Middle market executives are increasingly shifting from a linear to a circular economy mindset because it offers a systemic approach to economic development that benefits business, overall society, and the environment. Advanced 4.0 technologies can help them get there.
The era of linear lifecycles for manufacturing products is gradually becoming a thing of the past, especially as the growing focus on environmental, social, and governance issues raises the stakes for firms to be competitive in these areas. As companies embark on new goals to create more circular economy oriented products and production systems, it will be crucial for manufacturers to examine new ways in which advanced strategy and technologies can help them meet environmental targets.
The concept of a circular economy—in which a company makes reducing waste, reusing materials, and recycling products central to its production processes—is not new. But there is a confluence of factors making it particularly urgent right now: the Biden administration’s climate and energy goals, demand from customers and investors to adopt more sustainable practices, rising input costs for manufacturers, the semiconductor shortage, and new challenges around mining for and developing batteries, to name a few.
All of this is ramping up attention on circular economy efforts, and more and more research shows that this approach can help manufacturers tap into a huge market opportunity.
Industry 4.0 technologies such as advanced data analytics, digital twins, and 3D printing can enable companies to develop and hone their circular economy processes, thereby helping them realize these opportunities for savings, improved efficiencies, and reduced waste.
The growing prominence of the circular economy goes hand in hand with that of ESG priorities, and companies and governments are setting new standards related to these measures. The European Union, for instance, in March of 2020 adopted a circular economy action plan that includes “initiatives along the entire life cycle of products.” The plan “targets how products are designed, promotes circular economy processes, encourages sustainable consumption, and aims to ensure that waste is prevented and the resources used are kept in the EU economy for as long as possible.”
Industrial companies that want to keep pace with such changes need to act quickly to determine where they may need to make capital investments that make their products and processes aligned with circular economy principles. Investments in advanced technologies can help provide visibility into their production and supply chains that will identify, monitor, and improve critical areas.
“It will be crucial for manufacturers to examine new ways in which advanced strategy and technologies can help them meet environmental targets.”
Even companies that are profitable with their current use of linear production systems need to understand that a broad range of stakeholders will factor waste reduction and product reuse into their buying decisions more and more in the future. Going forward, companies will increasingly be judged on the process they took to develop a given part or product, rather than just the fact that they were able to manufacture that part or product.
Leadership teams need to get comfortable with competing on these new criteria and goals around reducing emissions, especially as familiarity around ESG has grown: “Familiarity among middle market executives with the use of ESG criteria to evaluate the performance of businesses, organizations and/or investments rose significantly in the third quarter of 2021, compared to the fourth quarter in 2019,” according to a recent RSM report that polled executives in July this year on ESG- and climate change-related questions. “In the last part of 2019, 39% of executives were very familiar or somewhat familiar with using ESG criteria to evaluate performance, and in Q3 2021, that figure was 69%,” notes the report.
High Impact Technologies
Along with identifying problems and how to fix them, advanced technologies can also help manufacturers identify new opportunities and figure out how best to tap into them.
For example, some specific 4.0 technologies can actively help manufacturers accelerate and deliver on their aggressive waste and emission reduction targets:
- 3D printing: Advancements in additive manufacturing technologies have enabled manufactures to make products using fewer components and consequently fewer resources. Moreover, additive manufacturing processes lend themselves to more rapid prototype development, significantly reducing the time, energy, and resources otherwise consumed in multiple iterations of physical tooling and molding prototypes.
- Digital twins: Digital twins provide virtual representations of products, processes, or equipment. By performing design activities, maintenance, and build changes on the virtual models, manufacturers can optimize the design or process and reduce time and resources involved in assembling, building, maintaining, installing, and validating factory productions systems. The successful implementation of digital twins requires IT infrastructure that supports the Industrial Internet of Things and the use of real-time data.
- Advanced data analytics: It is common knowledge that the manufacturing sector is one of the highest energy consuming sectors. Data will be central to manufacturers’ ability to adopt more circular production processes and it is critical to have the right infrastructure to access that data. Having access to key operational data is only the first step; companies also need to harness that data for insights that can reveal inefficiencies and identify opportunities for growth. For example, manufacturers can improve energy efficiency through real-time, data driven decision-making, allowing plant managers to monitor excess or untimely energy consumption so they ca organize quick interventions to reduce energy costs by realigning production schedules. Businesses can also use predictive analytics to reduce machinery downtime by anticipating factors that lead to machine breakdown or reduced performance, streamlining processes and reducing bottlenecks through real-time visibility into processes, suppliers, and priorities.
Opportunities and Challenges
While manufacturers can use circular economy practices to achieve their emissions targets and differentiate themselves from their competition, there is a wide array of possibilities for exactly how a company might implement these practices. As OEMs increasingly make ESG and circular economy principles central to their procurement practices, middle market suppliers can increase their relevance to OEM customers by helping them achieve such targets.
“Setting a defined methodology for tracking circular performance indications is imperative and will enable better corporate decision making.”
A number of areas may be ripe for progress, depending on where a manufacturer is on its journey toward closing the production loop:
- Shifting to the use of renewable energy sources
- Improving the traceability of sourced materials
- Using lighter and more aerodynamic materials (which can translate to using less fuel)
- Reducing or eliminating packaging waste
- Redesigning products to reduce waste
- Providing transparency around circular business practices
While some of these may be low-hanging fruit, companies should waste no time integrating these solutions. Competition will only get tougher as more and more companies embrace such practices. Companies are already getting serious about circular economy approaches across both their operations and supply chains. As Bloomberg’s BNEF research service revealed earlier this year: “There were a record number of supply agreements for recycled material in 4Q 2020.”3 Adding that, “Not only is the number of circular economy partnerships rising, but the engagements are more substantial.”
McKinsey estimates that of all the fuel that industrial companies use for energy, almost 50% can be replaced with electricity using technologies available today.
Manufacturers should be prepared to take advantage of government incentives around recycling and other programs related to reducing waste and emissions, but they should also think just as strategically about managing their inputs—that means using fewer inputs and using greener inputs. Companies are now exploring the production of green steel, for example, which involves making steel using hydrogen or other renewable sources of energy. And many are already moving toward electric products and the electrification of production processes.
McKinsey4 estimates that of all the fuel that industrial companies use for energy, almost 50% can be replaced with electricity using technologies available today. That shift toward electrification, of course, brings its own challenges of increased costs and investments needed, especially if the technologies are not yet widely adopted. Moreover, as companies increasingly move toward green products and processes to reduce their carbon footprints, demand for green metals such as nickel and copper are at an all-time high, driving up prices.
Middle market executives understand well the pro-societal outcomes that result from circular business practices, and yet, many still want to see the correlation between changes in business practices and improved financial, and even nonfinancial, performance. Setting a defined methodology for tracking circular performance indications is imperative and will enable better corporate decision making.
The shift to circular economy practices will bring many benefits for manufacturers, but the scope of challenges will vary greatly depending on where in the supply chain a given manufacturer operates. Middle market component suppliers, for instance, may have to rethink their broader value proposition if their customers need fewer components overall.
Businesses are now focused on more than just shareholders, and increasingly must meet the demands of a broader range of stakeholders including customers and suppliers. Middle market executives are continuing to shift from a linear to a circular mindset because they recognize that the circular economy is a systemic approach to economic development that benefits business, overall society, and the environment. M