The pace at which companies are adopting circular economy business models has been accelerating for the last two decades—and it has evolved from a specialist concept to a mainstream business strategy. Accenture Strategy recently surveyed more than 500 manufacturing companies with revenues greater than $1 billion, and found that more than 90% said they are implementing circular business models. And nearly all larger product-based companies say they've put in place circular supply chains for material recovery and recycling.
But too often, programs remain "skin deep." The vast majority of companies are utilizing circularity in principle, but they are failing to capture the full potential of the approach. As we look ahead to the next wave of circular business models, and as innovation continues to uncover brand-new opportunities to act sustainably and responsibly, it's time to come full circle—transform supply chain operations and company cultures to build a network of partners, suppliers and markets that fully capitalize on circularity.
Circling Success
Accenture Strategy research found that, when it comes to the elements of circular supply chains that companies are prioritizing, recycling comes out on top. But while recycling wasted materials across a company's operations is certainly a step in the right direction, it is low-hanging fruit that only scratches the surface when it comes to squeezing value out of the circular economy.
When looking at the adoption of deeper circular economy strategies—where companies are reusing or refurbishing materials they've recaptured at the end of life—there is significant room for improvement. While nearly all companies report products are returned for reuse or refurbishing, 75% ultimately destroy 45-75% of the recaptured products—losing all the embedded value. And while 92% of companies surveyed say they are geared up for product life extension, only 30% to 40% are actually doing it.
The survey reveals that many companies are adopting circular economy strategies because of competitive pressure, such as if a low-cost rival offers a similar part, or due to warranty issues—not with the intention of bringing large-scale change to the business by putting circularity at the forefront of supply chain operations. So most efforts don't decouple production from primary resource use. Not only is this leading to sizable losses in cost savings and efficiencies, but it is also resulting in missed opportunities to unleash growth and profitability across the business.
First Movers Reap Significant Value
Meanwhile, success stories show that first movers who go beyond basic recycling in favor of deeper, strategic approaches are achieving significant business value. For instance, Apple took quick action when it found that a number of low-cost competitors were refurbishing their iPhone products and reselling them in Asia. Rather than give up this market segment, Apple jumped right on board, refurbishing their products (even the iPhone 7) and selling them at a lower price to Asian consumers.
Other recent company initiatives also reveal a promising path ahead for circular models—and underscore that the opportunity to replicate these models elsewhere is now unprecedented. More and more, companies are announcing zero waste goals—and changes to the entire supply chain function rather than just individual projects.
One company that has successfully embraced the full circle approach to waste elimination in its supply chain is Dell. Dell manufactures products from plastics recovered from its own computer products—recapturing plastics in a closed-loop fashion to use in the production of new products. This results in a smaller carbon footprint and a reduction in manufacturing costs.
Caterpillar's Cat Reman program is another bright star in the full circle approach. The program offers customers the option of buying parts that have been refurbished from existing equipment to a "same as new" standard. And this means that the environment also wins. CAT recycles 134 million pounds of material annually and is approaching "zero landfill" status.
There is other promising news in store—traditional barriers to adopting circular as a business strategy are quickly falling. That's in large part thanks to digital technologies such as analytics, the Internet of Things (IoT) and sensors, which are helping to eliminate hurdles in operational issues such as sorting materials and recapturing them. Materials can be traced, while loops can be closed.
Accenture Strategy research found that 90% of companies believe digital technology has facilitated their ability to implement operational changes to deliver circular supply chains, product life extension or waste-to-value capabilities. In short, digital has eradicated any "excuses" for not acting.
Coming Full Circle
To capture the full potential of the circular economy in supply chain operations, companies need to pursue higher—and often more complex—value initiatives. To do that, successful companies should follow these four steps:
1. Focus on driving circular business models to capture the full value of the opportunity. At any given point in time, $7 trillion worth of passenger cars are unused around the world. It's a staggering opportunity—one that was recognized by Daimler through its subsidiary car2go. To act on something this big, it takes an expanded vision of circular that goes beyond recycling and prioritizes quantifying the full value of the opportunity for a circular transformation.
2. Break down silos. Circularity can be disruptive to any organization – requiring both strategic collaboration with suppliers and across functions such as R&D, procurement, supply chain, manufacturing and marketing. Corporate barriers are the reason why too many companies stop at recycling, which can be accomplished within a single functional silo. Companies that will gain the greatest value from circular will be those that look for opportunities that impact the very core of their operating models as well as seek to build a network of partners—both inside and outside of the company.
3. Start the circle from the top. Leadership at the very top of the company must create business imperatives, cultural changes and governance to promote circular objectives—as well as integrated goals and metrics. That requires taking traditional metrics—such as EBITDA and gross margin—and blending them with new metrics aimed at measuring the effectiveness of circularity. These include take-back quantities, the degree to which materials were effectively refurbished or reused, and resource productivity.
4. Leverage digital. Technologies, such as the IoT, radio-frequency identification (RFID) and analytics, are critical for embedding circularity across operations and company networks to increase the ability to track resources, and to monitor things like utilization and waste capacity. Digital allows companies to have a much more granular understanding of the value of materials, and to gauge the condition of assets and products—determining when they'll need service or replacement, for example. Gaining these capabilities is quickly becoming "table stakes" to engage in a fuller circular economy supply chain.
The circular economy is gaining real traction in the supply chains of most major product-based companies. Leaders in circularity spanning Apple, Caterpillar and Dell are showing first-hand the tremendous value that can be gained from making circularity a core tenet of business strategy. Once companies move beyond low-hanging fruit and adopt deeper circular business models through the four strategies outlined above, they'll find unexpected benefits.
Sudipta Ghosh is a managing director focused on operations strategy at global consulting firm Accenture Strategy. Harry Morrison is a managing director focused on sustainability at Accenture Strategy.
