Supply Chain Sustainability and the Move towards a Circular Economy

Stephen DeAngelis

September 10, 2012

Douglas Alexander, Principal Consultant at Component Engineering Consultants, writes, “When I think of the word ‘sustainability,’ I imagine lasting value based on reliability, efficiency, dependability, availability, affordability, and consistency — factors treasured by all manufacturers in the electronics industry. Though many other words may also apply, in general, these characteristics not only assure a long lifecycle, but when taken into consideration at the earliest conception and design stages, they also raise the probability of having a successful product or service.” [“Sustainable = Green + Profitable,” EBN, 10 August 2012] Alexander is making a point that I have made repeatedly in the past, the only sustainability efforts that are going to have legs are those for which a business case can be made. Alexander puts it this way, “One key to sustainability is lessening the material and energy overhead such that the product’s value equals or exceeds the value of a brand new or replacement product.”

Some companies are rethinking how they want to deal with sustainability challenges and have come to believe that a circular system may prove beneficial. In fact, the editorial staff at The Green Supply Chain claims, “‘Circular Economy’ thinking is gaining momentum.” [“Will Companies Retain Ownership of Products they Sell to Harvest and Re-Use the Materials they Contain?” 31 July 2012] The TGSC staff explains the concept this way:

“Slowly, but what appears to be influentially, a growing body of thoughts is suggesting that the fundamental precepts of commerce to date should be changed, including a model where the manufacturer/selling company actually retains ownership of a product after it is ‘leased’ to consumers, all in the name of Sustainability. This very much new age thinking comes under the umbrella of what is being called the ‘circular economy,’ a concept that dates all the way back to the mid-1970s but which has gained currency in recent years based on work by consulting firm McKinsey, The Ellen MacArthur Foundation, others.”

Fundamental realities upon which this thinking is based are: some natural resources are finite; material that is not recycled is lost to the economy; and disposal of some consumer products can harm the environment. An Ernst & Young survey conducted earlier this year revealed that “76 percent [of respondents] anticipate natural resource shortages, including water, will affect their core business objectives over the next three to five years.” [“Sustainability Execs Fear Shortages of Natural Resources Will Affect Their Supply Chains in Near Future,” SupplyChainBrain, 14 March 2012] With concern about the availability of resources growing, it should come as no surprise that a concept like the circular economy is gaining momentum. The Green Supply Chain article notes that “a recent report sponsored by [The Ellen MacArthur] Foundation suggests the world should ‘imagine an economy in which today’s goods are tomorrow’s resources, forming a virtuous cycle that fosters prosperity in a world of finite resources.'” The article continues:

“The need to rethink the traditional ‘take-make-dispose’ model is growing increasingly urgent, it says, as the world appears to be running into constraints on the availability of resources/commodities, driven by the rapid growth of emerging economies such as China, Asia, Indonesia and many more. As literally billions of citizens in those countries advance economically, the demand for goods and underlying inputs will strain resource availability and drive prices much higher under the current status quo in a way that will negatively impact both consumers and manufacturers.”

As more and more mega-cities emerge, dealing with waste will become an even bigger challenge and the requirement to recycle or reclaim resources an increased imperative. The article says “the basic thinking can be summarized as follows”:

“While major strides have been made in improving resource efficiency and exploring new forms of energy, less thought has been given to systematically designing out ‘material leakage’ and disposal. In other words, too much material goes into products that end up in landfills or other points of no return in its lifecycle, rather than being captured and re-used. When the toaster dies, it should not end up in the trash can, but rather returned somewhere so that plastics and metals used in its manufacture are harvested and reused. The ‘end of life’ paradigm that is associated with most products would be replaced with ‘restoration’ practices. The report says that ‘any system based on consumption rather than on the restorative use of non-renewable resources entails significant losses of value and negative effects all along the material chain.’ This is every bit as much a business issues as it is a Sustainability one, according to the report. Current input costs continue to rise overtime and just as importantly are increasingly volatile. … This plays havoc on a company’s bottom line.”

