In previous posts, I wrote on the emergence of circular model supply chains, and the likely impacts they may have. Of course, a response I often receive is Why? Why are circular model supply chains any different to the myriad of other supply chain sustainability banners that have come and gone over the past decade? Why now?
Why do manufacturers need to transform their operations to a circular model? Historically the reasons for manufacturers to engage in any sustainability initiatives were mainly regulatory or social. Some companies may have other reasons, such as an altruistic desire to do what is best for the planet. Companies embark on sustainability initiatives such as circular supply chains for many reasons. Research suggests it is most often a combination of several reasons. Some of the key drivers for the adoption of circularity include the following.
In our hyper-connected social media world, public relations disasters can spread virally, potentially undoing years of brand investment. In 2019 the Coca-Cola Company was named The World’s Most Polluting Brand in a Plastic Waste Audit[i]. The audit listed many household name brands, and the #breakfreefromplastic movement has a concerted campaign to name and shame these major brands. It is debatable how much brand damage such audits wreak; however, no consumer goods manufacturer wants their logo showcased in a viral social media post about an enormous plastic island floating in the Pacific Ocean.
There is evidence that Manufacturers do change their product design and supply chains to more sustainable models to protect their brand investment. Six of the top ten FMCG companies (by revenue), including Coca Cola, have now become signatories to the New Plastics Economy Global Commitment[ii]. Involvement obliges the participants to adhere to strict plastic eradication measures. The Ellen MacArthur Foundation leads this initiative in collaboration with the UN Environment Assembly.
The most recent KPMG Survey of Corporate Responsibility Report[iii] found that 93% of the world’s largest global 250 companies are publicly declaring sustainability and corporate responsibility standards. 67% of these companies now disclose targets to cut their carbon emissions.
Social awareness of environmental issues is at an all-time high. Environmental policy dominates the agenda of various economic forums and election platforms of political candidates. Now is the age of the electric vehicle and solar-powered home where Tesla dominates the headlines. Companies can no longer exclude sustainability from their annual reporting.
Political awareness invariably follows social awareness. In June 2019, the European Parliament approved directive (EU) 2019/904, a ban on single-use plastics[iv]. Under the proposed directive, items such as plastic straws, cotton swabs, disposable plastic plates, and cutlery would be banned by 2021, and 90% of plastic bottles recycled by 2025. This directive follows the European Commission adoption of a comprehensive report on the implementation of the Circular Economy Action Plan on the 4 March 2019.
Regulatory compliance is one of the more obvious drivers for a more regenerative supply chain. Government intervention is required to compel action by those industries that are lesser affected by other drivers. A regulatory framework around circulatory models is also essential to define standards for international trade agreements.
The cost of regulatory compliance increases the competitiveness of circular models and therefore, the arbitrage opportunities of renewable and regenerative supply chains.
Environmental factors now influence consumer buying preferences. We live in an increasingly connected world where the environmental friendliness of a potential purchase is instantaneously accessible at the point of decision making via Apps such as Good Guide. According to a US census forecast, millennials, those born between 1981 and 1996, are the largest portion of the world’s population and the first generation to have grown up in a digitally connected world. This generation has an unprecedented discernment of sustainable consumer choices. According to Nielson[v], sustainable consumer goods enjoy stronger growth than their product category. For example, the coffee market in the US declined 1% in 2018, whereas those coffee products with a sustainable image grew on average 1%. For bath products, the market grew 1% in the same year whereas those products identified as sustainable grew %14.
According to the McKinsey Institute Global Commodity Price Index[vi] commodities have increased in price since the start of the century following a continuous decline over the previous century. Business leaders are in search of a more secure hedging opportunity to avoid these risks. The circular economy that decouples corporate revenues from raw material consumption is a viable alternative.
Therefore it makes sense to examine alternative sources of less expensive supply such as the residual amounts found in disposed end products. The cost to source and salvage residual components has historically been commercially prohibitive. However, the increase in raw material prices incentivizes companies to design products for disassembly as well as assembly. At the Apple Laboratories in Austin, Texas, there is a robot that can dismantle any one of four different models of iPhone and sort all of the componentry in 8 seconds[vii].
The economics of such arbitrage opportunities are improving as commodity prices continue rising, and the effort and cost to salvage residual elements from end-of-life products declines.
The impending cessation of supply is a powerful motivator for any company to adopt an alternative business model. Current extraction is forecast to exhaust virgin sources for a growing number of raw materials used in many everyday consumer items. According to the UN TEEB & US Geological Survey[viii], metals such as Indium and Silver will be exhausted by 2024 and 2029 respectively. Mainstream metals such as Copper (2044) and Aluminium (2092) would deplete this century if current extraction rates were to continue.
The diminishing supply challenge is naturally linked to the increase in commodity prices. Business leaders will need to minimize risk by seeking alternative sources of supply or by “designing-out” the requirement for such raw material from their supply chain.
So now you know
There is no one single reason to adopt
circular supply chain models. There are
many reasons, and the effect of each will vary across industries and
geographies. Nevertheless, 2020 is the
year to start the discussion. To quote
an influential industry analyst “In 2028
the circular economy will be the only economy”.
[iv] EUROPEAN PARLIAMENT. (2019, 06 5). DIRECTIVE (EU) 2019/904 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 5 June 2019 on the reduction of the impact of certain plastic products on the environment. Official Journal of the European Union.