CSCMP's Supply Chain Quarterly
Strategy
January 19, 2020
Strategy

Three best practices for transitioning to a circular economy

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As companies invest in more sustainable practices, many are moving away from the traditional "take-make-dispose" linear economy and moving towards a more circular one. This model keeps materials within the economy as long as possible. To successfully transition to a more circular economy, companies must change how they design and create products, how they relate to their customers, and how they interact with other companies.

Companies around the world have a growing awareness of the environmental impacts of conducting "business as usual." As a result, they are taking action to change their practices as part of a broader concern for corporate sustainability. One model for a more sustainable future that is increasing in popularity is the circular economy. The circular economy is defined as "a framework for an economy that is restorative and regenerative by design" by the Ellen McArthur Foundation, which is dedicated to encouraging the adoption of circular practices. By "restorative and regenerative," the foundation means creating an economy that restores its products, components, and materials while at the same time regenerating its natural systems. (See Figure 1.)

Contrary to a traditional "take, make, use, and dispose" linear economy, the circular economy intends to keep materials and products in use as long as possible by reducing waste and encouraging reuse instead of disposal. For a circular economy to succeed, however, companies will need to change their practices. We highlight three key practices that are essential for the successful transition from a linear to a circular economy. First, companies will need to rethink how they design and manufacture their products. Second, companies will need to change how they interact with their customers. Finally, in order to realize the full potential of the circular economy, companies will need to collaborate more with peers both inside and outside of their own industry.

Article Figures
[Figure 1] The three principles of a circular economy
[Figure 1] The three principles of a circular economy Enlarge this image

To show how companies can adopt these three circular practices, this article will present specific, real-world examples from three marquee organizations: packaging company Amcor plc; technology conglomerate Cisco Systems Inc.; and Kohler Co., which manufactures bath and kitchen fixtures. Each of these three companies operates within very different industries, but all of them have made commitments to adopt more circular practices. They have all implemented large and small changes to their current models in order to produce more sustainable outcomes for the future. (More information about each of the companies can be found in the sidebar.)

Rethink product design

The ability to reuse, repurpose, and upgrade a product is an excellent example of circularity. If companies focused on designing products for reuse and upgradeability while also reducing product obsolescence, then the need to "dispose" of the majority of a physical product would be diminished. Products would stay in use longer, requiring companies to make fewer new products, which would reduce both raw material usage and greenhouse gas emissions. All the while, the product would continue to provide value to the economy, instead of sitting in a landfill.

One example of this circular practice is Cisco's initiative to design routers and other hardware to be more robust and allow for upgradability. Cisco has made its router enclosure more durable, allowing for the internal components to be replaced as they wear or qualify for an upgrade. Such design allows for a material part of the product to be reused, eliminating a waste stream. While having an environmental benefit, this new structure also provides Cisco's customers with an arguably better product and enhanced product experience.

The initiative also gives Cisco an opportunity to create a more intimate relationship with consumers of its products and expands possibilities for revenue generation. In order to upgrade products, the customer will have to provide Cisco with data on how and where the product is being used. This interaction gives the manufacturer an opportunity to establish a greater connection to the end-user. This opportunity is particularly helpful for those manufacturers whose products are sold via distributors, resellers, and other channel partners and may have difficulty gathering end-user data. These interactions can also lead to further product sales, competitor product replacements, and service sales. All of this opens up the potential for the development of totally new and novel products and customer categories.

However, in order to adopt such practices, a new business model is required. Currently, many companies do not offer upgradeability and instead incorporate planned obsolescence into their products as part of their strategy to create consistent revenue streams.

The new business model that Cisco is adopting can be seen in its Capital Equipment Pledge, which it made at the World Economy Forum in January 2018. In that pledge, Cisco committed to enabling 100% product return. Key components of the pledge include but are not limited to the following:

  • Provide product return pickup and transport. Offer warranty, replacement, and service and repair to extend the useful life of the product, minimizing obsolescence.
  • Establish alternative commercial models that promote product return and reuse including: purchase trade-in, return credit, leasing, and product-as-a-service.
  • Repurpose returned product into new products.

Although it operates in a very different industry than Cisco, Kohler is also committed to designing its products for durability, reuse, and upgradeability. The theory is that when customers take pride in the items they own, they are much more likely to hold on to them and ensure that they are in good working and aesthetic order. So, when Kohler designs plumbing fixtures with a timeless style using durable materials and makes them capable of being upgraded and repaired, it not only keeps customers satisfied longer, it also lessens the frequency of product disposals and improves sustainability performance.

Kohler's circular practices in product and process development are reflected in its Design for Environment (DfE) program. This program was created because of the belief that the achievement of "gracious living" is not possible when people and planet are not considered in decision making, and compromises are made that affect the well-being of those around us and the environment.

