By Christopher Koch, Will Ritzrau, and Dan Wellers, SAP
We are at a historic tipping point for the supply chain. For hundreds of years, we have operated under the assumption that the most efficient way to manage the supply chain has been to optimize it within the traditional model of “take, make, and throw away.”
However, that traditional model is an economic dead-end. A new model, which focuses on reuse, remanufacture, and recycle – a.k.a. the circular economy – has emerged to become the most economical.
Of course, this is a tremendously controversial idea: How could we possibly have a more efficient and effective supply chain by including the costs of recovering, remanufacturing, reusing, or recycling materials? It seems impossible.
It’s also an idea that is in danger of becoming caught up in the politically polarized discussion of the future of the environment.
Zero waste as business strategy
But the circular economy stands on its own as a smart business strategy that also happens to help the environment. Indeed, the core principle of the circular economy is “zero waste,” which leads many to think that it’s all about recycling. In fact, recycling is the least valuable loop in a circular economy and only a little better than just throwing stuff away.
The zero-waste supply chain is much more comprehensive than that. Just like the traditional linear supply chain, it’s about managing and optimizing resources, whether they be human, physical, or now, digital. And resources always have been, and always will be, a source for creating business benefit and differentiation.
While great strides have been made in improving efficiency in the linear value chain, we still either dump most “end-of-life” products into landfills or incinerate them. That wastes all the value, and all the costs, of the embedded material, labor, and energy that were used to create the products. Even setting environmental concerns aside, this makes no business sense.
Beyond green ideology: a design method for business value
The circular economy is not an ideology, it is a design method that answers a question fundamental to successful business: how to get the most value possible out of each dollar spent on materials, labor and energy.
The first thing the circular design methodology does is to design waste out during the product inception phase. Products are designed from the beginning to be easily repairable, reusable, and recyclable. Designing products for multiple cycles of renewal doesn’t just keep them out of landfills, it reduces costs and fattens margins. It costs much less and uses many fewer resources to refurbish a used part or product than it does to make them from scratch.
Renault makes circularity a profit model
There’s nothing new about this concept. Nor does it require new technology (though that certainly helps). It’s more a matter of mindset and market conditions. French vehicle manufacturer Renault started a parts remanufacturing plant in 1949 outside Paris to offer used parts with the same specifications and warrantees as new parts but at 30-50% discounts. The move was not designed to save the earth (indeed, no one had any conception of the damage the linear economy was doing at the time) but rather to gain a competitive advantage over its rivals in a still war-ravaged economy.
Today that plant generates revenues of $270 million annually. Everything that comes into the factory goes out as a refurbished part or is melted down to reuse as raw material. In the process, the plant has reduced its energy and water use by 80% or more. Renault’s success has driven the company to push its circular practices farther up the supply chain. It now designs its major vehicle components for easier disassembly to further increase the profit margins of refurbished parts.
A new type of supply chain partner
Renault has also partnered with a new vanguard of supply chain partners who specialize in recovering valuable materials of all kinds. As in the traditional linear auto supply chain, these companies are specialists in manufacturing specific parts and assemblies at a lower cost, and with higher efficiency and quality, than if Renault tried to vertically integrate all these specialties under its own roof. It’s just that the parts have already seen service elsewhere (often with other manufacturers).
For example, Renault has created a joint venture with a company that has developed a decentralized network of vehicle disassemblers across France and other parts of Europe that gather all makes of vehicles, not just Renault. Another joint venture specializes in recovering old car bumpers and “downcycling” them into “black plastic” parts for hidden areas of vehicles, such as wheel wells (the original bumpers retain too much trace elements of their original paint during the renewal process to be painted again).
Other partnerships recover old copper, other metals, old catalytic converters, and (soon) electric car batteries that can have second and third lives as products that fit with their decreasing potency as they are reused, such as home power storage batteries, which require less energy intensity than car batteries.
Mindset is what matters
While this new category of suppliers is highly networked with technology, the true value is in the mindset change that drove its creation. This view of the supply chain helps build Renault’s popularity not just with customers but also with its accountants. The number crunchers like the fact that the refurbished parts can go through endless cycles of renewal, thereby distributing manufacturing costs over an ever-larger window while protecting Renault from the price volatility that now plagues many categories of virgin materials (metals had record price volatility during the aughts—greater than that of any decade of the 20th century, according to a report by the McKinsey Global Institute).
Just as mindset matters, so does language. The term supply chain suggests a start and an end of a process, reflecting the classical linear thinking. Yet the circular economy is about continuous and infinite value creation, value maintenance, and value distribution for specific resources. This can only be achieved by trustful collaboration of all process partners driven by shared transparency based on reliable data.
So, call it whatever you will, but the core principle behind the circular economy, zero waste, minimizes costs, mitigates risk, grows profits, and increases customer satisfaction. That’s smart business from any angle.