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At a Glance
  • The circular economy concept mainly entails a basic principle: replace disposability with restoration.
  • It encourages corporations to move from “produce, use and discard” approach to “multiple use and restore” approach.
  • It advocates innovative modification of product design and manufacturing processes so that the constituent material can be extracted for reuse or the product can be refurbished.
  • Organizations must cooperate and work together to develop a circle of material usage and processes reducing net material cost, optimizing manufacturing, reducing supply risks and tapping into innovation potential based on scientific and technological advancement.

A reformative economic framework, a circular economy, is commencing to aid organizations in generating increased value but decreasing the need of limited resources.

Envisage that the manufacturing economy is a giant network of belts which leads energy and material from resource-sufficient countries to production units and then direct finished product to developing countries. Products are utilized, cast-off and exchanged at the end point. This scenario is an overstatement, but it does depict the core of lean production framework which has been the characteristic of global production scene from the start of Industrial Revolution.

The recent decades have exerted pressure on this linear industrial model. It is expected that in next few decades, developing countries will bring billions of customers to the market. The extraordinary increase in volume of consumers and its associated impact will cause companies to deal with volatile product prices as well as strong opposition and fluctuating demand. There has been a diminishing trend of the real-life consumer prices in the last century, but the increasing values of natural materials has started nullifying its impact. The recent economical depression has been most significant since the Era of Great Depression in reducing the consumer demand, however natural resource value has recovered more quickly than international economical yield. It is evident that periods of underrating natural resources have come to an end.

The natural resource sector is marked by fluctuation and unpredictability and there is a real concern about their exhaustion. Hence, there is an increasing need for an innovative economic framework. A consequently, number of companies are considering the underlying conventions in the manufacturing of their products and its sale. Organizations are aiming to regulate natural resources by determining new methods of reutilizing products and processes. Increased progress in this area has given rise to significant discussion. Is it plausible that economic growth can be disassociated from resources restrictions? Is it possible for an industrial framework – intended to be reformative in its structure, which operates on the principle of reusing material, effort and energy – to be suitable for corporative world and general community? Many organizations, based on their experience, believe that the answer is affirmative.

For instance, an automotive manufacturing company that refurbishes and reproduces parts for resale uses significantly reduced amounts of energy and water and, in turn, produces less waste than another company that produces new parts. Additionally, it provides higher productivity and operating advantage. The organization restructures components so that they can be quickly disassembled for reuse. It utilizes scarp material from older vehicles as raw material for new product. It makes partnerships with steel recycling companies and waste management organizations to incorporate end-of-use techniques into designing. As a result, the company succeeds in reducing cost on raw material used in production.

In terms of obtaining circular advantage, the company provided its supplier with incentive to innovate. It replaced the sales-based approach with performance-oriented model. As the relation evolved, the supplier felt inspired to restructure its product and improve its performance. The ultimate outcome was a remarkable reduction in generation of waste material and consequentially a significant reduction in production cost.

The advantages and prospects offered by a circular approach to manufacturing and production are realistic and substantial. There are obstacles and challenges to optimizing the impact of such approach, but it does have real-life environmental and economical benefits. The circular economy can be a key player in industrial evolution and growth.

Circular Approach to Economy

The concept of circular economy operates on one basic supposition, replace disposability with refurbishment. The essence of the approach is simple: shift away from designing approach concentrated on ‘produce, use and discard’ to ‘multiple use and restoration’. The starting point for such a system is the material and natural resource which should be considered a renewable input rather than a one-time component in an economic context. For instance, in the consumer-goods sector approximately eighty percent material used in production is not reused and simply contributes to increasing waste volume.

The main objective that the circular approach wants to achieve is reduction and eventual elimination of waste generated. In order to do so, it does not limit itself to the manufacturing methods (like lean management) but aims to focus on every production life cycle and purposes of the product itself. The general idea is that waste material can be reused to serve as valuable resource input. The product’s rotational utilization coupled with reusable design can outline the idea of circular approach and differentiate it from simple recycling (which corresponds to large losses of effort).

The circular approach helps segregate the useable components of the product from its durable ones. There is no such differentiation between companies under the traditional economic model. In the circular model, it is preferable to utilize untainted and unhazardous material, which can ultimately return to the eco-system and recharge. Durable materials such as metals should be reutilized for other manufacturing processes and productive functions for maximum number of lifecycles. This concept is fundamentally different from typical operational approach which functions on linear perspective for even broader aspects of operation such as supply chain and value.

