How a Circular Economy Changes Supply Chain Loops

A circular economy aims to redefine economic growth as a way to capture positive, society-wide benefits by shifting the focus of consumerism to the use of renewable resources. How will such a shift affect supply chains?

A critical supply chain challenge is how to reconfigure distribution channels, forecast methods and technology to generate value across business ecosystems. To achieve this goal, companies must create new business models and improve supply chain management functions.

These challenges were discussed at the MIT Solve Annual Flagship Meeting in May. The event brought together more than 500 prominent global leaders in the business, foundation, nonprofit and academic sectors, as well as MIT faculty and students.

Supply chains in the loop

To build business ecosystems that are compatible with the goals of a circular economy, companies need to improve their market response times. They must also develop new product ranges, production processes, sourcing strategies and distribution channels. And enterprises need to redefine customer relationships and the concept of product obsolescence.

These changes require new strategies that narrow, slow, intensify and close supply chain loops (supply chains that encompass the flow of materials back into the value chain). What does this mean in practice? Here are brief explanations of each change.

Narrow the loop. This approach requires companies to improve the efficiency of production, distribution and consumption processes. For example, P&G’s “liquid-free” DS3 shampoo and laundry detergent — products that can work without water — aim to eliminate “80 percent of the waste, 70 percent of the space and 75 percent of the emissions” that go into producing these types of product.

The technology could be used to transform many product categories as it changes production and sourcing processes, as well as the number and type of products marketed. Consequently, resource consumption, carbon footprint, product size and volume are reduced. These benefits have significant impacts on package usage, warehousing area requirements, and most of all, the transportation resources used to deliver the goods.

Slow the loop. Investing in ways to extend the life of products and reduce or avoid waste are central elements of this approach.

For example, technology company Cambridge Crops has developed ways to extend the freshness of food by using natural, edible and invisible coatings. The protective skins keep food fresh longer. The coating is invisible and doesn’t affect the taste. This innovative strategy enables “food producers, food processors and retailers to extend shelf lives, reach new markets and reduce waste,” according to Cambridge.

Extending product shelf life in this way affects the supply chain resource and purchasing function, storage and distribution and the way products are consumed. Sourcing decisions might be taken based on the product life cycle as a competitive advantage. Inventory turns may be significantly reduced — generating cost reductions and transportation savings for distributors and consumers.

Intensify the loop. This method goes beyond the slowing phase by transforming products into services. The approach involves new procurement methods that promote asset sharing (for example, cars), grounded in new distributed models and infrastructure. An obvious example is Uber (using a transportation system/app instead of owning a car). There are other examples in video and movie broadcasting, fashion clothes subscription, uniform rentals, pallet systems and lighting services.

In the latter example, the lighting company Philips introduced a service that offers hassle-free maintenance, remote support and guaranteed lighting performance. In effect, customers outsource their lighting needs to Philips.

Integrating the service into the supply chain changes product consumption patterns; customers don’t need to buy spare parts, for example. It also changes demand forecasting, company response times, the number and type of products on the market and relationships with other links in the chain, notably customers.

Close the loop. Companies close the loop by reintegrating waste into supply chains (from the production of textiles, plastics and energy), and by reusing and recycling products. For example, products that use glass, plastic, paper and metals are widely recycled. However, innovative manufacturing methods can provide opportunities for textile and apparel recycling too (for more on this see the article co-written by Debabrata Ghosh, Assistant Professor, Operations and Supply Chain Management, Malaysia Institute for Supply Chain Innovation) in the May 2019 issue of Supply Chain Management Review).

An example is the state-of-the-art chemical regeneration technology used by textile company Evrnu to transform post-consumer textile cotton garment waste into high-quality cellulosic fiber. This process can divert millions of tons of textile waste from landfill, avoiding disposal and offering new sourcing options.

Supply chain’s key role

As lifestyles change in response to environmental and climate concerns, product innovations and government policy, the case for transitioning to a circular economy becomes more compelling.

To achieve such a transition, more collaboration between various stakeholders is needed. Academia, the private sector and government need to come together to develop better ways to leverage the planet’s natural resources and support the behavioral changes needed to create new consumer models.

Moreover, it is critically important that we develop new supply chain models capable of supporting such a shift. More specifically, supply chains that are integrated with service offerings and can be scaled up to meet the demands of a global circular economy.

This article first appeared on MIT Supply Chain and was republished with permission. 

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