How manufacturers can take advantage of the positive benefits of integrating a circular economy model
Change at any scale can be a challenge, but when it comes to manufacturing companies and the environment, early adoption will be less costly than inaction. The key to adapting effectively will be to ensure the adaptations address forward considerations while taking present needs into account. A circular economy framework can help businesses to bridge this gap effectively.
A circular economy is not just about better recycling. It’s a comprehensive systems-based methodology to transforming linear economic patterns into ones that can enhance the longevity of materials and reduce waste and waste impacts, while increasing returns. A circular economy framework can be used in the manufacturing sector to improve transparency and traceability, transition to renewable energy and circular feedstocks, and optimize and extend existing value chains through digitization. Manufacturers can deploy artificial intelligence (AI) to open new market opportunities with reuse, repair, and remanufacturing loops in the value chain.
Manufacturing organizations looking to take advantage of circular economy principles should begin by seeking a basic understanding of how circular their operations are across the value chain — feedstock, manufacturing, distribution, product use, and product end-of-life. This will help to establish a baseline and identify opportunities to reduce waste and create circular material loops.
Next, select an element of the value chain to start with. Feedstocks? Production processes? Product use? End of first life? While some initiatives may span each of these areas, identifying a specific place to start can help organizations best understand how to scale a circular initiative throughout the company or a given manufacturing process.
It’s also important to get senior leadership buy-in to a circular initiative. Circularity in an organization is no small shift to make – if the highest levels of leadership are not helping to champion this endeavor, it will be very challenging to scale circularity throughout the enterprise. Once buy-in and sponsorship has been secured, begin the process of evaluating, planning, and enacting a circular business model. As was seen with COVID-19, businesses that can quickly adapt to rapidly changing global social and political dynamics will more ably leap ahead. Those that cannot adapt to changing global environments and sociopolitical preferences will have a very difficult time maintaining market share and brand reputation moving forward.
Shop Floor to Top Floor Traceability
Industry analysts in the manufacturing sector often talk about the importance of shop floor to top floor traceability. Companies need a framework in place to reduce resource use and create full traceability for certification that proves the inputs into their products are reused, recycled, or renewable.
In a circular economy, economic growth is decoupled from the legacy linear model of material consumption and end-of-life devaluation or waste. The circular economy maximizes both positive value capture by using resources efficiently, and value creation by keeping resources in the market. Value chain members take ownership of the energy, material, human, and data resources that form the products and services throughout their value chains. They design strategies to bring resources full circle for reuse without quality degradation — with an aim of zero waste and regeneration.¹ The circular economy is not just positive for the environment. Businesses that have embraced the model are seeing bottom-line business value – benefit streams can include cost and tax reduction, reduced material costs, energy savings, higher valuations, growth through new products/revenue streams, and favorable consumer and investor goodwill toward their brands.
“Be proactive and become a critical participant in the industrial community for designing sustainability and circularity strategies.”
Manufacturers need to expand dialogues with suppliers to better understand what’s in – and used in the production of – the materials they procure. Consumers are rapidly demanding that companies track every input, every operation, every application of energy for a particular product, and how those impact the various scopes of the global environment or system the business operates in. Now is the time to start looking into these points and building a corporate sustainability initiative. This will require alignment and collaboration vertically and across internal departments, along with external vendors and customers. If you wait to react until regulations are released, you may have mobilized too late. Be proactive and become a critical participant in the industrial community for designing sustainability and circularity strategies.
With the right foundational elements in place, industry 4.0 solutions can help factories – and the supply chains supporting them – meet these challenges. Improved operational agility can be achieved through enhanced visibility and predictive analytics. Fifth-generation (5G) cellular wireless communications leveraging on-machine or edge technology can unleash industrial internet of things (IIoT) devices and sensors to serve as the medium for capturing critical data flows across manufacturing assets — both new and legacy — on a much greater scale. The data generated by the IIoT ecosystem will be quickly processed with machine learning (ML) and lead to AI, generating insights now operationalized by robotic process automation (RPA). The creation of digital twins — software representations of physical manufacturing plants or other assets – will facilitate the simulation, monitoring, testing and modeling of data in a virtual environment to vastly improve real-world key performance indicators (KPIs).²
Maximize Renewable and Reusable Inputs
Manufacturers need to proactively maximize renewable and reusable inputs while minimizing footprints and net outflows with smart resource use. For example, if a facility has a solar thermal hot water energy system, the input is renewable solar radiation energy, while the output is heat in the form of heated water. The water does not exit the facility as waste; it is cycled back through cooling to renew as an input for continuous energy generation.³ In another case, distillery grain by-products are remarketed and sold as inputs to animal feed producers.4 Companies that can identify these types of opportunities can make a noticeable impact on their carbon footprint while positively impacting profits.
