How to go circular – and stay profitable
Sales, purchasing, finance and external suppliers need to work together for companies to successfully switch to circularity.
Circularity impacts the entire business model of a company, from the production materials used, to supplier and customer relationships, to the ways in which a company funds itself. In short, everything changes: aligning and motivating the various departments impacted by the move towards a circular economy is a big challenge.
The extent of the change depends on the circular economy business model a company adopts. These fall into five categories. The first focuses on product re-use, resource recovery and recycling and refurbishing of components. A second model is circular supplies, in which scarce resources are replaced with fully renewable, recyclable or biodegradable resource inputs. For example, health multinational DSM has developed a cellulosic bio-ethanol fuel based on agricultural residue (baled corn cobs, husks, leaves and stalks).
A third category is about product utility and includes product life extension (such as global repair community iFixit or Caterpillar’s remanufacturing activity, which returns end-of-life components to as-new condition). The fourth model is product as a service (such as hourly car rental firm car2go, lighting rental from Signify (formerly Philips Lighting) or the new furniture rental service launched by IKEA). And the fifth model is sharing platforms, such as handyman site TaskRabbit or Peerby, which allows people to borrow things from people in their neighbourhood. These meet the criteria for circularity because they result in better utilisation of existing resources and waste reduction.
Regardless of the business model chosen, a move to circularity affects all functions and requires close coordination across departments. Even non-core functions such as human resources will need to find ways to recruit people with a different skill set to existing employees, for instance. However, four functions – sales, purchasing, finance and supply chain – are at the heart of most businesses. Consequently, they are likely to undergo the greatest evolution.
The impact on the business
To help companies understand the challenges and opportunities of adopting circular strategies, ING (working with Netherlands-based consultancy Inchainge and Windesheim University of Applied Sciences) has devised a strategy game called The Blue Connection. Teams of four people adopt one of four key management roles – sales, purchasing, finance and supply chain – and are tasked with transforming the business model from linear to circular. The objective is to ensure both a healthy return on investment and circularity.
The entire game takes half a day to play – or can be extended and played virtually between individuals, business units or companies in different locations around the world. During a Europe-wide tour, it has provided ING clients with valuable insights into the implications of a circular model on company functions and the opportunities available. Below we highlight some of the choices and imperatives faced by the four key management groups as they move from a linear to circular model as outlined by the game.
- Purchasing and Design needs to secure the best terms with suppliers while simultaneously pursuing a circular sourcing strategy. The choice of circular strategy will determine the approach taken. For a recycling-focused model, one challenge is how to organise the flow of recycled materials to suppliers so that they can integrate them into new components without sacrificing product quality. Companies that opt for a durability strategy need to source different materials and components than those pursuing recycling strategy. Other important issues associated with purchasing include quality (especially in case of a durability strategy) and sustainability certification.
- Sales will need to pitch different types of offers, which go beyond traditional linear sales contracts, to buyers under a circular model. For instance, service contracts must be designed and buyback schemes established to give products and components second-life value through refurbishment or recycling. Sales must also take time to understand consumers’ needs and investigate new marketing models and product guarantees.
- Finance is responsible for facilitating business activity and working with finance providers to develop financing schemes that can support a circular model. The priority is to develop solutions to help extend the balance sheet and fund the retained ownership of a product as well as sustainable cash flow structures that can support new service models. It may be necessary to identify new funding sources, including project finance, source suitable insurance, address working capital requirements and consider issues such as counterparty risk.
- Supply chain needs to negotiate the best terms with recycling and logistics service providers to help optimise the reverse flow of goods and materials and keep them at their highest value. Another key challenge is how to balance stock levels on upcycled and new components and products to achieve the promised service level to clients while aiming for higher levels of circularity. The supply chain team also needs to track and trace materials and return flows, monitor recycling ratios and take a more strategic role in product design to ensure innovation, product life extension and easy end-of-life disassembly.
A new way of thinking
The Blue Connection provides just a snapshot of the challenges and opportunities associated with moving to a circular model. One common element in each of the examples above is the importance of dialogue and collaboration – internally within the organisation, with partners in the supply chain, clients, service providers and even competitors.
Corporates are also increasingly partnering with innovative startups to kick-start their transition to a circular model. For example, Plastic Whale – which trawls Amsterdam’s canals for waste – has teamed up with LAMA Concept and Vepa to produce plastic furniture. Similarly, Amsterdam’s InStock runs a restaurant and a food truck serving food from Albert Heijn supermarkets that would otherwise be discarded. And Belgian social enterprise EnVie sources surplus fresh vegetables from corporates such as McCain, Randstad and Colruyt and produces soups using the skills of people that have been given the opportunity to rejoin the labour market after a long period of unemployment.
Circularity is without doubt a profound change. However, the benefits are potentially enormous. It enables companies to create value by entering new markets (either directly or through partnerships with others) and gain market share by offering customers a new or differentiated proposition, often through the use of innovative technology. Perhaps most importantly from a business perspective, circularity can give companies a competitive advantage and deliver solutions that sustain their business – and our planet.