Tuesday, February 11, 2014

The Power and Possibility of "Reverse Network" Supply Chains in the "Circular Economy"

In recent years, the Ellen MacArthur Foundation (EMF) - founded and led by world renowned UK solo long-distance yachtswoman of the same name - has been dedicated to informing the world about the possibilities of a global shift to a circular economy (CE). Through its extensive and informative site, EMF has been sharing insightful reports, case studies, and videos, all of which seeks to tout the potential of, and energize support within industry for CE, outline the theories and principles that undergird its application, and offer records of note on CE's successful adoption. In one particular release in the last month, EMF claims that the shift toward a CE could generate $1 USD annually in 2025 while creating 100,000 new jobs and preventing 100 million tons of waste.

But what is CE anyway? In brief, CE begins by recalling the finiteness of our world and its resources. Using the simplest of existing models, they remind us that all of natural life on earth operates within a limited cycle of existence: organic resources and lifeforms come forth into existence, consume during their lifespan from materials and resources that occur naturally, then die and return to the earth. Humans, on the other hand, through development and advancement, have found incredible ways to defy the limitations of material existence and improve the quality of life through the development of consumable products. In the process, we have devised a linear approach to production and consumption that EMF aptly refers to as the "take, make, dispose" economy. In their overview of CE they explain our linear model in the following way:

"[the linear] model relies on large quantities of easily accessible resources and energy, and as such is increasingly unfit for the reality in which it operates. Working towards efficiency—a reduction of resources and fossil energy consumed per unit of manufacturing output—will not alter the finite nature of their stocks but can only delay the inevitable. A change of the entire operating system seems necessary." (Ellen MacArthur Foundation)

Contrasting the way in which many sustainability advocates criticize industry and production, EMF and their partners (which happen to be an impressive list) attempt to flip the script on traditional views of capital and waste rather than advocating a complete end to the current system. The model speaks of an economy where waste is "designed out" by industrial manufacturers who would simplify the engineering of consumer products large and small, making them more resilient, then tracking the valuable internal components that could be reused but are now often dumped in landfills along with the whole product at the end of life. The best laymen's-terms-example they provide is a power drill, which can be found here. In short, rather than simply applying our sophistications in supply chain strategy to forward logistics, a CE-adhering manufacturer would also supply the same energy to "reverse logistics." In so doing they have established a "post-consumer" phase of life in the recycling/reuse or refurbishment of the existing materials or the entire product. An EMF-Brunel University-Kingfisher-sponsored showcase redesign project video illustrates how a standard power drill would be reconfigured and handled using CE design and post-consumer principles.

Another really interesting example comes out of the large-scale consumer technology industry. Examples of their products are domestic machines such as dishwashers, laundry machines, and refrigerators. CE principles would scrap the current linear model of production, retail, consumption/use, disposal and replace it with a new idea of ownership. Instead of consumers simply purchasing the the machines for direct ownership, they could become a part of a circular relationship with producers. Manufacturers and their front-end retailers would license the machines to consumers for use in a particular period, after which it would be returned directly to them or a separate organization in the business of refurbishing and recycling while the consumer receives a replacement machine. Referring back to that three-part McK feature, supply chain expert and McK alumnus Markus offers a helpful and concise narrated visualization of how CE changes the way companies understand the value of their products and production components in "Moving Toward a Circular Economy."

An interesting detour at this point is to ask how exactly this thinking is being received by industry leaders and public organizations? I suspect beginning with the recent Annual Meeting of the World Economic Forum (WEF) in Davos might be a good place to start. In Davos 2014, the work of EMF received new attention on a global scale; not too bad for an organization only in its 5th year of operation. As part of the networking and collaborative efforts that take place at WEF's annual gatherings, CE made a big showing as it has now been adopted as a major prong in WEF's work advocating innovative reforms for the global economy. Through Project Mainstream, EMF has partnered with WEF as well as Mckinsey & Co. (McK - another "not too shabby" partnership to say the least) to bring the world the best research on CE, as well as networking capacities to improve its potential for adoption and scale-up. As a part of all this recent attention, McK has released three initial supporting features within 2 weeks on their "Research & Insights" page and in the current Mckinsey Quarterly to introduce the thinking. For starters, have a look at an interview with Ellen MacArthur on "Navigating the Circular Economy."