This can be very important when it comes to reducing the scope 1 and scope 2 greenhouse gas (GHG) emissions that organizations have some control over. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. According to the GHG Corporate Protocol, all organizations should quantify scope 1 and 2 emissions when reporting and disclosing GHG emissions, while scope 3 emissions quantification is not required.5 However, due to customer transparency expectations, more organizations are reaching into their value chain to understand the full GHG impact of their operations.²
In addition to creating a positive footprint with business activity, it’s critical to recommit to and elevate key disciplines to address increased supply/mix variability. Manufacturing processes will need to be more flexible to deal with a more variable supply. It’s not feasible to simply have more setups or big changes in yield, which also create inefficiencies and increased scrap and losses. Manufacturing systems need strategies to adjust to the reality of supply mix variability.
These areas both speak to the importance of visibility throughout the extended value chain. Are there tools and technologies that can help to better understand traceability, waste, value capture and value creation opportunities related to sustainability?
Digital transformation tools that already exist enable manufacturers to embed uniform process execution, quality control, recognize waste, as well as enable business partner management for operational scope outside the “four walls” of the business.
The capital allocation that comes with this may be different. For example, recycling plants, reuse, or surplus material remarketing points may be more distributed and owned by municipalities. Manufacturers may need to invest in those and new plants, embed part of their production system, and digitally integrate with them. Due to the field-based, multi-stakeholder nature of the opportunity, the reverse value chain and the circular economy are not going to be wholly supplier-driven and owned. There may need to be cooperative plants or investments. How can so many partners be managed? Procurement leaders are already thriving in agile relationships with key feedstock suppliers and commercial leaders with top distributors. Manufacturing can learn leading practice by engaging in conversations with their procurement and commercial counterparts.
“Remember to pause along the journey to recognize systems already in place to reduce waste.”
End customers may demand design or engineering for circularity topics such as disassembly, modularity or upgrade, maintenance and repair, favoring leasing business models over single product purchase, and reuse or remanufacture of parts. Lean in. They may optimistically design something that is indeed circular, but that would be very hard to make with current manufacturing capabilities or available materials. Design products with manufacturing processes in mind. Get more engaged in that process from the start by collaborating to match manufacturer readiness with customer demand. Design improvements that can make products and processes more circular. Skate to where the puck will be. If necessary, free-up capital for new plants and partners in the supply chain ecosystem.
Maximize Current Tools and Capabilities
Many manufacturers have invested a great deal of time and effort in becoming lean or earning kaizen and six sigma certifications. These are more than great starting points to building sustainability and creating a circular economy. Existing technology can be leveraged to transfer these concepts to quantify sustainability and circular economy activities. Those in the beginning phases of implementing IIoT technologies may have immediate opportunities in areas such as energy. Avoid hype-cycles like blockchain transformation. There are likely three or four other ways to become more circular at half the cost and in a third of the time. Solutions can be ported to the next technology platform when they are ready for prime time. Investing in the newest technology without considering current knowledge and solution capacity is a waste of resources that may create future problems and inefficiencies with legacy systems or technical debt.
There are always assessments to complete and value cases to build to justify spending significant capital. Start measuring right now. Build a baseline and iterate for the right level of fidelity or data clarity. Building an information baseline will help leadership and operational staff make better-informed decisions faster, and then scale more effectively to system or partner-wide intelligence. Start by aggregating data across multiple clients, recognize commonalities, and assign process and language standards to get benchmarks built.
“Circular thinking demands shifts in company strategies and authentic leveraging of company cultures.”
Building a baseline with symbiotic and simple processes is leading practice. The exposed baseline is going to trigger projects to effectively figure out when to act on the best opportunities. That’s likely going to be a lean, kaizen, or six sigma type of exercise with cross-organizational, external and customer stakeholders. Implementation teams will need to define success and how to measure across life cycles. Focus on that first objective as an alternative to new technology investments and drill down into that. Remember to pause along the journey to recognize systems already in place to reduce waste. These are value-capture mechanisms that enable the organization to be more efficient and can contribute to even bigger process improvements moving forward. If waste or outputs are still being created, especially ones that require paid disposal, those are key opportunities to turn wasted cash into revenue from reuse or remarketing channels with new downstream customers or municipal material marketplace sellers.
