Core Control

In remanufacturing, how core value is carried on the books during, and at both ends of the remanufacturing process, can be the subject of much gymnastic accounting activity. Today modern, specialized software systems recognize cores as special items and properly track both the physical item and the accounting entity throughout the remanufacturing process.

Core Life Cycle Management

Core Banking

Core Tear-down and Remanufacture

Core Value Tracking

Billing and A/R Considerations

Summary

Core Life Cycle Management

Core Life Cycle Management is the management discipline involved in controlling the return velocity of cores. So that supply is aligned as closely as possible to demand patterns in order to achieve optional product availability. A by-product of this practice is that the occurence of obsolete and excess inventories are also substantially reduced.

From a material standpoint, policies and practices can vary greatly from one remanufacturer to another.

• Cores as Commodities: At one end of the spectrum are situations where cores are relatively cheap and readily available. The prime consideration of the remanufacturer in these cases is keeping an eye on the balance between his sales to customers and the cores that the customer has returned. Sales and returns are somewhat disjoined - sales occur and cores flow in, often without any apparent direct linkage between the two. The key is that cores are plentiful, but the price demand can fluctuate - at least enough to make things interesting, and sometimes deadly to an organization.

Some customers may try to "play the market" to the remanufacturers' disadvantage. This would include games where a customer sends in more than they buy when the price is high, to get maximum credit, and later retain their cores when advantageous to do so. This leaves the remanufacturer to track cores to protect himself from being victimized in the commodity marketplace.

• Cores as High Value Items: In this scenario, cores are relatively expensive and scarce. The remanufacturer keeps tight control to keep the supply of cores coming so that there is a basis to continue the remanufacturing activity. Cores are returned one-for-one, with the customer purchases under tight control. Cores are like gold. They are hoarded, or "banked", awaiting use in the remanufacturing process. Often, the price associated with the core is inflated to encourage the customer to play the game right.

It is critical that the software package used for tracking cores is sensitive to the needs and practices dictated by these different operating philosophies. Such sensitivity is expressed through "switches" that the user sets in their core software, and/or behavior profiles for customers or core parts, to indicate what the ground rules are when transactions occur for those customers or cores.

How Do You . . .

• Monitor Supply and Demand Patterns?
• Manage Return Velocity?
  • Have Different Billing/Valuation/Application/Bank Credit Methods?
  • Raise or Lower Prices?
  • Use Premium Pricing?
• Control Your Core Market?

If these issues are of concern to you, click the above button to request our White Paper entitled: "Core Management: The Competitive Advantage".

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Core Banking

A key to financial control, especially in situations where core values are high, is the concept of the "core bank". A core bank tracks the status of the core at the greasy end of the process. Starting with the sale of the remanufactured end item, the core bank should record the customer's obligation to return a core of the same or similar type (to replace the core used to produce the remanufactured item that he has purchased). Such tracking is accomplished by posting a "debit" to the core bank to reflect the obligation. The customer then has a certain amount of time to return the core, or else the system "drops" the core and issues an invoice to the customer to prompt him for payment of his debt. If the customer returns the core on time, the core is posted to inventory and the core bank is credited and the credit is applied to the debit, resolving the obligation.

When the core values are lower, remanufacturers often bill the customer for both the remanufactured item, and the core value associated with it, together on the sale invoice. The customer then must send in the core to obtain credit to offset the core charge. The core bank records the receipt, but acts more as a physical bank, reflecting the contents of the warehouse or yard full of cores on-hand, as well as the habits of the customer in fulfilling his obligations.

The core bank also has a "flip side" in that the customer may send cores in excess of the remanufactured items that he buys. Such core receipts build a liability and it must be tracked closely. Late sales must be applied correctly to offset these credits. Market conditions greatly influence policies in this area.

In practice, core banking software must be quite flexible to allow for the variations that can occur in real life. Cores may be received in bulk and in some cases, must be matched against outstanding debits. The application might be to the particular debit, or performed according to "oldest first" rules.

