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
industry
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
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 ≥ recycle 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
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
stage.
Period 1
Manufacturer decides the
actual/target recycle rate and
meets demand.
Period 2
Manufacturer decides the
actual/target recycle rate and
meets demand.
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