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

In part III of this article (see part one and part two), an overview of the following last four 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?

6. What are the key processes that deliver a value proposition?

There are three critical processes required for this business model:

• The process of sourcing “cores”
  This source of cores can be obtained from the following:

• Permanently impaired vehicles.
• Warranty component pools.
• Like-Kind Exchange [LKE] component pools.
• Surplus assets.
• The remanufacturing process
  The efficiency and effectiveness of the process is driven by the following:
  • What tasks are to be performed that provide the value expected by the customer.
  • What is the configuration of the remanufactured product delivered that will provide a “like-new” product.
  • What design-for-remanufacturing elements have been incorporated into the item for optimizing the cost of material recovery and labor.
  • Managerial cost accounting
    This process is multiple folds more complex than the managerial accounting required for new product manufacturing. This is caused by:
    • Multiple conditions of the same part number employed in the remanufacturing process, each with their own cost: new, used, repaired and remanufactured.
    • Multiple configurations of the same part number, each with their own cost
    • Multiple transactions for a part number, each with their own cost: sale, exchange, loaner and renew-and-return.
    • Multiple ownership of the same part number throughout the Remanufacturing Enterprise requiring a robust management of the accuracy of the balance sheet: end-user owned, lessor-owned, OEM owned, dealer-owned and OEM-supplier owned.

7. What key resources are required to be employed in the processes?

The following are three key resources to be employed in order to be successful in managing the remanufacturing process:

• Forward and Reverse Supply Chain Management [SCM] professionals
  These individuals are very hard to find. Few professionals have been formally trained in Forward SCM and virtually none have formal training in Reverse SCM. Highly honed planning and acquisition skills are absolutely critical to assure the management of the business model.
• Process engineers
  There is no professional degree such as “Remanufacturing Engineer.” The skill sets required to creatively design the tasks for employing a remanufacturing process are only obtained through “real world” experience. Again, there are few individuals who have obtained the experience to truly optimize the efficiency and effectiveness of the remanufacturing process. The author has found it more advantageous to employ a non-degreed individual with remanufacturing experience, than an inexperienced degreed individual.
• IT infrastructure
  As a result of the complexity of the operational transactional activity, coupled with the managerial cost accounting postings, a large scale Remanufacturing Enterprise could not function without a robust IT infrastructure, with a specific emphasis on application/backroom software. Again, because remanufacturing is a nascent discipline, little Commercial-Off-The-Shelf [COTS] application software is available from suppliers.

8. What are the key sources-of-resources employed in the process?
Because the remanufacturing business model is so different than the current build-new-and-sell business model, OEMs should create a Remanufacturing Enterprise which employs many sources-of-resources other than their internal capabilities. The key sources-of-resources would be:

• The organization that disassembles and reassembles vehicles; this could be done by a low volume production organization, such as Magna International.
• The organization that remanufactures repairable components; this could be performed by the largest vehicle dealers or OEM-suppliers who currently perform remanufacturing processes such as Caterpillar’s remanufacturing division.
• The physical movement of cores; this could be performed by UPS or FedEx.

The alternatives are many, but a detailed Business Case Analysis [BCA] for selecting the sources-of-resources employed in the business model must be developed.

9. What is the cost structure?

The cost structure is focused upon maximizing the retention of the value-added content of materials employed in the remanufacturing process and minimizing the direct labor content employed in the process. Direct labor costs will be reasonably predictable, but the cost structure of materials will be a highly variable one; prices of cores and the residual values of vehicles could vary dramatically from year to year due to multiple supply and demand issues. As a result of this volatility, a robust accrual accounting system will be required to “smooth” the impact of fluctuating material costs upon the income statement and balance sheet. Revenue recognition issues will be extremely important in the construct of financial statements.

In conclusion, the business model described above is a framework that could be employed to evolve a light-vehicle OEM into a limited provider of remanufactured vehicles. The time has come for the Big-3 to think out-of-the-box regarding how they do business. The transition will not be easy, but the anticipated rewards of delivering remanufactured products will be one piece of the puzzle that will be employed to reinvigorate the domestic auto industry and continue to address environmental challenges.

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