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November 1, 2014

Closing the Circle

Remanufacturing, new product life cycles and other sustainable strategies cut waste, boost efficiency and increase competitiveness.

Under a blinding desert sun, more than 4,000 aircraft sit side by side and nose to tail. Known as the boneyard, it’s a vast landscape of old flying machines, covering 4 square miles near Tucson, Arizona. This is where many military planes and some commercial ones end their life.

Sean McGeough, CEO of Cleveland-based Nextant Aerospace, imagines that, years earlier, this could have been the final resting place for his company’s aircraft. But McGeough and his team have created an airplane remanufacturing operation that eliminates the need for such an aviation graveyard.

Nextant instead has built a thriving business based on modernizing “long at the tooth”—as he puts it—business jets. His company does not merely modify these geezers. It delivers a “like new” plane at half the cost with a new and more efficient engine, new avionics, improved aerodynamics and an upgraded cabin. “Instead of just buying new aircraft, we take an airframe and extend its life,” McGeough says, with a 120-day, 6,000-man-hour “holistic” process that results in an FAA-certified jet that sells for about $5 million. The price tag on a comparable brand-new machine: double that.

To date, Nextant has delivered 50 remanufactured business jets to 12 countries around the world with a backlog of more than $175 million in orders. McGeough says those pending orders represent about 120 jets out of a total existing fleet of 650 old Beechjet 400A/XPs. Not only does that mean these used aircraft won’t end up as scrap or worse, “when we bring it back to new, it drives the value of the entire fleet up.”

 

Pursuing a Circular Economy

Welcome to the new world of industrial economics and manufacturing, an era of disruption and change where innovative and resilient leaders are identifying new ways to sustain and expand their businesses. Much of this is happening in metals-intensive and metals-related sectors, and it has already begun to change how business is done up and down the value chain. Increasingly, manufacturers are expanding and deepening their relationships with suppliers, seeking innovative design solutions and rethinking the life cycle of their products.

While Nextant is a remanufacturing pioneer in its industry, it is one of a growing number of manufacturers and other companies capitalizing on the opportunity and need to carve new markets and profit from a shifting global landscape. They are looking at a rapidly expanding global population, a doubling of middle-class consumers by 2030 to nearly 5 billion, and the prospects of growing resource shortages and rising prices. The result: economic initiatives driven by the overarching notion that the planet’s resources are finite and there are more efficient, more innovative, more ecological and, yes, more competitive ways to make use of what we have.

 

From Straight Line to Circular

The approaches vary widely, including sharing rather than buying cars (think Zipcar and Uber), leasing jet engines by the hour (Rolls-Royce), recycling and even not washing jeans to save water (Levi Strauss & Co.) and using recycled consumer plastics rather than metals in cars. It means redesigning products and manufacturing processes to extend their life spans, drive growth and in many cases dramatically alter the supplier-customer relationship. Taken together, this means moving beyond the traditional and linear “take-make-dispose” model of consumption (which depends on increased resource consumption for growth) and replacing it with a circular system that emphasizes reusing resources and conserving energy as a way to recapture and expand value.

“There is increasing recognition that resource efficiency and security are critical to future economic competitiveness and resilience—for countries and companies alike,” notes Felix Preston, a senior research fellow for Chatham House, a leading London-based think tank, in his white paper “A Global Redesign? Shaping the Circular Economy.” “This requires a fundamental rethink on the role and function of resources in the economy.” To do so, he explains, requires “putting sustainability and closed-loop thinking at the heart of business models and industrial organization.”

The notions themselves are not so new. Ideas surrounding “regenerative” or “cradle-to-cradle” design, industrial ecology, bio-mimicry and closed-loop manufacturing date back to the 1970s. But the concept of a circular economy has been gaining traction in recent years due to a series of interrelated factors. As noted by the Ellen MacArthur Foundation, the leading research and advocacy group for the circular economy, and the World Economic Forum, these include:

  • The rising and unpredictable cost of raw materials and energy. Commodity prices overall increased nearly 150% from 2002 to 2010. Price volatility for metals alone was greater than any decade in the last century, and such industrially important elements as gold, silver, indium, iridium and tungsten are likely to be depleted in the next five to 50 years.
  • Dramatically growing consumer demand on a global scale.
  • The need for more resilient employment.
  • Consumers who increasingly prefer using instead of owning.
  • Rising urbanization that lowers waste collection costs.
  • New sensor technologies to track materials and products across global supply chains and provide increasingly useful data on a product’s life cycle.
  • An expanding body of carbon, energy and waste-related legislation and regulation, particularly in Europe.

