From PLI’s Course Handbook



From PLI’s Course Handbook

Green Technology Law and Business 2010: Legislation, Financing, Carbon Trading and Sustainability

#22737

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key legal and business issues in Remanufacturing as a key to industrial sustainability

Dr. Nabil Nasr

Golisano Institute for Sustainability, Rochester Institute of Technology

Definitions

Sustainability has been defined as: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”[1]

What is Remanufacturing? Remanufacturing (often shortened to “reman”) is commonly described as the process of disassembly of products during which parts are cleaned, repaired, or replaced, and then reassembled to “like-new” or “better-than-new” condition. In some cases, remanufacturing also adds upgraded components that were not available at the time of original manufacture; an upgraded microprocessor would be one such example.

The Remanufacturing Process

In general, there are six process steps required in remanufacturing in order to bring a product back to “like-new” condition:

• Inspection: An examination of the original product is the mandatory first step in remanufacturing. This is necessary to separate the main or “core” components according to the amount and type of rework that will be required to complete their remanufacture. For example, cores that are rusted will require very different cleaning processes than those that are merely dirty or oily. Cores that are too damaged to remanufacture are diverted for recycling or disposal.

• Disassembly: Most often disassembly involves exactly reversing the steps required to assemble the product originally – physically taking the product completely apart and reducing it to its single-component or single-part level. Disassembly is necessary because during remanufacturing every part must later be brought up to like-new standards in order for the final product to be considered “remanufactured.”

• Cleaning: During this step unwanted substances are removed from the surfaces of components in accordance with the required or otherwise agreed-upon standards. The surfaces are then inspected. An estimated 90 percent of all disassembled parts must undergo cleaning, and in some cases cleaning is the most costly and/or time-consuming phase in the entire remanufacturing process.

• Restoration / Replace: Out-of-spec or worn parts are either restored to as-new condition or replaced with as-new parts. Screws, washers, gaskets, wiring, and other minor components are usually treated as one-time use or disposable and are replaced with new items. Rejected or replaced parts are recycled whenever possible.

• Reassembly: This is the process which reconstructs the remanufactured product to operate like a new one. Typically, reassembly mirrors the original product manufacturing assembly line, but on a lesser scale.

• Qualify: Following reassembly, the products are subject to inspections that are the same as or even more stringent than the quality inspections used for original manufacture. The qualification step is used to ensure that all quality objectives have been met. Remanufactured items that pass quality inspections are packed for shipment and distribution.

The Remanufacturing Industry

Remanufacturing is global in scope; however, this section will focus on the domestic sector.

U.S. Remanufacturing Industry

The domestic remanufacturing industry is larger, more diverse, and contributes more to the national economy than most people, even industry experts, realize or appreciate. For example, there are 73,000 estimated total reman firms with $53 billion in annual sales and average annual company sales of $2.9 million. Direct employment is estimated to be approximately 480,000. Reman operations tend to be relatively small firms, with an average of 24 employees per company.[2]

For background, the U.S. Department of Defense is the largest remanufacturer in the world. Commercial (as opposed to military) remanufacturing is concentrated in the following industrial sectors:

• Automotive: Internal combustion engines (often diesel); fluid power cylinders and actuators; motors and generators; motor vehicle parts and accessories; and transportation equipment.

• Electrical: steam, gas, and hydraulic turbines; farm machinery and equipment; power-driven hand tools; electric and gas welding and soldering equipment; pumps and pumping equipment; air and gas compressors; industrial high-speed gears and drives; air-conditioning, warm-air heating, and refrigeration; power, distribution, and specialty transformers; switchgear and switchboard apparatus; motors and generators; relays and industrial controls; electrical industrial apparatus; telephone and telegraph apparatus; electron tubes; motor vehicle parts and accessories; and electromedical and electrotherapeutic apparatus.

• Furniture: Office furniture, with subsectors in wood furniture and furniture made from manufactured products.

• Machinery: Industrial valves; steam, gas, and hydraulic turbines; internal combustion engines (diesel); machine tools (metal-cutting types); machine tools (metal-forming types); textile machinery; printing trades machinery and equipment; food products machinery; special industry equipment; ball and roller bearings; air and gas compressors; industrial high-speed gears and drives; office machines; automatic vending machines; air-conditioning, warm-air heating, and refrigeration; service industry machinery; fluid power cylinders and actuators; scales and balances (except laboratory); industrial and commercial machinery; motors and generators; household vacuum cleaners; motor vehicle parts and accessories; railroad equipment; transportation equipment; industrial instruments for process control; optical instruments and lenses; and photographic equipment and supplies.

