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November 4, 2019

Can supply chains facilitate circular economy business models?

By Ryan Purcell
LLamasoft's Director of Global Impact

As defined by the Ellen MacArthur Foundation (EMF), a circular economy is based on the principles of designing out waste and pollution, keeping products and materials in use and regenerating natural systems. Circular economic models employ methods such as reuse, repair, sharing, refurbishment, remanufacturing and recycling, to increase the productivity of resources used and reduce waste. The new category of Product as a Service (PaaS) business models are circular, however this isn’t a new concept. Despite this, they have recently gained popularity and professionals are working to incorporate these practices in their business models.

As a global economy we practice the ‘take-make-waste’ linear economic model where a resource is taken from the earth, made into a useful product which is then thrown away when it is done being used. Due to this, humans now consume the earth’s resources at almost twice the rate the planet is able to replenish them. Add to that a growing global population and consumer class and it’s clear that new operating models will be necessary to facilitate continued economic growth. Additionally, the investment community is taking note. High valuations for circular businesses and announcements like the Global Partnership between BlackRock and EMF and the launch of their circular economy fund are an indication that investors see significant potential in the space.

So what does this mean for supply chains? Supply chain executives, managers, and practitioners should expect an increasing focus on the creation of input/output loops within supply chains. For some businesses this will mean running larger and more complex reverse logistics operations, in other cases innovation will be needed to reduce waste or create opportunities to repurpose or sell-off spent inputs, and in others it will result in new PaaS business models meeting customer’s needs. In each case, for it to be done successfully supply chains will need to adapt – and in many cases they will need to pioneer those changes from within their organizations.

Moving from linear to circular models will not be easy for most supply chains but there are many great examples of successful circular economy business models. Rent the Runway has turned clothing rental into a $1B business, Philips now offers lighting as a service and CHEP has successfully run their global pallet and pooling services business in a circular way for decades. These companies have strategized, analyzed, and optimized their supply chain with feedback loops in mind.

The challenge for supply chains will be in balancing and transitioning between two realities: the current supply chain paradigm where cost and service are king, and the future where we know sustainability and risk considerations will carry increasing weight in supply chain decisions. Organizations that proactively engage between their supply chain and sustainability functions will be best positioned to capture the inherent value in going circular.
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