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Vendors position ERP as heart of circular economy model

ERP vendors SAP and IFS are positioning themselves at the forefront of enterprise sustainability efforts just as businesses focus on reducing waste and prepare for new regulations.

Changing business conditions like supply chain disruptions, consumer and employee expectations and new government regulations are causing companies to consider moving to a circular economy model of production and distribution.

In the circular economy, goods are manufactured and distributed in a way that maximizes the use of the products or their components as long as possible. Products are designed from the start so that the raw materials and components can be reused or remanufactured in a closed-loop process.

Some of the goals of a circular economy are to reduce energy usage in production, carbon emissions in distribution and waste in the environment.

But the move to the circular economy is neither simple nor cheap, and companies need to gather and analyze vast amounts of data to understand and track corporate goals. Because ERP systems are at the heart of many of the processes and systems involved in the manufacturing and distribution of products, they can play a critical role in enabling companies to move to the circular economy.

Two ERP vendors -- the German-based giant SAP and U.K.-based manufacturing-focused IFS -- are making that case, staking claims in sustainability and the circular economy.

Circular economy focuses on whole product lifecycle

Sustainability and the circular economy are becoming more important as business conditions change, stemming from both the push toward government regulations and changes in consumer demand for sustainable products, according to Dana Gardner, president and principal analyst at Interarbor Solutions, an enterprise computing industry analysis firm in Gilford, N.H.

Dana GardnerDana Gardner

"Now companies are thinking about whole product lifecycle and energy use, and carbon use is becoming something we all have to think about," Gardner said. "There might be some very large financial implications if [countries] start to tax carbon, so that whole circular economy model is going to become more prominent for what a lot of businesses have to consider."

The circular economy may be gaining more of a foothold because issues such as the recent supply chain disruption are causing people to rethink how and where products are being produced, Gardner said.

"In the case of supply chain, the chickens are coming home to roost because we've had all this easy access to goods and materials from Asia, particularly China, and that's been disrupted and it may not ever go back," he said. "You've also never factored in the actual cost of the pollution, the sustainability or the lifecycle of these products and materials."

Companies need to start thinking more holistically and longer-term about how they make and distribute products, Gardner explained, but to implement circular economy models, they will need to invest in more technology.

Plastics usage targeted

ERP giant SAP has a portfolio of ERP products that enable companies to track and analyze sustainability goals that companies consider most vital, such as tracking carbon usage in enterprise processes like manufacturing and distribution.

Jim SullivanJim Sullivan

For the circular economy, SAP recently released SAP Responsible Design and Production, a product that focuses on enabling companies to design products more sustainably and begin to implement a circular economy production model, according to Jim Sullivan, head of product management for SAP Sustainability.

The primary target is reducing the amount of plastics used in packaging goods, he said. This is becoming a real issue for businesses as the U.K. and the EU are beginning to impose taxes on plastic usage, and the U.S., particularly California, is on the cusp of doing the same. Businesses need ways to measure the amount of plastics and renewable materials they use and to factor in new regulatory costs.

"In January last year, nobody expected a plastics tax to be passed, but we're seeing unprecedented quickness in plastics taxes that are coming into force in the U.K., in the Netherlands, in Italy," Sullivan said. "So from a business context perspective -- typically within SAP systems -- we can begin to take the lifecycle of what are the end-of-life or end-of-use costs on these particular materials and provide that in a business context back to the operational people as they're making operational decisions."

SAP Responsible Design and Production can help companies track and report on the data that can make the case for using recycled or sustainable materials, which are usually more expensive than plastics, he said. For example, companies can calculate KPIs like the amount of plastics used, sourcing costs and the amount of potential plastics taxes. This can provide an analysis of the costs and the environmental impacts to decision-makers.

Although recycled materials may cost more than plastics, the U.K. plastic tax carries its own cost of 200 pounds per ton of materials for all materials that don't have at least 30% recycled content.