• Medical: Computer peripheral equipment; surgical and medical instruments and apparatus; X-ray apparatus and tubes; and electromedical and electrotherapeutic apparatus.

• Tires: tire retreading and motor vehicle parts and accessories.

• Toner Cartridges: printing ink, computer peripheral equipment, and some motor vehicle applications subsectors.

Automotive Products

In the United States, the major market for remanufactured products is the automotive parts market. The following auto components and systems are remanufactured for parts suppliers, repair shops, and the home/do-it-yourself market:

• Air-conditioning compressors

• Alternators

• Engines (includes both “bare” engine blocks and finished engines that are completely equipped and essentially ready for installation into a vehicle)

• Fuel system components

• Rack and pinion steering

• Starters

• Steering gear boxes

• Transmissions

• Turbochargers

• Water Pumps

• Tires (remanufactured tires may also be termed retreaded)

Low-value parts such as plastic expansion tanks, filters, hoses and belts, spark plugs and wires, and bolts, screws and other fasteners are considered disposables (i.e., single use) and are rarely remanufactured unless there is a known and significant commercial demand. Otherwise, reman is not economically viable. In addition, those low-value parts are often recycled in order to reclaim the metal content (in particular, copper) or other materials that can be reused and/or to avoid disposal costs.

Recent Trends

Several ongoing trends have generated major changes in the U.S. remanufacturing industry since the 1990s.

First, remanufacturers are contending with high levels of technology found in the core components of products that are subject to remanufacturing processes. For example, internal combustion engines destined for reman are becoming steadily more sophisticated, with new kinds of materials and electronics steadily replacing conventional metal mechanical functionality (e.g., electronic fuel injection systems have almost completely replaced traditional carburetors). This trend is expected to accelerate in many areas where remanufacturing occurs. For example, current automobiles contain an average of 16 microprocessors per vehicle. Within three years, it is estimated that each new car will average 35 microprocessors.[3]

At the same time, entirely new technologies are being introduced into the products that will become subject to remanufacturing. Examples include large replaceable battery packs and sophisticated charging systems now used in most hybrid vehicles. The wide-spread adoption of such technologies will present new growth opportunities for far-sighted reman entrepreneurs.

Second, multinationals including Caterpillar, Xerox, GE, Delphi, and Hewlett Packard have established remanufacturing facilities around the world to meet market demands for lower-cost OEM products. For example, Caterpillar is opening a large, state-of-the-art reman facility in Singapore to market its own like-new products to meet the growing demand in Southeast Asia for construction equipment.

Increased competitive pressures originating within and outside the reman industry are also driving the steady consolidation of smaller remanufacturers into larger firms that can apply economies of scale to their operations. Consolidation also enables these firms to respond more rapidly to shifts in the marketplace demands due to technological innovation. Consolidation has also helped remanufacturers better cope with economic challenges such as the recent global recession.

Finally, the steady growth in consumer goods is opening up new opportunities for agile niche remanufacturers. For example, the proliferation and rapid introduction/acceptance/obsolescence cycle of cell phone models in the developed nations has spawned a new reman industry segment devoted to refurbishing discarded older phones for resale in third-world countries. And in the developed world there is a ready market for remanufactured versions of current-model high-price, high-value items such as large screen personal and corporate computers and peripherals, major and many smaller appliances, and HDTVs and entertainment system components. Purchasing such remanufactured products allows consumers to maintain or advance their standard of living even when economic conditions would oblige them to curtail purchases of equivalent new-production goods.

The Benefits of Remanufacturing

From the standpoint of sustainable production, the key benefit of remanufacturing when compared with new production is that approximately 85 percent of the energy expended in the manufacture of an original product is preserved in the remanufactured product. An early study conducted at MIT determined that the process of recycling reclaims only the material content of a product, whereas remanufacturing reclaims the:

• Material content of the product

• Energy from casting, machining, packaging, etc.

• Labor expended in the original production processes

• Capital invested in the original design, development, manufacturing, etc.

• Original function and design intent of the product[4]

For the consumer, a remanufactured product can offer the same (or even better) performance, reliability and durability as a newly manufactured product. Why is this? The failure rate of new parts is reduced when using remanufactured products because those parts prone to failure are replaced with durable components as part of the remanufacturing process. In this sense, a remanufactured product is more reliable and may have a longer commercial life than a newly designed product. Put another way, the resulting product has already been burned-in, field proven, and refurbished.[5] One study comparing warranty returns on new original equipment (OE) products with those of remanufactured products found that the remanufactured products were six times less likely to be returned under warranty than OE products.[6]

Economic Benefit

The economic benefit of remanufacturing can be quantified in terms of the recovered value minus the cost to implement recovery. The following economic considerations affect the ultimate benefit of remanufacturing a product:

• The initial part cost, replacement cost, and yield of the original product.

