The Circular Economy: How Closing the Loop Can Upgrade Procurement

Many thanks to Kelley HindsJim RidgwickRohit SatheLance Younger and Rainer Veth for your feedback and thoughts. 

As pressure mounts to reduce environmental impact, procurement professionals can leverage circular economy thinking to create a green supply chain and drop costs.

Procurement has long been about more than optimising the supply chain to reduce costs and secure value. Contributing to an organisation’s success means meeting increasing regulatory demands around supply chain transparency, bolstering resiliency to counter climate, political, and various other external disruptions, and meeting growing consumer and governmental demands for sustainable products and minimal environmental impact.

These demands require more than effective waste management and recycling. They require an overhaul of the linear production and consumption economic model in which most material and energy resources are expended as waste or emissions. The take, make and dispose flow that prioritises sourcing and purchasing new products to meet consumer demands must go.

The circular economy offers a solution but the path to circular varies greatly by industry. The circular economy model is a holistic approach to sustainable, resource-efficient procurement that aims to close energy and material loops within supply chains and product life cycles to minimise waste creation and environmental impact. It re-envisions how we think about all aspects of the supply chain – the design, production, distribution and eventual disposal of products to maximise value during and after use. At its simplest, the circular economy promotes procurement that reduces, prevents or reverses obsolescence throughout the supply chain. And in the process, it can give companies a significant leg up against the competition. However without good engagement across the organisation, aims to incorporate circular thinking may be short-lived. Rohit Sathe, CPO at a leading medical devices organisation indicates that a broader and structured team needs to be involved for best effect; “The Circular economy is like an orchestra where in Procurement can play the role of the conductor” and adds “Circular practices are not possible without engaging various stakeholders and getting each of them to do their part in a synchronized way. This is a very obvious point but best said than not”.

Figure 1. The Circular Economy in Action, Ellen MacArthur Foundation

The Challenges of Implementing Circular Economy Strategies

Within procurement, globalisation has increased choice and reduced cost, yet it has also facilitated massively extended intercontinental supply chains with multiple tiers and poor visibility. Not only does this raise the risk of regulatory noncompliance and unexpected disruptions; it makes implementing a circular economy difficult.

“Scale is a critical component in the achievement of the circular economy” says Kelley Hinds, Global Procurement Head of Sustainability & Risk at Roche. Hinds adds “The size of the supply chain dictates the approach and timeline. For some industries, the biggest global companies have less than 500 suppliers and supply chains of 4 or 5 tiers. In contrast, the pharmaceutical industry has one of the largest and most complex supply chains. Roche has more than 60,000 suppliers. One of our top pharmaceutical products has 126 components and a supply chain that is 10 tiers deep. Intricate supply chains require multi-faceted strategies to achieve circularity and this means that procurement needs to adopt techniques from both scientific research and behavioral economics to deliver innovative business solutions.”

Digitalisation can help companies gain visibility into their supply chain and start implementing changes. As Jim Ridgwick, Global Head of Procurement at Save the Children International explains, “At its most basic level, Procurement Technologies allow organisations to track and control who is buying what, from whom and at what price. Beyond this, when considering supplier visibility, with some notable exceptions, most typical departments would realistically aspire to have full transparency and supplier influence to their supplier’s supplier (i.e. tier 2). Digitisation in the form of supplier marketplaces and supplier management solutions have brought us closer to these aspirations. Whilst supply chain visibility and modeling solutions have a rightful place in procurement’s arsenal, they are limited by the quality of data fed into them and the ability for human beings to apply the resulting rich insights to make fact-based decisions and take action.”

How can digitalisation help procurement experts leverage the circular economy?

Yet studies show that simply assessing and monitoring suppliers fails to produce the desired results. Companies must take a proactive approach to supplier relationship management. To overcome the cost and logistics of realigning existing practices, they must adopt a collaborative approach, creating strategic relationships with suppliers to share knowledge, combine complementary resources, and seek greater transparency and governance over the long term. This alleviates the responsibility of individual companies for the entire value chain and enables agents at each tier to contribute to eliminating obsolescence.

There is also a mindset challenge when it comes to the circular economy. Many procurement departments are still under the impression that integrating recycling at the end of the supply chain is enough. Yet while claims about the amount of material recycled are great for a company’s reputation, the actual process of recycling is rarely resource efficient – often it requires significant energy expenditure to repurpose material.

Looking at recycling alone misses the scope for innovation and ignores the holistic approach critical to the circular economy. Ridgwick argues, “By supplementing supply selection criteria beyond the traditional factors of cost, quality, service and social value, to – what I call – the Total Impact of Ownership (TIO), procurement departments will shine a light on hidden, negative environmental impacts of one supplier’s solution compared to another’s as well as rewarding innovation from supply markets.”

