The Circular Economy and Supply Chains

The Circular Economy and Supply Chains

Source: Adapted from the Ellen MacArthur Foundation.

The conventional organization of supply chains is linear, involving a sequence from suppliers, manufacturers, and distributors to the user. Despite the perceived efficiency of manufacturing and freight distribution, the consumption and use of material goods are associated with high waste levels. More than half of the materials used will be burned or discarded depending on the supply chain, while a smaller fraction (about 15%) will be reused or recycled. The reasons behind this reality are numerous but often linked with the comparative costs of sourcing new materials instead of recycled materials. Therefore, supply chain strategies can enhance sustainability by making new sourcing strategies available.

The circular economy is a feedback system that tries to minimize the inputs of resources (biological and technical) as well as the generation of wastes leaking into the environment. It is expanding reverse logistics principles into a more comprehensive framework, including two subsystems; one related to biological goods (e.g. food) and the other to technical goods (products).

Although supply chains in a circular economy appear similar to conventional supply chains, there are two fundamental differences:

  • The first concerns product design and the socioeconomic context of consumption. In a circular economy, products are designed to last longer and be reprocessed in some manner once their life cycle is complete. It is also assumed that most goods are shared (particularly capital goods), which increases their utilization level; fewer goods are required to provide the same service level.
  • The second concerns collecting used/consumed biological and technical goods for various reprocessing forms, where the conventional linear structure of supply chains becomes a feedback loop. For technical goods, it becomes important to have digital manifests that inform about the exact resource composition of a product in terms of type, quality, and quantity, which allows for determining its recycling value.

The circular perspective about supply chains underlines four layers to the reverse logistics of technical goods:

  • Maintenance. Ensuring the ongoing serviceability of a product, including its upgrade, at or near its place of use. Depending on the product, this can involve on-site maintenance.
  • Reuse. The transfer of a product from one user (or user group) to another through its collection, maintenance, storage at the distributor, and delivery.
  • Remanufacture. The manufacturing of a new product from similar products once it has ceased to function because of damage or wear and tear. The manufacturer refurbishes major parts and adds new components for the parts that cannot be repaired if necessary. Then, the product is reintroduced into the supply chain.
  • Recycle. Collecting various materials to be used in the (re)manufacturing of new products.

A controversial issue is that the circular economy is at odds with several manufacturing and marketing principles based on planned obsolescence and individual ownership. Still, circular economy principles are increasingly integrated into manufacturing and distribution strategies. Therefore, firms that have reached a market saturation of their products are more likely to implement circular supply chains as a strategy to gain or retain market share. Benefits are mainly derived from resource and energy efficiency gains, which indirectly result from reverse supply chain improvements.