Circular economy model enables sustainability and resilience

In this Q&A, IFS' Colin Elkins discusses the circular economy and how it can improve sustainability, enable business models like servitization and become a competitive advantage.

The time for the circular economy may be at hand.

For years, mass production of goods has followed a linear economy model. Goods are manufactured, sold and used, then discarded as either trash or recycling. As issues like sustainability and the potential for supply chain disruption become more prominent, however, the waste and inefficiencies of this planned obsolescence model become increasingly apparent.

That is one of the underlying reasons why a circular economy model, which focuses on keeping materials in the economy as long as possible, is being adopted by more manufacturers. Unlike recycling, which is a way of managing product waste, the mission of the circular economy is to build goods that last longer and eliminate waste.

The model requires a considerable shift in manufacturing and business practices so that goods can be easily remanufactured rather than discarded. By reusing components rather than obtaining new ones, companies can improve supply chain resiliency, according to Colin Elkins, vice president of manufacturing industries for ERP vendor IFS. They can also adopt new business models like servitization, where they sell the outcomes of products or related services rather than the products themselves, he said.

In this Q&A, Elkins discusses why manufacturers are seeing value in the circular economy and how it can help companies weather potential disruptions brought by climate change, COVID-19 or supply chain fragility.

How does the circular economy differ from the linear economy?

Colin ElkinsColin Elkins

Colin Elkins: Many people think it's just about sustainability or wearing some sort of eco-warrior T-shirt, and it isn't about that at all. It is all about an economy; it's about doing good business. We've traditionally operated in a linear economy, where we take stuff out of the ground, make it into something and eventually recycle or bury it. However, the Circular Economy model is about keeping the materials in the economy for as long as possible. The last thing you ever want to do is to bury material in the ground. You want to keep it going around that circle as many times as you can.

Can you provide some examples of how companies are using the circular economy model?

Elkins: One good example of this is [copy machine manufacturer] Kyocera, which effectively remanufactures their products about six or seven times. They make a brand new machine, then they take the machine back and remanufacture it by reusing some existing components and putting in some new components. They then ship it out with the same warranty as the new product. Another good example is the Dell Latitude 5590 PC, which was redesigned completely so it contains only standard fasteners now. It's basically clipped together, there are no glues used, and they made the motherboard to be easier to repair. It's basically designed to be taken apart and reused.

How important is product design in the process?

Elkins: The reality is that you'd find it difficult to enter a circular economy in some respects with an existing product. You have to go back to page one and design your product to stay in the economy as long as possible. For example, many years ago when I was apprentice, we made impeller pumps -- big cast iron pumps. These were designed with an impeller inside a housing, which is extremely expensive to make. Over a period of time, the impeller and the housing wear [down] and they eventually have to go to scrap. But if you design that pump again, you'd put a hardened steel ring inside the cast iron shell. Now when it's at end of life, you take the steel ring out and put a steel ring in and you don't lose the value of the casing. That's a good practical example of redesigning a product for the circular economy, rather than designing it to go into waste or recycling.  

This might work for large industrial equipment, but can it work for consumer goods?

Elkins: There are some very interesting consumer examples. One is a U.K. company that remanufactures paint. There's something like 2.5 billion liters of paint lying around in the U.K., and they're actually remanufacturing it. But [changing consumer mindsets] is difficult because we are obsessed with the new. You can buy a new product on Amazon for $150, but you can also find that product remanufactured with the same warranty for $90; everybody still buys the $150 product because we believe that new means better than remanufactured. That's going to take a lot of time and effort to change. You also [need to] have a mechanism to get products back. This is easier for very large products, engines for example, because they have so much value. But that bar is lowering. There are lots of schemes now where manufacturers are trying to entice the public to give their products backs. Boots, a large pharmacy company, has started a campaign where customers can bring mascara pots back and gives them credit on their card. That's the key, you have to give an incentive to do it.

Is servitization an example of the circular economy model?

Elkins: For servitization, you want to redesign all your products, because the last thing you want is for them to fail. For a servitization example, there's Philips [Signify], which supplies light -- not lightbulbs -- to Amsterdam Airport Schiphol. Philips owns the lightbulbs because they want them back, and they want them back because the bulbs contain some relatively expensive components. The phosphorescence used within the lightbulb has a higher value as a returned product than having to dig it out of the ground in China. There may also be a disruption to the supply chain from China, which is another reason for keeping it in the economy. If you own it, you're going to get it back and you're in control of the materials. Maybe not all, because they're not all going to be reusable, but it makes the whole supply chain much more complex if you have to bring in virgin products from all over the world.

Will the circular economy model address issues like supply chain disruption and resiliency?

Elkins: Absolutely. There's an explosion now in electric motors in cars and a plethora of other machines, and these are all centered around rare earth magnets. These rare earths mainly come from three places -- China, Afghanistan and South Africa. There are sources in the U.S., the U.K. and Europe, but those three places have about 90% of the world's supply that are accessible, not buried in the ground like in other countries. So if you could keep those magnets every time a motor breaks down rather than having to buy a new one that needs rare earth materials from China to manufacture these magnets, that has to be good for cost and supply chain resilience.

Where are we in the circular economy now and where will we be in a few years?

Elkins: The circular economy model has been around since at least the 1970s, but the reality is that it's been relatively owned by big high-tech manufacturers that make big products like aerospace engines. There's been a push from consumers for lower-level products like the mascara pots. There's also pressure on manufacturers to do something about sustainability. This is being driven by customers who want to know the providence of the product and by the economies of reducing energy and raw materials. All of these things are starting to impinge on their costs as commodity prices and energy prices are going up. Gartner predicted that by 2029, there would be only one economy, the circular economy. I don't think it will be 100%, but we will see a massive swap. A lot of that will be driven by big changes in servitization and rentals, because the younger generation doesn't want to own anything anymore. The circular economy makes more sense now with the environment, with COVID, and some quite dramatic events that we've seen. It's not going to be easy but there's a big opportunity there.

Jim O'Donnell covers ERP and other enterprise applications for SearchSAP and SearchERP.

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