Adopting the circular economy needs change and innovation to build an ecosystem

The study & comparison of circular economy over the linear economy has been going on for a long time. However, the transition to circular economy is not straightforward as it calls for a change through innovation in the entire ecosystem of operation of business model.

Linear economy is focused on disposal at the end of the life cycle, whereas circular economy focusses on maximise utilisation of resources, recycle and eliminate waste

The linear economic model is focuses on the disposal of goods produced after the usage and its life cycle, whereas the circular economy looks upon adding more sustainability in reducing or eliminating the waste by recycling the goods as much as possible at the end of its life. This means maximising the utilisation of the resources, product life expansion, thereby, creates a need for an innovation for the companies to build the ecosystem.

In this article I am going to discuss about the changes required for adopting circular economy, focusing on three key areas that needs innovative approach, namely product, supply chain & integration of products and services

The business model is not same as the revenue model.

Business Model

Linear model: Make, distribute & sell, use and dispose

Linear economy model as mentioned in the graphics above focuses on making or producing the goods, distribute and sell the goods from the manufacturer to the buyer who is also the end user. The end user owns the goods and maintains it over the lifetime and takes care of the disposal at the end of life. Manufacturers or OEM can have dealers or traders as channels who play an extended role in distribution, sales and services of the goods.

Circular model: Make, distribute, use, reuse, repair, refurbish, remanufacture & recycle

Circular economy emphasises on recycling and re-use of the goods by repairing, refurbishing and remanufacturing at whichever stage it is possible. Unlike the linear model, the manufacturer takes the ownership of the goods & services in this model. The end user can have the product for usage based on agreement with the service provider/manufacturer after which manufacturer takes it back, reuses the product to refurbish or remanufacture into a new one.

However, one may claim that reuse happens in the linear model, yes, it does, but more towards repair, service, and re-use or sale as second-hand what we call as pre-owned or used goods. but in the end the disposal is in the hands of end users who ever it is and the wastes from all the process during manufacturing is also disposed.

Revenue model

The Linear model generates revenue by selling the goods to the user and charge the user for the after sales service, whereas Circular model focuses on providing product as a service where users can pay as per utilisation either a fixed period contract or it can be a performance based contract

A simple example, A car manufacturer sells a new car through its distributor to a customer who will then own it, use it, maintain it by servicing frequently. In this case the customer avails finance from a bank. After the lifetime of the car, it can be refurbished and sold as a pre-owned car and get the ownership transferred. At the end of life, the car is disposed in a scrap yard.

Consider, the same new car is provided to the same customer on lease for a short term or long-term where customers can choose to pay the dealer or manufacturer a fixed amount per month or annual basis either based on period of usage or based on the km/miles contract. The customer can then return the car after the usage expires and get a new car of the same model or can avail an upgrade to another model. In this case the ownership of the car is with the manufacturer or a dealer. This enables manufacturers to take control of the car after return, to remanufacture the parts and components to quality same as a new part or use of a recyclable material that can be reused to make into a same new part. This way the waste is reduced or eliminated to form a circular economy. For the customer it offers full flexibility, pay for usage, well manageable within budget as it brings peace of mind with no ownership.

These revenue models can be applied to both the business models, the later is more complementary for the circular business model as the ownership of the product is with the manufacturer and the service provider who is also responsible for the making it re-useable and recyclable.

Another example is Apple offering recycling of their products to their customers at free of cost upon return (broken ones) and incentives to customers in the form of trade-in of old phones (working condition) for a new one with discounts. By this way, Apple can recycle the old products and add to circular economy.

The shared model is more like an Uber, Ola, Lyft type of aggregator driven models that focuses on maximum utilisation. The omni channels rentals like Hertz, Avis also belong to the same model. They serve as an extension in the economy in addition to the manufacturers, dealers or service providers, but we are not discussing this in this article.

Adopting the circular economy needs change and innovation to build an ecosystem

While it might sound so simple, adopting a circular model needs change management, especially when moving from a linear model in the B2B market. Reading more about this, made me curios to think what are the focus areas that will call for a change and an innovative approach to build the required ecosystem.

