditional
values of the early settlers (such as no alcoholic beverages in
restaurants) are still in high esteem. This mental familiarity with the
preservation of existing values may be an advantage in working in the
field of remanufacturing. Remanufacturing
is still an area largely unexploited by engineering research, and offers
therefore plenty of opportunities at different levels. This also means
that there is plenty of room for innovation and improvement - for
those who can see it and take advantage of it! The remanufacturing
facility in Corinth employs a team of highly motivated young engineers
as a 'salvage development group', also in charge of quality control.
One of their imaginative activities consists of visits to the plant's
scrap yard, in order to look for 'money that is being thrown away':
expensive components which could be repaired if an appropriate
technique was developed, or components which are candidates for
repairs but are thrown away in disassembly. The right decision for a
part to be scrapped or remanufactured is one of the basic problems
inherent in remanufacturing - and one that is fundamentally different
from manufacturing! In remanufacturing, the preliminary cleaning and
stripping (separation of engines and auxiliary components) of the 'dirty
old engines' at the very beginning of the remanufacturing line is the
place where workers decide if a component will go to scrap or to
remanufacturing. Yet for these people who are doing a physical job,
handling water hoses and big tools, dressed in boots and rubber clothing
and standing on a slippery surface, it is a mentally difficult task not
to make mistakes in the judgement of what looks like waste. In addition,
they are expected to handle the components destined for
remanufacturing with care, rather than throwing them into containers -
a demanding job. The
objective of the remanufacturing strategy developed by Caterpillar is to
produce remanufactured parts of the highest quality, as good as new.
This enabled Caterpillar to develop a process in which the old engines
lose their identity. After disassembly, components continue
independently through an initial quality check and the cleaning
process to the remanufacturing operation, which is done in batches of
similar or identical components, in parallel lines. At the end,
remanufactured and new parts are assembled into reman engines, and each
engine receives a new numbers and the same guarantee as a new one.
Compared to the remanufacturing of individual engines, this process is
more efficient and enables the multiple remanufacturing of parts and
components according to their individual quality. THE ECONOMICS OF THE REMANUFACTURING
BUSINESS The
engine remanufacturing business consists of two distinct business areas:
the regionalized remanufacturing of complete engines for 'smaller'
engines, and the decentralized repairs of big engines using
remanufactured parts. The quality-focused strategy by Caterpillar
enables the same remanufacturing lines to be used for parts for both
business areas. The
logic behind these two market segments is both economic and ecologic:
the handling and transport of big engines is expensive and unnecessary.
It is easier and cheaper to exchange and transport only their broken or
worn out components, and to repair larger pieces of equipment (such as
engine blocks) on site, using specialized repair technologies developed
by companies such as Castolin-Eutectic. In
both cases, however, it is vital to let all partners active in the
retro-distribution (take-back) chain share in the economic benefits of
remanufacturing, but also to educate them in the notion of 'value
preservation' or 'asset management'. As the first law of remanufacturing
is ‘do not destroy what is not broken’, the amount of the 'core
deposit fee' (up to 40% of the part price) reimbursed by Caterpillar to
the dealers which return parts and engines depends on the state of
non-destruction and completeness of the engines and their parts. Following
the same logic, the remanufacturing plant is organized in three distinct
activities: the 'core receiving and inspection facility', the 'materials
(engine) storage facility', and the 'remanufacturing facility' itself.
In Corinth, the first two are in a different building from the latter,
which makes sense for different reasons. This
separation of tasks, which is fundamentally different from Caterpillar's
main manufacturing activity, is fundamental for an understanding of the
economics of remanufacturing. But it can be difficult to understand
and express it in terms of traditional accounting. The economics of
remanufacturing are primarily based on asset management (or value
conservation), not on value added - a new concept difficult to grasp
with traditional management tools. In the case of Caterpillar, this fact
of an asset management within a closed loop is further underlined by
the impossibility for a dealer to buy a reman Caterpillar engine without
trading in an old one! The main steps in Caterpillar's remanufacturing
are the following: -
Core receiving/inspection
(corresponding to the procurement department in manufacturing): In
manufacturing, materials or components are bought for their present
value, and could normally be resold for a similar price to another
buyer. In remanufacturing, however, old engines are bought back at a
price which is not embodied in the materials or components, but based
on their future value after remanufacturing - an entirely different
economic concept based on asset management instead of value added! -
Storage: Engines
are remanufactured by Caterpillar 'on demand', or 'just in time' (JIT).
But the accounting problem mentioned above arises again with the storage
of the old engines. Before remanufacturing, they have a minimum value
in accounting terms, yet the large area they occupy seems to contradict
both the return on investment and JIT philosophy. A
stock of old engines (as well as a minimum number of remanufactured
ones) is necessary in order to enable trade-in exchange with dealers.
The large stock of old engines is therefore a precondition for the
remanufacturing business, as it constitutes a resource that cannot be
bought on the market. Furthermore,
the volume of demand for the remanufacturing of engines and parts of any
one engine type builds up in parallel with the number of engines in
operation, and then slowly goes back once production has stopped.