In the circular economy model, customers are viewed as users rather than consumers as the model focuses primarily on restoration. It implies a distinct modification in implicit relationship between companies and customers. In the consumer-based model, products are manufactured to be sold. However, in the circular model, the ideology is that the product is rented so that its components are returned and reutilized. The products are designed and sold in a way to generate motivation for customers to return them for reuse. It may seem unrealistic, but several organizations are employing four approaches to turn the concept into real-life practice.

1. The Inner Circle Approach

An international office machine manufacturer launched a product line to optimize reutilization and reduce use of brand-new materials. Upon conclusion of the lease agreement, products and their components are examined, disassembled and thoroughly refurbished. Parts are replaced, if needed and software is upgraded prior to returning the machines to the market. Due to original component design intended for reutilization, organization can successfully decrease the consumption of new materials. This develops a close circle of processes so that reduced quantity of material, cost, labor and energy is used. In case of products that lack the potential for reprocessing, parts are recycled locally. Company’s data indicate that it can achieve considerable reduction in use of new materials.

2. The Circling Longer Approach

The circular approach can provide advantage to organizations by optimizing the series of successive product cycles and processes as well as time spend in them. Suitable development and structure of every cycle can reduce overall material, labor and energy usually employed in new product manufacturing. For instances, an automotive part manufacturing organization rents out electric automobile batteries, so that they are easily recovered for reengineering and recycling and in turn extra duty. Vigilant process control enables high quality of the product and develop close relations with the customers. Similarly, a tire manufacturing company rents vehicle tires to trucking fleet and provides continuous upgrades, upkeeps and replacements for performance maximization and total cost reduction of ownership. The company keeps a constant control over their tires so that it can amass worn out tires and re-treat them for resale. The retrofitting of existing tires involves fifty percent less material than new tires.

3. The Cascaded Use Approach

Product value can be achieved by varied reutilization of its component across value chain processes, as well as reallocating materials intend to replace virgin materials. For instance, retail businesses often provide discounts and other incentives when their customers bring worn out clothing. In turn, these companies provide these clothes to reverse-logistic companies which sort them for an array of successive “cascaded uses”. Most of these clothes are directed to secondhand clothing shops and retailers. Unusable clothing is used as replacement of new material in a variety of endeavors such as insulation material or cleaning products. Furthermore, if collected clothes are remaining, they are used as fuel for electricity production. This scheme is an effort on the part of clothing companies to enhance inflow of traffic into the store as well as develop customer relations.

4. The Pure Input Approach

In order to employ the concept of circular economy, organizations should structure and design their products and processes such that they can categorized clearly as either consumable or durable components. This helps in maintaining the safe and unharmful use of material during manufacturing. Easier distinction makes it possible to improve the collection and reallocation of material productivity along with quality assurance. It is worthwhile to note that high quality standards are an essential economic factor. For example, less than thirty per cent of the rubble produced is reused in the construction industry, even if it consists of high quantity or reusable concrete, wood and steel. Similarly, paper recycling companies find it hard to eradicate inks and fillers from paper while maintaining its worth, hence resulting in material loss. On the other hand, a carpet manufacturer organization operates a collection program under which they get used out carpet tiles back from their customers and recover the material to either use in successive production processes or resale to secondhand suppliers. The nylon used in the carpet tiles is converted to new yarn as nylon fiber do not disintegrate upon multiple usage. Hence, a product design which can aid in obtaining the pure materials back can reduce cost and sustain value for the company.

There are three obstacles to the full implementation of the circular approach, and companies can take the necessary steps to address each of the challenges.

Geographic Scattering

In the linear economy system, the approach to arrive at supply and operative decisions taken by organizations is perhaps the most significant obstacle for planners and managers. The issue extent to not only complex but straightforward products. Maintaining high quality values for reusable resources depend greatly on global backing, which is often lacking. In terms of location preference, businesses may try to develop closed loops or open cascades, but they cannot escape the risk of unproductive and inefficient collection, reutilization and recovering process. The risk is higher in developing countries as informal sector is usually responsible for gathering and recovering of end-of use materials. There is a lack of appropriate policies for reprocessing materials, which as a result suffer from ineffectiveness and even cause safety and health threats for labor.

In order to deal with the issue of geographic dispersion, management must focus on reverse-network tasks in the same manner as they concentrate on typical inbound activities. Of course, to achieve this they must handle numerous hard trade-off decisions. For example, it is more beneficial for the process of restoration to take place in the area of production or use? At what stage is it more cost effective to strip down the product to its basic materials for resale? How economical is it to partner with other businesses to create a reuse loop for product components as compared to manufacturing new ones with virgin supplies?

