Manufacturers Gain with
August 1, 2018
addition to being environmentally friendly, recycling can help
manufacturers develop new, strategic sources of raw materials --
particularly rare and precious metals -- giving them a competitive
advantage, according to research co-authored by an Indiana University
Kelley School of Business professor.
Authors of "Recycling as a Strategic Supply Source," in the May print
issue of the journal Production and Operations Management, examined the
financial impact of recycling in the $20 billion industrial metal
cutting tool and inserts industry, finding benefits for customers such
as lower prices.
"Because you become your own supplier -- you sell your products and you
collect them and you recycle them -- it gives you your own source of raw
materials," said Gilvan C. "Gil" Souza, the Ming Mei Chair in Business
and professor of operations management at the Kelley School of Business.
"It insulates you from the volatility of the market, at least partially.
You're still buying some portion of your raw materials from the
commodity market, which is volatile, but if that's a smaller and smaller
portion, then that's a significant benefit."
Souza and his co-author, Gal Raz, associate professor of operations
management and sustainability at the Ivey Business School at Western
University in Canada, compared efforts by two companies. Sandvik Tooling
recycles tungsten metal inserts collected from its customers, while
ISCAR acquires its supply on the open market.
From 2005 to 2015, prices for tungsten -- which is used in drills,
military projectiles, lighting, golf clubs and automobiles -- rose from
$50 per ton to $350 per ton and have continued to skyrocket due to
concerns that supply may not be able to keep pace with demand. The vast
majority of the world's tungsten supply is produced in Asia. Sandvik
owns and operates a recycling facility in India, where the company sends
all the tungsten inserts it collects.
The two companies gave Souza and Raz a unique opportunity to study fixed
and variable recycling costs, in addition to collection costs, relative
to unit costs of virgin materials. Using a Nash Equilibrium game
theoretical model, they found that recycling can be a strategic supply
source, resulting in cost savings per unit, higher quantities and
"From the demand market perspective, we confirm that recycling is good
for customers and the society as market prices under recycling are lower
than under the case of no-recycling, while welfare is higher, and more
recycling the better," they wrote in the paper.
The value of using third parties to recycle common commodities such as
aluminum, steel and paper is well established. But manufacturers wanting
to recover rare materials such as tungsten may invest in their own
facilities to ensure quality, initially adding to production cost.
As one would expect, the competitive advantage is greatest when the
other manufacturer does not recycle. But Raz and Souza found that
companies faced increasing challenges as they sought to increase
recycling rates. Costs of collecting the used material go up at an
increasing rate as companies go farther to gather it from customers and
as companies begin paying more for smaller quantities more often.
some instances, they found that a manufacturer may recycle less if the
unit cost of the virgin material increases. This is because increased
costs of virgin materials reduce the firm's ability to finance the
higher collection costs associated with greater recycling rates. This
result emphasizes the importance of carefully researching the collection
and recycling cost structure.
Souza and Raz also studied the environmental impact. While finding that
recycling has a lower environmental impact per unit, the total industry
environmental impact from manufacturers recycling could be higher
because more is being produced overall.
"Regulators who are interested in lower environmental impact should
consider incentivizing firms to invest in technologies that reduce the
environmental impact of recycling as these would help recycling to be
beneficial from both economic and environmental perspectives," they