It's been said that "one man's trash is another man's treasure." HBS Assistant Professor Deishin Lee, however, has taken that old adage a step further in her recent working paper Turning Waste into By-Product by showing how it's possible for companies to turn their trash into their own treasure.
The concept of by-product synergy (BPS) consists of taking the waste stream from one production process and using it to make a new product. The concept is hardly new—in agriculture, cast-off corn husks are converted to animal feed, and discarded cow parts are turned into everything from leather to jet engine lubricant.
“You need to ask what are your resources, and how can we organize to maximize the value we create?”
But Lee's research extends the concept into industrial processes, using an analytical model to show that a modern manufacturing plant can use BPS to make any number of new products in order to both reduce environmental impact and increase profits.
"Every manufacturing process creates something—a car, paint, chairs—but in addition, other outputs are collaterately generated," says Lee. "The default disposition of these outputs has been some form of waste disposal, but we need to change that mindset."
In the simplest analysis, productively using waste instead of trashing it can cut costs by reducing disposal fees. Some companies have taken that a step further by opening up additional revenue streams through by-product sales. But according to Lee, the greatest returns are realized when a company widens its scope to think strategically to consider it as a joint production process.
"You have to stop thinking of yourself as a company that creates a certain product and instead think about the resources you have (including raw material resources) and how you can use them to produce as much value as possible," says Lee. In some cases, that might mean, paradoxically, creating more waste, not less, in order to maximize profit.
Making A By-product Strategy
Lee explains she originally backed into the concept of BPS. Her past research focused on environmental sustainability, examining how companies could minimize their impact on the environment. Thinking that a recycling firm would be the most logical place to start, she contacted Gordon Forward, CEO of Chaparral Steel, a Texas firm using recycled steel to make new products. But when she contacted him, he was extremely excited about the notion of by-product synergy, something he experienced first-hand in a partnership with cement manufacturer Texas Industries to use the steel slag waste stream to make Portland cement. "He said he challenged his organization to think not as a steel company or a cement company, but as a company that had resources and capabilities and asked, 'What could we do with that?'"
Intrigued by the concept, Lee began researching the possibilities. She developed a model with three scenarios based on the relative value of the original product, the by-product, cost of waste disposal, and cost of raw materials. In the first scenario, where the by-product is of low value, a company might maximize profit by only turning some of the waste into a new by-product, while still disposing of some of it through traditional means. In the second scenario, as the value of the by-product increases, it might make more sense to actually increase the production of your primary product in order to increase more "waste." In that case, even though profits might fall for your primary product as the market becomes saturated, the increased profits from the secondary product would more than compensate for the loss.
In addition, the production of more waste might have other beneficial consequences as well. One case study Lee examined is a manufacturer called Cook Composites and Polymers Co., which produces gel coats for high-end yachts. One of the wastes produced in the manufacturing process is styrene, a chemical used to clean molds between batches, which can also be used to make coating for concrete. Productively using the styrene waste stream gave the company more degrees of freedom to optimize the now joint production process, creating a win-win situation.
Using the waste stream to make new products doesn't always create such serendipitous scenarios. A classic example, says Lee, are chicken wings. Years ago, wings were thought of as waste, processed into any manner of lesser quality chicken products. When buffalo wings began appearing at every football game tailgate party, however, wings suddenly became a hot commodity. Since BPS implies a proportional quantity relationship between products, it becomes more complicated to manage production. Should the demand for breast meat be driving the production of chicken, or should it be the wings?
The third scenario Lee considered is where the by-product becomes more profitable than the original product. In that case, an industrial manufacturer 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 companies for the secondary product that are limited to sourcing virgin material.
More Emissions Possible
Ironically, increasing production in this way doesn't always have a net positive effect on the environment; in fact, it can lead to even more production of emissions through increased production of the by-product.
"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," says Lee. On the other hand, it's hard to quantify the net effect of the entire joint manufacturing process on the environment, as BPS may change the nature of the environmental impact. After all, she asks, "Is it better to have carbon in the air or toxic waste in landfill?"
Then there's the fact that increasing production could come mostly at the expense of competitors, leading to a net zero effect on industry emissions overall—and in some cases, using the waste for by-product production may decrease emissions over using virgin material. Take Chaparral Steel, where Forward estimated the company cut carbon emissions by 10 percent and decreased energy usage by 10 to 15 percent in the concrete production process because the steel slag had already been treated in a way that is value-added for cement production.
In order to take advantage of those kinds of savings and the potential profits of by-product synergy, a company must broaden its focus beyond a market-driven managerial approach that only takes it cues from what customers want, and also look at what the company is well-positioned to produce.
"If you look at everything as market-driven, it's very unlikely you'll get to operational synergies that fully leverage natural resources and capabilities within the firm," says Lee. "You need to ask what are your resources (raw material, labor, and capital), and how can we organize to maximize the value we create? Merging this with the market perspective can then be very powerful. "
And if your trash turns out to be someone else's treasure, well, then so much the better.