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Closing the Loop on the Circular Economy
Many organizations encounter challenges as they attempt to navigate the circular economy. A few key factors can separate success and disappointment.
5 Min Read
OreoImages via Alamy Stock
The circular economy presents a compelling proposition: It’s possible to save money and boost sustainability by reusing resources, trimming waste and reducing consumption. As a result, 75% of supply chain leaders rank the circular economy as “important” for their organizations, according to a Gartner study.
Yet, with supply chains and business processes designed for a linear world, it can be incredibly difficult to unlock value and achieve the desired results. The same Gartner study found that only 19% have the tools and processes in place to support circularity initiatives. Consequently, circularity has decreased from 9.1% in 2018 to 7.2% in 2023 -- a 21% drop, according to the Circle Economy Foundation’s Circularity Gap Report 2024.
“Despite the hype, the circular economy is yet to get out of first gear,” states Guy Bailey, head of Oils & Chemicals Markets for Wood Mackenzie. Several factors fuel the problem. Underdeveloped systems for waste collection, a need to scale new technologies, and “an inability of companies to build relationships that scale circularity across a whole value chain, rather than simply in their own interest,” he notes.
It’s vital to focus on a few key areas, says Anne Michelle Avolio, a supply chain sustainability analyst at Gartner. These include focusing on technologies that unlock value from the circular economy, developing new relationships and standards, and achieving executive sponsorship and stakeholder engagement. “Organizations that hit the mark can achieve significant gains,” she says.
Beyond Recycling
Circularity revolves around a simple enough idea: keeping resources in use as long as possible -- and at their highest possible value point. Yet, converting the concept into action is often tricky. Part of the problem is a lack of standards. Complicated and fragmented processes undermine results and lead to disagreements about what constitutes value. A circular value chain is only as strong as its weakest link. “What constitutes ‘fair’ allocation of value can look different to various participants,” Bailey points out.
This leads to a secondary issue, imbalances in supply and demand. “A fundamental challenge for circular economy targets is that the supply of renewable or recyclable materials is highly constrained,” Bailey notes. “Companies have devised circular targets based on what they would like to achieve, and when all companies do that, demand far exceeds supply and prices rise.”
In addition, business leaders don’t always assess circularity opportunities correctly. Too often, there’s a fear that prolonging the lifespan of products undermines revenues and profitability, yet the opposite is frequently true. “Circularity can introduce opportunities for an as-a-service business model,” explains Autumn Stanish, a director and analyst in the Research and Advisory Practice at Gartner.
The results often prove impressive. Revenue gains may extend across both existing customers and new prospects. By designing products in more modular or flexible ways, extending their lifespan and introducing lower cost refurbished or recycled goods, it’s possible to enter new markets and gain new market share. “There are cost savings, innovation gains, and sustainability benefits,” Stanish says.
Want Not, Waste Not
While the IT industry has established itself as a leader in circularity -- computers, smartphones and even GPUs all comprise a robust ecosystem of refurbished products -- other sectors are taking notice. Fashion, for instance, is trading in its fast-paced, disposable image for a more sustainable one. Some retailers now issue credits or discounts when a customer brings in an old pair of jeans or a blouse. Companies such as Supercircle route the clothing to other companies that resell them -- or recycle the fabrics to make new products.
Zero-waste packaging is also taking shape at restaurants, grocery stores, and food delivery services. Reusables, for example, has introduced RFID and QR coded trackable food and beverage containers. Customers who choose to participate pay a fee only if they keep the containers; they can drop off the containers at numerous locations. The firm cleans and sterilizes the containers before they go back into circulation. Reusables has achieved over a 95% success rate across more two dozen establishments in Vancouver, Canada.
Industries like petrochemicals and heavy manufacturing can also benefit, Bailey says. The key to success is creating partnerships, establishing new systems, and achieving vertical integration within a supply chain. “If we want to hit the accelerator, business leaders need to find ways to share the proceeds of circularity so that all value chain participants have incentives to act,” he says. “This will require new business models, and the hard thinking to support them.”
Values Matter
Unlocking greater value from the circular economy requires a change in the underlying thinking. “The big switch that companies must make is to move their targets from ‘what’ they want to achieve, to ‘how’ they will achieve it,” Bailey says.
This requires more creative business models and innovation along with clearer targets and incentives, a topic that Wood Mackenzie addresses in a 2024 report, Waste to Wealth: Unlocking Circular Value Chains. It’s also important to create standards across an industry and supply chain. Business leaders must confront “harder questions of precisely how these targets to be realized.”
Gartner’s Avolio says that a few critical questions are at the center of a more enlightened approach to circularity. This includes: “What does Circular Economy mean for us? How can we adapt it into our organization? How do we build a business case? She suggests starting with a few products and pilot projects and expanding as the organization learns what works and what doesn’t. This includes the B2C space as well as the B2B arena.
A broader view of circularity can lead to other gains, she says. For instance, most businesses focus on developing circular products and services. Yet, huge opportunities exist related to circular operations. This includes designing facilities that optimize building materials, machinery, energy, water, and more. “Organizations that combine circular products with circular operations can achieve significant gains,” Avolio says.
Of course, putting a plan into action may also require new technologies -- including ERP upgrades, specialized software, and connected devices, Stanish says. Artificial intelligence can also play a role in sifting through data and spotting opportunities for both innovation and practical gains. This includes ratcheting up traceability and verifying that a material or component came from an authentic source, Bailey points out.
“A circular model is a seismic shift for a lot of companies,” Avolio concludes. “It requires executive buy-in and coordination across internal stakeholders and external groups. Organizations that get it right discover that it is a very powerful lever for innovation, revenues and sustainability.”
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