The circular economy: securing tomorrow’s resources at yesterday’s prices
The circular economy is currently a hot topic, with regular features in the business press, support from the World Economic Forum, and a more ambitious European Union (EU) strategy due this autumn. How can procurement teams use it to create new value for the business?
Demand outstripping supply
World population has quadrupled in the last century, and the ‘consumer class’, about 1.8 billion people in 2010, will swell to nearly five billion by 2030. This rapidly expanding consumption increases pressure on resources, leading to price volatility.
Extracting metals, minerals, oil and gas is becoming more expensive. Geopolitics is a concern: the European Union lists 20 materials as critical in terms of security of supply. Even renewable resources, including food, fibres and timber, are constrained by availability of fertile land, oil-based fertilizers and water. The MGI Commodity Price Index shows a ‘century of price declines, reversed in a decade’. ‘Licence to operate’ costs are increasing, as governments tax and legislate to reduce the impact of business externalities, including pollution, carbon emissions, landfill, and health issues. Critical business risks now include securing resources and controlling costs.
A leaky hosepipe
Most manufacturing follows a linear process: take some materials, make a product, and sell it to the user – who generally discards it at the end of use. Process inputs are also wasted: agricultural crops do not take up 70 per cent of fertilizer. Globally, one third of food, and 80 per cent of Fast Moving Consumer Goods is lost as waste. McKinsey calculate that 60 per cent of discarded materials were either landfilled or incinerated, losing 95 per cent of the material and energy value.[i] Even materials that are generally recycled, like steel, paper and PET plastic, lose 30-75 per cent of their material value in the first cycle.
Products may be under-utilised during their life too: the average European car, for example, is parked for 92 per cent of the time. It feels like a using a leaky hosepipe to fill a paper cup with water. Energy, chemicals, and paper used to purify the water, and make the cup, are all lost. Material choices create other issues. Thousands of unregulated man-made compounds released into the air, water and soil are difficult for ecosystems to process and detoxify. This pollution harms both our health and the support systems we rely on for climate control, pure air, clean water, healthy soil and oceans.
From leaky to loopy
Those three billion new consumers present fantastic opportunities – how do we secure enough resources to fulfil their needs?
The circular economy provides a buffer against resource costs, retaining products and materials at the highest quality and value: so linear becomes ‘loopy’, and products are ‘made to be made again’, [ii] intensifying the use of materials and products. Product-Service systems, such as mobile phone contracts and car-share schemes, replace ownership with access. Recovery flows can return to the company (closed loop) or into/out of other companies and sectors (open loop). Search YouTube for ‘Get Loopy’, a good primer on the circular economy.
Crucially, circular designs decouple demand from resources, aiming to:
- Use less: improving resource efficiency
- Use it more: (both product and materials) intensely and/or for longer; re-sell to more users. Use it again: secure access to your future resources. Reuse the product, parts or materials; ‘design for disassembly’ to simplify reuse; create material cascades, or by-products, for other sectors.
- Use sustainable inputs: renewable, pure, non-toxic and recycled materials
The circular economy helps create local jobs in repair, disassembly and re-manufacturing. A new report by McKinsey and the Ellen MacArthur Foundation, ‘Growth Within’, shows potential for around 1.8 trillion Euros of benefit for European economies every year.[iii]
Waste – your part in its downfall
Markets for more durable products and ‘product as a service’ offers mean different designs and sustainable materials: purer, non-toxic, renewable, recycled and recyclable. Each input will need a traceable ‘backstory’: origin and purity of ingredients; quality and consistency; supplier ethics.
Procurement teams can lead the circular economy journey, helping to continuously improve on materials, and secure future resources. Can you find new sources of recycled materials? Or partner with a specialist or university to develop specific recycling processes? Are the sources sustainable, or competing with food production? Can you encourage your suppliers to explore circular economy opportunities for their businesses? Recovery loops for re-manufacturing and repair may need new partnerships and relationships, with innovative contracts and ways to measure and share value.
Equipment and consumables will have circular opportunities: the ‘sharing economy’ could include collaborating with local businesses to share equipment for peaks, or perhaps a sector initiative for returnable transit packaging. You may be able to buy good-as-new re-manufactured or used items, and sell your unused or end-of-life assets: platforms like WarpIT help connect businesses to exchange equipment. For packaging, can you influence design and materials, including reusable, recyclable outer and transit packaging?
The third industrial revolution began with computers, the internet and then digital technology. Technological dissipation is accelerating: 10 years ago, we hadn’t heard about smart-phones, Google glasses, or the Internet of Things. Amazon, Bitcoin, Uber and many more are disrupting their sectors. New materials are appearing – graphene, nanotechnology, rare-earth minerals, bio-plastics. Intellectual property is harder to protect: hacking, copying, open-sourcing and free education. Consumers can be ‘prosumers’: sell on eBay, rent a room on AirBnB, and lend each other money through Zopa.
Using a circular economy lens means asking different questions. Systems thinking and ‘frugal innovation’ can fuel ideas and disruptive approaches. Value Chain analysis can uncover value not captured, highlighting new opportunities. The circular economy offers a fundamental change in how to create, deliver and capture value, opening a sustainable route to (and from!) those new consumers.
[i] McKinsey, Ellen MacArthur Foundation (2015) Growth Within: a circular economy vision for a competitive Europe
[ii] Ellen MacArthur Foundation (2013) A new dynamic: effective business in a circular economy
[iii] McKinsey, Ellen MacArthur Foundation (2015) Growth Within: a circular economy vision for a competitive Europe
Originally posted as a Thought Leaders Article for Procurement Leaders: https://www.procurementleaders.com/thought-leaders-articles/thought-leaders-articles/think-global-act-circular