• “Demanufacturing” cost, representing all costs (materials, tools, and labor) required to completely disassemble the original product into its component parts.

• Restoration processing cost, representing all costs (materials, tools, and labor) required to completely restore and reassemble the product from original component parts of verified soundness and condition, plus the costs of all parts required to replace original component parts that are broken, worn, or otherwise incapable of restoration. Note that in some cases the remanufacturer may intentionally substitute better-than-original replacement parts in order to rectify known defects or issues inherent in the original core type or model and/or incorporate additional functionality that will enhance the resale value of the finished remanufactured product. In all of these cases, the additional cost of the substituted parts must be entered into the total cost for restoration processing.

The economic benefit from remanufacturing in terms of Recovered Value is derived from the following equation:

RV = ((UMC – URC) + CRC - CDS)

Where

9

URC = ( (1/Yi)*Ci

i=1

According to the following variables:

|Variable |Description (normalized per design) |

|UMC |Unit Manufacturing Cost (cost of new) |

|URC |Unit Remanufacturing Cost |

|Ci |Remanufacturing process i |

|Yi |Yield of process i |

|i = 1 |Core cost |

|i = 2 |Initial inspection and test |

|i = 3 |Disassembly |

|i = 4 |Replacement part |

|i = 5 |Processing |

|i = 6 |Inventory cost |

|i = 7 |Reassembly |

|i = 8 |Final qualification |

|i = 9 |Amortized reman development |

|CRC |Recovered material value |

|CDS |Disposal cost |

Ecological Benefit

The ecological benefit of remanufacturing can be expressed as the recovered energy and avoided environmental impact minus the impact of the remanufacturing processes. The positive impact on the environment provided by remanufacturing operations on a worldwide basis is significant. A recent study conducted by the Argonne National Laboratory estimates that annual worldwide energy savings from remanufacturing activities amount to 400 trillion BTUs. This equals the electricity generated by five nuclear power plants, or approximately 10.7 million barrels of crude oil (enough to fill 233 standard supertankers). At the current price of $70/barrel, that represents nearly $750 million in savings. In addition, the energy saved in remanufacturing avoids the generation of 28 million tons per year of carbon dioxide (CO2).

CS130 Example

The potential benefit to the environment offered by remanufacturing vs. new production can be seen in the following example energy/material analysis for the Delco CS-130 100A automotive alternator.

About 61.1 Kwh of energy are required to manufacture one new alternator. During production of the new alternator, 66.6 pounds of CO2 are generated. In contrast, only 23.4 Kwh are needed to remanufacture one alternator and only 15.2 pounds of CO2 are generated. The annualized benefits from remanufacturing 1000 Delco CS 130 100A alternators are an energy savings of 37,700 Kwh and a CO2 savings of 51,357 pounds.

Consumer Products

Eastman Kodak Company One Time Use Cameras

The benefits to the environment offered by remanufacturing apply equally to consumer products. For example, 20 years ago, Kodak set a corporate goal of improving the environmental attributes of their products throughout the products’ life cycles. The company’s Film Products Group focused on removing as much as possible of the waste generated by their One Time Use Cameras (OTUC) through remanufacturing and recycling. Since 1990, the total number of OTUCs collected by Kodak reached 1.2 billion units. In 2007, Kodak collected 120 million single-use cameras.

Since 1990, 800 million Kodak OTUCs have been remanufactured and the balance sent back to other manufacturers. By 2007, the company was approaching 100 percent of Kodak OTUCs manufactured from recycled bodies and/or parts. Not only did this divert millions of pounds of plastic waste from landfills, Kodak achieved $1.968 billion in revenue of which OTUCs are a significant contributor.[7]

Consumer Products Evolution

Changes in the consumer product marketplace during the past several decades have increased the amount of complexity and risk associated with remanufacturing for products in this sector. These factors include the following:

• Product complexity is increasing as microelectronics and new functionalities are added to even the simplest products.

• Product life cycle is decreasing as companies introduce new products into the marketplace at faster rates.

• Residual value varies greatly, depending on whether there is a perceived market for specific remanufactured goods.

• Required competencies are increasing due to the proliferation of microelectronics and new materials, compelling remanufacturers to adopt and become proficient at new production skill sets, such as:

– Electronic board repair, including machine-soldered high-density surface mount technologies

– Finishing/refinishing delicate surfaces

– Handling new materials (e.g., composites, synthetic and formulated polymer systems, etc.)

