An analysis of uncertain returns, demand benefit and regulation on

product recycling claims

Prof. Ananth IyerSusan Bulkeley Butler Chair in Operations Management,

Krannert School of Management, Purdue University

*Joint work with Prof. Paul Lacourbe (CEU Business School) and PhD student Aditya Vedantam

Benefits of recycling in the glass industry

Glass manufacturing industry – An exampleBenefits of using recycled glass (“cullet”)• Reduced energy costs • Decreases by-products Saves raw material and carbon

requirements to produce• Reduces landfill dependence • Lower greenhouse gas emissions • Increases furnace life • Customer Requirement & Marketing Tool• Soda Ash Price has doubled in last 5 years

Role of regulators

• Major source of uncertainty in production – variable consumer returns

• Regulators objective – improve recycle rates for consumers

• What can regulators do to increase returns and decrease variability?– One Source recycling– Use technology to simplify refund process (www.tomra.com)– Grass roots movements like ‘Sustainindy’– Tighten evaluation window of claims– Bottle Bills

Effects of regulation like bottle bills on recycling rates

Role of Manufacturers• Manufacturers objective – Stabilize cullet returns, increase profits doing so• What can manufacturers do increase returns?

– Educate consumers about recycling benefits – Third party recycling

• Green wine bottles historically difficult to recycle• Wine Bottle Recycling LLC collects, sorts , washes & sterilize and repackage

wine bottles for resale

– Innovative recycling methods• In UK, green glass is not feasible to use for glass production• Green Mountain Glass LLC invented technology permits using mixed glass

from glass and clear bottles to produce new glass

– Support government recycling programs with human capital and funding

Potential conflict of interest

• Manufacturers and regulators objectives not aligned

• Initiatives like bottle bills encounter resistance from industry - argument is that container deposits drive down sales

• General notion in industry that regulation always hurts industry profits

Research interest

• Questions we are interested in– Under what conditions will tighter regulation of

claims by regulators increase manufacturer profits and claims?

– How do mechanisms to stabilize recycled content availability (such as bottle bills for glass) impact the level of recycled content use?

– How do schemes to increase the demand impact of recycling claims affect the recycled content used by manufacturers?

Our Model

• Objective: Find “win-win” conditions for both manufacturers and regulators

• Model features:– Two period model with stochastic cullet returns and linear

collection costs– Two levels of regulation

• Tight regulation – Target recycle rate claim• Loose regulation – Average recycle rate over two periods recycle

claim

– Demand deterministic and linearly increasing in claim. Demand benefit for tight regulation

– Bottle bills : reduced variability keeping mean returns constant

Manufacturer makes ex-ante recycle claim r

Free cullet U1 received. Manufacturer can buy cullet at this stage.

Free cullet U2 received. Manufacturer can buy cullet at this stage.

Period 1 Period 2

Manufacturer decides the actual/target recycle rate and meets demand.

Manufacturer decides the actual/target recycle rate and meets demand.

Timeline of events

Intuition

• Deterministic example – low returns in period one, high in period two

• Under tight regulation manufacturer recycles more than claimed – Cullet not contributing to claim (CNCC) or “leakage”

• Reducing leakage drives up tight regulation claim

• In loose regulation manufacturer can balance recycled amount with claim

Managerial Insights – tight regulation

• Tight regulation demand benefit should be greater than a threshold for win-win

• Regulation should be tightened in industries with – Higher margins – Low cost differential between cullet and raw

material – Low procurement cost of cullet – Low raw material procurement costs

Managerial Insights – tight regulation and bottle bills

• Bottle bills over tight regulation are win-win if reduction in returns variability is above a threshold

• Bottle bills should be introduced over tight regulation in industries with– Lower margins – High cost differential between cullet and raw

material – High procurement cost of cullet – High raw material procurement costs

Examples from industry

• Example: Beverage (soft drinks), Paper & paperboards– High margins, low cost of collection (high diversity rate, low

cost/ton ratio)– Tight regulation can lead to win-win– Government should focus on increasing redemption centers, take

steps to facilitate collection/sortation before introducing bottle bill.• Examples: Glass manufacturing

– Lower margins, high cost of collection (bulky, higher processing & segregation costs)

– Government & manufacturers should educate consumers about benefits of recycling, before regulation can be tightened

– Bottle bills can be less effective (higher variability) and still lead to win-win