Engine design strategies, such as component standardization, can
therefore have a substantial impact on the success of component-life
extension (and economic benefits from manufacturing) after the
production of an engine has stopped. This fact has led other companies,
such as Xerox Corp., to develop and adopt a strict 'commonalty
principle' in their Design for Environment strategy for photocopiers. Engines
and parts are only transferred from incoming stock to remanufacturing
when there is an order. This makes economic sense, as it minimizes the
finance immobilized in the old stock as compared to reman equipment; but
it demands a strategy of 'zero cost inventory' in accounting. -
Remanufacturing Remanufacturing
makes economic and ecologic sense! The cost of a remanufactured engine
is 60% of the price of a new one, reman parts are sold at the price of
40% of new ones, both with the same guarantees as new ones. The
economics of remanufacturing depend directly on the number of parts of
each engine that can be remanufactured. Today, 40% of the components in
a reman engine are new; ideally, this could be reduced to about 25%.
Possible strategies to reduce this percentage are a better
availability of reman components, a better quality control and less
scrapping of parts that could be remanufactured. The financial
benefit for increased reman content is considerable. The minimum rate of
25% is due to the fact that some components will always need to be
replaced, due to the materials used (gaskets, filters, etc) or their
specificity (bearings). In
some cases, small batches of parts from engines the production of which
has stopped 20 years ago, are still remanufactured, with the advantage
that the pricing structure for these parts becomes more flexible, as
the cost advantage of economy of scale in manufacturing may have
disappeared, and the price of new parts increase. -
Re-Marketing In
terms of business strategy, re-manufacturing must always be complemented
by re-marketing in order to be successful. In the case of the
Caterpillar trade-in policy, this problem is less important as the
remanufacturing facility operates in a closed loop with the dealers -
the moment an old engine is taken back, a reman one has been sold. In
some case where new parts for a piece of equipment are no longer
produced, remanufactured parts become the only supply available for a
continued operation. The
remanufacturing of engines and their components relies on the instant
availability of spare parts and exchange engines, as new parts or
engines are almost always available in competition. This instant
availability can best be achieved through a strategy of redundancy in
the storage of old engines and parts, and a certain stock of reman
goods. THE IMPACT OF REMANUFACTURING ON
SUSTAINABILITY The
biggest differences between remanufacturing and manufacturing are:
Firstly, the inheritance of (toxic) substances contained within the
old engines, such as grease, oil and metal deposits from operation, as
well as components containing asbestos and rubber. The problem of
recycling old oil filters has recently been solved in collaboration with
a steel recycler. Secondly, the milling and polishing operations in
remanufacturing use mostly dry techniques, whereas manufacturing uses
wet techniques, leading to solvents mixed up with metal waste. -
Resource productivity Remanufacturing,
as all activities linked to product-life extension, reduces the speed of
the resource flows through the economy, and thus reduces resource depletion
and waste volumes, as well as the environmental impairment that goes
with all activities linked to manufacturing and waste management,
including transport. Remanufacturing
has a decisive impact on increasing resource productivity through the
extension of the useful life of equipment, engines and parts, by making
it cheaper to operate old machines. In
the case of engines which are no longer produced, and for which original
spare parts are no longer available, remanufacturing enables the
continued operation of equipment which otherwise would have to be
scrapped for lack of vital components - a classical case of the
'pars-pro-toto'-syndrome. (Caterpillar has a policy of manufacturing
new parts even for very old machines - this last point is therefore
possibly of lesser importance for the Caterpillar case study). -
Toxicology Remanufacturing,
in comparison with manufacturing, furthermore reduces the impact of
toxic substances on the environment; the biggest environmental challenge
in the Corinth remanufacturing plant is the cleaning process of the
old engines. The
original cleaning process in the Corinth plant, dating from 1982, used
state-of-the-art technology based on a series of chemical salt baths
and needing more chemicals containing v.o.c. (volatile organic
compounds) immediately after the baths to prevent corrosion of the steel
parts before remanufacturing. A second line using pressurized steam and
water for cleaning was installed a few years ago, but suffers from
problems, which are typical for a prototype. A third cleaning line,
which will first be installed in the new plant, is using a refined
technology based on pressure steam and few chemicals in a closed loop
process. The
grease and oil residues from the dismantling and cleaning operation are
recycled as much as technically possible. Another
big improvement in the cleaning process could be achieved by quality
testing to be done before cleaning. In remanufacturing, every part is
checked for quality defaults, which means that parts that cannot be
remanufactured are cleaned unnecessarily. The reason for this is
partly that people prefer to work on clean parts, and therefore clean
them for convenience before doing the quality checks. It
would be of great interest to compare an analysis of the overall
toxicity level produced by a remanufacturing plant with the analysis for
a manufacturing plant for the same products. However, this is outside
the scope of the present case study. -
Closed product liability loops in addition to material loops. Caterpillar
offers not only a voluntary take-back, but a buy-back guarantee (in
combination with the core-deposit-fee) to its dealers. This concept is
at the centre of the 'Pollution Prevention Legislation' of the European
Union focussing on closing the product liability loops through mandatory
product take-back by manufacturers in addition to the material loops
(re-use and recycling). -
Waste prevention Remanufacturing
again has to find its own optimisation with regard to waste prevention.
