By-Product Synergy

Transforming Manufacturing Waste into Profit

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) consistsof 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.
But Lee's research extends the concept into industrial processes, using an analytical model to show that a modern manufacturingplant 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 simplestanalysis, 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 ofyourself 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 conceptof 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 ofby-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 beganresearching 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 traditionalmeans. 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...