Challenges in building a Circular Supply Chain

Gæsteklumme af Alis Hinrichsen, Commercial Business Development Lead, Optilon

In this article, we will look at why you, as a business leader, board member or Supply Chain professional should build a Circular Supply Chain. We will start by looking at why it is important in 2021 to embark on this journey. We will look at it from a risk and innovation perspective but we will also look at, why it is so difficult for so many companies to get started. Throughout the article you can expect to get tips and tricks to embark on the Circular Supply Chain journey yourself.

Continued dependence on scarce resources is a serious business risk

The growth model favored by economies, and indeed most companies for the last 250 years, is based on the availability of plentiful and inexpensive natural resources. It is living on borrowed time and, so are companies that rely on it. Since the industrial revolution, waste has constantly grown. This is because our economies have used a “take-make-consume and dispose” pattern of growth – a linear model, which assumes that resources are abundant, available and cheap to dispose of.

A circular economy is taking into consideration, that valuable materials are leaking from our economies. In a world, where demand and competition for finite and sometimes scarce resources will continue to increase, and pressure on resources is causing greater environmental degradation and fragility, we can benefit economically and environmentally from making better use of those resources.

For businesses, and their top executives responsible for setting the direction of their firms, this leads to one inescapable conclusion: Continued dependence on scarce natural resources for growth exposes a company’s tangible and intangible value to serious risks. Due to:

  • Revenue reduction: Supply uncertainties and changing consumer preferences could prevent companies from generating revenues and maintaining market share. For instance, companies that depend heavily on scarce resources might have to shut down production at times and be unable to deliver demanded volumes.
  • Cost increase: Companies whose growth is tightly tied to scarce resources, will find themselves at a competitive disadvantage. This is due to rising and volatile prices, that reduce their ability to forecast and compete with less resource intensive competitors.

  • Intangible assets: A company’s environmental footprint and resource dependence could erode brand value, as consumers shun companies with unsustainable business practice. And, as planetary bottlenecks and resource scarcity become more critical, policymakers likely will favor companies that can prove they have positive societal impact and can operate without depleting the country’s natural resources.

Circular supply chain is expected to grown in 2021

Looking back to January 2020, when the pandemic started, concerns began to emerge in relation to importing components or goods from certain geographies. Since then, stress on global supply chains has increased month by month, culminating in some supply chains actually collapsing. The more complex the Supply Chain, the more prone it becomes to vulnerability. This has caused a domino effect with respect to production and how goods are produced and the agility to change production.

Furthermore, the unpredictability of the opening and closing of borders and government policy changing on a weekly (if not daily) basis, has forced numerous enterprises to rethink their Supply Chains with respect to how international they wish such Supply Chains to be. How much control, or lack of, do manufacturers, for example, wish to have over critical components or materials?

In a linear economy where the fragility of Supply Chains has been exposed by the COVID-19 pandemic, manufacturers and suppliers are being forced to rethink their entire business models and consequently switch to circular models. The more unpredictable and indeed costly materials have become, due to global Supply Chain disruption, the greater the focus has been upon innovative solutions to keep materials in use, to prolong their lifespan, to upcycle etc.

The pandemic has also illustrated that, when necessary, production processes can be much more agile that once thought. The necessity for economic survival resulting from global Supply Chain unpredictability has further fuelled an unforeseen circular economy transition that is expected to grow in 2021. Let’s have a look at what a Circular Supply chain is all about.

Adopting a circular supply chain requires a new mindseet

In a circular economy, growth is decoupled from the use of scarce resources through disruptive technology and business models based on longevity, renewability, reuse, repair, upgrade, refurbishment, capacity sharing and dematerialization. Companies should no longer focus mainly on driving more volume and squeezing out costs through greater efficiency in Supply Chains, factories and organizations.

What should then be done?

Businesses should concentrate on rethinking products and services from the bottom up, to future proof their operations to prepare for inevitable resource constraints. They must build systems where products are recirculated and supports a circular production and material flow. The Supply Chain has to support the business in creating a more circular customer journey and circular products. Companies should stop producing specialized parts. Also they should stop trimming the production from a performance vs. cost tradeoff.

Why? Seen from a design perspective it is important to create “part commonality” and easy disassembling. So get as few parts as possible, but also use local sourcing. It is important to create a space, where the costs of reusing are low and the rawmaterials used are available both faster and cheaper.

What if companies do not change? The challenge for many companies is, that they have chosen a business strategy where they optimize the performance by creating specialized parts that has an added functionality. They have created economies of scale by creating big, centralized production units which share costs and who delivers to a larger geographical area. The challenge for many companies is, that it can become quite expensive to create this “new logic”.

The “new logic” means, that these companies should stop using large production facilities. They must also stop using specialized parts so it becomes easier to recycle. New technologies such as 3D printing will definitely support the change. Also already exisiting, and well proven technologies, such as Supply Chain Design can help break down the complexity. It can also support in making the right decisions.

Collaboration across the ecosystem is key

Collaboration across the ecosystem is also key to enable a circular transformation. The Supply Chain has to facilitate that supply partnerships emerge from a pure cost orientation, towards a strong focus on joint collaboration and innovations. Who else? Supply chains are getting more complex every day in terms of the number of involved partners and the quality and degree of interdependency between them. One of the predictions in relation to the integration of a Circular Supply Chain is, that complexity will increase.

We must also remember, that businesses have to operate in a globalized world where the volatility of markets, the speed of technological progress and the pace of change, in the economic and business environments, will continue to rise rapidly. As a result product life cycles are getting shorter and market demands become more and more unpredictable.

Collaboration with all types of partners, and their willingness and ability to share their knowledge, will be crucial and key to a successful development and integration of circular thinking. The risk to miss an important trend and the threat of being commoditized, has become the substantial risk of every company. This provides a great opportunity for Supply Chain to take on the lead on circular innovation.

In many companies it is typically a challenge to include suppliers in the front end of the innovation process. Procurement teams are often disconnected from the functions they serve and the markets they engage with. They are not fluent in the nuances of the business and hence lack experience and authority. Also in many companies, procurement is used to “innovation” being an internal capability and are hence not used to working together with external partners on delivering innovation.

Key questions to ask: How can Procurement or Supply Chain advance the collaboration with suppliers on circular thinking in an effective way? How can Procurement ensure that the suppliers are willing and able to share their knowledge? For Procurement and the Supply Chain to be successful in these innovation oriented supply partnerships, it requires new models for relationship building and collaboration. It also requires that the involved parties integrate across the whole organization.

Continued dependence on scarce natural resources for growth exposes a company’s tangible and intangible value to serious risks.