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November 19, 2017
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The challenges of implementing a circular economy

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A paper from the European business school INSEAD points out the obstacles a company must overcome before it can sell remanufactured goods in a closed-loop supply chain.

Companies are facing a growing amount of pressure from nonprofit organizations, government agencies, consulting firms, and consumers to take "the next step" when it comes to product reuse and sustainability. A recent paper put out by two researchers from the graduate business school INSEAD (Institut Européen d'Administration des Affaires), however, urges caution. The paper recommends that companies clearly account for all associated costs and understand all potential impediments before they fully embrace the concept of a "circular economy."

Originally developed as an alternative to the traditional production model of "make-use-dispose," the circular economy involves purposely designing products to be remanufactured, an approach that requires thinking of a product's supply chain not as "cradle to grave" but "cradle to cradle." The potential benefits include cutting down on waste and reducing a company's reliance on nonrenewable raw materials.

The idea was originally formulated in the 1980s by two environmental economists, but more widespread use of the term was sparked by a 2013 report Towards the Circular Economy: Economic and business rationale for an accelerated transition commissioned by the Ellen MacArthur Foundation and written by the consulting firm McKinsey & Company. Many, such as the consulting company Accenture, are pushing the concept because they believe it will not only be good for the environment but will also lead to greater economic growth and profitability.

Luk Van Wassenhobe and Patrica van Loon of INSEAD, however, urge caution, saying that in many cases, the circular economy is easier to talk about than to implement. "How Companies Can Assess Their Readiness for the Circular Economy" argues that before companies can effectively adopt a circular economy model on a large-scale basis, they need to have not only a solid business case, but also sufficient external supports, such as appropriate financing models and legislation, new business models, and a supportive customer base.

Although the paper points out several roadblocks to the circular economy model, it does not suggest that companies should automatically reject the concept. Rather, it advises that before embarking on a remanufacturing program, companies should verify that the circular economy makes sense for their products.

A first step is to analyze the potential profitability. Because consumers are typically unwilling to pay more for remanufactured products or those that contain recycled parts, a company has to make sure that the cost of recovery and reproduction are below the product's original manufacturing costs. That analysis should include a number of variables, such as the costs associated with product collection, disassembly, repair/remanufacturing, resale, and delivery, according to the INSEAD paper. Additionally, many remanufactured products will require some new components, and the costs of those parts must be considered as well.

Companies should also determine whether remanufacturing will actually benefit the environment. For example, some newer electronic products are more energy-efficient than older versions, and therefore it might make more environmental sense to replace old products with new ones instead of remanufacturing them. The authors recommend that companies evaluate the carbon footprint for such activities as return transport, remanufacturing, and forward transport of remanufactured goods, and then compare those results to a scenario where only new products are created.

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