Remanufactured Products: A New Business Model For Light-Vehicle OEMs, Part II of III

In part II of this article, an overview of the first five of these nine elements of this new business model will be discussed:

1. Who is the customer?
2. What is the value proposition for the customer?
3. What are the channels employed to deliver the value proposition to the customer?
4. How are customer relationships established and maintained with the customer?
5. What are the revenue streams?
6. What are the key processes that deliver a value proposition?
7. What key resources are required to be employed in the processes?
8. What are the key sources-of-resources employed in the process?
9. What is the cost structure?

1. Who is the customer?

The target market for this new business model is light-vehicle fleet operators. Currently this segment acquires an estimated 10-15% of all newly manufactured light-vehicles (Figure 1) or an estimated 1-2 million vehicles per year.

The fleet operators are hourly rental subscription service providers (i.e. Zip cars), daily-rental enterprises (i.e. Enterprise), utilities (i.e. Verizon), governmental agencies (i.e. GSA), leasing operators (i.e. Penske), multi-location corporations (i.e. GE) and others. The Big-3 often sell directly to the larger operators, but their dealer networks sell directly to the smaller fleet operators. One point in common for all fleet operators is that the value of their acquisition is reflected upon a balance sheet, with a depreciation schedule.

2. What is the value proposition for the customer?

The objective of a fleet operator is to minimize Total Ownership Cost [TOC], which is driven by the [(acquisition cost minus residual value) + (operating costs) + (product support costs)]. It is estimated that a remanufactured light-vehicle could decrease TOC by a weighted 10% to 15% by reducing the [acquisition minus residual] value by 20% to 30%; operating and maintenance costs would be marginally impacted, unless the engine was converted to a natural gas.

The two processes that create remanufactured vehicles would be the following:

• Previously employed vehicles by a fleet operator would be inducted into a production line and would be returned in a remanufactured condition. The product retains its original identity/serial number. Note this model was employed by the Marathon/Checker Cab Mfg. Co. for over 40 years.
• Vehicles in a new product manufacturing assembly line would employ remanufactured components comingled with new components. The product has a new identity/serial number.

The fleet operators would also be provided with a warranty that is the same as a new-condition vehicle.

Fleet owners, who provide short-term rentals or operating leases to the end-users, would be best positioned to obtain the highest value from this new business model; they are accustomed to aggressively managing TOC. This is especially true of daily rental fleets where the primary profit driver is managing the residual value of vehicles; rental income is primarily a means for them to cover their depreciation costs.

Note that fleet operators could tout the fact that their remanufactured vehicles are “green”; this can often create a positive image for their organizations.

3. What are the channels employed to deliver the value proposition to the customer?

A new dealer network for fleet operators would be established, both large and small, under a marquee such as “OEM-Reman”. Current OEM dealers would be invited to join, but participation would be limited. The driver for this exclusivity would be the importance of focusing on the management of the forward and reverse supply chain of the remanufactured vehicle; too many dealer participants will increase the complexity of this effort. For example, Caterpillar has been very successful in segmenting their markets for remanufactured products.

4. How are relationships established and maintained with the customer?

Rather than employing the mass consumer marketing approach so common with the Big-3, a highly focused program would be established, geared to the Business-to-Business [B2B] environment of a fleet operator. Reduced TOC will be the primary value proposed to the customer, but other value propositions could also be delivered. For example, a sophisticated internet portal interface for the delivery of a series of enhanced fleet monitoring tools could be exclusively provided to the remanufactured vehicle fleet operators.

5.  What are the revenue streams?

The new business model revenue would begin slowly and require a 10 to 12 year time frame to be fully implemented (Figure 2). Driving the timeframe would be setting-up the dealer network, re-engineering production lines, delivering a compelling story to the fleet operators and obtaining “cores” (components inducted into the remanufacturing process) to drive the component remanufacturing process. Below is a graph of the revenue interrelationships between new product deliveries and remanufactured product deliveries.

Ron Giuntini is principal and Remanufacturing/PBL/Outcome-Based Product Support subject matter expert with Giuntini & Company.