The manufacturing industry faces what is likely to be the most fundamental shift ever in its business model. Since the beginning of the industrial age, manufacturers have sourced raw materials, added value to them through design and transformation and sold them, creating more wealth than any other time in history. But now they are being pushed towards a circular economy from all directions:
- Consumers, according to a global study by ING, will abandon companies that don't help them ‘reduce, reuse and recycle'.
- Lenders are offering sustainability-linked loans with more attractive terms in an effort to reduce risk from regulation and changing consumer preference.
- Business-to-business buyers are making circular economy inroads in e-waste, plastic packaging and other categories.
- 55% of investors in a study by asset management giant Schroders say investing sustainably delivers better returns.
US-based research in 2019 by the NYU Stern Center for Sustainable Business found that sustainable consumer packaged goods (CPGs) consumption is growing 5.6 times faster than conventional CPGs. A 2020 survey by GlobeScan and BBMG found 60% of under-30s and 53% of older respondents said businesses need to ‘build back better' for sustainability after the coronavirus pandemic.
Maggie Slowik, research manager for manufacturing insights at IDC in Europe, the Middle East and Africa, in a recent IFS MindFuel for Manufacturing event, said manufacturers have taken note. She commented:
When we surveyed our manufacturing community in Europe, 46% of them told us that the pandemic has had a very positive impact on sustainability development goals. I would almost go so far as saying sustainability is the new digital.
One decade to go
Lars Aaen Thøgersen, chief innovation and circular transformation officer at the Nordic coffee roastery Löfbergs, added: "There is a strong need now for a new normal. Consumers and partners expect that we move forward in creating that new normal." For its part, Löfbergs is committed to eliminating all waste related to growing, processing and consumption of coffee by 2030, even helping customers re-use coffee grounds.
Gartner says that by 2029, linear economies will be completely replaced by a circular one. But last year, the non-profit Circle Economy found only 8.6% of the world economy was circular, down from 9.1% in 2018. Manufacturers must run far and fast, adopting net new business processes and supporting business systems for reverse logistics and environmental footprint management.
Reverse logistics as a business discipline started with the customer-driven, reactive return of goods from consumers or from another business through a return materials authorization. While ease of returns is important to customer experience, once a product is returned there is a complex series of routings regarding disposition of the returned product-return to vendor, recycle, resell and other outcomes.
Reverse logistics software also must deal with contractual obligations and complex processes around what happens to the products and what has been promised to the customer. As IFS field service expert Tom DeVroy wrote in Supply Chain Brain:
Reverse logistics must work in harmony with other performance areas such as warranty management, contract management and field service operations in order to cause a positive ripple effect across the entire business. Research suggests top-performing service organizations have embraced this as their modus operandi-and this could apply to manufacturing organizations moving into aftermarket service contracts.
Supporting new disciplines
Software for reverse logistics must manage complexities like placing a residual value on an item that requires rework or repair. It also must track the location, ownership, and status of components under repair, including those that may have gone to third-party manufacturers or service providers. It is this software that will contain business rules regarding impact of repairing an item versus replacement.
As manufacturers push more of the revenue and cost for what they sell after the sale, they will need systems that tie accurate lifecycle cost data back to design and quality so circular productivity comparable to existing linear processes while increasing margins.
This requires a united suite for enterprise resource planning (ERP), enterprise asset management and field service management, likely bolstered by artificial intelligence (AI) to manage the complexity of this value stream.
According to IFS Manufacturing Industries Vice President Colin Elkins, the goal will be to engineer maintenance out where possible. During the MindFuel event, he said:
Waste is the result of poor design. We need to be able to start redesigning our products. In a servitization world, the last thing we want is for our products to fail, which is totally the opposite model of where we were 20 years ago when manufacturers made most of their profit out of spares. Now it's a case of trying to keep everything in the economy for as long as possible.
A circular economy will require a company track not just cost and revenue from each unit manufactured, rolling that up to product family and company-wide metrics. Table stakes for this process will be the ability to track and reduce use of substances that are difficult to dispose of or are potentially harmful, starting with those covered by WEEE and RoHS regulations. As Elkins wrote in Software magazine:
Software can incorporate environmental footprint management tools to capture the environmental footprint of the product over its lifecycle and present information for decision support. This information can include the percentage of postconsumer waste used in a product and will help manufacturers see where they can implement more sustainable practices.