Proposals this summer by the European Commission (EC) to ban burying recyclable waste in landfills by 2025 and to recycle 80% of packaging waste by 2030 illustrate its efforts to develop a more sustainable ecosystem. The EC contends that the legislation would create more than half a million jobs and make use each year of some 600 million metric tons of materials now discarded as waste. This follows the EC’s “Manifesto for a Resource-Efficient Europe” announced in 2012: “In a world with growing pressures on resources and the environment, the EU has no choice but to go for the transition to a resource-efficient and ultimately regenerative circular economy. Our future jobs and competitiveness as a major importer of resources … are dependent on our ability to get more added value.”

Price volatility for metals alone was greater than any decade in the last century, and such industrially important elements as gold, silver, indium, iridium and tungsten are likely to be depleted in the next five to 50 years.

Beyond the legislative push, a growing number of global corporations have allied themselves with this shift, joining the “Circular Economy 100” intended to accelerate the transition by sharing best practices and joint problem-solving. Coca-Cola, Unilever, Cisco and Ricoh are among them, but they are not the only ones taking an aggressive stance.

Procter & Gamble, the global consumer products company, says it has achieved “zero manufacturing waste to landfill” at 50 of its operations worldwide. P&G says that, since 2009, it has created more than $1 billion in value from waste by recycling, repurposing or converting it into energy. This includes using scraps for upholstery filling and making roof tiles.

Harbec, a small precision plastics and metals manufacturer in Ontario, New York, has committed itself to conserving energy and natural resources throughout its operations. This has translated into such initiatives as employing wind turbines for heat and power, capturing a million gallons of rainwater each year to help cut its energy consumption and seeking customers interested in reusable packaging.

Herman Miller, the Zeeland, Michigan-based maker of office furniture, has created several dozen “cradle-to-cradle” products that rely on recycled content, eliminate toxic chemicals, are easily deconstructed and can be almost totally recycled. This design and production process started with its Mirra chair, which primarily uses aluminum, steel, plastic and foam/fabrics, and involves 65 components and subassemblies from 18 suppliers.

Philips, the lighting maker headquartered in Amsterdam, has an ownership stake in nearly two dozen EU collection and service firms that gather some 40% of all mercury-containing bulbs on the market and boasts a recycling rate of more than 95%. It also has begun contracting for a full lighting service, rather than just selling hardware. In its “pay per lux” model, business and municipal customers pay Philips a regular fee to handle lighting design, equipment, installation, maintenance, and eventually replacing and recycling the fixtures. In some cases, the electricity itself is entirely funded by the savings in energy and maintenance costs.

Clearly, Philips’ CEO Frans van Houten is all in: “Like all major transitions in human history, the shift from a linear to a circular economy will be a tumultuous one,” he has written. “But if businesses, governments and consumers each do their part, the Circular Revolution will put the global economy on a path of sustainable long-term growth.”

 

Caterpillar Gets On Board

It’s not only European global enterprises that are leading this charge. At its annual shareholders meeting in June, Caterpillar Chairman and CEO Doug Oberhelman emphasized the company’s commitment to sustainability and its decision in 2014 to make it a core value.

Oberhelman noted that since 2006, Caterpillar has cut its energy intensity by more than 25%, cut water use intensity by more than 35% and reduced greenhouse gas intensity by more than 35%. (Intensity measures the full product cycle—the amount of a given resource required for the production, distribution and disposal of a good or service.) To highlight the company’s commitment, Caterpillar held the annual meeting at its flagship remanufacturing plant in Corinth, Mississippi, which produces engines, cylinder heads, cranks and blocks.