As such, the DfE programs make a strong cause-and-effect connection between design choices and people/planet outcomes. The program has a specific focus on helping the company to rethink how it designs products so that it considers a product's environmental impact over the span of its entire life cycle. This includes looking at the materials used, the longevity of the product, and disposal at the end of a product's life cycle. Designers are encouraged to think not only about how consumers use the product but also about how to minimize the product's production, packaging, and transportation footprint. This program allows Kohler to differentiate its products and brand via more sustainable solutions. This tool specifically provides customers with choices in materials, recycled content, and an Environmental Product Declaration (EPD), which provides detailed information about a product's environmental impact over its lifespan.

As a part of the DfE program, Kohler has invested great effort in reducing the diversity of its material choices and the number of its manufacturing steps. One example of how they reduced their material use is in the redesign of the strainer in the Kohler Bardon Urinal. By redesigning the component with the use of a tension-fit form, the strainer stays in place without the use of a large steel bolt and nut. The redesign also minimized thickness and maximized hole pattern, resulting in a 69% material reduction. A second example is in the design of the Kohler Modern Life Toilet. Through extensive user testing, Kohler was able to design a toilet that reduced the time to clean it, by including a beveled rim edge, removing gaps, and creating a low profile for the foot of the seat. These design changes reduced the chemicals needed to clean it and had other associated impacts.

The result of the program is an increase in the potential for material reuse (due to the reduction in material choices) within the manufacturing process and at the end of a product's useful life, lessening the frequency of product disposal. The overriding rationale is that by creating simplicity in materials that make up complete products or major product subassemblies, the company can improve the potential for material reuse.

Make it clear and convenient

A company can spend a great deal of time and effort creating a product designed for the circular economy, but if the solution is inconvenient or unclear to customers and end-consumers, it is highly likely it will fail. A key part of incorporating the concepts of circular economy into a company's operating principles, then, is designing business practices and effective communication that support reuse.

Take recycling, for example. Recycling is often referred to as a circular practice. In reality, however, it is far from circular with more than 66% of waste materials in the United States leaving the circular economy and ending up in a landfill. This low recycling rate (34.4%) can be attributed to the lack of consistency, convenience, and education within our current systems. Substantial inconsistencies exist among what materials and products can be recycled across municipalities as well as the directions printed on product labels for recycling, making the process considerably complex. This complexity adds to the inconvenience of separating waste, not to mention the many products that actually require physical separation in order to recycle the "recyclable" parts of the product (for example, removing tops from plastic bottles or plastic films from cardboard containers). In addition to these challenges, there is a lack of education and simple, straightforward communication to the consumer on what to recycle and how.

One way that Amcor is helping to overcome these challenges is by participating in a standardized labelling program, called How2Recycle (howtorecycle.info), a program that works to clearly communicate recycling instructions to the public, in a clear, concise, and digestible way. The program works with brands to ensure that their consumers are aware of and understand how to recycle their packaging through providing standardized labels.

The program's goals are:

  • To reduce confusion by creating a clear, well-understood, and nationally harmonized label that enables companies to convey to consumers how to recycle a package.
  • To improve the reliability, completeness, and transparency of recyclability claims.
  • To provide a labeling system that follows the Federal Trade Commission's (FTC) Green Guides, guidelinesfor environmental marketing claim.
  • To increase the availability and quality of recycled material.

Programs like How2Recycle that focus on the societal barriers to a circular economy are just as important as the production of recyclable and upgradeable products, as all stakeholders will need to be involved in the transition from a linear to a more circular system. Human behavior has always been a strong barrier for solutions like recycling, and convenience has always been key.

Convenience and easy-to-use infrastructure are also critical in supporting circular solutions beyond recycling. Johnson Controls, for example, made sure to incorporate these principles into the reverse supply chain it developed for its car batteries. More than 98% of a car battery is eligible for reuse. To ensure that these parts of the car battery are indeed reused, Johnson Controls has created an ecosystem where spent batteries can be picked up at predetermined collection sites, taken to a facility for remanufacture, and then delivered as new products to customers, some of which are the same stores/locations where previous spent batteries were collected.

Convenience is also a cornerstone of Cisco's Capital Equipment Pledge. This pledge creates a loop for collecting aged product, which is not only "easy" but provides for relatively seamless upgradability.

Circular solutions do not need to be complicated. A very basic concept—like how commercial rugs are collected, replaced, cleaned, and then put back into service—can be used for inspiration to other industries; adding value, convenience, and environmental benefits in creating an overall more circular and sustainable system.

Collaborate with others

Collaboration is vital in achieving circularity on a large, systemwide scale. In order to gain optimal benefits from the model, circularity must be adopted by the majority, otherwise the beneficial outcomes may be negligible. Systems thinking—a holistic approach that considers how a system's parts interrelate and how systems work over time and within the context of larger systems—is an essential part to the circular economy. That's because to realize the benefits of the circular economy, massive infrastructure changes are required, such as redesigning entire waste systems or developing the logistics processes for a takeback program.

These changes will require collaboration within and across industries. There are several ways that companies can foster this type of collaboration. They can work together with their direct customers, suppliers, and other supply chain partners; participate in industry coalitions; and attend cross-industry events.

