The Circular Economy Explained
Imagine you need a new pair of Adidas® athletic shoes. When you buy them, the clerk tells you they come with the following promise — after you’ve worn them out, bring them back and they can be traded for a new pair. Meanwhile, the store sends your old shoes, made of thermoplastic, back to the factory where they are re-made into a new pair for another customer.
Or you’re hungry and stop into your local Burger King® for a burger and drink. You pay for your meal, but there’s a deposit added to the bill. For what? The containers. When you’re done eating, whether it was in the restaurant or your car, instead of dumping all the used, dirty packaging into the trash — you put the drink cup and the burger container into a reuse container at Burger King. At that point, your deposit is refunded. Meanwhile, Burger King cleans them for re-use.
Or you buy a new Toyota® car. When you’re done, you take it back. At that point, it’s cleaned up, broken down and nearly 100% re-used or recycled. Toyota gives you a credit towards a new car.
These are a few examples of a new industrial trend known as the circular economy.
The Linear Economy versus the Circular Economy
The old industrial manufacturing paradigm was based on a linear process of extraction, process, manufacture, and disposal. Little thought was given to reuse, energy efficiency, or recycling. Energy and raw materials resources were thought to be limitless.
The circular economy is based on the premise that we live in a closed environment with a growing population, dwindling resources, and clear evidence that the climate is changing. Air and water pollution are rising. Landfills are brimming. Meanwhile, resources such as fresh water, clean air, and raw materials are finite.
The circular economy concept is that products will be made to last, and less waste will be produced. Products will be manufactured from more durable, higher quality materials and designed to be reused or recycled. The reuse and remanufacturing process will use less energy or renewable energy. The goal is to extend the life of resources and minimize or eliminate waste. It is a holistic approach that impacts businesses, consumers, and even governments.
And it’s more than a theory. Circular economy critical mass has been building for years, driven by private equity firms and existing large companies. For instance, more than 40 new tech providers and new ventures are operating pilot- and commercial-scale material recycling plants in North America today or will do so in the next two years. Those plants are likely to produce rail carloads of liquid fuels or plastic resins.
These small chemical plants are being developed close to the source of recycled plastic supply – the consumer household.
A ‘First-Mile’ Challenge: Less than 10% of Plastics are Recycled and Less than 60% of the U.S. has Direct Access to Recycling Systems
This supply chain’s first-mile challenge – getting consumers to recycle properly and getting them access to a recycling network. Less than 10% of plastics are recycled and less than 60% of the U.S. has direct access to recycling systems.
Overseas, the circular economy has a big cheerleader in the European Union government. One way it’s pushing this trend is in the automotive sector. Starting in January 2015, the EU required that 85% of every vehicle must be reused or recycled, and 95% recovered. Automakers have looked to see what parts of the car can be reused – such as engines, batteries, alternators, and steering systems. Fluids, gases, and other parts and materials will be collected and recycled, as appropriate. The vehicle bodies will then be shredded and re-used.
Toyota, one of the participants in the EU, has built an auto dismantling center where consumers can turn in their cars. Toyota has developed a circular economy model for North America as well.
Some of the stakeholders in the circular economy include:
- Consumers – who vote with their buying preferences and the amount they are willing to pay. There’s a growing realization on their part that despite their higher up-front cost, circular economy products are made of higher-quality, longer-lasting materials. They are willing to pay a premium.
- Retailers – who are shifting product offerings to those sourced from the circular economy.
Walmart® and IKEA® are two retailers with circular economy strategies. IKEA will accept returns of gently used furniture, repair it, and resell it. The customer that returns the furniture receives a credit toward a future purchase. Walmart is offering refillable consumer products.
- Manufacturers – who are creating or remaking manufacturing processes. They recognize the new consumer trend and the fact that resources are limited.
- Non-profits – many of whom have long been involved in the environmental movement and who have been some of the first providers of recycling and reuse systems. They are partnering with manufacturers, providing key expertise.
- Private investors and funds – These firms have provided seed and start-up funds. The circular economy is not a crunchy pipe dream. Accenture® estimates that: “the value of the circular economy worldwide is set to hit US$4.5 trillion by 2030.”
