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The circular economy business model | How can the supply chain maximise the value of materials and promote economic efficiency?

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The circular economy business model | How can the supply chain maximise the value of materials and promote economic efficiency?

The circular economy model of manufacturing, distribution and recycling is becoming more prevalent as companies seek to enhance the flow of goods and services and improve business productivity. With raw materials costing more than ever before, coupled with a rise in demand and fluctuating prices, it is more important than ever that industry models are less dependent on primary energy sources and material inputs and use the raw materials they have as effectively as possible.

Richard Girling’s book “Rubbish!” states that, 90% of the raw materials used in the manufacturing process becomes waste before the final product is shipped and 80% of products produced will be disposed of within the first six months of life.  The circular economy model looks to neutralise some of these concerns by removing the association between economic growth and resource consumption.

It is predicted globally that US$1 trillion could be saved by 2025 and 100,000 new jobs created in the next five years if companies increase the rate of recycling, reuse and re-manufacturer.  In this model the value of materials is maximised even when products reach end-of-life

Sustainability is still a struggle for many companies, so how can this substantial predicted saving be achieved?

Reducing waste through innovation in the circular economy

Innovative design processes will play a major role in the reduction of manufacturing waste. The goal is a combination of designing for better end-of-life recovery, and minimising energy consumption by manufacturing more with less. European manufacturing companies spend approximately 40% of their total costs on raw materials.

By extracting the maximum value from  initial resources and recovering and recycling resources at the end of each service life, this will have a substantial effect on business profitability and viability.

Unilever is an example of innovation aiding the reduction in waste, they formulated “Small and Mighty” which uses 40% less packaging in comparison to the diluted product and is the commercially greener alternative as it reduces unit transportation costs.

Enhancing resources through closed loop models

The leasing model provides economic motivations to manufacturers whilst also providing the consumer with a sustainable product by reducing the consumption of raw materials.

The manufacturer retains ownership of the product, providing an incentive to make products more durable and to develop ways to reuse or recycle the product when it is at the end of its lease. The manufacturing company Philips is looking to implement this model with the production of MRI machines for hospitals. Head of Sustainability Henk de Bruin highlights that connectivity is the key when implementing the leasing model, “We realise that the circular economy is not a strategy you can pursue alone. It requires relationships with recyclers, retailers, consumers, resource providers, regulators and so forth: basically, everyone involved in a company’s value chain, from start to finish.” The leasing model can be seen in several sectors including the retail industry; for example, Mud Jeans utilises this model with positive effects.

Re-using, recycling and re-manufacturing

The circular economy structure places prominence on the importance of designing durable products rather than aiming exclusively for efficiency. Caterpillar have employed this strategy in their own product design, and rather than aiming to use less material, they emphasise the importance of creating a product that is intended to be re-manufactured several times.

A major challenge for companies who market their products as re-manufactured is the customer perception that this means inferior quality, in this case the manufacturing saving that is being passed on to the customer can also have a negative connotation with inferior workmanship. However if a company is willing to put the effort into marketing their repurposed products they can gain substantial otherwise wasted revenue, in 2012 Renault’s Choisy-le-Roi factory re-manufactured around 200,000 components, generating a turnover of 100 million Euros.

Whilst manufacturers can make several changes to their production lines, the success of the circular economy is dependent upon supply chain resilience and collective value for the consumer and manufacturer hard-wired in.

Prodware is a Microsoft Gold Partner active in sectors within the circular economy, providing technology solutions to manufacturers and distribution companies to support business productivity.  Our experience within these industries means that we are well-positioned to unite the different elements of the circular economy and provide guidance on how to maximise material production, improve manufacturing processes and enhance go-to-market strategies.

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