To this point, we have discussed generally what CE is and how it works, but we've only scratched the surface on how this impacts supply chain management. Surely, as you're considering the introduction of concepts such as "reverse logistics," ownership vs. licensure, and "post-consumer processes" you're also wondering how this impacts traditional supply chain management, especially given the incredible complexities of global supply chains. For starters, have a look at the third of the three McK features I mentioned above, which is a fantastic interview by McKinsey Quarterly with Philips CEO Frans van Houten called "Toward a circular economy." This interview will provide you with a first-person look at how a large firm has incorporated CE into its activities.

To offer more than an interview, I would like to conclude by sharing a report that brings some objective analysis in answering the necessary question: In light of the undeniable hurdles of supply chain complexity CE advocates must contend with, what are the major points of consideration and change for traditional SCM thinking? The report is EMF's third annual CE report and is entitled, "Towards the Circular Economy: Accelerating the scale-up across global supply chains." Through the Project Mainstream partnership, this publication describes the ways in which CE is both well-suited for certain global supply chains but remains only a possibility for others with the attendant need for new approaches. Right from the start, EMF and the sponsor analysts at WEF and McK recognize that there is no pie in the sky with CE. They offer a forthright introduction in the "Executive Summary" that serves as the backdrop for the entire report: 

In this report [we've] joined forces to reconcile the concept of scaling a circular economy within the reality of a global economy and complex multi-tier supply chains. The key objective is to propose a very specific joint plan of action for industry leaders. The challenge of closing materials loops and regenerating natural assets is an exponential function of product complexity and supply chain length. While more localized production is experiencing a robust renaissance in some economies, we cannot ignore nor fail to tap the power of global division of labour, specialization and economies of scale. This report sets out to emphasize that the circular economy must hold its promise not merely to the village economy, but also to a globalized economy of nine billion. It presents the concept of circularity as a tangible driver of industrial innovations and value creation for the 21st century global economy. In addition, it positions the concept for today’s global CEO as a practical business strategy to “hedge” against the complex and interconnected risks of resource competition, commodity price volatility, new materials technologies and changing consumer demands. (emphasis added; Project Mainstream)

In essence, they admit, the the burden of proof is on them to prove the veracity of their claims and the real potential for take-up and scale-up. Despite the undeniable evidence that there are resource constraints that the world is coming to grips with, and that global producers and suppliers must contend with, the EMF-WEF-McK tripartite collaborative must make the case for a feasible and actionable shift to CE that gives proper deference to the equally important constraints provided by the complexities of the world as it is.

Following this candid introduction, they offer their seven key messages in the Executive Summary. I would like to highlight the two (#s 2 and 3) that directly assess CE's SCM impact:

#2 Circular supply chains are up and running— and they’ve gone global.
The first point I want to highlight that the potential is already in action naturally, and its operating on a global stage. They use global fiber networks for paper and cardboard as good examples. They continue by suggesting that growing availability for supporting technologies are cropping up that allow for more intricate industries.

#3 Supply chains are the key unit of action, and will jointly drive change.
EMF and their counterparts rightly recognize that the heart and soul of CE's success will be found in the right approach to existing supply chain strategies. Their recognition spawned the development of a taxonomy of the various current supply chain archetypes, followed by a consideration of the archetypes that pose the greatest challenge to CE adoption. The first order of business within these archetypes is to establish the leading causes of "systemic leakage."

