Tuesday, June 18, 2024
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Circular Economy is the true 4th industrial revolution. Decoupling economic growth from resource consumption and creating sustainable business satisfies shareholder, consumer, stakeholder, and business needs alike. Looping today’s linear Supply Chains disrupts how consumer needs are satisfied today – from Supply Chain processes and organization over to product design and ecosystem requirements.

Driven by resource scarcity, growing economies and the rise in population and wealth, the concept of a Circular Economy has emerged as part of the solution for a transition towards sustainability. Despite not being new, there are only niche applications of the concept to present, yet hype is expected in the near future. Recent developments such as the shift to a multipolar business world or increasingly disruptive events are fueling the transition.

Circular Economy: The true 4th Industrial Revolution?

It took a Circular Economy almost two decades to incubate – however, it could become the true 4th industrial revolution, demoting Industry 4.0 to an enabler instead of the predominant transformation factor. 

Four key forces are globally accelerating our transition to sustainable businesses and most of them are fundamental and irreversible:

1. Capital shifts towards sustainable businesses 

2. Regulators push green, fair and resilient supply chains

3. Societal mindset & consumer habits are disrupted 

4. Technology enables new business models and physical
material streams

Circular Economy is in many ways the answer to challenges arising from these radical paradigm shifts of investors, regulators, consumers, and technology. The true dilemma lies in the complexity of orchestrating the transition. Product design, material flows, ownership & business models as well as eco-systems need radical rethinking across highly atomized & streamlined value chain participants. Any approach starting such a transformation with a few experts or from a single angle of the value chain is doomed to either fail of fall short on impact and results.

Activation energy challenge

To overcome the dilemma of lacking both a clear starting point and a simple transformation roadmap, we need to understand the underlying success factors for Circular Economy implementation:

• Trustful collaboration & open culture

• Holistic mindset & idealism

• Broad know-how

Embedding Circular Economy into an organization needs upfront installation of these foundational elements, that contradict many aspects of how we’re doing business today. They will act as catalysts that make the transition towards economic growth decoupled from resource consumption possible. -The holistic nature of Circular business reinvention makes incremental approaches obsolete as they’d rarely be economically viable. Thus, trustful collaboration across value chain participants, holistic approaches and deep knowledge of Circular Economy in all functions and on all levels of the organizations are essential to success.

Loop the chains

Closing loops in the Technosphere and Biosphere is more than a matter of rerouting transports. 

The circular economy will replace linear economies, creating highly interconnected flows of goods. Logistics will become the centre of future business models and will be called upon to live up to its responsibility. The demand for localized, condition- and cycle-specific transport solutions is increasing, and new value-added services will emerge.

Closing loops in the Technosphere and Biosphere is more than a matter of rerouting transports. 

A new supply chain model “Supply, Collect, Overhaul & Re-X” shows which new process steps such as analyzing or monitoring parts condition need to be integrated into future logistics. Manufacturing operations are mixed with Re-X (reuse, refurbish, recycle, repurpose) and need replicable, stable, and efficient operations in all major markets. This will require Industry 4.0 technology to compensate the lack of expertise in the localized operations. Also, the transactional side will not work without a significant degree of digitally enabled automation: data capturing and transmission must feed the operational & financial processes as well as and the individual product records.

Rethink everything

Closing the supply chain loop opens the door to long-term value creation for stakeholders and the environment. The benchmark concepts of Circular Economy create positive environmental, social and/or economic footprints instead of just reducing negative effects. Such solutions are highly attractive to Consumers and investors and even act as talent attractors for the organization itself. Besides this rather intangible value, most Circular Economy business cases are financially far more attractive than their linear counterparts – especially when taking into account ever rising environmental cost implied by regulators. 

Circular thinking demands a shift in company culture, as the traditional view of how a business operates and makes money is turned upside down. Circular models require a longer-term view and ample patience – sometimes cash flow might not be realized until the second iteration of a product when resources finally get reused. Thinking a step further, product design principles will change according to the business models applied. For complex consumer and industrial products, this would include a stratification of products with different design criteria for structural, functional and “skin” parts. In all cases, the integrated approach to rethink design, business model and matching eco-systems is required.

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 chain together and having them act as one company. Often, it’s a matter of “who goes first,” as each supplier may feel they’re in the wrong position in the value chain to launch the effort.

Then there’s the added complexity of the supply chain. From start to restart, a circular supply chain is larger and much more complicated than a traditional linear model. Designs must account for durability and consistency to keep components in play longer and for ease of disassembly to efficiently reuse resources. Tracking all the parts of a product and their histories is necessary to determine which parts need to be replaced and when. Reverse logistics are an added link in the chain to make sure parts get returned to the original manufacturer for recycling or reuse.

Bye-bye, traditional Supply Chain functions

Going circular 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.

Going circular 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. 

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.

PLANNING: 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, the availability of the product depends 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 the replacement or repair of assets in line with current demand patterns.

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, refurbishment 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).

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 has been created 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 favour 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 products 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 behaviour. Decoupling economic growth from resource consumption: the next industrial revolution? 

Re-Metering – a case study

A producer of flow metering devices faced a material price increase for their core mechanical components some years ago. Most competitors reacted by switching to plastic-based components with higher wear, yet better cost positions. The producer took the strategic decision instead, to apply Circular Economy principles, resulting in a product redesign with even higher quality and more expensive components. The flow meters are typically sold to municipal utilities and they need to be replaced after the calibration period, the location and return timing of these products is transparent. Using a modest incentive to activate technicians to return the replaced devices yielded a 40% return rate. Refurbishment costs including the incentive and logistics efforts were still a fraction of virgin equipment production. Despite a negative margin in the first cycle, the producer was able to realize a 250% margin increase compared to the old linear product when averaging cycles 1 and 2. Given the potential increase in return rates (e.g. by switching to lease/rental business models) and considering planned regulatory changes that would allow devices to be directly reused if recalibration is successful, there is a significant value creation upside for the future.


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