Closed-Loop Supply Chains

As we discussed earlier, supply chains typically cause significant harm to the environment when their output ends up in a landfill. One of the biggest opportunities to improve sustainability is for firms to design products that use fewer resources and can be recycled and remanufactured after use. An example of a commonly remanufactured product is retreaded tires. Retreaded tires are used in trucks, buses, heavy construction and agricultural equipment, aircraft, and passenger vehicles. Retreaded tires are cheaper to produce and tires can be retreaded multiple times. Despite these advantages, retreaded tires accounted for only “about 3 percent of total sales by U.S. firms within the tires sector” between 2009 and 2011.^[1] In 2011, production at U.S. tire retreaders was limited by the availability of used tire casings. The example of tires raises two important ques­tions that arise in every industry: Why do we not see more instances of remanufacturing? What can be done to increase the return of used product (like tire casings)? The extent of recycling or remanufacturing depends on the following factors:

• The incentive to recycle or remanufacture
• The cost to recycle or remanufacture

Unless they are forced to, manufacturers have typically limited their efforts to design recy- clable/remanufacturable products. Even when such products have been designed, recycling rates have often been low because of the lack of customer and manufacturer effort. The absence of successful recycling and remanufacturing can be explained by the tragedy of the commons, man­ufacturer concerns that remanufactured products may cannibalize demand from new products, and the lack of effort from customers to return used product. The cost of a product ending up in a landfill is borne by society (until recently, it has been free for manufacturers), whereas the additional cost of recyclable products is borne by each manufacturer. This decreases any incen­tive for manufacturers to make this effort. Calcott and Walls (2000) discuss theoretical models for the design of incentives to encourage design of products that are environmentally friendly. To encourage the appropriate behavior in supply chains, it is important that the polluter pays the cost inflicted on society (referred to as the polluter pays principle). Policies that are consistent with this idea include take-back mandates, advance disposal fees, and deposit-refund programs. The WEEE Directive is an example of a take-back mandate in which producers bear responsibil­ity for end-of-life electrical and electronic waste in Europe. Producers bear both the financial and physical responsibility for meeting recycling or recovery targets. Advance disposal fees have been used for materials such as motor oil, antifreeze, tires, and solvents that are hard to dispose of. California charges an electronic waste recycling fee for any product sold with a screen. Deposit-refund programs are used for cans and bottles when customers pay a fixed deposit when they purchase soda or beer. A refund is then provided when customers bring back empty cans or bottles. In each example cited here, the goal is to put a cost in place that encourages reduction of waste and a positive incentive that encourages increased recycling.

The fear of cannibalization of demand for new products is a major deterrent to remanufac­turing. Manufacturers are concerned that sales of the remanufactured product will reduce demand for new products, thus hurting firm profitability. The impact of cannibalization depends on the presence of distinct customer segments for the product. If there are at least two distinct customer segments, remanufacturing can be used to target the lower-price segment while new products target the higher-price segment (see Chapter 16). This strategy is used by tire manufacturers for truck tires, as remanufacturing allows strong brands to compete with lower-end brands without diluting the value of the new product. When there are two distinct segments, remanufacturing can help rather than hurt profits. However, when this distinction between segments is not feasi­ble, customers are likely to be strategic and purchase the remanufactured product at a lower price, leading to cannibalization of demand for new products.

If a customer could be charged for pollution based on the precise cost to society, customers are likely to return recyclable products at a high rate. The challenge, however, is that most people pay a fixed monthly fee for collection, hauling, and dumping of trash. In such a setting, people have a lower incentive to recycle. A “pay as you throw” (PAYT) model, in which the cost incurred is proportional to the amount of garbage thrown out, is likely to increase recycling. Most com­munities with PAYT require customers to use specific garbage bags, for which they are charged. This approach links people’s spending on garbage to the number of bags they use, thus rewarding them for recycling a product rather than dumping it with the garbage.

Even when the right incentives are in place, the actual cost of recycling or remanufacturing has a significant impact on the extent of recycling. Much of the cost in such instances is linked to the logistics cost of collection and transportation. Consumer electronics are a classic example for which the high cost of collection and transportation hurts recycling and remanufacturing. Most of the consumer electronics are manufactured in Asia, with large consumer markets in Europe and North America. Not only is it expensive to recover used electronics from customers, but it is also very expensive to ship any recycled parts back to Asia for remanufacturing. This makes the cost high enough that remanufactured products are often not cheaper to produce than new ones. One company that is working to reduce the cost of remanufacturing smartphones is Brightstar, one of the biggest providers of refurbishing services for the telecom sector. As smartphone hard­ware becomes more standardized and subject to less change (with most of the change shifting to software), Brightstar, with local refurbishing centers in North America, is hoping to provide low- cost refurbished handsets. The use of standardized parts that make the remanufacturing process cheap, along with local presence that lowers transportation cost, increase the likelihood of suc­cessful remanufacturing in this space.

Single-use cameras were one of the most successful examples of a closed-loop supply chain with remanufacturing. This was an instance in which remanufacturing was successful because all the incentives were right and the costs were low. The cost of collection was low because custom­ers naturally brought their single-use cameras to a retailer for printing pictures. No further incen­tives were needed to encourage customer returns. Manufacturers had the right incentive because remanufacturing saved the manufacturers money and there was no difference in price between a remanufactured camera and a new one. There are few other examples, however, with the same success. The right incentives for both manufacturers and customers, along with well-developed reverse supply chains, will be required for greater use of recycling and remanufacturing.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.