Recycling provides manufacturers with real competitive and economic advantages, study says

BLOOMINGTON, Ind. -- In 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 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 greater profits.

"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.

In 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 wrote.

Editors: For further assistance in obtaining a copy of the paper, contact George Vlahakis at the IU Kelley School of Business at vlahakis@iu.edu or 812-855-0846.

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