Some of the methods developed by Caterpillar for its manufacturing
plants, such as paint over spray recovery and subsequent paint re-use,
are not feasible for the remanufacturing facility, due to its
considerably smaller volume of engines to be painted. But an analysis
would need to compare the overall waste output in manufacturing and
remanufacturing, as mentioned before. All
waste from the remanufacturing facility is recycled through specialized
companies. -
Social ecology Remanufacturing
is not only labour intensive, its economic viability also partly depends
on the ingenuities of the employees, rather than their productivity in
terms of traditional economics. Every part that has to be replaced by a
new one means an additional expense to the company; every part that can
be reman and re-used is 'free'. The cost of labour in remanufacturing a
part is not in direct competition with the manufacturing cost by e.g.
a robot, but with the sales price of the new part. It would be of great
interest to compare the labour input per unit of output (physical and
in dollars) between manufacturing and remanufacturing. But again, this
goes far beyond the scope of this case study. Labour
employed in remanufacturing is in a mental environment of waste prevention
and value conservation, qualities that are mostly missing from the
modern manufacturing society, but necessary to build a sustainable
society! The fact that Corinth is situated in the 'Bible belt' of the
U.S., and that many employees are familiar with non-monetary concepts
such as the preservation of existing values, of sharing and caring,
may be a considerable advantage in the long term. OPPORTUNITIES AND INNOVATION IN
REMANUFACTURING Within
the Corinth facility, the search for better solutions and methods to
improve the technical and economic feasibility of remanufacturing
continues all the time. Some of the activities of the 'Salvage
Development Group' have been described above, under 'nuts and bolts'.
Similar efforts are being undertaken to develop innovative repair techniques
for expensive parts, such as the metal spraying of the worn surfaces of
e.g. piston rods, with subsequent machining to manufacturer's
tolerances. In
some cases, a cross fertilization between different types of engines has
taken place, as in the case of liners ('sleeves') for pistons. Bigger
diesel engines use liners (steel tubes in which a piston runs) as a
standard design. When these parts are worn out, they can be exchanged
locally for remanufactured parts, consisting of new liners and reman
pistons rods and (reman) piston heads. In the remanufacturing of smaller
(sleeveless) engines, the same method has been introduced: the bore of
the cylinders is increased, and liners with standard pistons are pressed
into place. The advantage of this procedure is that it enables engines
to be remanufactured several times, using standard piston heads and
piston rods. As always, the proof of the pudding is in the eating.
Engine blocks with 3 or more previous numbers can be observed in the
process of remanufacturing. Another
innovative technique has been developed for the repair of engine heads
and blocks with cracks or similar faults. Again, a method of milling,
metal spraying and burning in is used before the final grinding and
polishing. OBSTACLES TO PRODUCT-LIFE EXTENSION
STRATEGIES One
of the big problems in remanufacturing lies in the minds of the people
dealing with the old engines, from dealers to employees. Many of them
still look at the 'dirty old engines' as pieces of scrap, not as 'assets
in transition'. This obstacle can hopefully be overcome through
education over time - a process, which is favoured by a stable workforce. Another
potential obstacle is the design guidelines used in the engine
manufacturing division. The Caterpillar management philosophy is still
predominantly based of the optimisation of manufacturing, in line with
mainstream economic thinking. The priorities and choices to optimise
remanufacturing and manufacturing overlap, but do not coincide. The
feasibility of remanufacturing could thus be greatly improved by a
conscious research of the options where both manufacturing and
remanufacturing profit most. Also, remanufacturing produces a wealth of
knowledge of how engine design could be improved, that today often does
not find its way back into the design teams. Again, the Xerox example
has shown the economic and ecologic benefits of having only one design
team for re-manufacturing and manufacturing. The
same is true for design changes in the context of continuous product
improvement. Changes in engine design can make the technological
updating of engines in the market easy, or impossible. As many clients
prefer to use engines of state-of-the art technology, technological
improvements that can be retrofitted during remanufacturing enhance
the prospects of remanufacturing, whereas design changes that cannot be
retrofitted tend to lead to shortened product-life. Caterpillar
today has a policy of preferred procurement from suppliers, which remanufacture
their products. This means that it tries actively to convince its
suppliers of components for its engines to start the remanufacturing of
their products. However, Caterpillar has been unable so far to convince
most of its European and Japanese components suppliers, with the
exception of the Vickers Group, despite the fact that these suppliers
include companies recognized for their environmental concern. This means
that these suppliers leave the door wide open for any newcomer to walk
into this market, and push the existing suppliers out. If the companies
concerned do not pay any attention, maybe the governments of the
countries where these companies have their manufacturing base should
wake up to the potential danger cum opportunity? An
obstacle of technical nature is the lack of tools and methods for the
quality testing of used components, such as bearings. Some
remanufacturers have started to re-use e.g. roller bearings in water
pumps, starters and alternators; according to a leading bearing
manufacturer, most bearings have a remaining lifespan of about 90% of
total life when they are scrapped. Walter
R. Stahel - Geneva, November 22, 1995
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