- Governments – Who set policy, develop regulations and are looking to provide jobs and protect national resources.
Partnerships are key to making a circular economy strategy or ESG initiative a reality
The participants in the circular economy include a diversity of industrial firms, as well as retailers. This list includes well-known firms such as PepsiCo®, Toyota, H&M®, Nike®, North Face®, Patagonia®, Adidas, Puma®, Burger King, HP®, Dow Chemical® and
The high number of shoe and apparel makers is no accident. Apparel waste makes up a significant percentage of landfill volume. According to the Environmental Protection Agency, 21 billion pounds, or 85% of post-consumer textile waste (PCTW) goes to landfills (the remaining 15% is recycled). PCTW accounts for 5% of the volume in landfills.
Looking deeper into the manufacturing process reveals that industrial building-block companies, such as chemical firms are being impacted. How’s that? Because consumers are avoiding disposable plastic food and beverage packaging and personal care products.
Chemical companies are starting to be involved in the chemical recycling of consumable products. They’re developing plastics and plastics production lines make recycling easier. They are making new types of recyclable packaging. The latter will be used, collected, sent to a recycling or reuse center, and made into new packaging products.
The companies are partnering with new for-profit and non-profit recycling firms. For instance, Adidas is making new shoes from recycled plastic. The plastic is supplied by Parley for the Oceans — a non-profit committed to cleaning up plastic waste in the oceans. The group collects plastic that has washed up on beaches. That material is recycled into new products.
On the for-profit side is TerraCycle®. It specializes in reusable and re-fillable consumer product containers. The firm was founded at the beginning of the century — making plant food out of worm castings. But it has grown into a provider of recycling services — with an emphasis on consumer goods. It is partnering with the Gillette company to recycle razors, for instance.
Supply chain and logistics must be a key component of any circular economy strategy – – and at a local or regional level
Implementing a shift to the circular economy is not easy. Large hurdles exist, both at the consumer and corporate levels.
Firms need to develop local recycling networks and develop a more engaged consumer base.
Many steps in the circular economy will likely occur on a more local or regional level. Fewer and fewer raw materials will be sourced remotely. Eventually, the circular process will likely be regional or local in nature. Manufacturers may prefer to locate remanufacturing facilities and warehousing closer to their customer base. They will seek out underused or unused brownfield properties for site recycling and remanufacturing processes. This also may involve locating facilities near wind or solar farms.
The logistics will likely emphasize the use of e-vehicles or hybrid trucks. Trucking may be the predominant mode of transport, but in some cases, rail may be used. Logistics firms will be key partners in the shift to a circular economy. Given the higher value of products, low-cost providers may find themselves competing with higher-value service firms that promise high reliability. With goods moving locally or regionally in the circular economy, logistics firms will need to be nimble and able to respond quickly. Ultimately, moving toward a circular economy requires a big corporate shift. This can be difficult for many firms. Corporations usually are loath to undertake the large-scale change required to make this shift, an MIT Sloan Management Review said. Corporate leaders need to reframe a firm’s identity with a commitment from its leadership as well as external engagement, the review said. This message must also be internalized by employees. The Healthcare firm, Novo Nordisk® is one firm that has made the adjustment. Making the shift appears to be worthwhile to the bottom line, the MIT Sloan study showed.
“High sustainability” companies significantly outperformed their counterparts over an 18-year period in terms of both stock market and accounting criteria, such as return on assets and return on equity. In terms of stock market returns, the “high sustainability” companies had an abnormal stock market performance that was 4.8% higher than the “low sustainability” companies on a value-weighted basis. They also exhibited lower performance volatility – –
the MIT Sloan study said.
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PLG Consulting has been tasked by its clients to help bring logistics solutions as innovative as the mission itself – capturing and repurposing the 90+% of post-consumer waste plastics that currently end up in landfills, oceans, waterways, beaches, and elsewhere. We’ve helped our clients with waste plastics feedstock sourcing and supply chain design. To learn more about this transformation and how we can help, contact us today.
CLIFTON LINTON, SENIOR CONSULTANT
Clifton Linton is Sr. PLG Consultant and a 30-year veteran business journalist. In 2016, he founded Energy Transport Insider, an analytics firm that tracks rail car lease rates.