The article notes that “circular thinking really begins in the product design phase, where the goal is simply to ‘design waste out.'” No company believes that promoting waste is profitable. That’s why making a business case for reducing waste is not difficult. The article goes further insisting that “eventually, waste will not exist.” It continues:

“Products are designed and optimized for a cycle of disassembly and reuse. ‘These tight component and product cycles define the circular economy and set it apart from disposal and even recycling where large amounts of embedded energy and labor are lost,’ the report says. A second key point involved maintaining a strict differentiation between consumable and durable components of a product. Consumables in the circular economy will largely made of biological ingredients or ‘nutrients’ that are at least non-toxic and possibly even beneficial for safe return to the environment. Durables such as engines or computers, on the other hand, will be designed from the start for reuse. Thirdly, the energy required to fuel this cycle will be renewable to decrease resource dependence and increase overall system resilience.”

If this concept really catches hold, the biggest change that consumers could see is that the products they want might be available only for lease rather than purchase (or at least consumers would be under some sort of legal obligation to return the product to the manufacturer at the end of its useful life). The article notes that this is probably the most controversial aspect of circular economy thinking. It continues:

“The conceptual groundwork is already being laid for such a change, [the report notes] that we are ‘in midst of a pervasive shift in consumer behavior. A new generation of customers seems prepared to prefer access over ownership. This can be seen in the increase of shared cars, machinery, and even articles of daily use.’ It notes not unreasonably that even powerful movements like cloud computing are furthering this trend, as businesses move away from owning their own big computer systems, and consumers may eventually rely on simple web devices attached to the cloud for their own computing needs, rather than continually buying and replacing home computers.”

You have to admit that car leases and cloud computing are in fact moving us in a direction that makes circular economy thinking more palatable for most individuals. The big rub, of course, will be the economic details. I doubt that the majority of people want to make endless lease payments to manufacturers for their household appliances. A more likely arrangement will be that products will come with a surcharge (like some soda bottles) that will be refunded once a product is returned. Just like some people pick up extra cash collecting aluminum cans today, there will be those who scour the countryside looking for old appliances to recycle in the future. Here’s how the article sees the program unfolding:

“In one of the potential examples of how circular thinking could work, the report says that its research has shown that high-end washing machines would be accessible for most households if they were leased instead of sold. How? The idea would be that more commercial type units would be leased rather than individuals buying the basic consumer models. The result, the report says, is that customers would save roughly a third per wash cycle, and the manufacturer would earn roughly a third more in profits, saying that ‘over a 20-year period, replacing the purchase of five 2,000-cycle machines with leases to one 10,000-cycle machine would also yield almost 180 kg of steel savings and more than 2.5 tonnes of CO2 emissions savings.'”

As the old saying goes, the devil is in the details. I still see leasing as a hard sell for most consumers. The article continues:

“In a related article from McKinsey, the company says that ‘In a resource-constrained world, value creation moves toward the owners of the resources. Companies should therefore consider developing new business models that enable them to retain ownership of the materials used in their products so that they can recycle or reuse the product at the end of its life cycle.’ It says in fact that chemical-catalyst manufacturers have done this for decades, essentially selling the functionality of catalysts to customers without transferring ownership of the materials themselves. This makes sense in this industry, because the catalysts are often not consumed in the manufacturing process. But McKinsey says even steel makers might consider such an approach, suggesting they could retain ownership of the steel they sell and thereby reduce their exposure to prices for iron ore and coal. This of course raises a key question about this concept, which is how such ownership would be managed across different components in a product from different suppliers, and the multiple tiers of the supply chain. Who would own the steel in an automobile eventually lease to a customer – the steel maker or the auto OEM? Regardless of this and other big questions and issues, it is clear an entire new generation of waste processing companies and new harvesting technologies would need to be developed.”

In a companion article to the one found in The Green Supply Chain, the staff at SupplyChainBrain published an infographic provided by McKinsey & Company that addresses the circular economy. [“Towards a Circular Economy?” 8 August 2012] It states the infographic “a long one, but there is some interesting material within.”

Circular-Economy

The SupplyChainBrain staff concludes, “Will circular thinking take off? Our guess it will take a while, but that we will all be hearing a lot more about this in coming years. McKinsey says rising resource costs will practically force it.”