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' (circular economy) – 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

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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

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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