Here is a hard truth: Earth’s resources are finite, and our planet’s ability to absorb the waste and pollution we generate is decreasing inexorably year after year.
You may already have heard about the circular economy or read some articles about it, but do you understand what it is? Do you know why it’s crucial and why it is the best way to deal with the hard truth that faces us?
Before diving into these questions, let’s first put things into context.
Understand the Context
The current world population is more than 7.8 billion in 2021. And according to the United Nations (UN), the world population will reach 9.2 billion by 2050. That’s a lot of people constantly consuming resources and producing large quantities of waste every day. Not only is that number growing, but living standards are rising as well. With the expansion of the middle-class population, total consumption and demand for resource-intensive goods are increasing, putting our planet under relentless pressure.
Another important fact is the degradation of two of our most priceless resources: water; and air. According to the World Health Organisation, 785 million people in 2019 lack access to drinking water, and by 2025, half of the world’s population will be living in water-stressed regions. Yet at the same time, projections estimate that the number of people at risk of floods will rise from 1.2 billion in 2018 to 1.6 billion in 2050; this is 20% of the world’s population. Our air is also in serious trouble. With the massive increase in the use of energy and yearly increases in industrial production, air pollution currently kills 7 million or more people a year.
The Circular Economy
So how to tackle these and many other issues? The answer is not just consuming less because that only buys us some time, but it doesn’t eliminate the root causes. Earth’s resources are finite. The answer is to transform our present linear business models, built on the principles of “take, make, and waste”, into a model that is regenerative by design; one that delivers better resource productivity and utilization – a circular economy (CE).
Often, people confuse the circular economy with recycling. These two terms are not the same. Recycling is one element of the circular economy, but it only minimizes the negative impact; it helps us do less harm. The circular economy is a large concept focused on eliminating waste (wasted resources, wasted life cycles, wasted capabilities), and adding to resource production instead of only consuming resources. In a circular economy, everything has a value, and growth is based on performance and productivity, not just resources. This requires a massive shift in the way we produce, consume and do business.
The circular economy systems diagram created by the Ellen MacArthur Foundation is called the Butterfly Diagram, and it shows how both technical and biological materials flow in a circular economy.
The circular economy doesn’t benefit only the natural environment and people; it also benefits businesses and the economy as a whole. With innovative ideas and a redesign of business processes, many new markets and business models will appear. Companies and brands moving to a circular economy will benefit from a better reputation and more customer loyalty. According to Accenture Strategy, this transformation can create a global opportunity worth 4.5 trillion by 2030.
Reaching the Full Potential of Circularity
So how can businesses reach the full value potential of the circular economy? Part of the answer to this question can be found in “The Circular Economy Handbook“. Studies show that true impact and scale will only be delivered when companies deploy circular business models and Fourth Industrial Revolution technologies holistically. New business models will help companies achieve alignment with circular economy principles, and new supply chains will help us get there as fast as possible.
Circular Business Models
There are five business operating models that support the circular economy. Companies can adopt one of these models, but a combination of two or more has far more potential to generate maximum value. Here is a brief definition of each of these five business models:
- Circular Inputs: With this business model, companies replace the linear inputs with fully renewable resources and completely recycled materials. In this way, we eliminate waste building up and polluting our environment.
- Sharing Platform: It’s a business model where businesses encourage collaboration among users to maximize the usage of assets. In this model, no capability is wasted. The goal is to have no underutilized assets to get maximum benefits from the infrastructure we build.
- Product as a Service (PaaS): As the name suggests, in this business model, the customer doesn’t buy the equipment itself, but rather rents it when it needs it. A rental company keeps ownership of that equipment and efficiently serves a wide customer base.
- Product Use Extension: Here, and with the right design, the life cycle of a product is extended as much as possible by doing repairs, refurbish, update, or resale on other markets where used products are accepted. This greatly reduces waste and the buildup of trash that pollutes our environment.
- Resource Recovery: This business model is about recovering and recycling end-of-life products. Companies sell their used products for the valuable materials that can be extracted by recycling them. And manufacturers sell waste generated in their production process to companies that recover raw materials from that waste.
New Supply Chains
Supply chains are a key enabler for implementing a circular economy. They are the foundation. But, today’s supply chains support a global economy, which is still linear. So they have to be redesigned. What will supply chains for the circular economy look like, and how will they support the new circular business models?
Let’s start with the upstream supply chain that supplies parts and materials to our factories. To achieve success, manufacturers must collaborate with trusted suppliers and design products with a circular lifecycle in mind. Procurement teams must work closely with designers to find opportunities that align with circularity. This will play a significant role in the transition to a circular economy.
Manufacturing processes are also changing. To eliminate waste and extract extra value, waste from one operation can be used as a resource for another. Ways can be found to recover value from inputs, creating a whole range of valuable by-products and co-products. Remanufacturing also has a pivotal role in achieving a circular economy. It helps to reduce environmental impact, and it increases profit margins, reduces supply risk, and reduces lead time.
The downstream supply chain delivers products from manufacturers to retail locations and individual consumers. In this supply chain, companies must redefine their relationship with customers so as to track and retrieve used products from customers. Retrieved products can then be refurbished or recycled, thereby closing the loop. Business models, like products as a service or sharing platforms, will be the norm. An example of this is batteries used to power electric vehicles. Tesla customers own their cars, but they share their batteries which are constantly being refurbished and recycled in a circular supply chain as shown below.
New technologies and innovative circular business models are key to enable a circular economy, yet they are not enough. To accelerate this transition, we also need to be responsible and engaged customers. As customers, we must demand products that are eco-designed for circularity. And we must build supply chains and appropriate infrastructure where reverse logistics can be done effectively and efficiently.
If we think about what businesses and supply chains need to move to a circular economy, we find just a few requirements: transparency; visibility; innovation; and efficiency. The good news is all these requirements can be met with technologies that already exist. We are ready to implement circular economies on a large scale.
What are we waiting for?
For more insights about the circular economy, I recommend the Ellen MacArthur Foundation website and reading “The Circular Economy Handbook: Realizing the Circular Advantage” by Peter Lacy, Jessica Long, and Wesley Spindler.