An analysis of uncertain returns, demand benefit and regulation on

An analysis of uncertain returns,
demand benefit and regulation on
product recycling claims
Prof. Ananth Iyer
Susan 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
Glass manufacturing industry – An example
Benefits 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
• What can regulators do to increase returns and
decrease variability?
– One Source recycling
– Use technology to simplify refund process
– 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
• 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 ≥ recycle claim
• Loose regulation – Average recycle rate over two periods ≥ recycle
– Demand deterministic and linearly increasing in claim.
Demand benefit for tight regulation
– Bottle bills : reduced variability keeping mean returns
Timeline of events
Free cullet U1 received.
Manufacturer can buy cullet at
this stage.
Manufacturer makes
ex-ante recycle claim r
Free cullet U2 received.
Manufacturer can buy cullet at this
Period 1
Manufacturer decides the
actual/target recycle rate and
meets demand.
Period 2
Manufacturer decides the
actual/target recycle rate and
meets demand.
• 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
• 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
– 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
– 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

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