Today’s supply chains are still mostly linear, taking raw materials from the planet, using them, and disposing of them when they no longer have value. This creates significant waste. By embracing a circular supply chain, industry leaders can help:
- Eliminate waste and pollution
- Circulate products and materials at their highest value
- Regenerate nature
As organizations continue to optimize supply chains, this process can provide significant benefits. Supply chains at a consumer goods company, for example, make up about 80% of the company’s greenhouse gas (GHG) emissions. A circular supply chain can reduce greenhouse gas emissions.
This process also increases resilience, key in today’s uncertain global economy, and provides cost reductions.
What Is a Circular Supply Chain?
A circular supply chain does not see the consumer as the end user. Instead, products or parts are repaired, resold, refurbished, or recycled to reduce waste and build sustainable supply chains. Consumer-facing examples include Nike’s Reuse program, where customers return used shoes that can be donated and reused, or LEGO Replay, which encourages customers to donate their old Legos for recycling and remanufacturing.
However, circular supply chains are about much more than recycling.
Adopting this approach consists of a distributed and interconnected network of partners, creating a flow of information, goods, and funds across partners. This delivers and captures value across the supply chain.
Here are three examples of how companies adopted a circular supply chain approach and saw significant results:
- RUSH University Medical Center saved more than $244,000 by reusing workplan furniture.
- Volvo’s remanufacturing of auto parts reduced CO2 emissions by 4,800 tons.
- BBB Industries’ sustainable manufacturing processes using recycled materials reduced GHG emissions by 38% compared to virgin resource production.
Building a Circular Supply Chain
The Ellen MacArthur Foundation, a nonprofit focused on transitioning to a circular economy and solving global challenges such as climate change and biodiversity, recommends nine areas of focus for building and advancing circular supply chains.
- People and Structure
Supply chain leaders face challenges when transitioning to enable flows. Gaps in knowledge and clarity around ownership for realizing circular supply chains exist, requiring a rethinking of organizational structure and goals. Teams must fully understand the concept and goals, and be equipped with the tools to enact change.
Recommendations:
- Clarify roles and responsibilities for how each supply chain sub-function will adapt ways of working.
- Develop circular economy knowledge and skills through training programs and pilot projects.
- Network Design
Today’s supply chain networks optimize for linear material flows. Capturing value after the initial use is not generally part of the process and processes are not designed for reverse logistics in many cases. But, circular supply chains require cost-effective ways to recapture products to extract value.
Network design needs to evolve to handle distribution and collection, allowing product recovery to eliminate waste and reuse products.
Recommendations:
- Explore centralized vs decentralized options for take-back systems and infrastructure.
- Consider new partnership models like competitors pooling resources for material reprocessing.
- Supplier Engagement
Suppliers have a critical role in ensuring the availability, quality, and traceability of these circular inputs. Supply chain leaders need to set up criteria and expectations for their suppliers — and provide support to building capability.
Circular supply chains require multidirectional communication and innovation, so the technology must provide easy ways to accomplish this. It takes a proactive and diligent approach to make the change.
Recommendations:
- Incorporate circular requirements into supplier qualification processes and agreements.
- Reward supplier innovation and progress on circular initiatives.
- Provide guidance to build supplier capabilities.
- Data and Technology
Existing supply chain technologies optimize for linear processes and transactions, so organizations need a fresh approach to tracking and visibility. Emerging technologies like IoT, AI, and machine learning can provide deeper visibility in the overall supply chain process.
Robust tracking, monitoring, and auditing will be essential for meeting goals.
Recommendations:
- Implement robust tracking systems to verify circular input sources and histories.
- Work with data solution providers to meet emerging transparency regulations.
- Metrics and Performance Management
Legacy supply chain metrics rarely capture the effectiveness of circular supply chains. For example, inventory turnover rates incentivize volume-based models rather than product durability. Companies will also need to evaluate their KPIs to make sure they align with sustainability goals.
Recommendations:
- Collaborate with sustainability and finance to align on relevant circular metrics.
- Make employee evaluations and bonuses contingent upon meeting circular KPIs.
- Business Models and Product Design
Product designs that have not been optimized for a circular approach can hurt efforts. Product designs that are disposable, rather than repairable, encourage waste. By working with design and business teams, companies can create more modular products that encourage replacement or repair to extend product lifespans.
Working with suppliers and vendors, organizations can help create a closed-loop process that delivers on the circular supply chain promise.
Recommendations:
- Inform design stages to optimize products for circular outcomes like disassembly.
- Connect internal and external teams to close the loop on product lifecycles.
- Customer Engagement
Customers need to participate, too. The Nike or Lego projects don’t work unless consumers are willing to send back their shoes or building blocks. Getting customers to take part in the circular supply chain will require marketing resources to encourage sustainable behavior. Consumers may also need to be provided with incentives to participate.
A McKinsey study shows that 78% of consumers say a sustainable lifestyle is important to them and companies that deliver on that promise can see gains in brand loyalty. As such, a circular supply chain can improve customer retention. The right rebate or trade-in program can encourage additional purchases.
Recommendations:
- Offer trade-in discounts or deposit schemes to encourage return behaviors.
- Ensure return logistics align to maximize product capture and reprocessing.
- Financial Resources
Change requires commitment, including an upfront investment into the supply chain infrastructure. Organizations need the technology and adequate funding to adopt circular supply chain methods. Changes may require changes to the physical environment, workflow, and training — all of which have a cost attached to them.
Using resources efficiently depends on organizational alignment between the supply chain, sustainability, and finance to drive a unified circular vision. Rarely does substantive and lasting change happen without buy-in from top leadership, backed by the funding to make it happen.
Recommendations:
- Build a unified circular vision and priorities among top leadership.
- Build investment cases based on circular benefits, aligned with goals.
- Policy and Regulation
There are often conflicting legislation, standards, and incentives that can negatively impact circular flows — especially when you have cross-border flows. Organizations will likely need to be advocates to encourage others to embrace a circular mindset, helping evolve any regulatory constraints into innovation opportunities.
Recommendations:
- Advocate for harmonized standards and incentives facilitating circular flows.
- Turn policy constraints into innovation opportunities for localization.
Making the Transition to Circular Supply Chains
Transitioning from the prevalent linear “take-make-waste” models of today to circular supply chains requires a shift in thinking, capabilities, and coordination. Organizations must take a systemic approach that transforms everything from metrics, incentives, and infrastructure to product design, customer engagement, and policy environments.
Breakthroughs on these fronts, powered by advancements in technology for transparency, will be key to realizing supply chains that circulate products and materials at their highest value.
