Reducing supply chain costs through the circular economy
Today, the linear ‘take, make, dispose’ economy that relies heavily on cheap resources for growth, is under threat from increasing commodity prices and growing consumer demand. The ‘circular economy’ offers a viable alternative, with cost savings estimated at over $1-trillion per annum by 2025. The supply chain has a key role to play in driving the transition to a circular economy, Tech-Pro tells SmartProcurement.¹
The linear model, where goods are manufactured from raw materials, sold, used and discarded, has dominated industry for more than a century. However, with three-billion middle class consumers expected to enter the global market by 2030 and increasing commodity prices, which rose 150% between 2002 and 2010, change is needed.¹
In contrast, the circular economy – an ‘industrial system that is restorative or regenerative by intention and design’ – aims to ‘decouple revenues from material input’.¹
Guiding principles of this approach are:¹,²,³
• Reduce waste by cycling all materials infinitely, in either biological or technical cycles.
• Derive energy from renewable or sustainable sources.
• Build resilience through diversity.
• Human activity should support the environment and focus on rebuilding natural capital.
• Resources should be used to generate value.
• Think in ‘systems’ – or understand the connection and flow between parts of a system.
• Think in ‘cascades’ – or how additional value can be extracted from products or materials beyond current life spans through use in other applications.
• Shift from ‘one-way’ product consumption, where the consumer is ‘owner’, towards ‘access’ where manufacturers retain ownership and act as service providers.
Benefits of a circular economy
Research from the Ellen MacArthur Foundation found that key benefits include:¹
• Substantial ‘net material’ savings: Cost saving estimates for FMCG are as high as $700-billion a year, net of materials used in reverse-cycle activities – equal to 20% of current total material input costs.
• Mitigation of price volatility and supply risks: Lower demand for raw materials would affect the price of commodities, lessening risk and demand-driven volatility.
• Innovation: Creation of ‘circular by design’ products and reverse logistics networks is likely to spur innovation, boost technological development and improve labour, energy and materials efficiency.
• Job creation potential: Innovative re-use, remanufacture and recycling will create jobs, with 500 000 jobs created by the recycling industry in the EU alone.
• Land productivity and soil health: Regeneration (moving biological material back into the soil to improve quality and productivity) can reduce current land degradation costs.
The circular economy and the supply chain
Supply chains have a key role to play in the successful transition from a linear to a circular global economy, particularly through reverse logistics.
Defined as ‘the process of planning, implementing and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal’, reverse logistics includes reusing, recycling, product or packaging redesign, hazardous or obsolete material disposition and asset recovery.
Examples of circular supply chains
• Renault has adopted circular principles, including remanufacturing of mechanical subassemblies – like engines – which are sold at a lower price, generating $270-million of revenue annually. In addition, the company manages raw material streams, focuses on manufacturing service improvement by working with suppliers to reduce the cost of ownership of cutting fluids by 20% and offers an ‘access over ownership’ model that leases batteries for electric cars. Increased labour costs of the approach are offset by limited capital outlay and reductions in the use of energy, water and waste.¹
In South Africa:
• SAB Miller’s returnable glass bottle system allows the company to manage material flows and sell more than 85% of volume in a closed loop, halving glass output needed.¹
• Royal Haskoning DHV has worked with a brewery to convert methane gas captured from beer effluent into heat to power boilers, reducing heavy fuel oil use by 40% and has implemented a trigeneration project for a calcium carbide plant, which reroutes furnace gas, containing carbon monoxide and hydrogen, to generate electricity, reducing GHG emissions.⁵
What are your thoughts on the circular economy? How is your company meeting the challenge of implementing these principles?
¹: ‘Towards the Circular Economy: Accelerating the Scale-Up across Global Supply Chains’, World Economic Forum prepared in collaboration with the Ellen MacArthur Foundation and McKinsey and Company, January 2014
²:The Ellen MacArthur Foundation website, 2014.
³: ‘Let’s Close the Loop’, Circle Economy
⁴: ‘What is Reverse Logistics?’, Karen Hawks writing for Reverse Logistics Magazine, Winter/ Spring 2006
⁵: ‘Greening Projects Encouraging Industry to Adopt Circular Economy’, Mia Breytenbach writing for Engineering News, August 2014.