Defects may be discovered that demand the core be discounted, allowing only partial credit against the customer's obligation. As remanufactured items move through the distribution chain, it may turn out that one customer returns a core against an obligation originating from another customer's purchase. Another area of potential confusion is that cores may cross part-number boundaries, where the obligation generated by the sale of one item may be satisfied by the core for a different item.

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Core Tear-Down and Remanufacture

Dirty cores are torn down, meaning cleaned and stripped of useable and unusable parts. Useable parts are "recovered". Such recovery is usually predicted by a "teardown bill of materials", describing the anticipated yields. It is efficient to report the scrap quantities, as these are generally fewer to count. The system should calculate "good" quantities based on standard mortality factors in the teardown bill of materials. Recovered parts are posted to inventory at a standard recovery value. Later they are processed into resalable condition through normal production activities.

The core, now reduced to its base condition, is then remanufactured into a unit of like-new condition. From a financial tracking standpoint, it is key that recovered items be properly valued, and that the core value stay isolated from the labor and value-added in the remanufacturing process.

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Core Value Tracking

When a part is remanufactured, the value-added reflects the new parts used in the process, along with other consumables, replacements for broken or used up components, and new components added to upgrade the part. The value-added also includes the labor and other costs of the remanufacturing operation. However, the core value, once established, remains constant as the core flows through the system and is not diminished in the cycle of use and remanufacture, and reuse. A key to clear financial tracking is that the core value remains isolated from the value-added throughout the process. This is easy to do only when the system recognizes that for costing, a core is a special type of inventory item.

However, the value of a software systems that gracefully,a nd intelligently accomplishes this separation as the core moves through work in process and finished goods inventory transactions, greatly eases the job of financial control. The system should accomplish this trick through tight, automated integration between inventory transactions for cores and remanufactured items and the general ledger. The system must sense when a core part or a remanufactured part containing a core is transacted and immediately update the general ledger in such a way that it properly separates the value of the core and value-added portions of the cost.

When a remanufactured item is sold, the cost of the goods is seen as the cost of the labor, new parts, and burden. Profit is calculated on the value-added. The core value remains isolated from this picture.

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Billing and A/R Considerations

When a remanufactured item is sold, the various philosophies described above, influence how and when the customer would be charged for the core. Specialized software for remanufacturing should provide choices; allowing you to implement policies, consistent with your philosophy. The choices should include:

Of special importance here is the timely recognition of profit. If you pre-bill cores, you have A/R that is potential A/R, mixed with the real A/R on your books. Until the customer's window of opportunity to return the core expires, potential A/R must be properly understood. When the customer's window expires, the bill then becomes payable in cash. Software should allow you to see the difference between billings for which you can reasonably expect to see a core returned, and billings for which you expect cash. The business of remanufacturing demands clear visibility of up-to-the-minute information on the status of the core bank, both physically, as well as by customer (and even by family of customers). This should include summary and detailed agings of core bank transactions, and the ability to print customer core bank statements. To control cores, you need complete and accurate information about core value in inventory, work in process, and A/R.

Flexibility is essential. In many real-life situations, it is necessary to accept substitutions where you physically accept one core into inventory, yet apply the receipt to the debit for another core, or even another customer's obligation, as tracked in the core bank. The core bank must keep it all straight, including properly posting cost differences to variance accounts.

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Summary

For may companies in remanufacturing today, the marketplace is global. All manufacturers, including remanufacturers, now see that the "bar has been raised". Competition is tougher than ever. Margins are harder and harder to protect, and in many cases are eroding. Old, antiquated approaches to financial control in remanufacturing are a burden to an organization as it looks to the future. Tracking of cores is key to financial control in these environments and modern tools are available to vastly reduce the amount of effort to gain such tracking control, while yielding the benefits of clear and accurate information necessary to successfully compete.

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