Embracing a Circular Economy

Stephen DeAngelis

April 03, 2014

“Linear consumption is reaching its limits,” states a World Economic Forum (WEF) report entitled “Towards the Circular Economy: Accelerating the scale-up across global supply chains.” The report continues: “A circular economy has benefits that are operational as well as strategic, on both a micro- and macroeconomic level. This is a trillion-dollar opportunity, with huge potential for innovation, job creation and economic growth.” I first wrote about the concept of a circular economy in post entitled “Supply Chain Sustainability and the Move towards a Circular Economy.” The conclusion from that article is that a circular economy isn’t likely to emerge in the near-term, but that in the long-term it would become an imperative. What, you may ask, is a circular economy? According to the Ellen MacArthur Foundation, a leading proponent of the circular economy and one of the principal collaborators (along with McKinsey & Company) on the WEF report, “The circular economy refers to an industrial economy that is restorative by intention; aims to rely on renewable energy; minimises, tracks, and hopefully eliminates the use of toxic chemicals; and eradicates waste through careful design.”

“Visualize, for a moment,” write McKinsey analysts, Hanh Nguyen, Martin Stuchtey, and Markus Zils, “the industrial economy as a massive system of conveyor belts — one that directs materials and energy from resource-rich countries to manufacturing powerhouses, such as China, and then spirits the resulting products onward to the United States, Europe, and other destinations, where they are used, discarded, and replaced. While this image is an exaggeration, it does capture the essence of the linear, one-way production model that has dominated global manufacturing since the onset of the Industrial Revolution.” [“Remaking the industrial economy,” Insights & Publications, February 2014] They continue:

“Increasingly, however, the linear approach to industrialization has come under strain. Some three billion consumers from the developing world will enter the middle class by 2030. The unprecedented size and impact of this shift is squeezing companies between rising and less predictable commodity prices, on the one hand, and blistering competition and unpredictable demand, on the other. The turn of the millennium marked the point when a rise in the real prices of natural resources began erasing a century’s worth of real-price declines. The biggest economic downturn since the Great Depression briefly dampened demand, but since 2009, resource prices have rebounded faster than global economic output. Clearly, the era of largely ignoring resource costs is over.”

The desired goal sought by proponents of a circular economy is to design waste out of the production and consumption cycle. They understand that reaching that goal will probably take decades; but, they assert that through recycling, refurbishing, and repurposing, companies can immediately take steps towards that goal. In the following narrated slideshow, “McKinsey alumnus Markus Zils explains how the circular economy encourages companies to seek ways of retaining more of the value of the material, energy, and labor inputs that go into their products.”

The WEF report claims, “The pressure on resource productivity is reaching a breaking point. A number of enablers are now also creating unique opportunities to adopt more resource-efficient approaches to value creation. The need for action and ability to act have never been better aligned.” As I noted earlier, however, to achieve a genuine circular economy, products must have that goal designed into them. Chris Sherwin asserts that we can learn a lot about better design by critically examining the current design of products; but, he believes that approach also has shortfalls that need to be addressed. [“Design for circular economy must consider disruptive technologies,” The Guardian, 12 November 2013] He explains:

“A lot of design for the circular economy is based on disassembly projects, generically termed as teardowns. You can learn a lot from taking an in-depth look at the mechanics and technicalities of how a product is put together. It can unquestionably help make portfolios more circular, easier to disassemble and recycle, more resource efficient and minimise its hazardous substances and environmental footprint – all valuable stuff. However, do these tools and methods adequately prepare us for an ecologically and economically sustainable future? There are risks in getting designers to focus, quite literally, on the nuts and bolts of current products, rather than on the disruptive technologies that can supersede them. It may distract us from systemic product-system redesign, and circular economy designers need to track the seismic technological shifts that disrupt what we do today. … Circular designers need to develop functionality and service-based thinking, as well as knowing about products, technology and material science, and we should never lose sight that in the end, almost all products are designed for people and their needs.”

Creating a circular economy won’t be easy. It will disrupt current manufacturing practices, will complicate supply chains, and will require a cultural shift in consumer habits. The WEF report concludes, “The full potential value of the circular economy goes well beyond simply recycling used materials — whether down- or upcycling them. This value is embedded in the reuse, maintenance, refurbishment, and remanufacturing of components and products, so it is equally important to strengthen these reverse setups and capabilities. Companies have mastered the orchestration of complex, multi-tier inbound supplier networks. Now the same sophistication needs to be applied to orchestrating post-usage value streams across multiple reverse cycle partners.” In the end, the cultural shift in consumer habits may be the most difficult obstacle to overcome. The following video, prepared by the Ellen MacArthur Foundation, downplays the cultural shift that will be required but provides a good overview of its vision for a circular economy.

The WEF report stresses that establishing a circular economy will take both dedication and perseverance. “As with every major transformation,” it states, “it is vital to take a systematic approach, unravelling the issues at the point of greatest leverage.” The report outlines three avenues of action. They are:

  • Set up global reverse networks for products and components. This focuses on building out reverse-network capabilities, which is essential to address the geographic dispersion challenge. This will ideally take place at a product and component level, so it will be industry specific and require collaboration along the incumbent value chain and adjacent/cascaded activities.

  • Reorganize and streamline pure materials flows. Materials represent the greatest common denominator, and the most universal assets across industries and geographies: they will ultimately require closed loops at a global level to achieve full potential. The key will be to tackle materials complexity and create pure materials stocks at scale that generate sufficient economic benefits for participants.

  • Innovate business models on the demand side. This will be critical to mainstreaming the circular economy. Innovation will be the way ahead for B2B-favorable setups, and wide adoption in B2C. New models will also be key to tapping the growing trend towards collaborative use of physical assets: the ‘sharing economy,’ as well as overcoming linear lock-in.”

Nguyen, Stuchtey, and Zils write, “A circular economy replaces one assumption — disposability — with another: restoration. At the core, it aims to move away from the ‘take, make, and dispose’ system by designing and optimizing products for multiple cycles of disassembly and reuse.” They continue:

“This effort starts with materials, which are viewed as valuable stock to be used again, not as elements that flow through the economy once. For a sense of the scale involved, consider the fast-moving consumer-goods industry: about 80 percent of the $3.2 trillion worth of materials it uses each year is not recovered. The circular economy aims to eradicate waste — not just from manufacturing processes, as lean management aspires to do, but systematically, throughout the various life cycles and uses of products and their components. (Often, what might otherwise be called waste becomes valuable feedstock for successive usage steps.) Indeed, tight component and product cycles of use and reuse, aided by product design, help define the concept of a circular economy and distinguish it from recycling, which loses large amounts of embedded energy and labor. Moreover, a circular system introduces a strict differentiation between a product’s consumable and durable components. Manufacturers in a traditional economy often don’t distinguish between the two. In a circular economy, the goal for consumables is to use nontoxic and pure components, so they can eventually be returned to the biosphere, where they could have a replenishing effect. The goal for durable components (metals and most plastics, for instance) is to reuse or upgrade them for other productive applications through as many cycles as possible. This approach contrasts sharply with the mind-set embedded in most of today’s industrial operations, where even the terminology — value chain, supply chain, end user — expresses a linear view.”

McKinsey analysts believe that a circular economy is inevitable. The first steps towards that economic model must come from the industrial sector and a desire to recover valuable resources as a way to increase profit margins. Consumers are likely to lag behind as they resist changing the ownership mentality that has been cultivated for thousands of years.