Hence, the three important focus areas that I want to discuss for changes in order to have great influence and impact on building an ecosystem for circular economy

1. Product
2. Supply Chain
3. Integration of product and services

Let's start with the customer value proposition. In the linear model, the value proposition for a customer is based on the investment required to buy the products, the performance and quality of the product that allows them to use it successfully to generate revenue and finally the maintenance and serviceability that determine the total cost of ownership, in the end define the customer profitability.

In circular model, Customer value proposition changes from total cost of ownership to higher utilisation and lesser or no downtime

How does it change for customer moving into a circular model? Well, the ownership will no longer be an important decision criteria as the burden of financing moves to the responsibility of the manufacturer or the service provider. The performance and quality will still be an important factor. The total cost of ownership might change towards looking at the availability at all time for maximum utilisation and a low or no downtime.

Customer/User will no longer tolerate or might not consider the failure or breakdown of the product as it will become the responsibility of the manufacturer or service provider to make sure a working product with the quality and performance is always available at all time. Hence, the customers will pay for the usage and/or based on the performance.

Customers will no longer see products and service as two separate contact points

This is with an understanding that the product sales and service will be no longer seen as a separate organization or contact points to the customer, hence, the concept of a service provider comes into the picture. These become the touch points for the customer where a customer can take charge of the product, use them, return them after usage or for repairs or maintenance. The customer will expect a new product as an exchange upon return since they pay for the usage. Customers will also expect these touch points to be as close as possible and hence the location and the network of service providers becomes an important in the implementation.

Customer will need the product available at all times as they pay for usage

The manufacturer and its service provider should replace the product at the point of sale upon return of any defective product so that customers usage is not affected while they can repair/refurbish the product in the background and make it available for a next customer. Segmentation of the target customers based on their needs and contracts is also important at this stage.

The availability of the product at all times with the right level of inventory plays a key role in the circular model, therefore inventory management at these touch points is an important factor to be considered.

An effective supply chain management is required not only for forward logistics, also for the reverse logistics

This means the reverse logistics of the defective parts or components needs to be handled for repair, remanufacturing and recycling in the whole value chain process. This calls for a state of the art, modern supply chain management to ensure customer satisfaction.

Product innovation should consider the product life extension, maximum utilisation & reduce waste

Having said that the ownership of the goods/product is with the manufacturer or service provider, it adds to their responsibility to design the product with innovation considering the circular model. That is, design for ease of repair, refurbishment, remanufacturing and recycling.

The key to innovation relies on understanding the effect of usage of the product on its life based on customer requirements in order to achieve the product life extension. This will help in maximising the utilisation of the resources at all stages of manufacturing to establish the process of repair, refurbish, remanufacture and recycle processes. The end goal is to re-use and recycle to reduce/eliminate waste.

Therefore the product innovation is a primary requirement and it is important to look into modular designs of the product and obtain standardisation where ever possible in order to avoid product complexities. This helps to reduce waste and the downtime at all stages of the circular model.

Connected IoT and digitalisation will help in traceability & monitoring the usage, life of the product and its journey during the circular model

The traceability at all stages raises the hands to show its significance as the product which is with customer needs to be monitored for usage and upon return the traceability of the lifespan of the products and its components that goes through the reverse logistics also needs to be monitored. Therefore, smart, connected IoT systems and digitalisation platforms in the supply chain will bring transparency in both inventory and customer management. In the end it will help gain more trust and loyalty with customers.

A smart pricing strategy to ensure all costs are covered

All these changes involve the costs of development of product and establishing processes, costs of manufacturing, costs for repair, refurbishments and recycling that are included by the manufacturer, in addition to the responsibility to ensure availability for customers. These are factors that important for a manufacturer to consider in their pricing strategy and remain with an attractive offering to customers.

It is important to communicate the value and benefit of product offering from a circular model

It is an important task of marketing to communicate the value of both the solution and the positive effect of the circular model on the sustainability. As today, many companies have adopted sustainability reporting to ensure reduce carbon footprint, preserve nature, use of recyclable materials, go green initiatives, renewable energy, reduce emissions etc.

Product innovation, state of the art supply chain management and integrated service with product are three focus areas that I have considered, however, the focus is not limited to these three areas there are many other areas and factors that will need change, please do list them in your comments below

Hope you enjoyed reading, please do share your thoughts in the comments.

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