Caterpillar

In 1972, Caterpillar Inc, a manufacturer of heavy earth-moving and construction equipment, was chosen by the Ford Motor Company to supply diesel engines for a new Ford delivery van. Ford’s decision surprised a number of people. At the time, the Cummins Diesel Company was expected to win the Ford contract because it dominated the diesel engine business partially by keeping its costs down through the remanufacturing of used engines. Caterpillar knew that to remain competitive and retain its relationship with Ford, it too had would have to keep its costs down and increase its knowledge base – perhaps in the same way Cummins did. So after careful analysis Caterpillar decided to open up a remanufacturing plant in Bettendorf, Iowa, close to its Peoria headquarters. The idea was to test the waters of this new venture and see where remanufacturing would lead.

Ten years later, convinced that it was moving in the right direction, Caterpillar relocated its growing remanufacturing activities to Corinth, Mississippi and set-up shop in an abandoned factory building. Land was cheaper in this part of the country and the location was more central to the majority of Caterpillar’s customers as well as a proliferation of road networks. Three years passed before a second Caterpillar remanufacturing operation was opened up across town (Stahel, 1995). Success met with success and soon thereafter the company began operating a third facility in nearby Prentiss, Mississippi. Today, Caterpillar’s Sawyer plant in Corinth receives worn engines and assemblies from all over the country - mostly from dealers who send the company around 160 tons of used equipment (about 17 truckloads) every day. The items Caterpillar finds suitable for remanufacturing include engines, fuel pumps, injectors, oil coolers, cylinder packs, and hydraulic assemblies - each of which must be exhaustively taken apart by hand. On average it takes two workers a half-day of hard work to reduce one engine to its components. Every piece, including the tiniest screw, is saved because employees have been taught that anything placed in the trash is money thrown away (Business Week, 2006). The numerous pieces are then cleaned.

Almost every part that Caterpillar tries to salvage is embedded with grease, oil, carbon build-up, paint, or rust. A mixture of baking soda with ten-percent alumina grit is needed to remove these contaminants. Afterwards, the scrubbed parts are sent away for inspection and sorting and the waste used to clean the parts is collected and used as a reagent in the neutralization of acidic liquid waste – a process that renders both liquids non-hazardous and has reduced the company’s annual liquid waste from nine million pounds (over 4 million kilos) to 4.5 million pounds (just over 2 million kilos) (Assembly Mag, 2003). Of course, not everything is recoverable. The parts and materials that aren’t suitable for remanufacturing are passed on to the company’s foundry in Mapleton, Illinois, where they’re melted down and recast. In 1999, Caterpillar’s foundry recycled 235,526 pounds (106,835 kilos) of aluminum alloy; 16,865,767 pounds (7,650,312 kilos) of cast iron; and 5,680,509 pounds (2,576,679 kilos) of steel.

It hasn’t all been smooth sailing. One of the difficulties inherent in remanufacturing is maintaining a steady stream of used equipment. Without prior preparation it’s quite possible to receive several truckloads of used products one week and then nothing for several weeks afterwards. Caterpillar eliminates this problem by offering its customers incentives that make them unwitting suppliers in the remanufacturing process. For example, when a customer needs a new part or a new piece of equipment, he or she is first asked to submit the old one. When an old part is handed in the customer is rewarded with a new part at up to half its full price. If the customer does not hand in the old part, the full price is charged.

Additional lessons have also been learned. By designing and producing higher quality parts in advance, Caterpillar has discovered that it can get two or three lives out of its products. Manufacturing a component with another one-sixteenth inch layer of metal on it may cost more to create, but the company knows that this investment will ultimately yield more profits because the improved product can be remanufactured. For example, Caterpillar estimates that it can remanufacture a good engine three times before it simply can’t be used again – a practice, which produces such substantial profit margins that more than $1 billion worth of sales were reported in 2005 at Caterpillar’s Corinth operation alone (Business Week, 2006). Since its inception, this number has grown at least 15-percent annually.

Further savings are derived at Caterpillar from the company’s commitment to reuse and recycle common work materials to add to its remanufacturing processes. For example, the wood pallets on which most equipment arrives are regularly inspected, repaired, and reused. When they can no longer be fixed they’re sold to a packaging company as boiler fuel. Similar waste reduction systems are in place to reduce office paper, aluminum cans, computer equipment, and cardboard packaging. Today, 96-percent of the waste stream at Caterpillar’s Corinth plant is either reused or recycled – making the program so successful that it’s sparked off similar programs in local schools, government offices, and 15 nearby industries (All Business, 2000).

For all the dirty work involved, the costs of revitalizing a previously manufactured product are often 60-percent to 70-percent less than creating the product from scratch. This is because remanufacturing conserves the original energy, materials, labor, and manufacturing effort that exist in every product.
Generally speaking, in most manufacturing processes 70-percent of the cost of producing a product from scratch is needed for materials and 30-percent pays for labor. Remanufacturing tries to recover the 70-percent of material costs invested in the original product. By recapturing pre-existing value, remanufactured products cost about half as much to make as new products made from scratch.

How much energy and materials can be exhumed from a remanufactured product? According to studies undertaken at the Fraunhofer Institute in Stuttgart, Germany, the energy savings derived from remanufacturing worldwide equal the electricity generated by five nuclear plants or 10,744,000 barrels of crude oil carried by a fleet of 233 oil tankers. In addition, the amount of raw materials saved would fill 155,000 railroad cars and form a train 1,100 miles (1,770 kilometers) long. By avoiding these expenses, remanufacturing allows companies the choice of offering lower cost product ranges to customers while enticing new buyers into markets where the price of introducing new products is seen as prohibitively high (Lund & Hauser, 2003). Refurbished (i.e.: remanufactured) computers, for example, particularly laptops and PC’s, are renowned for offering exceptional value-for-money.

Source: Managing the New Frontiers by Jonathan T. Scott (Management Education Services, 2008) pgs, 302-305