Magazine Spring 2009 Research Feature

The Profit-Making Allure of Product Reconstruction

Whether it involves recycling, refurbishing or remanufacturing, product reconstruction can offer attractive consumer prices, high-quality goods and a host of profit opportunities.

John A. Pearce II Reading Time: 16 min 

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Image courtesy of Flickr user edcrowle.

In the face of a global recession and a recovery that could take years, minimizing the costs of raw materials and supplies is becoming a higher priority among manufacturing-company executives. “Product reconstruction” in particular—the recovery of used goods, their processing and their resale—looms as an excellent way for a company, perhaps your own, to enhance revenue, profits and market share.

Reconstruction, which covers a continuum of activities from recycling to refurbishing to remanufacturing,1 allows companies to sell goods at lower prices than if they were to assemble nearly identical new products. In most cases, the prices of remanufactured products are 50 to 75% lower than those of new ones.2 Despite lower prices, however, reconstruction provides customers with high-performance goods.

The leading question

Does your company have what it takes to succeed at product reconstruction?

Findings
  • Product reconstruction—recycling, refurbishing or remanufacturing—allows for higher profit margins (typically, 20%) than the creation of new equipment (3 to 8%).
  • The appropriateness of product reconstruction for a company depends on the nature of its customers—six kinds in particular make for the best fit—and its specific core competencies.
  • Federal and state governments are encouraging the product-reconstruction trend through legislation and public/private programs.

Product reconstruction also allows for higher profits than the manufacture of new equipment. The average profit margin for product-reconstruction activities is 20%,3 whereas margins in the manufacturing industry typically range from 3 to 8%. By beginning the reconstruction process with components that retain much of their original value, a company eliminates many of the costs that would be incurred if the manufacturing process were to start from scratch.

Additionally, product reconstruction within a larger corporation can provide a new revenue source, allowing the company to profit multiple times from its initial investment. It can use product reconstruction to leverage its knowledge base and manufacturing facilities.

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About the Author

John A. Pearce II is professor of management at Villanova University, where he holds the VSB Endowed Chair in Strategic Management and Entrepreneurship.

References (19)

1.J.A. Pearce II, “In With the Old: Reconstructed Products Offer a Promising Market for Many Companies,” Wall Street Journal, Monday, Oct. 20, 2008.

2.National Center for Remanufacturing and Resource Recovery, “Remanufacturing Industry Timeline,” Rochester Institute of Technology, 2006, www.reman.rit.edu/timeline.aspx.

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Comments (4)
Laser Blue
Minimizing the costs of raw materials and supplies is becoming a higher priority among manufacturing-company executives. Product reconstruction, in particular the recovery of used goods, their processing and their resale, looms as an excellent way for a company to enhance revenue, profits, and market share.
Siswanto Gatot
the idea of product reconstruction should be understood as the next step of manufacturing process, ecomanufacturing. ecomanufacturing means low cost, low  CO2 emission and low price
Guy Siverson
Another advantage to product reconstructions (also known as refurbished products) is that they tend to be more eco-friendly than buying a new product every time.

Do you have a ideas for products that are best bought new verse one's that lend themselves nicely to the world of product reconstructions?
drsbanerji
Product decisions should not be internal. Fresh design or assembly can also be perceived as integral to new product development. It is always a matter of meeting new customer requirements. Any other motivation is unlikely to add value.
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