"Companies need to figure out how they can get 30% recycled content into their goods, which may be a bit more expensive on the procurement side," Sullivan said. "But you can bring in an action item from a tax and finance obligation perspective and show that you've optimized for the [plastic taxes]. The next piece is showing proof that you are using recycled content."

Circular economy, servitization merge manufacturing and service models

While SAP is offering circular economy products, IFS is also helping companies move in that direction. Its manufacturing-focused ERP products and field service management (FSM) products can enable manufacturers to move to circular economy models and support servitization goals, where products are offered as a service.

The circular economy and servitization strategies can be intertwined, according to Marne Martin, president of IFS Service Management.

Marne MartinMarne Martin

"If you're going to have a circular economy, you have to design products for service and for that circular economy," Martin said. "That impacts not only how you design the product, but also how you build your service models, your estimates on asset longevity, your spare parts strategy, refurbishment, replacement, all of that fits into not only your servitization strategy, but also your circular economy strategy."

To implement circular economy and servitization, companies need business acumen and the digital tools and technologies that support both models, such as IFS' ERP systems to manage manufacturing processes integrated with its FSM products to manage the as-a-service model, she said.

The most proactive companies are designing products for the circular economy and servitization from the start. Under both models, companies manufacturer products that get serviced or replaced rather than disposed of at the end-of-life.

The drive to adopt either model needs to be business-driven rather than just focusing on the societal benefits of sustainability.

"If you're manufacturing something that has valuable rare earth metals, you want that back not because it saves the environment, but because it has value to the company," Martin said. "That's been the gap in businesses where they've sold a product where they have always acquired the new materials to build that product versus thinking about how to reuse materials."

Beware of misleading sustainability claims

The idea of the circular economy -- and sustainability in general -- has become top-of-mind for many business executives, and efforts by ERP vendors like SAP and IFS to address these issues are worthy, said Joshua Greenbaum, principal of Enterprise Applications Consulting, an enterprise computing industry analysis firm in Berkeley, Calif.

Joshua GreenbaumJoshua Greenbaum

But it's also reasonable to be skeptical about the how much the products and the companies that use them can accomplish.

People are right to take companies' sustainability claims with a big grain of salt, as they are susceptible to greenwashing, where companies mislead consumers with exaggerated or false sustainability claims, he said.

"We know that here in the United States, it's completely mythological that you take plastic waste and put it in a process bin and it gets recycled. It's being burned or put in landfills, but it's not being recycled," Greenbaum said. "So there are certain limits in terms of the circular economy as to what can really happen."

Nonetheless, companies must start somewhere to implement sustainability goals like the circular economy, he said, and SAP and IFS are positioned better than most ERP vendors to credibly address sustainability issues.

"SAP has a real legitimacy in standing up and saying they are supporting this, with SAP Responsible Design and Production being a really good starting point," Greenbaum said. "IFS is also coming at this from a place of genuine sincerity. But you have to be wary of people checking the box [about sustainability claims]."

Still, the writing is on the wall, and product development as well as production processes are moving in the direction of sustainability. While the circular economy may be a long-term transition, companies should look for a place to start, according to SAP's Sullivan.

"This is a journey, and there's no silver bullet for this, there's silver buckshot, and you need to be implementing a lot of things simultaneously and innovating in order to get to where you want to get to," he said. "So just because you don't have the data is no reason not to act, but you need enough data to be directionally correct with your actions, and there's always a place to start and improve from."

For example, there will be a point when it will be unacceptable to use single-use packaging for consumer packaged goods, so companies need to be innovating on refillable bottles and the reverse supply chain to return and reuse them.

"Change is coming, which we can see from the regulations, customer demands and activists, and currently that change is accelerating," Sullivan said. "If you don't adapt to that and have a way to adjust business processes to that, it's going to become a critical issue for your business sooner rather than later."

Jim O'Donnell is a TechTarget news writer who covers ERP and other enterprise applications for SearchSAP and SearchERP.

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