Introduction
You are the vice president of manufacturing of a company that does not yet earn a profit from remanufacturing even though you manufacture capital equipment. Your plant could manufacture industrial machines, medical devices, trucks, packaging equipment, airplanes, or other products. And, of course, you also purchase capital equipment like machining centers, robots, paint booths, 3D printers, and various materials storage and handling systems. You are a capital equipment expert your friends and associates contact when making a CapEx acquisition.
On the other side of the organization chart, someone else is also an expert in capital equipment. They are less of an expert than you when it comes to acquisition but more of an expert than you for equipment lifetime support. This person is the vice president of service (support, aftermarket, field service, or parts sales). Depending on your industry, the vice president of service may be responsible for more significant revenue than the value of the products you ship and more likely more significant profit than the products generate.
How Can That Be?
The answer is straightforward. In most companies, the service organization receives some revenue for product installation and warranty support and all the income the company generates from your company’s installed base (the aftermarket). The aftermarket business should generate substantial results if the company has been in business for a while and the product has at least average reliability. This means the business has many years to harvest revenue while creating customer value.
Harvesting Revenue and Profit from Older Products
I like to break the services the OEM provides to its customers into two groups:
- The services that are used during the complete product lifecycle. — This is like the routine physicals and tests your primary care physician performs with you, regardless of age.
- The services associated with aging products. — Keeping with the medical analogy, this is like visiting a dermatologist, cardiologist, or ophthalmologist. You can see these specialists when you are young, but you will most likely need some of them as you age.
Businesspeople are generally familiar with the essential services offered by OEMs. Most have heard of services like refurbishing and remanufacturing, but their company has not provided them yet. But, a smaller number of companies are creating customer value while also earning revenue and profit by extending the lives of older products. Here are three examples:
- The B-52 bomber
- Caterpillar heavy equipment
- Medical devices
The B-52 Bomber Upgrade Story
The last B-52s still flying were delivered to the Air Force in 1962. They cost the government $9.3 million each, or $89 million today—quite a bargain.
- In the late 1970s, the wings’ top skins and tails were replaced.
- In 2011, Boeing rewired all the planes and upgraded some electronics.
- This year, Raytheon will be upgrading all the radars, and L3Harris will upgrade all radar-jammers
- Rolls-Royce will replace all the jet engines and pods with new, more fuel-efficient engines in the coming years.
- The government will spend $232 million per airplane to improve its capabilities by 2030. They want to keep the airplanes in service until about 2060, so there will be more upgrades.
- The B-52 is the gift that keeps on giving!
Caterpillar’s Western Australian Partner Gives New Life to Underground Loader and Generates a Large Profit from Remanufacturing
Caterpillar has been in the refurbishment and remanufacturing business for many years. However, unlike many companies, Cat© has a global network of distributor agents that are large businesses. Their Western Australian partner developed a program to give an underground loader a new life.
The Cat©® R3000H Underground Loader was designed for a 30,000-hour service life and to be remanufactured at the end. Still, WesTrac Bathurst had never remanufactured one and, therefore, had never generated a profit from remanufacturing.
Major work included:
- Remanufactured the engine, transmission, and hydraulics
- Replacing all worn parts that do not meet current specifications
- Updating software and adding all product enhancements
- Repainting the unit in the owner’s color choice.
Think about how much profit from remanufacturing was generated during this process.
The result was a machine with a new serial number, product warranty, and another 30,000-hour service life. It cost the customer only 65% of the cost of a new machine, and it was out of service for only eight weeks. It will again receive all the recommended preventative maintenance and remedial services it received in its initial life.
WesTrac plans to remanufacture five or six of these machines yearly from the same owner and others in Australia.
This process is a win for the owners, Cat©, and, most of all, the environment. Cat© recently reported that its remanufacturing activities kept 127 million pounds of materials out of landfills, and 88% of eligible end-of-life returns were collected. However, they did not quantify their annual profit from remanufacturing.
Caterpillar has been in the remanufacturing business for nearly 50 years. It remanufactures turbine and gas compressor components under the Solar Turbines brand, locomotives, and railroad tracks under Progress Rail. Finally, Cat© has a business dedicated to serving military users under the Caterpillar Defense brand.
Here is another example from Cat. Consider the Cat 797 dump truck. This truck costs about $5 million new, ships in sections, is assembled on-site, and has a planned operating life of 20,000 service hours before a suggested rebuild. Here is what Finning Cat (Western Canada) said about the vehicle: “Twenty-one years ago, Syncrude’s Cat® 797A Haul Truck went into service, and it is still going strong at their Aurora Mine in the oil sands. On December 4, 2020, it reached a major milestone and world record – 150,000 hours.” Finning’s mining branch manager, Eric Marquis, emphasized this accomplishment: “The 797A is still operating at peak performance. After ten engines, 1,578,272 km, and 165,776 loads hauled… it’s a true testament to the durability and reliability of 797s.”
How to Get into the Remanufacturing Business
There are a few prerequisites to consider before you start:
- You must know where the majority of your equipment is located and whether it is being used
- Identify how many similar items are nearing their end of service life
- You will require parts and trained people to work on them. Since qualiified people are difficult to hire, this may be an opportunity to return a few retired workers on a part-time, as-needed basis while assessing the venture’s viability and potential volume. These workers can document their work and train permanent workers if necessary.
- You should have a supply of needed parts. Remember that 10-year-old products were designed at least 15 years ago, and many electrical and electronic components may be out of production.
- If you think you will have to replace custom parts, ensure you have everything you need to make them and that your vendors have enough capacity.
- Likewise, with shipping material
- You should discuss your idea with the CFO. You may require the finance group to create new systems or procedures.
- Identify the highest version of any software you can install on the old equipment and determine if it will create value for the customer.
- Ensure all tools and test equipment will be available when needed without negatively impacting production and customer service.
- Find out if remanufacturing a legacy product will require issuing a new warranty.
If you have good answers to the above questions, you have three key steps to evaluate:
- What is the maximum possible cost? What will you charge?
- How much will setting up a workspace and other related business needs cost?
- How many total units might be returned for refurbishment at the list price you are considering? How many in the first year?
With satisfactory answers, you can document your story, update price lists, train your service sellers, update the website, and communicate the plan to everyone in your company and the extended team — like manufacturers, agents, and resellers. Once everyone is on board and the communications package is ready, it is time to launch the new service and generate a profit from remanufacturing.
Related reading – Unlock Growth from Your Installed Base
About Middlesex Consulting
Sam Klaidman is the founder and principal adviser at Middlesex Consulting. He helps his B2B product manufacturing clients grow their service revenue and profitability by applying the methodologies and techniques associated with Customer Value Creation and Customer Experience professions to assist his clients in designing and commercializing new services and the associated business transformations. Contact Sam here.
Image credit: Renee Gaudet from Pixabay