The practice of outsourcing cartridges by remanufacturers and dealers alike has been an ever-increasing phenomenon in our industry over the past several years. Based on discussions with numerous outsourcing providers and market research data, the trend appears to have no end in sight. As a matter of fact, in relationship to the standard life cycle of industries, the outsourcing of laser and inkjet cartridges is consistent with the natural law of consolidation within any given industry.
The Downside: Industry “Shakeout”
Using the terminology of economics, consolidation is consistent with industry “shakeout.” Shakeout occurs when companies fall out of the total population of companies within a given industry due to competitive reasons. In the remanufacturing industry the reasons for shakeout are many: technological difficulties, capital costs, expanding number of types of cartridges produced, poor cash flow management and costs exceeding price of units produced.
The toner and inkjet remanufacturing industry is truly an industry of entrepreneurs. A broad glance across the industry landscape will reveal that literally thousands of budding entrepreneurs entered into this industry in the late 1980s when only a few types of Hewlett-Packard cartridges where being produced in local markets, yielding phenomenal profit margins well exceeding 60 percent. A number of these original industry members are still active, but with more defined business models. However, many of the original players are no longer competing due to various reasons, such as bankruptcy, selling the business, pursuing other interests or still functioning as dealers of cartridges but no longer producing cartridges in-house.
The Upside: Unprecedented Expansion
Despite the natural laws of industry consolidation, our industry is experiencing an amazing expansion phase in terms of units produced per month. Due to improvements in quality and technology, in conjunction with a growing appetite for lower-cost remanufactured cartridges by consumers, actual demand for remanufactured products is increasing and with it the number of units produced per month in the industry. This trend has been fueled by the recent flat economy and expanding channels of distribution, comprised of local dealers, Internet distributors, office supply superstores and contract stationers. (For the purposes of this article, it is important to note that references to outsource remanufacturing is not limited to sales of cartridges strictly to remanufacturers or former remanufacturers. It also encompasses all of the aforementioned channels of distribution.)
The Few Supply the Many
Perhaps one of the most impressive statistics pertaining to outsource remanufacturing is that the top 4 percent of all remanufacturers in the United States produces more than the combined output of the remaining 96 percent of the industry in any given month. (Please note that this statistic is based on the author’s own interpretation of Lyra Research’s 2002 Remanufacturer Survey.) To many within and outside the industry, this statistic might be alarming if the perspective is one of distribution of wealth being concentrated upon a small percentage of the industry. In all candor, however, this percentage is representative of the natural order of economic evolution within an industry and, in reality, represents efficiencies that benefit the large-scale outsourcers and their customers alike, who earn very respectable profits from the purchases of wholesale laser and inkjet cartridges.
The Pros of Consolidation
So, is the consolidation of remanufacturing good for the industry? The answer is unequivocally, yes! Some might ask why consolidation is good. It really boils down to one common denominator: a higher quality, lower-cost product for end-user consumers. Not only are prices lower and products are of higher quality than in the past, but also they are being produced in much greater volumes then if left to our industry’s original model of several thousand small producers distributing solely to local markets.
Greater Efficiency, Lower Costs
Greater efficiency and lower costs can be achieved by remanfacturers who produce several thousands of specific types of cartridges. These producers can buy at better prices due to volume purchasing of toner and components. In addition, they can standardize and streamline their procedures to create efficiencies not normally seen in most small operations. Furthermore, large-scale, wholesale producers can offer colorful packaging and branding options that typically exceed what a smaller operation can reasonably afford. More important, small remanufacturers can compliment their own production in a cost-effective manner that expands their remanufactured product offering. All of these factors benefit consumers and dealers alike.
Environmental Benefits
The other key benefit of the expansion of overall cartridge production is related to the environment, because as more cartridges are being remanufactured per month, fewer empty cores end up in landfills. Once again, the overall consolidation of the industry benefits more than wholesalers, dealers and consumers. Mother Earth has also become a beneficiary of consolidation. Another positive outcome of increased cartridge production across the industry is more jobs. More cartridges being produced translate into more jobs for production workers, quality control staffers, packagers and shipping and receiving personnel.
The Cons of Consolidation
Admittedly, the scenario of consolidation is not always a rosy one. A small remanufacturer or former remanufacturer who buys cartridges from an outsource supplier loses control of remanufacturing, which can result in occasional quality or supply issues beyond its control. Both of these problems affect the small remanufacturing company and its customers, and, in some instances, such problems can be fatal to a business relationship. The worst words an outsource provider can hear is, “I lost my best customer today, because your cartridges failed and the company elected to go with another supplier.”
Another perceived trade off is profit margin. Often, a remanufacturer can produce a cartridge and achieve a higher profit margin if it makes the cartridge in-house. However, the affiliated capital costs for test printers and associated operational costs can quickly offset any additional profit dollars achieved through internal production. In the end, it comes down to the most efficient use of capital. Certain dollars should be spent on the selling of cartridges, and certain dollars should be spent on the production of cartridges. Somewhere in this equation is a departure point that says, “From a capital and cash-flow point of view, our company is better off letting a large remanufacturer produce this cartridge for us and our customers.”
Cores are at the Core
One other factor that influences the outsourcing equation is the one fundamental requirement this industry needs, and that is quality cores in sufficient volume to meet market demand. As volume continues to grow, cores will be in higher demand, and the prices of cores will increase if shortages occur. The marketplace has experienced this situation on many occasions, especially when new printers are introduced by the OEMs. It is something we as an industry have overcome in the past and should continue to as long as we are innovative in our ability to capture empties. This is particularly true in the inkjet sector of the marketplace. The increasing complexity of chipped technology and the use of advanced chemical toners both in black and color toner will continue to place an increasing emphasis on outsourcing of cartridges, because many smaller remanufacturers will not be able to keep up with the pace of change and the associated costs.
A New Industry Model
The natural result of technological change, quality demands and volume requirements will be to create a need for large-scale outsource remanufacturers that function more like OEMs in the way they produce their products. While this is not an eye opener, it is a sharp irony that we as an industry will more and more resemble the companies that we have collectively battled over the past 15 years or more in terms of the way we produce our products. For the consumer, this evolution is a good thing in that the quality of remanufactured products will continue to advance over time, and the breadth of the remanufacturing industry’s collective product lines will continue to grow. And along with these changes, hopefully, the remanufacturing industry will further develop and maintain fair business practices and avoid the anti-competitive practices the OEMs have engaged in over the years.