Beginning on page 29 of the report, the authors charge into their discussion of leakages and archetypes. They first characterize the causes of leakage they gleaned from discussions with key corporate decision makers:

  1. Geographic Dispersion
    Manufacturing and supply is a global system of producers and suppliers that has resulted in a greatly dispersed production and conveyance eco-system. Global economic conditions (trade liberalization, competitive labor rates) have supplied the environment to make dispersion profitable and preferred.
  2. Materials Complexity and Proliferation
    The products that consumers now see as commonplace are, in fact, quite complex, resulting in weighty constraints that flow directly from the Bill of Materials.
  3. Linear Lock-in
    Our current linear-centric approach is an entrenched and historic system that makes the success of any new approach dubious at best. The resulting forces of the economic status quo are powerful disincentives for any transformations. For example, current approaches are most certainly operating in markets of relative scale, a dream of traditional economic theory and a powerful anchor to say the least. Another example are the aligned incentives that now exist between customers and producers, within firms, along supply chains, and across geographic regions as a result of what works best in the linear approach when considered from purely monetary economic terms.
With these points of systemic leakage in mind, they share what their research shows to be the four main archetypes of supply chain flows. For the sake of simplicity, I will place their report's visual representation of them.

Finally - to the area of interest I have wanted to arrive all along - they move to a discussion of where the CE is most likely to be a viable option under current conditions, as well as where it could become viable given certain transformation(s). It goes without saying, under current constraints, the geographically closed loops are the ones that would fair the best. They openly admit, traditional thinking requires the acknowledgement that "the ones organized locally rather than globally should, in theory, exhibit superior economics." Any deviation from this serves only to jeopardize (1) current product quality and (2) economically superior production networks that are deeply rooted.

Nevertheless, beginning in section four "What are the solutions?" (39-48) they describe practices that can be adopted within the next couple years by leading producers in an effort to deal with those two leading obstacles to scaling up CE. They advocate a systematic approach (vital to any major transformation) that they summarize in three major categories of corporate action:
  1. Set up global reverse networks for products and components
    Firms have invested enormous amounts of time, money, and energy into perfecting their "multi-tier inbound supplier networks." That same energy should now be spent on the orchestration of "post-usage value streams across multiple reverse cycle partners."
  2. Reorganize and streamline pure material flows
    The "purest" and "smoothest" flows of materials will become the most highly prized within CE. By this they mean streamlining materials flows all the way back to the source, and standardizing the purities of essential components of basic materials.
  3. Innovate businesses on the demand side
    Given that a CE shift will begin emphasizing "access-over-ownership" and returning goods to the manufacturers, models for these activities will need to be cultivated that make the process understandable and accessible to average consumers.
To see these at greater length, please find their report at (http://www3.weforum.org/docs/WEF_ENV_TowardsCircularEconomy_Report_2014.pdf). Their solutions chapter begins on page 39.

If you're anything like me, you often struggle with the difficult tension between your support for capitalism and your commitment to sustainability. Without a doubt, you and I will have a qualified support for the notion that freer markets mean freer and more prosperous societies; but you also believe that the advances of the 20th century have allowed free markets and free economic actors to emphasize growth and development - efficient as they may be - to a fault and sometimes without moderation, at times resulting in enormous inequities and doctrines of production and consumption that are largely divorced from the very real resource and space constraints of our finite planet.

Sadly, as culture, people, and the most vocal among us have a tendency to skew towards extreme ends of the spectrum, we often find those who emphasize one of those ideas over the other with no nuance or variety. Anyone who supports the first perspective tends to support it without qualification, overlooking the obvious consequences playing out before our eyes and relegating any efforts toward sustainability to classes of people they dismiss under pejoratives such as "leftist" or "naive." Anyone who supports the second of the two notions often advocate for an entirely untenable scale-down of the global economy, or they simply warn of its eventual self-destruction, all the while wave their judgmental fingers in the face of industrialists exclaiming, "Shame, shame shame!" I am not of either extreme, nor do I think its necessary - I find that kind of myopia a complete lack of rational consideration and intellectual creativity.

As such, what makes me most excited about CE is that it is the first intelligent discussion I've learned of that takes both perspectives seriously. Rather than willfully ignoring the consequences of a linear production-consumption paradigm (as some industrialists often do), or demonizing industry and suggesting that the only alternatives are mutually assured destruction or a revolutionary scale-down of the modern global economy (as some environmentalists often do), CE and its leading supporters are offering us an alternative that considers the entire equation. In this discussion, our class is offered a clear case of SCM innovation that is both current, trending, and instructive.

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