Build the Circular Economy Value Chain
Circular thinking demands shifts in company strategies and authentic leveraging of company cultures, as the traditional view of how a business operates and makes money is turned upside down. Circular models require a multi-term view and ample persistence — sometimes cash flow might not be realized until facilities are reconfigured, or the second iteration of a product when resources finally get reused.²
For a circular strategy to work, all the ecosystem partners — including suppliers, manufacturing, and logistics partners — must commit to the process. One of the biggest obstacles is bringing all the participants of a value chain together to share information and act as one aligned ecosystem. Often, it’s a matter of who goes first, as each supplier may feel it is in the wrong position in the value chain, doesn’t have the authority, doesn’t want to assume liability, or doesn’t want to invest first to launch the effort.
Then there’s the added complexity of extended supply chains. From start to restart, a circular supply chain may consider more and different stakeholders than a traditional linear model. Designs must account for durability and consistency to keep components in play longer, and for ease of disassembly and secondary refinement to efficiently reuse or recycle resources. Tracking all the parts of a product and their histories is necessary to predict and deliver maintenance. Service channels, local production partners, and reverse logistics may be added links in the chain to make sure parts are available for repairs or get returned to the original manufacturer for reuse or recycling.
“For a circular strategy to work, all the ecosystem partners must commit to the process.”
Other implications to consider include:
- Who will certify that a product uses non-virgin materials? How?
- If a company runs short of a recycled product, will it delay delivery or fill the order with a product that uses virgin materials?
- Will it ship from an alternate location with thus a larger carbon footprint?
- Where will repair and disassembly or remanufacturing centers be located to minimize emissions generated from a product’s return?
- Is there a clear plan to manage and cut carbon emissions in the supply chain while meeting ever-tightening service levels?
- If a company is exhibiting material stewardship by storing usable scrap for remarketing rather than disposing of outputs, what are the sales drivers and revenue-sharing mechanisms for municipality-managed materials markets?
Bottom Line: Don’t Wait to Get Started
Circular economy advisors recommend business leaders start simple. If considering a recycling strategy, perhaps focus on a product that uses a raw material known to maintain functionality or integrity through multiple recycling processes, such as glass and metals.6 The next step would be determining how the strategy can quantifiably result in positive impact on the environment — not just hypothetically reduce a negative impact at a single point in the value chain. For example, the reverse logistics take-back solution proposed may inadvertently cause negative emissions impact. The key is to consider the entire scope of the approach — elevating this to a transformational discussion rather than a series of siloed continuous improvements. Thought must be given to the product design, business model, operating model, use phase, partner ecosystem, and process for return² to ensure the improvements are creating solely positive impacts, rather than a domino effect of unintended consequences in the manufacturing process and/or product.
Cultural and operating model transformation must align with the maturing business strategy. Leaders must set broader metrics, align incentives, and provide risk coverage to persuade employees and partners to rethink the way they do business. Map stakeholder knowledge and motivations when building the business baseline; these are the barriers and enablers. Surface areas for learning and mitigating hindering mindsets that could delay or halt initiatives. There will be changes required in all functions, including research and development, sales, purchasing, and manufacturing. Finance considerations come into play if a company moves from a sales model to a leasing platform, as traditional cash flows and key performance indicators such as product turnover will not work in a circular model. Employees need to be backstopped by leadership for making decisions that optimize environmental, social, and governance (ESG) all together, not just the “G.”
Adopting a circular model is not an easy process that will happen overnight. It typically requires a multiyear transformation. It is fine to start small with initial efforts, iterate rapidly to determine best solutions, and then scale. There is much riding on the shift to a circular economy, and markets are expecting transformation — the time to start is now. M
What Is a Circular Economic Model?
A circular economy model can help companies identify, plan, enact and iteratively improve sustainable strategies to reduce their environmental footprints. Key components to enacting this shift within a manufacturing context include optimizing the use of existing tools and supply options, identifying ways to keep materials in active through closed-loop strategies, increasing transparency in the value chain, and increasing renewable and reusable feedstocks, where possible.
Note: The views reflected in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.