It is important to identify a realistic and comprehensive economic setting. It is also important to generate successful partnerships. For instance, a company opted to return the product constituents to the suppliers for reduced unit price and confirm material supply. It also provided the suppliers to choose if they wanted to reutilize the material for new products or resell to raw-material retailers.

Another important aspect in this approach would be reverse-logistics capabilities. For example, one manufacturer of office machines has been able to succeed with this approach due to their ‘take-back’ policy. Such system maximizes the supply and demand for refurbished machines. But it does need highly developed reverse-network-management skills like maintaining a database of location and state of used machines and its components.

Complex Materials

Design and development of modern and innovative product incorporate highly complicated processes and rapid increase in material usage. These complexities are not a matter of public knowledge; hence it is hard to recognize them even for businesses. For instance, plastic manufacturers have started using a wide array of material in innovative and sophisticated manner. These innovations have been made possible by addition of different additives.

Additionally, the practice of increasing material usage can sprout from lack of managerial attentiveness or standard routine. Businesses increase their material input to achieve cost reduction or novelty in product and do not reassess their strategy. These issues greatly augment the complication of material usage along with making gathering and categorizing more difficult, especially on the level needed for arbitrage prospects or showing results to potential investors.

Usually businesses lack cost-effective methods of utilizing technical processes to harvest root raw materials and reserve product integrity. Large portion of initial value, hence, becomes lost due to smelter-based recovering processes.

It is important, at this point, to note that there are organizations on their way to success despite these shortcomings. For example, there is a plastic manufacturer that utilize infrared technology and lasers to classify plastics swiftly. However, it is also a fact that modern processes depend mainly on precise presorting which is required to fulfill a certain criterion of purity for economical profitability.

In order for complex materials to have a bankable value, it boils down to their large-scale harvesting. This requires cooperation between businesses in a pre-competitive environment. There are preexisting arbitrage prospects in the value chain, including material suppliers and manufacturers, providers of innovative technology and end-of-use players. Companies have the opportunity to achieve untapped economical advantages as well as monopolized impact on global practices and product development trends.

Status Quo in Industrial Trends

The last challenging in implementing the circular approach is the strain of changing deep-rooted practices. The various components of the standard system are defined by decades old decisions. Some of these decisions have mild impact but many results in higher expense.

Skewed motivations are a characteristic aspect of the current industrial system. They create difficulties in generating, capitalizing and reallocating value. Customers have a habit of apprising the cost of product at the time of sale, although products with longer life are more cost-effective long-term. The concept of leasing is uncommon despite its many perks to businesses and their customers.

Corporate standard practices, which have been in place for many years, also hinder progress. Upper management is mainly concerned with higher capital requirements associated with product modification and resistance to replacing a sales-based model with a performance-based model.

Skewed spurs are present amongst organizations as well. Distributing returns from maximized circular product design is complicated owing to incorporated varying motivations. For instance, in beer sector closed-loop practices are well recognized. However, in certain markets portion of bottles returning to manufacturers has decreased. The cause of such a swift is the shop owners’ inclination towards disposing of empty bottles on their own accord as this optimizes the availability of space to showcase new products. In order to deal with these problems, companies must devise models that incorporate profit-sharing incentives. They must also acquire the sense to identify the correct periods to dismantle the status quo, such as at the time of entering a new market, renewing contracts with suppliers or comparing major investment opportunities.

Implementing the Circular Economy

As the above-mentioned challenges apply to businesses globally, individual organizational actions, although warranted, may not be sufficient. For the circular economy to exist in its true form, important players from both corporate and research world must combine forces and they should be backed by strategy planners and big investors. All these key players should work together to reinvent and innovate product processes as well as movement of products and materials.

The potential benefits offered by the circular economy can be achieved through a united effort of all key participants. The starting point is to manage the flow of materials, which is perhaps the most valued asset in the industrial world. The main objective is to develop a closed loop for material flow globally and to create routes that will bring most of the material back into the production system without loss of quality..

Alignment and coordination of various stakeholders is a tough task as well. There is an important role to be played by NGOs and nonprofits in enabling these alliances. Organizations may opt for any form of partnership or grouping, but they must work together in utilizing the science and technology available to design projects and initiate processes that can lead to a self-imposing circular economy loop. Such efforts will be beneficial for every participant – suppliers, corporations, customers and general public.

In the ‘gather, develop and discard’ production system, lower cost of material, labor and energy is vital for consistency and growth. However, this approach is no longer viable. The circular economy model – a system developed to be regenerative – provides visionary organizations to capitalize on growth prospects and lay down the foundation for a new age of industrial success. This approach does require innovative and creative thinking and different work trends, but the overall advantages outweigh the extra effort.