Amcor, for example, has worked with its customer Method, which manufactures cleaning products, to invent a 100% post-consumer recycled (PCR) container for liquid laundry detergent. The goal of collaborative efforts like this one is to drive commercial innovation, create a competitive advantage, and build stronger relationships with customers. Overall, the hope is that these types of research and development efforts will make both Amcor and its customer's business more successful and more circular.

Amcor is also one of the founding members of the New Plastics Economy Initiative. This partnership includes over 350 companies, governments, and nongovernmental organizations (NGOs) as signatories. It unites these groups behind a common vision and targets reducing plastic waste and pollution. The goal is to eliminate all problematic and unnecessary plastics; to ensure that plastics are reusable, recyclable, or compostable; and to keep the circulation of all plastic items within the economy and out of the environment.

Other examples of industrywide collaboration include coalitions like the Canadian Circular Economy Leadership Coalition and the Platform for Accelerating the Circular Economy (PACE). Coalitions like these are one way that companies can share and stay abreast of circular economy best practices. These specific partnerships exist to build sustainable, prosperous, zero-waste, low-carbon-emitting circular systems on a large scale while still driving competition and innovation. It is through the sharing of technical expertise and collaboration on best practices that the development of solutions at all stages and levels of a circular economy will become possible. Coupled with annual sustainability reports, participation in these types of partnerships is becoming an expectation of employees, communities, and shareholders.

It is also important to form partnerships that extend beyond one's own industry. Reaching international sustainability goals depends on the ability for all types of organizations, sectors, and communities to come together to solve these problems. For example, in March 2019, the University of Wisconsin-Madison Grainger Center for Supply Chain Management at the Wisconsin School of Business and the Nelson Institute for Environmental Studies hosted a circular economy panel discussion featuring representatives from Johnson Controls, Kohler, and the World Economic Forum. The conversation was focused on ways to create a sustainable future and transform the way the world does business. Such gatherings are an example of an ideal platform to share ideas, insights, success stories, and lessons learned.

Preparing for the future

Although the circular economy offers many benefits, it also comes with limitations. We must acknowledge that a 100% circular economy cannot exist, as there will always be some loss to a system. Further, not every system will benefit from transitioning from linear to circular. Therefore, a circular economy and its benefits should be evaluated on an individual basis to ensure that the benefits outweigh the cost. However, using circularity as a guiding principle for creating better, more efficient practices is a good way to begin to move forward. The best practices discussed in this article—such as designing for upgradability and reduced obsolescence, planning for convenience, and collaborating with industry partners—are just some of the circular solutions that companies, across different sectors, can use to begin to create a more sustainable future.

 

Amcor was founded in 1860 as the Australian Paper Manufacturers and later become known as Amcor in 1986. The firm is a global packaging solutions company, supplying a range of packaging products for use in the food, beverage, pharmaceutical, medical, home, and personal care industries. It is a leader in the responsible packaging movement. Amcor has adopted sustainability as a core concept with a specific emphasis on circularity within its value chain. Amcor was the first packaging company to commit to having all packaging recyclable and/or reusable by 2025 and has made substantial progress towards meeting that goal. Further, in 2018 Amcor was recognized as one of the sustainability leaders on the Dow Jones Sustainability Australia Index, a subset of the Dow Jones Sustainability Indices in collaboration with the international investment company RobecoSAM, which focuses on sustainability investments.

Cisco Systems Inc. (Cisco), which was founded in 1984 by Leonard Bosack and Sandy Lerner, is a multinational technology conglomerate positioned in the center of Silicon Valley. With the help of more than 74,000 worldwide employees, Cisco develops, manufactures, and sells telecommunication equipment, network hardware, and other high-technology products and services. Cisco specializes in specific technology markets such as energy management, domain security, and the Internet of Things (IoT). In 2018 Cisco was recognized as one of the sustainability leaders on the Dow Jones Sustainability North America Index. As a worldwide technology leader, Cisco has embraced circularity within aspects of its business. The circular economy is a key part of Cisco's strategy as it looks beyond the traditional take-make-dispose business model and aims to redefine growth through a combined focus of consumption minimization and creativity maximization.

Founded in 1873 by John Michael Kohler, Kohler Company (Kohler) is a Wisconsin-based company specializing primarily in plumbing products. It also manufactures generators, engines, cabinetry, and furniture as well as owning numerous hospitality venues. Kohler's bath and kitchen fixtures are available through do-it-yourself (DIY) stores as well as Kohler Kitchen and Bath distributors. The company also has the capability to do artistic custom work. Kohler Company has embraced the philosophy of circularity, specifically through its product design and reuse.

Tracy Harvey is a doctoral student at the Nelson Institute for Environmental Studies at University of Wisconsin-Madison studying corporate sustainability with a certificate in Business Environment and Social Responsibility. Tim Buhl, CPA is an instructor for the Grainger Center for Supply Chain Management in the Wisconsin School of Business at University of Wisconsin-Madison. The Nelson Institute for Environmental Studies and the School of Business work together to prepare students for careers within circularity.

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