Larry has been in the supply chain management field as an author, manager, business trainer, academia, and consultant for many years. Larry has worked in both the private and public sectors. Recently he has been co-facilitating NECI eSeminars, classroom sessions, and online modules. His new book, Good Planets are Hard to Buy, was released in the fall of 2015.

The Legal Edge Article

by Larry Berglund | SCMP | MBA | FSCMA

A sea change is occurring in Europe and the ripples are crossing the Atlantic. The Circular Economy (CE) is affecting environmental, social and governance values. Why? It makes good business sense to adapt to a world with resource scarcity.

Contributing to profitability while exercising more responsible use of natural resources is tough to argue against. Creating employment to ensure an extended life for resources builds social capital.  The 200-year old tactics of cheap, cheaper or cheapest materials and labour is running dry.

The CE provides a viable business model alternative and is restorative in nature. With international business icons such as Apple, Coca Cola, H&M, Philips, Renault, and Unilever getting on board, the CE strategy, albeit in its early days, is gaining traction.

For supply managers, if you could not buy raw materials, how could you sustain your operations? The answer cannot be found entirely within the procurement mandate; it starts at the design stage. Rather than design for disposal, we adopt a design for the environment model. Any product being brought to market is designed to be deconstructed, repurposed or harvested for its critical materials to contribute to future production.

Waste is not acceptable – is a part of the CE mantra. Landfill sites are not to be used as a repository for poor designs and low cost disposable goods. Every industry and market sector has a role to play as well as their customers and consumers. The fast moving consumer goods (FMCG) sector generates mega-tonnes of packaging which is largely treated as an externality cost. It’s estimated that we can only recycle about 20% of the volume we are generating and we are generating more each year.

Recycling has been around for a long time; however, it has failed to meet our needs. Recycling actually encouraged customers to buy more disposable products under the guise that they could be recycled after use.  We simply exceeded the capacity to recycle the mass production of goods. The unit costs of the mass-produced goods were reduced making cheaper goods available to a wider range of consumer incomes. The end result is an economy that requires a certain segment to continue to buy and support this disposable cycle. The CE will be challenged to transition to more sustainable economic models focused on conservation rather than consumption.

Converting a company’s waste or by-products into useful materials is also not new. Wood waste from sawmills goes into pulp and paper or fuel pellets. Fertilizers are made from oil refining. Old cardboard is made into new cardboard. Scrap metal is a source for many types of alloys and can be reformed into new products. Glass can be converted to other glass products. The sheer volume of these types of common waste led to finding more useful and commercial purposes. The Circular Economy proposes to manage waste by design rather than default.

Critical materials, once more accessible, are now subject to two forms of risk: Supply due to geopolitical conditions; and environmental stress where water and soil degradation may exceed the benefits of extraction. Many precious metals are found in politically sensitive areas such as China, Russia, and the Democratic Republic of the Congo.

By 2030 there is an estimated 3 Billion more consumers coming into the market mainly from emerging economies. The CE will assist industry and business with preparing for market growth. Economic decoupling refers to the ability to grow markets without a corresponding increase in energy and resource usage or environmental stress. Sustainable growth takes into consideration the impact on air, water, soil fertility and biodiversity. Technology and science are big contributors to the advancement of CE success through biomimicry – emulating nature to sustain business.

Innovations such as Velcro, in 1952, from the ability of the burdock seed which uses its hooks to attach itself to the coats of animals as a means of dispersion; by watching how the Kingfisher dives into water with nary a splash led to the Japan’s bullet train design with a 50-foot beak to reduce sound waves, increase speed, and use less energy; studies of shark skins led to developing a film to repel bacteria in hospital surface materials; the desert dwelling Namibian beetle collects water on its back from fog and innovators copied this natural process and designed dew bank bottles to convey moisture into a drinking container; microscopic tardigrades can dry out for ~120 years and be returned to life by water. This realization encouraged research leading to the development of vaccines which don’t require refrigeration and can be reanimated with water after 6-months which is extremely useful for treating disease in tropical climates; LED illumination has been increased by 55% after redesigning LED products to mimic the workings of the firefly. You get the picture – biomimicry is creating breakthroughs using less toxic solutions in a sustainable manner for thousands of applications.

CE has automobile manufacturers designing vehicles to be deconstructed after their useful life with parts and materials going into new production. Lighting companies are turning to leasing customers their products and taking them back after use. Tire companies won’t sell you tires, they will let you use them and pay for the wear and tear upon return. I:CO (I Collect) participates in a closed-loop process collecting and sorting clothing, furs, socks, belts and other garments in more than 90 countries. Collecting used clothing to produce new products can reduce the amount of fresh water by 90-95%.

The CE will require a much more efficient infrastructure to collect and segregate industrial waste. The CE will require changes in consumer behaviours and commitments to collection efforts as well. For industry, reverse logistics will play a much more strategic role in supply chain management. CE is more than recycling. Reverse logistics ensures responsible management of all related materials to support the ability to redirect these for further valuable uses as opposed to scrap. The collection link in the supply chain in turn will create employment for thousands of low-skilled workers.

We can reduce energy needs and natural resource depletion through increased labour in a sustainable manner. Sweden estimates that an improvement of 3% of its GDP will be achievable through the CE when using renewable energy, energy efficiency and material efficiencies along with increased employment.

Unilever’s Sustainable Living Plan provides supply chain leaders with a good framework to adopt. At the core of Unilever’s initiative is the recognition that while consumption of products is inevitable, innovative designs and resource conservation are fundamental in enabling sustainable business models. Steelcase, a long-time market leader in office furnishings, see zero landfill waste a critical component when designing their products. Reclaiming materials is a component in their holistic vision for sustainable and ergonomic products. Reducing waste contributes to profitability. The Circular Economy views waste as a target to be eliminated.

Designing products to be repurposed is not new as Xerox was successful with this strategy in the late 90s with its copier fleets. Older models were taken apart and many usable mechanical parts were recovered and installed in next generation copiers by design. The CE requires the majority of the players in a sector to adopt more progressive design strategies as the norm and not the exception. 3D manufacturing, for example, will contribute when it achieves scalable solutions for large industrial applications.

The Ellen MacArthur Foundation began this Circular Economy strategy in 2012 to affect social and economic development. CE has quietly grown and permeated the boardrooms of global players. All supply chains will be affected either directly or indirectly as innovations in design come to fruition. While there will still be a need for the conventional competitive bids and negotiations for goods and services, supply chain managers may need to start thinking more about critical supplies rather than tactical processes.

With an estimated consumption of 800 kgs of food/beverages requiring 120 kgs of packaging and 20 kgs of apparel/shoes per person, per year in the western world – something has got to give. The Circular Economy is giving ideas that work.

Readers are cautioned not to rely upon this article as legal advice nor as an exhaustive discussion of the topic or case.  For any particular legal problem, seek advice directly from your lawyer or in-house counsel.  All dates, contact information and website addresses were current at the time of original publication.

Reprinted form The Legal Edge Issue 113 | JAN – MAR 2016