– Performing accurate remaining life assessments

– Achieving high levels of cleanliness, including sterilization in some market niches.

Remanufacturing: From Basic Research to Commercialization

Print cartridges

Remanufacturers are constantly searching for new market niches to exploit. Beginning in the 1990s, the commercialization of inexpensive laser printers intended for domestic and small office applications opened up the possibility of remanufacturing the replaceable toner cartridges, which had originally been envisioned as single-use disposables.

The purpose of the cartridge components is to deliver toner to the printer’s imaging device. Cartridges are designed to contain the consumable toner and other high-wear items in the copier.

Very soon a business sector was created, known as “rechargers.” These were generally small shops that refilled depleted cartridges with new toner and then prepped them for resale at a price well below new OEM cartridges. By the mid 2000s, approximately 30 million toner cartridges were remanufactured in the U.S. each year and demand for them continues to grow.

The success of laser printer cartridge recharging led those in the industry to see if there was an opportunity to reduce their costs by more economically remanufacturing key high-cost/high-value cartridge components that otherwise would have to be replaced with new-production parts. The Golisano Institute for Sustainability (GIS), a reman research and education unit of Rochester Institute of Technology, Rochester, NY, was asked to conduct an R&D investigation involving two such components:

• Wiper Blade: The wiper blade in a printer cartridge represents approximately 15 percent of the total cost of replacement components during remanufacturing. Traditionally wiper blades were not reused during the remanufacturing process.

• Organic Photoconductor (OPC) Drum: The OPC drum is the single highest value component of the cartridge; it constitutes nearly 45 percent of the total cost of replacement components during print cartridge remanufacturing. Currently OPC drums are not reused during the cartridge reman process.

GIS developed four specialized testing units to facilitate accurate analysis of these two cartridge components: Wiper Blade Edge Analyzer, Wiper Blade Reuse Tester, OPC Drum Life Analyzer, and OPC Drum Reuse Tester.

Wiper Blade Research and Commercialization

Wiper Blade Edge Analyzer

This test apparatus was designed to analyze the condition of the edges of wiper blades contained in returned toner cartridges. Edge condition is the major criteria for reuse of the original wiper blades in remanufactured cartridges. The results of the wiper blade testing and analysis conducted at GIS determined that:

• Wiper blades have a significantly longer life than cartridges; theoretically blades can be reused up to 10 times. Between 90-100 percent of wiper blades are typically reusable after one use.

• The primary reason for failure of wiper blades is edge defects due to handling issues. Over time, small defects will propagate to unacceptable levels.

Wiper Blade Reuse Tester

Based on the results from the Wiper Blade Edge Analyzer, GIS developed equipment to rapidly assess the condition of wiper blades for reuse in remanufactured toner cartridges. The Wiper Blade Reuse Tester measures the size of defects in the blade edge and provides the user with a reuse/discard signal. This equipment was patented and is now licensed for use in 10 companies world-wide.

Based on feedback from users, GIS estimates that more than 2,000,000 good wiper blades have been recovered in less than three years, saving remanufacturers approximately $1,200,000. This dollar amount does not take into account the disposal costs that the remanufacturers would be obliged to pay if the wiper blades were not reused.

OPC Drum Research and Commercialization

GIS also designed and constructed apparatus to test what factors lead to deterioration of the electrostatic coatings on OPC drum components.

OPC Drum Life Analyzer

This equipment was designed to determine the wear characteristics of operating both new-production and recovered wiper blades on the costly OPC drum. Following extensive testing, GIS researchers assigned to this project found that:

• New wiper blades cause a high rate of wear on OPC drum coatings. On average, only 40 percent of OPC drums can be reused after operation with new blades.

• Recovered wiper blades reduce drum wear by between 25-45 percent. This allows an average of 60 percent of OPC drums to be reused.

OPC Drum Reuse Tester

Results obtained from the Analyzer led GIS to develop new equipment to quickly assess the drum coating thickness and the electrical continuity of received OPC drums in production environments. The resulting measurement signatures provide data on the ultimate reusability of any drum. The GIS OPC Drum Reuse Tester processes up to four drums per minute and provides the tester with straightforward reuse/discard indications.

Not only does this produce significant cost savings to the remanufacturer, it provides a quantifiable bonus in terms of environmental sustainability. For example, the energy savings that result from remanufacturing 21 OPC drums and wiper blades (instead of replacing with new production) could power an average American household for one full day.

Sponsored Research

Basic and applied research into remanufacturing practices is generally conducted at the behest of one or more sponsors. GIS’ work in remanufacturing R&D projects is representative of the research conducted in this industrial sector.

