Case in Point: How a business can make recycling profitable, as well as noble
By Gal Raz and Michel Schlosser,
The big idea: Recovering and recycling one’s own products is not only good for the environment but can also be profitable.
The scenario: With sales of $2.8 billion in 2010, Sandvik Tooling is the world leader in cemented carbide inserts (the critical component of advanced metal cutting tools). Sandvik Tooling is part of Sandvik, a global high-technology group in Sweden.
In 1996, the company launched a program for recovering its inserts, called the Coromant Recycling Concept, coined after Sandvik Tooling’s leading brand, Coromant. The program was organized as a global stand-alone project: A new reverse supply chain was created. The rationale was to show that this activity was profitable and to recognize the differences between the forward and the reverse chains. The forward supply chain for Sandvik focused on responsiveness, enabling the company to deliver inserts to more than 200,000 customers within 24 hours almost anywhere in the world. The reverse supply chain, on the other hand, focused on cost efficiency and low environmental impact (low CO2 emissions) through slower but high-volume transport modes.
In 2010, 14 years after its launch, the recycling business was operating profitably, but in many countries, a ceiling prevented the company from recovering more than 50 percent of its products. In addition, Sandvik had a hard time promoting the CRC to its sales organization. Sales teams considered dealing with recycled inserts as counterproductive to meeting their sales objectives. Insert recovery did not affect their compensation. As such, they did not appreciate the strategic value of recycling, which enables Sandvik to have greater control over its supply of materials. (China is the largest producer of tungsten, the key element in the inserts.)
The fact that the take-back and recycling business was small made these issues hard to address. Sandvik’s forward business sells knowledge, and its solutions are priced many times the cost of material. Therefore, a stand-alone recycling business had no chance to compete with the forward business.
Should Sandvik accept that take-back and recycling, like many environmentally oriented activities, would remain marginal? Should it abandon it? Or should it transform and relaunch it?
The resolution: In 2011, the company decided to integrate the CRC into the normal selling process so that a new “value chain offer” could be promoted to customers.
Program enhancements were introduced under which customers were allowed to offset part of their tooling bills with their take-back payments. Resellers, who in the United States handle 90 percent of Sandvik Coromant’s sales, were closely involved. In 2011, Sandvik Coromant U.S. was the largest market of the company for total recycled volume, as well as for recycled volume as a percentage of weight sold. In fact, this past year, the U.S. organization recycled twice the volume sold to its customers! (Sandvik also recycles its competitors’ inserts.)
The lesson: Deciding to recycle one’s products is much more than adding a new business. Its genuine value is not the stand-alone value of a typical recycling business but instead often comes from the potential opportunities to reconfigure the existing business.
— Gal Raz and Michel Schlosser
Raz is a professor of business administration at the University of Virginia’s Darden School of Business. Schlosser is an expert in sustainable global leadership at Darden’s Batten Institute.