“Over the last 10 years, our U.S. and overseas remanufacturing facilities have returned more than 500,000 tons of materials—materials that might have otherwise been scrapped or gone to a landfill,” he said. How much is that? Oberhelman noted that the Empire State Building weighs 365,000 tons. “We’ve returned that amount, plus another 135,000, and we’ve kept over 1 million tons of greenhouse gas out of the atmosphere through remanufacturing alone.”

Mark Stratton, general manager for Cat Reman, a division of Caterpillar, insists that remanufacturing is the key driver of change. “I think remanufacturing is the poster child for the circular economy. Our whole focus is keeping end-of-life products out of landfills, restoring them and giving them another life without starting over. The magic of remanufacturing—rather than recycling—is not only to save the raw material, but also the energy that it took. We don’t have to start over: These products just get to roll right back into the economy.”

It’s a view strongly supported by Nabil Nasr, director of the Golisano Institute for Sustainability at the Rochester Institute of Technology, who has studied remanufacturing for 25 years and has witnessed its accelerating growth. He estimates that remanufactured goods from the United States alone now represent more than $100 billion in annual sales, and remanufacturing encompasses thousands of product categories and employs approximately half a million people.

 

Beyond Environmentalism?

While Nasr sees remanufacturing as integral to the growing focus on a sustainable, low-waste economy, capturing a majority of the materials, energy and labor that went into the original products, he does not link the development to environmentalism. “I can’t think of one manufacturer that got into it because of the environmental issues,” Nasr says. “Remanufacturing has higher margins. It makes money. It closes the loop with customers. It’s good for business.”

In Caterpillar’s case, the remanufacturing business can be traced to a request in 1973 from Ford Motor Co. Executives in the trucking division wanted Caterpillar to rebuild old engines. Reluctantly, Caterpillar took on the work because it wanted to keep selling Ford new engines. “We didn’t just naturally start it ourselves,” Stratton acknowledges. “It was done to serve the customer.”

These days, with its remanufacturing operations estimated to generate more than $3.5 billion in more than a dozen factories in the United States, Europe and Asia, it’s no wonder that Caterpillar showcases its success. “There’s been a rapid spike in growth that happens almost naturally when customers recognize the benefit,” Stratton says. And that’s only accelerating as global companies and governments focus on reducing waste and driving growth. “Governments around the world are gaining appreciation for ‘reman’ as a positive contributor to sustainability,” he says. “The business benefit has opened the dialogue for global development.”

Increasingly, manufacturers are expanding and deepening their relationships with suppliers, seeking innovative design solutions and rethinking the life cycle of their products.

Still, there’s more work to be done in changing perceptions of decision-makers, customers and the general public. “In the early days of recycling, there’d be a concern about using recycled goods. [People would ask,] ‘What’s that?’ Now you pick up a Starbucks cup and see it’s made with 10% recycled goods. You don’t say, ‘I don’t want that; it’s used.’ That’s where we need to get with remanufactured goods.”

 

Creating an Industrial Ecosystem

Earlier this year, the World Economic Forum (WEF) in partnership with the Ellen MacArthur Foundation estimated that more than $1 trillion could be generated annually by 2025 if companies developed and expanded circular supply chains to raise the rate of recycling, reuse and remanufacture. Their report, “Towards the Circular Economy,” released in January at the annual meeting in Davos, Switzerland, emphasized the need for more circular flows of key global raw materials, such as polymers, steel and glass. “This would be a decisive step in itself,” the report noted, “allowing re-used and virgin materials to become interchangeable.”

In an effort to propel the movement, the WEF and the Ellen MacArthur Foundation announced Project Mainstream, a two-year initiative to create business partnerships in a range of industries to tackle issues such as materials management, information technologies and other business innovations. The stated goal: $500 million in material cost savings and more than 100,000 new jobs over five years.

This ambitious program—attempting to push beyond individual solutions, government regulations and a lack of uniform standards and public subsidies—acknowledges the need for the private sector to drive innovation. “Project Mainstream will leverage the convening power of the World Economic Forum and bring together a group of business leaders capable of triggering widespread innovation and employment,” said Ellen MacArthur, the foundation’s founder, in a prepared statement. 