Sponsors of Reman Research

GIS has conducted studies for the following major sponsor groupings:

• OEM manufacturers and suppliers, including Kodak, Xerox, General Motors, and HP.

• Government agencies, including:

• Federal-level Departments of Transportation, Defense, and Energy

• NY State-level Department of Environmental Conservation

• Regional and local agencies, such as Monroe Country in NY State.

• Non-governmental organizations, such as industry trade groups

• Private businesses and entrepreneurs

Research Structure

Research programs conducted by GIS usually fall within one of three general categories:

• Sponsor driven agenda: Projects are conducted according to a plan provided by the sponsor, with highly specific objectives such as determining the optimal reman cleaning procedure(s) for a unique high-value product.

• Policy driven agenda: Projects are conducted to determine the feasibility of implementing a policy, such as the average cost required for eliminating toxic solvents from remanufacturing operations in a region or state.

• Subcontracted work-plan task: In this case, projects are performed as subcontracted assignments that are completed within a larger framework of research being undertaken by a separate leadership entity such as the Office of Naval Research.

Government Assistance and Role

As the Sustainability movement continues to grow, policy makers are beginning to appreciate the benefits of remanufacturing.

Recognizing the need to curb resource depletion and waste generation, in 1998, the President’s Council on Sustainable Development recommended remanufacturing as a potential means to “close the loops of material and energy flows,” citing reman’s cost and energy efficiency for products at the end of their life cycles.[8] Accordingly, many U.S. government agencies give preference to remanufactured products in their purchasing decisions.

A recent example of this trend is the found in the business practices of the U.S. Postal Service, which during fiscal year 2008 invested more than $88 million to acquire remanufactured tires and other vehicle parts. USPS found that these purchases were also a key component in the organization’s cost-control efforts. Tires were cited as the USPS’s third largest expenditure (after the cost of drivers and fuel), so the savings that accrued from remanufactured tires helped the Postal Service control vehicle maintenance expenses.

In addition, state legislatures often require that state agencies give priority to the purchase of remanufactured or recycled goods.

Government Assistance

The reman industry receives limited support from governmental agencies at different levels. Assistance to remanufacturers is usually rendered through the following mechanisms:

• Funding: Government funds are often directed at basic research designed to remove technical barriers or to further technology commercialization of remanufacturing processes and practices. Funding is also provided to support technology transfer and/or provide direct financial assistance.

• Purchasing Directives: Government purchasing requirements typically create annual bid requirements and influence purchasing guidelines. Directives are often used to encourage municipalities and school districts to follow state office guidelines to save costs.

• Tax Benefits: Tax benefits may be instituted to encourage investment in new equipment as a means to enhance productivity and/or company stability. Tax advantages in the form of sales tax reductions or tax deferments may also serve to encourage consumer acceptance of remanufactured products.

Tax laws

Like most industry sectors, remanufacturing is subject to tax legislation. Unfortunately, the unique business model of the reman industry is often not well understood by many accountants and legislators. Consequently, changes to the established tax structure that are made without consideration of their impact on remanufacturing can have a substantial (if unintended) detrimental effect upon individual businesses and industrial sectors.

Automotive Industry Example

In the early 2000s, the U.S. Internal Revenue Service indicated that (without consulting the automotive industry) it would change the formula for calculating the values of remanufactured cores using a higher “core charge.” Industry trade organizations quickly realized that these changes would be catastrophic to the automotive parts remanufacturing industry. These organizations engaged the IRS and challenged the calculation methodology, and forecast the likely adverse consequences should the proposed tax formula be adopted. In the end, the IRS’ valuation formula was reformulated so that cores were valued at market price, thus preserving the economic benefits of remanufacturing and allowing remanufacturing processes to remain in place in the automotive sector.

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[1] UN World Commission on Environmental Development, 1987.

[2] Lund, R., The Remanufacturing Industry; Hidden Giant, Boston University, 1996.

[3] Kripli, J., Remanufacturing – The Service Solution, APRA Global Connection, June 2009, pp. 7-9.

[4] Bollinger, L., et al., Remanufacturing Survey Findings, Center for Policy Alternatives, MIT, Cambridge, MA, 1981.

[5] Nasr, N., “Remanufacturing from Technology to Applications,” Golisano Institute for Sustainability, Rochester Institute of Technology, Rochester, NY, 2004.

[6] Kripli, J., p. 9.

[7] 2007 Global Sustainability Report, Eastman Kodak Company.

[8] The President’s Council on Sustainable Development, Towards a Sustainable America, May 1999.

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