What is the circular economy?

The circular economy, which is set to be the biggest revolution in the global economy in 250 years according to Accenture, is part of the ongoing narrative on industrial sustainability. Recent economic factors such as input cost rise and resource volatility have heavily influenced this shift towards a circular approach, but not all the reasons are reactive.

A circular economy is where you design out waste and pollution by keeping products and materials in use for as long as possible and find ways to create new resources from what we discard.

In a resource-constrained world, there is a noticeable trend of organisations opting into the circular economy model. For manufacturers, this shift involves a move away from the “take-make-dispose” process and a step towards increased responsibility over the total lifecycle of a product and its environmental impact. But to close the loop, manufacturers need to embrace change and learn to adapt their processes and products.

Manufacturers have immense potential to exploit the benefits of the circular economy. However, there’s a lot of messaging around it, which may be baffling. You may already have waste management systems in place, but is this the same as being an active member of the circular economy? And, is the narrative on plastic and other materials recycling a worthwhile circular economy strategy helping the environment, or just a tactic forced on them by consumers?

What is the circular economy?

A traditional linear economy is where you make, consume and throw away. Moving to a circular economy is all about creating a ‘circle’ where you design out waste and pollution by keeping products and materials in use for as long as possible and find ways to create new resources from what we discard.

Circular economy business models are likely to be more common in the future. By 2029, Gartner predicts the circular economy to be the only economy, replacing wasteful linear economies. The analyst claimed that this was due to consumer and shareholder preferences shifting towards sustainability.

“Organisations are under pressure to reduce the amount of waste they’re producing – from consumers and governments alike,” commented Steven Steutermann, Managing Vice President of Gartner’s supply chain practice. “The solution to this challenge is a shift towards a circular, waste-free economy. The supply chain will play a key role in this process.”

Benefits of the circular economy for manufacturers

According to the Ellen MacArthur Foundation, a charity that’s working to accelerate the transition to a circular economy, the manufacturing industry could achieve from 10% to 15% cost savings on direct materials required for production by adopting circular economy strategies.

The circular economy can change the way manufacturers operate by ‘designing out’ waste in the design phase before a product is used.

The former director of sustainability at UK-based clothes and grocery retailer Marks and Spencer, Mike Barry, says in the circular economy documentary ‘Closing the Loop’, that there’s still a lot of work to do:

“I think a lot of what people call circular today is just generally improved waste management. It’s fundamentally thinking about producing something from the very beginning that can be circular, ensuring that the customer can see a real benefit from using it and having a practical interest in terms of reusing it and returning it to us. So, I think there’s a challenge of genuinely satisfying customer needs. We cannot be satisfied until hundreds of thousands of companies, servicing hundreds of millions of customers, are doing circular”.

So, how can manufacturers get out of a ‘waste management’ mindset and follow a ‘circular economy’ approach?

Instead of only thinking about the functionality and price of making products, manufacturers should think about the whole lifecycle of their products, maximising the usage of materials and cutting out waste.

Currently, many consumers still don’t consider what happens to products after they’ve used them – it’s assumed that at the point when it stops being useful, the product can be thrown out and replaced. Businesses design products to make manufacturing as easy as possible, which doesn’t lead to sustainable use.

Discover new commercial opportunities

Refurbishment, remanufacturing and recycling

Refurbishing, remanufacturing and recycling can help manufacturers to compete at a lower price than their competitors without reducing quality. Industrial processing of used parts to bring them up to the same standard as new parts enable manufacturers to take advantage of cost savings.

Consider electronic equipment like smartphones and laptops. Manufacturers often offer refurbished equipment by simply collecting, fixing and installing new software in models for consumers that don’t need or decide not to upgrade.

Recycling

It’s cost-efficient for manufacturers to recycle product components, ensuring that they reuse these in new products instead of using raw materials. The circular economy approach means manufacturers are finding smart ways to create products that are durable and subsequently recyclable while retaining profitability.

Different circular economy business models

Leasing

Leasing is a contractual arrangement that calls for the user of an asset to pay its owner for its use. Often, we talk about property, buildings, and vehicles in this sense, but industrial equipment is also leased. The tyre company Michelin, for example, offers durable tyres that are rentable. Leasing agreements require manufacturers to maintain responsibility for sustainable products after they are sold, but also when they come back in.

Services based on performance

This business model retains ownership of a product and provides a service based on its performance outputs, such as data on availability, maintainability, efficiency, and reliability (which the Internet of Things (IoT) could measure). An example could be a washing machine – instead of the customer needing to own the washing machine, they would pay for the benefits that come from using it (i.e., the act of washing clothes).

Incentivised return

A business offers an incentive (usually financial) for the return of used products, such as electrical or electronic equipment. These products could then be refurbished and re-sold.

Asset management

Maximise the life of products and minimise the need for new purchases by tracking your assets, allowing you to decide what can be reused, repaired, or redeployed. You could reuse your assets as part of an asset-sharing platform, where you contact other firms to share assets you can’t justify the expense of buying.

Collaborative consumption

The rental or sharing of products between members of the public or businesses, often through peer-to-peer networks, is a way to reduce waste. One example is car-sharing services available for people who don’t need to spend money on a car.

Register for our Circularity with Sage X3 Online Event on 19th September at 16:30 (BST) to learn how to accelerate your circular economy efforts with Sage X3. Hear from our customer TXO, on how Sage X3 supports their core processes, enabling them to focus on being the world’s local partner for sustainable communication networks.

Check our guide ‘How the circular economy can transform manufacturing’ to discover how manufacturers, distributors and wholesalers can unlock the opportunities available from the circular economy.