The Circular Economy: Understanding The Business Case

26th Mar 2014

As companies explore more sustainable business models, some are turning to circular economy thinking for inspiration to "design out" waste and reuse and restore materials wherever possible along the supply chain.

Examples from businesses around the world offer insight into how the circular economy can uncover new sources of value and play a role in creating new, resilient markets capable of delivering sustainable prosperity in the long term.  

U.S.-based Caterpillar, which develops and manufactures engines and machinery, has been applying circular economy principles for decades through Cat Reman. Established over forty years ago, the company has remanufactured parts and components to provide same-as-new performance and reliability. To complement Cat Reman, Caterpillar itself designs products on the outset with disassembly and remanufacturing in mind. Through its ‘Product Link’ digital interface, components and machinery in the hands of dealers or customers are tracked.  Data, including information on product risk and performance, are analyzed with the aim of repairing components and parts before they break. Caterpillar then rebuilds these using both used and new parts, thus reducing material costs – estimated at 65 per cent of total costs – and allowing the company to gain competitive advantage in an industry where focus is often placed on reducing overheads. Customers also benefit from this more proactive approach to maintenance, which results in less downtime as well as increased product performance.

Circular economy thinking can also drive changes in business models and expand a company’s product offerings.  For instance, customers of Mud Jeans, a small apparel retailer in the Netherlands, can buy their jeans outright, or lease them for €5 a month. In the latter case, after one year, the user has three options: swap their jeans for a new pair and continue leasing for another year, pay for four extra months at €5 each and keep the jeans for as long as they like, or end the relationship completely by returning the jeans to the company. Mud jeans are made of high-end organic cotton, which uses a lot of water.  And since they are hard to source it makes business sense to retain the jeans within its supply chain for as long as possible, where they are cleaned and re-used multiple times until they need to be recycled.

In 2011 Philips, an international electronics company, embarked on project with an architectural firm in Amsterdam based on the idea of the “performance economy” in which manufacturers focus on services and not just products. Philips fitted the office with a minimalist lighting infrastructure that used LED lights and a sensor and controller system that worked in tandem with daylight to keep energy use to an absolute minimum.

Using the ‘Pay per Lux’ system, Philips sells the light – charged per unit – and maintains ownership of the materials. This solution has attracted the attention of government municipalities, as LED lights often require higher up-front costs.

The experiences of these three companies will prove instructive for businesses looking to innovate, as well as for policymakers seeking to promote such practices.

But for circular economies to take root, skills in design thinking, disassembly, remanufacturing and the supporting logistics need to be developed on a wider scale. Large multinationals may be able to invest in building such capabilities, but in Asia – where the vast majority of global supply chain players are small and medium size enterprises – this knowledge may need to be built, shared, and disseminated within industrial clusters or ecosystems. Collaborative networks will therefore be crucial.

The success of the circular economy will also depend on the adoption by both business customers and individual consumers of new types of products and services, such as remanufactured products and pay-per-use models. In Caterpillar’s case, remanufactured parts are usually less expensive, and yet come with the same warranties and have undergone the same – or more stringent – tests as new parts. On a business-to-business basis, such guarantees are often sufficient.

On the consumer side, however, trust issues may arise when it comes to products that have had multiple useful lives or businesses that apply a new ownership model. Mud Jeans markets its “rent” payment system as expensive clothing made affordable. It has also positioned the worn appearance of re-used jeans as “vintage”. Competitors on the other hand are still spending money and energy to replicate the second-hand look.

By helping companies rethink traditional models of production and consumption, circular economy thinking may point to solutions tackling economic as well as environmental challenges, while uncovering new opportunities and markets.  

 

This article has been adapted from a report series published by the Ellen MacArthur Foundation, the most recent of which can be found here. An archive of case studies can be accessed here

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