Turning industrial waste into gold

The idea that waste from a manufacturing process can be reused or sold is fairly well established.  In agriculture, cast-off corn husks are being converted into animal feed, while discarded cow parts are turned into everything from leather to jet engine lubricant. Harvard Business School professor Deishin Lee has pushed the notion of waste management even further with her concept of “by-product synergy.” As outlined in the school’s Working Knowledge newsletter, BPS is about taking the waste stream from one industrial process and using it to make a new product. According to Lee’s research, a BPS strategy can: 1) boost profits by reducing waste disposal fees;   2) create new revenue streams by using the waste to develop new products;  2)  decrease the environmental impact of a process and;  3) improve operational efficiencies through increased manufacturing utilization. 

Virtually every manufacturer defaults to a disposal or sale strategy when dealing with waste.  BPS looks at waste more strategically by asking a simple question:   What is the maximum value that can be extracted from the by-products given existing inputs, processes and capabilities?   At its full potential, BPS leads to the development of new products, derived from the by-product waste, and delivered through the same production process.

To tie her conceptual thinking into a practical tool, Lee developed a scenario-based model that is driven off the relative value of the original waste-generating product, the cost of waste disposal, and the cost of raw materials:

Scenario 1 – Waste has low value and utility  

Since the by-product is of low value, a company should not commit too much time or capital to repurposing the waste.  To maximize profits, firms would seek to dispose of the waste through traditional means and look for easy and inexpensive opportunities to turn some of the waste into a new product.

Scenario 2 – Waste has significant value and utility

As the value of the waste increases, managers would explore how to “productize” it within the existing operational model.  In some cases, there may be a profit incentive to actually increase the production of the original product in order to generate more “waste.” Though profits of the legacy product might fall due to market saturation or reduced operational efficiencies, the incremental revenue and profits from the secondary product could more than compensate for the loss.

Lee uncovered this insight in her study of Cook Composites and Polymers Co., a manufacturer of gel coats for premium yachts. One of the by-products created in the manufacturing process was styrene, a chemical used to clean molds between batches.  Interestingly, the firm discovered  styrene can also be used to make coating for concrete. Through productizing the styrene waste stream, the company gained more options to optimize the joint production process, creating a win-win situation for both products.

The operational benefits of manufacturing multiple products in one line will not always be apparent. Competing product priorities could generate capacity and workflow challenges since BPS implies a proportional volume relationship between products.

Scenario 3 – Waste is more valuable than original product

The company may discover that the by-product is more profitable than the legacy product. In this case, a consumer goods producer might deal with the problem by sourcing virgin material to create more of the secondary product. Not only does the company reduce costs for the original product by cutting down on waste, but it also gains competitive advantage over other firms for the secondary product – who are limited to sourcing virgin material.

Environmental questions

While BPS can deliver new revenues and greater operational efficiencies, its environmental benefits are not always clear cut.  According to Lee, “As you create more value and demand for your by-product, and you increase the quantity of everything, then emissions might increase, depending on process characteristics. That could be the unfortunate part of being successful.”  Furthermore, it is hard to quantify the net effect of a joint manufacturing process on the environment, as BPS may change the nature of the environmental impact.  In essence, Lee asks “Is it better to have carbon emissions or toxic waste in a landfill?”

Manufacturers with hundreds of inputs and complex production processes could face a dizzying array of BPS options.  To choose wisely, managers should apply a market lens to focus on what current customers want and what the company is well-positioned to produce. Properly planned and managed, BPS can be the alchemy that turns industrial waste into gold.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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