Adapting Business to a Circular Economy

November 5, 2020 Elizabeth Lo

The second industrial revolution kickstarted the age of science and mass production, resulting in highly efficient ways of extracting and creating value from resources. This revolution created massive levels of growth for industries and businesses and was boosted by the onset of globalization and high levels of consumption. However, our industries have simultaneously been neglecting the value lost through wasteful business practices across the supply chain. Systems are already experiencing growth limitations due to our reliance on perpetual extraction and the consumption of finite resources. As a result, an increasing number of businesses around the world are advocating for a circular economy.

 

The Problem

At the heart of our current economy lies a linear “take, make, waste” model. This model involves the extraction of non-renewable resources, material production, product manufacturing, followed by product use and disposal. In contrast, a circular economy looks beyond this linear model and is restorative or regenerative by intention and design. It relies on system-wide innovation to redefine products and services, to minimize all forms of negative externalities. Waste and pollution are minimized, materials stay within the natural environment (regenerative) and operational activities such as repair, refurbishing, remanufacturing, and recycling (restorative) keep materials in use indefinitely.

 

The Solution

The circular economy business model presents profitable opportunities that are unparalleled to the current linear model. According to McKinsey, engaging in circular economy activities improves operational efficiency and reduces long-term costs. Take e-waste, for example. A more circular approach could be efficient in terms of operations and cost. This is because e-waste is a resource already present at the end of the value chain, as opposed to, for example, gold mines, which are limited in quantity and geographically distant from operational facilities. There is also more gold in electronic scrap than there is in ore pound-for-pound. The hydrometallurgical recovery of electronic waste, for example, yields on average, $5420/metric ton of waste. Waste recovery presents a profitable opportunity since raw materials on average make up 40% to 60% of the basic costs borne by manufacturing companies due to scarcity and import costs. An even more significant advantage to large businesses is the economies of scale that apply to waste recovery, too. Other activities include shifting to renewable energy and materials, and keeping materials in closed loops through remanufacturing and recycling, as evident in the fashion industry.

 

Looking for even more insights on how to make sense of circular economy in the supply chain? Check out this webinar recording

 

No Longer a Luxury, Now a Necessity

ecological degradation, a growing population and regulatory barriers. Many production sites with excessive requirements for virgin resources are struggling to renew their social license to operate as they pose detrimental risks to biodiversity and people's livelihoods. Finite natural resources such as metals, food and industrial agriculture - crucial inputs penetrating most industries and supply chains - are becoming increasingly limited in supply while demand keeps climbing. It is important to acknowledge not only the upward pressure on price volatility levels of agricultural and industrial inputs but also the fact that the supply chain as a whole will cease to function once an indispensable resource is gone.

It is clear that for businesses with dispersed and complex supply chains, the trajectory of supply chain risks/disruptions associated with these circumstances will only go upwards if business practices do not challenge the status quo.

So the question now is, what direction should businesses take to become more resilient to supply disruptions of critical and strategic materials?

 

Implementing a Circular Supply Chain 

A potential solution would be Circular Supply Chain Management (CSCM). Differing from other forms of SCM, CSCM places emphasis on the entire business ecosystem. CSCM requires companies to consider reducing their need for virgin materials and increase the circulation of resources within different supply chain systems among various industries. According to the Ellen MacAarthur Foundation, a CSCM could mean cross-industrial cooperation, circular design and production, reverse supply chains, or imagining new business models.

 

Read also a guest article by one of our training partners:
Circular Economy: Where Do We Stand

 

Renault’s Circular Breakthrough

A fine example is French car manufacturer Renault's short loop recycling initiative and how it embodies 3 of the characteristics mentioned above - circular design/production, a reverse supply chain and a new business model. Currently, 85% of Renault's end-of-life-vehicles (ELVs) are recyclable, while 36% of the total mass of new European Renault's being made from recycled materials. After switching to recycled plastic materials, it made business sense for Renault to pursue a circular economy strategy to secure a steady and cost-effective supply of raw materials. This decision came from the fact that the supply chain for recycled plastic is poorly developed, which presents a challenge in securing a predictable stream of materials for planning manufacturing operations.

One aspect to highlight here is Renault's collaborative approach to its initiative. Accessing raw materials is no longer about procurement in the traditional business sense, but coordination across the automobile industry, such as collaborating with INDRA, a company which collects and dismantles ELVs, and Synova who turns dismantled parts into plastic pellets ready for remanufacturing

 

Effective Communication Is Key

Achieving such a broad collaboration requires transparency in the material flow for a product's entire life cycle. Effective assessment plays a supporting yet vital role in helping companies optimize their supply chains' sustainability performance and transition towards becoming more circular. Effective assessment is partially achieved by assessing suppliers on their environmental, social, ethical and sustainable procurement performance. For instance, suppliers are assessed on how well they integrate eco or modular design into their products to simplify repairability, reusability and recyclability. Suppliers can also be assessed on how efficiently they reuse wastewater and materials in their operations, or whether they recycle perished products to encourage consumers to increase their recycling rates and close the material loop. When we move upstream in the supply chain, we're able to assess how suppliers integrate the environmental issues of their own suppliers into their management system. Take, for example, the purchasing of certified green and recycled commodities.

The final result is that companies have a more transparent view of the operational circularity of suppliers in various industries based on these assessment sustainability material issues. This clarity can assist in optimizing their supply chain by selecting suppliers with the best environmental and social practices. On the other hand, companies may invite their existing suppliers for assessment and aid them in becoming more circular through working on their improvement areas. EcoVadis provides the necessary tools for companies to collaborate with their suppliers on sustainability issues.

 

Over to You

In communicating these issues, companies build a solid supply chain network based on mutual trust and collaboration. In turn, this further encourages and eases transparency and flexibility in adapting to change. These capabilities are critical to building resilience in both today's continually shifting natural and business environments.

About the Author

Elizabeth Lo

Elizabeth Lo is a Sustainability Analyst at EcoVadis committed to helping companies better integrate sustainability into their operations and supply chains. Her work focuses primarily on companies operating in the APAC region. Elizabeth holds a Bachelor’s degree in Business Management from University of Sheffield and Master’s degree in Sustainability and Business from University of Leeds.

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