It's not trash. It's treasure

The circular economy will require a fundamental re-think in business operations, nowhere more so than in the way we see the supply chain

In the linear economy, a manufacturer’s relationship with the products that they have sold usually ends long before those products have reached the end of their useful lives. In the circular economy, those end-of-life products become one of the companies most valuable assets. What has, until now, been regarded as trash will become treasure.

The automotive sector provides one of the best examples for this. The trend toward new forms of car financing, where vehicles are used on a service basis are a key feature of the automotive circular economy and one aspect of this could enable car makers to retain ownership of their products?even as they pass through the second-hand market in a use phase that might last 10 years or more.?

As?EVs become the norm, this could be very significant for automotive OEMs. In the?European Union, from 2027 battery producers must recover 90% of the nickel and cobalt used, rising to 95% in 2031. They must also recover 50% of lithium, rising to 80% over the same period. Quoted in a recent article in The Economist , Christian Dahlheim, of VW suggests that, because these raw materials will be in such high demand, the battery may be worth more than the rest of the car. The car itself will become a ‘mini gold-mine’, by far the most reliable and cost-effective source of those materials.

This is true in many sectors, particularly those that rely on critical raw materials. It’s not just metals like titanium and hafnium that are becoming scarce, so are critical bio-based resources like natural rubber and sustainably produced cotton. As a result, no manufacturer can afford to allow such resources to be lost to landfill. This will mean finding efficient ways to ensure that end-of-life products are drawn back into the manufacturing process so that their value is retained, and materials are reused.

A New Mindset

This circular supply chain is an entirely new paradigm for most companies. Like other aspects of the circular economy transition, it will require significant technological, commercial, and organisational change

A circular supply chain contains many familiar linear features. Materials are sourced, products are manufactured, distributed, and serviced in the same way as the linear economy. Circular supply chains add to this with a reverse loop, consisting of processes that are much less familiar.

Firstly, they require a business model that enables a manufacturer to re-take ownership of an end-of-life product. That can take many forms, such as supplying products on a leased or as-a-service offering, or incentivising consumers to trade-in used products for new.

Secondly, an efficient process of collection and return needs to be found. With some products, there may be a process of de-installation required before the product can be returned, this would have to be managed cost-effectively too. Finally, there is a triage process to be managed in which products can be assessed as to how much value might be retained from them before they re-join the familiar processes of redistribution.

This reverse loop part of the supply chain has very different characteristics from the linear. Linear supply chains are designed to meet demand; they?pull?resources and materials through the value chain on the implicit (but wrong) assumption that an unlimited supply exists to meet it.

By contrast, the reverse loop of the supply chain has to?push?a limited pool of resources toward reuse.

Logistically, linear supply chains are about achieving the most efficient distribution network to send products outward to many locations. Reverse logistics, require efficient collection from multiple locations and convergence to a single point.

However, there are strategies that can be adopted from more conventional supply chain management, and a range of new digital technologies that can be used to make the transition a success.

I see two aspects to be addressed in creating a successful circular supply chain and each of them has requirements that need to be fulfilled through careful process design and the application of technology.

Material Flow Visibility

Companies must have a means of assessing the potential quantity, availability and value of products, parts and materials that could be used to recreate value

The advantage for a manufacturer able to source material from their own used products is that those materials are a known quantity. Their properties and quality have already been assured, so if they can be recovered in a condition that makes them reusable, then the constant search for materials of the required standards that characterises linear supply chains, can be made easier. However, this means finding ways of tracing the company’s products once they have left the factory gate. Only in this way can a manufacturer know what the location, condition and availability of those resources are. In a circular supply chain, the ability to forward plan the procurement of materials is just as important as in a linear model.

In future the Digital Product Passport (DPP) as proposed by the European Union will become an important enabler for this. The?internet of things (IoT)?will also play an important role as connected devices will not only enable longer product life through predictive maintenance but also allow manufacturers to monitor location, condition and availability of products so that their return to the value chain can be predicted.

In the meantime, manufacturers can still build a supply chain of materials from their used products by commercial means; using sales and service channels to locate products and by offering trade-in or buy back options on existing products.?

It’s important to remember that, even in the circular economy, not all material needs can be met by reclaimed sources. Products may have a useful life of many years before they can once again be considered part of the material supply chain and there will almost always be some need for virgin materials to be included. Under these circumstances, a company must be able to model and forecast how much of their future needs can be supplied from reclaimed sources as well as predicting when they will become available.

Currently, the manufacturers best placed to adopt circular models are in markets such as medical equipment, industrial machinery, and other capital goods, where the products are of high-value and produced in relatively low volumes. They are often made from valuable components that can be reused cost-effectively and without compromising quality.?

Furthermore, in these industries that have lead the way on ‘servitisation’ for many years, such products are often leased from and maintained by the manufacturer, and so visibility of their location, condition and availability is possible.?

This opportunity for the ‘high value / low-volume’ industries to gain the most benefit from being an early adopter in the circular economy is being seen in the way in which sectors like automotive, office equipment, domestic appliances and high-end consumer electronics are embracing circularity.

Reverse Logistics and Operations

Companies need three things in circular supply chain operations An efficient reverse logistics operation, able to collect product from the customer and deliver it to a process centre. Fast and efficient operations that assess the reuse potential of the reclaimed products, and the ability to base decisions on both environmental and economic benefit

Once returned to the manufacturer, products may be refurbished and resold for a second life, or parts may be harvested to be used in repairs. Both options maintain the highest possible value in the materials but if neither are feasible, then the products need to be reduced to their component materials for recycling. Whether the products are reused or recycled, making the transition to circular business demands that these processes are done as efficiently as possible to make the operation commercially viable.

To realise the value of the returned products quickly, systems need to be able to ‘triage’ returned product into work streams that will refurbish the product, recover valuable parts, or recycle its materials. Familiar logistical processes of transport, storage, inventory, and warehouse management need to be adapted or in some cases entirely reinvented.?

Even when recycling there are choices to be made about whether the original supplier of the material is best placed to reclaim and reprocess it or whether it can be sold on the open market. Having the ability to place those recyclable materials on a market platform and to realise their cash value quickly and with low transaction costs will be a key element in making the circular model viable for many companies, particularly those that do not fall into the ‘high-value / low-volume’ categories.

When designing these processes, it will also be important to recognise that they, like every other activity in the value chain, will consume energy and materials and so have an environmental impact. Lifecycle assessment (LCA) has been used to analyse the ‘cradle-to-gate’ and ‘cradle-to-grave’ impacts of a product, but we must now also include the reverse logistics and reprocessing scenarios in LCA. The circular economy is an inherently more sustainable one than the linear, but it is possible that some current remanufacturing or recycling processes may be so energy intensive that the outcome would be even worse for the environment than allowing the materials to be wasted. Equally, extending the useful life of an older, less energy efficient product may be less beneficial than simply replacing it with a new, modern, less power-hungry equivalent. Both scenarios illustrate how important it is to use LCA as a decision-making tool in the circular supply chain.