As Chatham House’s Preston sees it, the speed of change is enhanced by technological advancements. “For the first time, you can track individual items all along the supply chain and really work out where there are inefficiencies in the system,” he says. This can have even greater impact when enterprises have created partnerships and networks of companies at various points of the supply chain. Still, on a global level, these are early days. “As we stand today, I don’t think we can really say the world is more circular, it’s more that we’ve slowed down the use of resources.”

As Rochester Institute of Technology’s Nasr notes, “The EU is very invested in the closed loop and circular economy. You don’t see the same energy in the U.S.” But he has little doubt that that must change. “Unless we are able to all of a sudden find significant resources, we have to do this. We have material shortages and the costs will go up. Sooner or later, you have to form an industrial system to survive.”

Preston agrees. He notes that governmental action is often critical to accelerating the pace of innovation in material sciences and product design. “In the absence of government policy, there will always be some pioneering companies,” he says, “but they won’t be enough to address the real resource pressures we face.”

 

How the Threat of Crisis Inspired Change at GE

It’s hard to overstate the global reach of GE and its dependence on material supplies to sustain its business. GE operates in more than 100 countries and employs more than 300,000 people. It spends $40 billion each year on materials, including about $4 billion to purchase metals and alloys, and it makes use of 75 of the first 83 elements in the periodic table.

Over the last decade, GE recognized a growing risk of material shortages that could lead to production disruption, particularly for rare metals such as rhenium, which comes primarily from Chile, the United States, Peru and Poland. An alloying element in high-pressure turbine blades for jet engines and energy generators, rhenium is used by GE at a 3% level to reduce corrosion and operate more efficiently at high temperatures (it has the highest boiling point of any metal). “All of our materials are getting more complex. Some of our alloys have eight, nine, 10 elements in them,” says Steven Duclos, chief scientist for GE Global Research.

GE knew it had a problem when the price of rhenium increased by as much as six times. “The price went very high because all jet engine makers realized it was a great element,” Duclos says. “It was simply getting harder to obtain—to find people that would sell it at a volume we needed.”

Determined to avoid disruption and minimize the economic impact, GE discovered that “there are many things that a company can do, and we did all of them in parallel,” Duclos says. These included:

  • Improving sourcing by diversifying the supply chain and working more closely with suppliers.
  • Improving the manufacturing techniques to reduce the amount of scrap material.
  • Introducing recycling technologies to use elements from manufacturing scrap and “end-of-life” products, as well as expanding its recycling program with customers of its engines.
  • Redesigning the engines to make it easier to disassemble the components and recycle the valuable material.
  • Designing alloys with less rhenium.

The result? “This is a problem we solved,” Duclos says. “Now we are in better shape, the world is in better shape, and the price of rhenium is down.”

The experience motivated GE, which used 2.8 billion pounds of raw materials in 2010, to create a “criticality analysis” or what Duclos calls “an early warning system” to anticipate material shortages and potential disruptions. With a five-year horizon, “it’s enough time to respond,” he says.

The experience also deepened the company’s commitment to sustainability. As Duclos and Anthony Ku, a senior scientist with GE Global Research, noted in a recent article, “We believe that material sustainability—the usage of increasingly scarce raw materials in a sustainable manner—will increasingly drive the design, manufacture, use and end-of-life fate of future products.”

Note the emphasis on design. As Duclos explains it, “This is about how you design your products to be made in a way that conserves materials and can be reused and have a longer life—that don’t need to be replaced all the time.”

That’s the kind of thinking that influences the work of GE’s staff of more than 45,000 scientists and engineers around the world. As Ku told the U.S. House Subcommittee on Energy and Mineral Resources in July, “We invest a great deal of time and resources to develop new materials and processes that help reduce our dependence on any given material and increase our flexibility in product design choices.” He was there to advocate for a “clear and comprehensive national policy to assure domestic availability of minerals essential for national economic well-being, national security and global economic competitiveness.”

Surely, his position was strengthened by GE’s proactive role. It was neither waiting around for long-range public policy nor allowing short-term business realities to cloud the long view of a shifting global landscape. As Preston puts it, “These choices are not just about resources. They are about how you perceive the future of competitiveness.”


Steven Beschloss is an award-winning editor, journalist and filmmaker. His work has been published in The New York Times, New Republic, Chicago Tribune, Village Voice, Wall Street Journal and Parade Magazine.