Procurement leaders must re-integrate waste and by-products back into production. But they must also consider ways of extending product life through better design and build quality and of slowing resource depletion either through more efficient logistics and manufacturing or greener energy supply.

The Benefits of Implementing Circular Economy Strategies

Circular procurement benefits both companies and the planet. The Ellen MacArthur Foundation (EMF) suggests circular economy activities could save USD 700 billion in annual material costs and reduce CO2emissions by almost 50% by 2030. According to the Circular Economy Action Plan 2020, “up to 80% of products’ environmental impacts determined at the design phase”.  According to Lance Younger, CEO at ProcureTech, “the earlier involvement of procurement in design goes beyond smart scouting and matching of suppliers, and fundamentally elimates and optimises design.  In the same way that data and technology create transparency in the supply chain it helps companies design optimal products and solutions that are fundamentally more sustainable.”

Integrating a circular economy model into the procurement process enables companies to gain visibility into their supply chains. And with visibility comes easier nonfinancial reporting to regulators and greater transparency, two essential abilities for companies increasingly asked to hit environmental, social, and governance (ESG) targets. Proactively closing the supply chain loop also facilitates due diligence, helping companies investigate the agents with whom they engage and prevent reputational damage.

Another benefit is risk management. With geopolitical incidents, trade wars, extreme climate events and other unpredictable risks frequently hitting supply chains, procurement professionals are under rising pressure to monitor and mitigate risk. And circular procurement can enable this, helping to build resiliency, reduce reliance on external, untransparent actors and improve logistical planning.

One of the biggest benefits the circular economy offers is allowing procurement teams to significantly impact the environmental footprint of the final product and integrate sustainable practices throughout the value chain. This is more important than ever in a business environment permanently hindered by resource scarcity, rewarding companies that can extract value from otherwise wasted resources. And meeting the growing consumer demand for green products also unlocks reputational gains that increasingly hold sway over corporate profitability.

Of course, there is also the huge cost saving associated with the circular economy model. Sourcing supplies, assets and equipment with slower depreciation, the ability to be recycled, or which can or have been repurposed can drastically lower costs. For example, the pharmaceutical group GSK saw a €280,000 per year saving when it switched from virgin-grade methanol to recycled alcohol. Meanwhile, refurbished equipment is typically 20-40% cheaper than a new product and frequently comes with equal performance and warranty.

Case Study: From Purchasing the Product to Purchasing Its Use

In Bremen, Germany, the Senate Department for Environment, Construction and Transport previously owned a fleet of 11 passenger cars. They paid for their upkeep, fuel and the cost of leasing the few vehicles they did not own outright. But they were plagued by rising servicing costs as the fleet aged, high emissions, and low use – with most cars only booked out for three hours a day.

The circular economy solution was simple. It got rid of its vehicles and switched to a local car-sharing service with a simple-to-use online booking system. This ensured that they only paid for time their employees spent driving, gave them access to an improved fleet of vehicles with lower emissions, and eliminated the cost of upkeep, parking fees and management time. Ultimately, they reduced cost by 20% and saw emissions sink well below the average of other municipal departments.

Case Study: From Asset Expenditure to Asset Management

Professional services provider, Sweett Group, in London decided to refurbish their Gray’s Inn Road office. Its primary assets were furniture items, and it saw considerable expenditure on them due to the high quantity it required and the significant new unit purchase cost. Sensing an opportunity to close the material loops, it opened a dialogue with their contractor and undertook risk analysis to optimise the purchase of new items, incorporate the reuse of old material and prolong asset lifespans.

By focusing primarily on higher-quality servicing, they were able to reduce the furniture sent to landfill by 70%, increase residual asset value by 37%, and reduce capital expenditure over lifetime up to €15,000.

The Bottom Line

The circular economy is designed to work at the system, supplier and product level. Contractual methods can secure take-back agreements with suppliers for reuse, recycling and refurbishment of products, and they can create new partnerships and collaborations for resource sharing and reuse. Working with suppliers, procurement functions can help build circularity into their systems by implementing design to disassembly, repairability of standard products, resource efficiency, resource recyclability, and developing new solutions for industries with complex supply chains. It is a holistic process that completely reworks the old linear production to consumption model.

In order for the wider communities to understand the benefits for the environment and the organisation it’s important for organisations to share best practices; Sathe supports this view and explains “For circular economies to proliferate we need inspiring stories. Procurement leaders need to find and narrate those inspiring stories”.

And the benefits are exponential. Procurement professionals are able to leverage the circular economy can save costs, reduce environmental impact, increase supply chain resilience, conduct greater due diligence, bolster their reputation with consumers and meet the increasing demands of green transition legislature. For a forward-looking company, it is a forward-looking philosophy.

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