A Systematic Approach to Circularity and Circular Value Chains

Familiar Examples of Circularity

Let’s explore the principles of circularity with some practical examples almost everyone may recognize from the time of their grandparents. These examples reveal the basic principles of circularity can be structured in 4 categories: Reduce, Reuse, Renew and Recycle.

Reduce

Meat, fish, and any kind of plant-based food would have been 100% used in the past. Throughout history, food has been a scarce resource, so nothing was discarded. Excess waste is a relatively new phenomenon which came about in the western world with excessive industrial food production. The negative effects of this are increasingly being addressed by many stakeholders in the agricultural, food and retail sector.

Reuse

Packaging has been reused almost everywhere in the past. Think of the “milkman” system with refillable glass bottles. Reusable systems have been replaced by single-use packaging in modern retail. But there is increasing awareness that one-way solutions are not sustainable, even if the material is recycled.

Renew

Mechanical tools and other assets were maintained and repaired over and over to extend the assets’ lifetime. The preference for refurbishing - instead of dumping and replacing - was logical, as long the refurbishment costs did not exceed the investment in a new one. The replacement option has become cheaper due to manufacturing cost degression. But this has only been possible because the environmental costs for terminating an existing asset and manufacturing a new one have not been included in the pricing. Ignoring the environmental and social cost will not be viable in the future.

Recycle

Scrap metal is another example. It’s always been collected and re-used due to its near to perfect recyclability. This material loop has never been abolished, simply because it’s always been economically attractive. But there’s potential to improve. The financial viability of a circular business is a key factor for success. However, this financial assessment should incorporate environmental costs, as we explained in the previous example.

Despite falling out of use in the past decades, the examples illustrate how materials and resources can be used effectively following common sense. The principles behind them are as relevant as ever. With modern circular thinking, they can be re-invented and adjusted to fit today's society and economy.

Compared with these good, old best practices, today's circular business models are more complex. They also integrate business processes with sophisticated digital tools. In a nutshell, circularity is about turning value chains into value loops by systematically applying these circular principles with the help of technology.

The Circular Economy Today

In modern terms:

• Reduce means minimizing material, energy and water consumption and avoiding or mitigating waste and emissions.
• Reuse is an umbrella for business models like sharing, pooling and product-as-a-service.
• Renew means repairing, refurbishing and remanufacturing products or parts, and repurposing products for a second life.
• Recycling strives to recoup material from products at the end of their life and use the recycled material to produce the same products or other types of products.

Circular businesses are often based on several of these four major concepts. Besides these building blocks, there are some essential considerations that position a circular business for success. The backbone of any circular business is a supply chain that operates in a loop, often referred to as a circular supply chain or value chain.

The Circular Value Chain

While linear supply chains integrate all transformational and logistical steps from the source of the materials or ingredients to the final product and its distribution to customers, circular supply chains extend the scope across the entire product lifetime. In other words, circular supply chains include the end-of-life activities or the activities that lead to a product's “second-life.”

Classical supply chain instruments are therefore not fully adequate to manage circular value chains. The value chain term - or value loop - is used deliberately here. Circular businesses include many specific processes, such as product monitoring, reconditioning, maintenance and repair, and reverse logistics. They also consider different ways to make products accessible, such as renting, sharing or pooling services.

While there is a vast range of circular business models with many specific characteristics, there is one overarching enabling function which is crucial to run such businesses successfully. That is, visibility and transparency along the supply chain.

Analytics and the Circular Value Chain

Data needs to be captured along the entire value loop. It should make the supply chain traceable and the product application visible. Collecting data on product usage, its condition and any maintenance performed along the product’s lifecycle is key. Furthermore, information about activities at the end of the lifecycle is essential to determine if the product can be sold “good-as-new”, or whether it can only be used for recycling - to name just two of many options.

Analytics is crucial to derive insights about how a circular business performs. This is part of an overall performance management architecture, with planning tools for strategic decision-making and for tactical and operational purposes.

Synchronizing the processes within a circular business is a key success factor for operational excellence. But this is a data-intensive and demanding challenge. We will focus on the data and planning aspects in the forthcoming articles of this series. Let’s turn to some examples of circularity in today’s business sectors.

Examples of Circularity Across Sectors

The quest to become circular is relevant for both consumer-focused and business-to-business sectors.

Circularity in Business to Consumer Models

In consumer-focused sectors, circularity has rapidly taken the stage and is evolving fast:

• While consumer electronics has promoted a culture of “always the newest gadget” over many years, the industry has recently changed course. It’s enabling longer product lifetimes and promoting more extended usage of devices as consumers claim the “right to repair.” Product-as-a-Service is emerging as a business model for manufacturers or dedicated service providers. Refurbishing and second-life markets are developing fast, and scarce metals and other materials from old equipment are increasingly being secured to produce new devices. The potential is enormous: less than 20% of more than 50 million tons of global electronic waste is recycled.
• Fashion is a fascinating use case for circularity. While fast fashion is still supported by large, often low-price, fashion retailers, the market for circular fashion is rapidly developing. Second-hand platforms, like Vinted and Vestiare Collective, are growing rapidly. Fashion rental platforms are also on the rise, with demand driven mainly by Generation Z. In addition, large fashion brands are more open to using recycled garments and plastic to manufacture new textiles and shoes.
• Packaging has a tremendous potential for circularity. FMCG producers are tackling the challenge by using more recyclable materials and by making packaging thinner and lighter. Reuse concepts are only applied as exceptions so far, even though they provide clear advantages. In the beverage sector, the use of refillable containers has even decreased in major markets, like Germany. Packaging directives have been put in place or are in the making on national and international level, which will drive substantial change in this market.

Circularity in Business to Business

While business to business markets may be less known for adopting circularity, there are numerous examples where circular models have been implemented. The potential to increase circularity in B2B is tremendous; new breeds of circular service providers will undergo rapid growth, as they will play an important role in the economy’s transformation towards circularity.

• In our upcoming articles we will look at product-as-a-service and how renting and sharing concepts will grow steadily in the push to reduce emissions. This will bring exciting changes for industries that use heavy technical equipment, like construction, agricultural machinery and material handling.
• We will also discuss reusable packaging in manufacturing and retail supply chains, and how it’s replacing one way packaging with foldable plastic containers, sleeve packs or similar returnable load carriers. This provides huge opportunities, given the size of the packaging market with several hundred billion euro in turnover overall, and its huge impact on greenhouse gas emissions.

Before we delve into specific industries, we will publish another article that explores the benefits of circularity in more detail. We will discuss how a circular business can generate long-lasting customer relations, how it can generate profitable growth, and how it helps you meet emission reduction targets and get you closer to net-zero.

The following articles will provide best practices to apply circularity. We will discuss the challenges and opportunities and address data-driven aspects such as performance analysis, forecasting and planning. Also, we will provide valuable insights into how analytics and planning tools can help drive the transformation to a circular economy.

We are interested in any feedback you may have and hope you enjoy the next write-ups in this series!