Circular models decouple economic growth from resource consumption, creating long-term value for the stakeholders and the environment. As a side effect, circular economy business models act as decarbonization amplifiers for scope 3 GHG emissions by extending the lifecycle of energy-intensive materials.
While many traditional sustainability approaches focus on reducing negative footprints, the Circular Economy aims at creating positive footprints in the ecological, economic and social dimensions and comprehensively transforming businesses and value chains.
Common circular approaches include:
- New product design to increase durability and allow effective maintenance, repair and disassembly
- Alternative business models, material ownership and recollection schemes
- Localized ecosystems that provide lifecycle services for products
- Dematerialization efforts
- Implementing material loops in the technosphere and biosphere
Circular thinking demands a shift in company culture, as the traditional view of how a business operates and makes money has been turned upside down. Circular models require a longer-term view and considerable patience — sometimes cash flow might not be generation until the second iteration of a product when resources finally get reused.
For a circular strategy to work, all the ecosystem partners — including suppliers and manufacturing partners — must commit to the process. One of the biggest obstacles is bringing all the participants of a value loop together and having them act as one entity. Often, it is a question of who goes first, as each supplier may feel they are not in the right position in the value chain to launch the effort.
Then there is the added complexity: from start to restart, a circular supply loop is larger and much more complicated than a traditional linear model. Demand is split into demand for new products and for repair, refurbishment and reuse services during their lifecycle. Supply also has a dual model, where both used parts or components from the field and new parts are fed into manufacturing and assembly processes.
This will lead to disruptive changes in traditional supply chain functions. The entire model and setup of how product lifecycles are handled may change significantly to service-oriented approaches. The key factors for economic success will be driven by product design, ecosystem setup and digitally oriented service excellence rather than price, inventories or conversion cost.
Circular Economy Procurement
Looking at today’s standard supply chain setup, some of the fundamental changes can be anticipated clearly. The procurement function must become the orchestrator of ecosystems that provide services during the product lifecycle. Transparency and digital integration based on product lifecycle management (PLM) information accessible to all participants in the material loops is a key aspect. Alternative ownership models will reduce the classical strategic and operational procurement activities to a bare minimum. Instead, future buyers will need to continuously assess the valuation of components, parts and material transitioning during the technosphere and biosphere loops. Buying services and developing service providers may become one of the key aspects of circular procurement.
For planning functions, balancing demand, supply of materials and production capacity will become simple things from the past. In the circular future, material supply will be new materials to a small extent and in most cases, used parts that require individual processing before entering the next lifecycle loop. Production capacity will be divided into repair, refurbish, reuse and recycle, each in need of ‘production’ planning based on the condition of the returned goods. Forecasting may shift from simple product sales towards understanding the usage intensity in PAS (product as a service) models. Demand peaks can be fulfilled in several ways in shared asset business models, availability of the product is depending on the number of assets, their uptime, local demand and other factors. Circular planning will be the key to determining the economically suitable timing for replacement or repair of assets in line with current demand patterns.
Logistics in a Circular Economy
Logistics will shift from in- and outbound transport of goods towards complex distribution and relocation of assets according to demand. Business models may be enriched by differentiated reverse logistics and need to be synced to technosphere services such as repair, refurbish or disassembly operations. Logistic providers may even include on-site services such as replacing components, simple maintenance or cleaning in their portfolio. Future logistical processes may involve assessing asset conditions to determine the next processing step (from simple re-use to refurbishment, disassembly or recycling).
Circular Economy Manufacturing
Manufacturing currently faces challenges involving the complexity of product variants and increasing customization. Industry 4.0 supports the trend towards lot size one and may be key for circular economy manufacturing as well: the additional complexity comes from varying conditions of parts and components returning from a use cycle. Technology will once again enable the lot size one trend in material supply. However, the transformation will not kick in smoothly, as many products need radical redesign for maintainability, repairability and disassembly before they are suitable for circular business models.
The timing to embark on the transformation journey could not be better. The regulatory environment is about to be created in almost all regions worldwide, financial investors are seeking opportunities with long-term value and public opinion is increasingly in favor of sustainable businesses and offerings. Most importantly, digitalization has reached the required maturity level to enable economic viability for circular economy business models even for complex technical products. Starting from platforms, location technology and automated ordering and billing processes that support a sharing economy to sophisticated I4.0 technology that helps automate individual processes both in assembly and service operations. Blockchain technology supports digital chains that create transparency for technical conditions and ownership transactions for product or components that run through multiple lifecycles in the technosphere loop.
The challenges for closing the loops and switching to a Circular Economy are mainly:
- Redesigning products and making them suitable for extended lifetimes and industrialized disassembly processes
- Switching business models and organizing financing models for new material ownership structures
- Creating ecosystems serving the loops based on fair value contribution sharing principles to attract the right partners
The transformation can be summarized as the journey from linear, global Supply Chains towards regionalized, circular ecosystems, fully leveraging technology and automation. Successful circular businesses have boosted margins, changed their negative footprint to positive in one or more areas of sustainability and typically contributed directly to decarbonization. In these cases, Supply Chains changed dramatically, including the portfolio of suppliers, key value drivers and geographical extent, in many cases even impacting customer behavior. Decoupling economic growth from resource consumption: the next industrial revolution?
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