Supply Chains and the Circular Economy, Part 1

Stephen DeAngelis

July 26, 2021

As the world struggles to emerge from the Covid crisis, worries about inflation are growing. As the staff at Investopedia explains, “Cost-push inflation occurs when prices increase due to increases in production costs, such as raw materials and wages. The demand for goods is unchanged while the supply of goods declines due to the higher costs of production. As a result, the added costs of production are passed onto consumers in the form of higher prices for the finished goods.”[1] The current situation finds mixed reasons for inflationary concerns. Savings rates dramatically increased during the pandemic — meaning people have money to spend. Unfortunately, lockdowns curtailed some resource harvesting and production capabilities — resulting in an abundance of money chasing too few products. Exacerbating the situation are backlogged ports around the world. Once the backlog clears and production increases, inflation concerns should ease. In the meantime, people are beginning to realize that commodity shortages could persist if global supply chains don’t fully engage in a circular economy. In the first installment of this two-part article, I want to lay the groundwork for why circular supply chains are a good idea — even if they are difficult to implement. In the concluding portion of the article, I’ll talk about some specific ways supply chains do a better job of becoming more circular.

 

What is a Circular Economy?

 

MIT academics Alexis Bateman, Eva Ponce, and Inma Borrella, explain, “Circular supply chains are at the heart of efforts to tackle the massive environmental problems created by waste and end-of-life products.”[1] Jonquil Hackenberg, a Managing Partner at Infosys Consulting, insists, “If we’re serious about reducing the billions of tons of plastic and other waste that gets sent to landfill or pollutes our rivers and seas, we need the corporate world to come up with creative solutions that will enable us to enjoy our products — without further contributing to the environmental apocalypse.”[2] A big part of the solution is implementing a circular economy. Georgia Wilson, a supply chain journalist, notes, “A circular economy is an economic model that encourages continuous reuse of materials to minimize waste, as well as driving demand for natural resource consumption.”[3] She cites a Gartner study that concludes, “The circular economy starts with good design, end of life and raw material reuse in mind.”

 

The Ellen MacArthur Foundation, a leading proponent of the circular economy, defines it this way: “The circular economy refers to an industrial economy that is restorative by intention; aims to rely on renewable energy; minimizes, tracks, and hopefully eliminates the use of toxic chemicals; and eradicates waste through careful design.” Former McKinsey analyst Markus Zils adds, “The circular economy aims to eradicate waste — not just from manufacturing processes, as lean management aspires to do, but systematically, throughout the life cycles and uses of products and their components. Indeed, tight component and product cycles of use and reuse, aided by product design, help define the concept of a circular economy and distinguish it from the linear take-make­-dispose economy, which wastes large amounts of embedded materials, energy, and labor.”[4]

 

Circular Supply Chains

 

From the above description, it should be clear that supply chains lie at the heart of circular economies. Chris Cunnane (@ccunnane), a Senior Analyst with the ARC Advisory Group, explains, “Supply chain sustainability is increasingly important for the future of business and the world as a whole. … More recently, we have seen a push towards building a circular supply chain to eliminate waste and build a continual use of resources. … Circular systems employ re-use, sharing, repair, refurbishment, re-manufacturing, and recycling to create a closed-loop system to minimize resource inputs and reduce waste, pollution, and carbon emissions. The key to building this economy is to keep products, equipment, and infrastructure in use for longer periods of time, which makes these critical resources more valuable.”[5]

 

Most people agree that eliminating waste and reusing resources is a good idea. Circular supply chains are designed to eliminate waste and reuse resources, which leads Khaled Soufani and Christoph Loch, professors at the University of Cambridge’s Judge Business School, to ask, “Why are they so rare?”[6] They blame consumers. “Despite the interest in circular supply chains,” they write, “there are very few functioning examples. The reason for this is that successful circular supply chains tend to be quite local and the products and services involved are made up of a relatively limited number of components — in many ways akin to what we observe in natural supply chains. Human-made products and services, however, tend to involve many specialized parts and highly dispersed operations in order to optimize a performance cost trade-off. Because of this, circular supply chains will remain rare unless consumers are willing to compromise on performance and cost.”

 

Since companies stand to gain from creating products that can remain in a circular supply chain, they should do all they can to persuade consumers to cooperate. Deborah Dull (@circular_nomad), Founder of The Circular Supply Chain Network, believes a circular supply chain has the following characteristics:[7]

 

  • A circular supply chain is where the raw materials used are recycled back into the manufacturing operation. The materials that normally would end up in a garbage dump are repurposed into the production of another product.
  • The goal is to monetize waste — the output of one supply becomes an input for another supply chain.
  • Overall, the point of a lean or circular supply chain is to simply eliminate waste and reduce the carbon footprint.
  • Opportunities to make better use of the materials we are using today.
  • Finding ways to operationalize the circular supply chain.
  • Everything that’s not used anymore can be used again.
  • Circular supply chains find and monetize waste.

 

Like Soufani and Loch, Dull recognizes that the ability to keep product components in a circular supply chain decreases with supply chain complexity. She tweeted, “A short supply chain is a happy supply chain.”

 

Concluding Thoughts

 

Richard Howells (@howellsrichard), a Vice President over Solution Management for Digital Supply Chains at SAP, asserts most companies would like to be more sustainable. He explains, “Climate change, the circular economy, and sustainability have all come to the forefront over the past few years and our global supply chains sit right in the middle of these challenges, both as a major contributor to the problems and as a great area of focus where we can take action.” He concludes, however, “The need is clear, but the path to get there is not.”[8] In concluding installment of this article, I’ll discuss what some experts suggest supply chains can do to become more sustainable.

 

Footnotes
[1] Alexis Bateman, Eva Ponce, and Inma Borrella, “Linear to Circular: Reshaping Supply Chains for a Sustainable Future,” MIT Center for Transportation & Logistics, 21 January 2020.
[2] Jonquil Hackenberg, “How Circular Supply Chains Will Take Businesses From Landfill To Refill,” Forbes, 19 December 2019.
[3] Georgia Wilson, “Circular economy: the future of supply chain,” Supply Chain Digital, 27 February 2020.
[4] Markus Zils, “Moving toward a circular economy,” McKinsey & Company, February 2014.
[5] Chris Cunnane, “The Circular Supply Chain: A Push for Sustainability,” Logistics Viewpoints, 16 June 2021.
[6] Khaled Soufani and Christoph Loch, “Circular Supply Chains Are More Sustainable. Why Are They So Rare?” Harvard Business Review, 15 June 2021
[7] Joe Lynch, “Circular Supply Chains with Deborah Dull,” The Logistics of Logistics, 8 May 2021.
[8] Richard Howells, “Sustainable Supply Chains: Balancing the Bottom Line and the Green Line,” SAP News, 17 May 2021.