This issue’s question

“What are circular supply chains and how does the model impact the financial supply chain? Is it more than just a Corporate Social Responsibility (CSR) issue?”

In a circular economy, products and materials flow in loops, maximising asset utilisation and minimising waste by design. It avoids the economic losses along the value chain and negative externalities inherent to the traditional linear model of production and consumption. The Ellen MacArthur Foundation, SUN and McKinsey have identified that by adopting circular economy principles, Europe can create a net economic benefit in 2030 of €1.8trn compared to today, double that offered by the current linear development path². The circular economy can simultaneously create opportunities for growth and jobs, stimulate industrial renewal and innovation, and reduce environmental pressures.

For companies to capitalise on this opportunity, business models as well as collaboration across the supply chain need to be reconsidered. The following two examples of circular economy business models being used on the ground are illustrative. One hundred La Place restaurants in the Netherlands provide 2.5t a week of waste coffee grounds to GRO-Holland, a company that uses them as a growth substrate for oyster mushrooms. The mushrooms are then sold back to the same restaurants to be used as ingredients. The supply chain is therefore made symbiotic or ‘circular’ by turning one player’s by-products into feedstock for the other.

As an example of pay-per-use, in addition to selling lightbulbs, Philips now also signs contracts to provide light, by the lux. The company keeps ownership of the lighting system, taking care of maintenance and remanufacture during the contract. Such a model can be both more profitable than traditional products sales for the manufacturer and cheaper for the user. It also promotes increased customer interactions – and potentially loyalty.

How do these business models affect companies’ (and customers’) working capital and financing needs? In the symbiotic ‘circular supply chain’ model there is a potential reduction in non-payment risk. Players become both buyers and suppliers and so possess a more equal balance of economic power, likely formalised by contracts that incentivise the continuation rather than termination of the relationship. Can such a risk reduction be measured and priced? Could cash handling costs be reduced, and more liquidity unlocked, by using closer bonds in the supply chain to net off more transactions and to extend supply chain finance to earlier in the purchase process?

The pay-per-use model increases working capital requirements by extending the time, potentially by years, before which production costs are recovered. It increases credit risk towards customers, but reduces risk from volatile raw materials prices by extending the useful life of the asset. Can assets on the now-extended balance sheet be valued by component rather than by product to allow depreciation to depend on each’s remanufacturing cycle? Can a leasing model share between the user, producer and financier the higher underlying value created by reduced future production costs?

These questions are part of a fundamental re-think of how companies create value and the potentially profound impact on their cash flow and financing: what is at stake is a transformation of the core business strategy, not a mere CSR plug-in.

Finance in a circular economy is a young field. More such innovative financial thinking is needed. How do treasury professionals see the potential for cash and risk management in their own institutions changing to take account of circular economy business models? What are the more radical ideas for new instruments to enable these models? The answers will help shape the financial landscape of the future.

Mireille Heijnen

Head Social & Environmental Responsibility, EMEA/APJ

Hewlett Packard Enterprise

With the former CEO of eBay, Meg Whitman, at the head, Hewlett Packard Enterprise (HPE) is introducing technology that helps companies grow faster, but also allows them to be more sustainable – by playing a part in circular supply chains, for instance. The cloud solutions offered by HPE remove the need for data centres in every office building, saving on hardware and energy costs. The focus is on sustainably meeting the data needs of the future through energy efficient and innovative server technology.

For example, the company is the first in the industry to offer a ‘composable infrastructure’ to be able to respond faster to IT needs with software managing the hardware and when the job is done, the hardware is packed up again. IT infrastructure can be configured for a specific workload within seconds and then reconfigured as quickly for a different workload. This removes the need to run idle servers which are doing nothing, waiting until more capacity is needed. HPE provides this technology as a service, limiting the investments on the part of the corporate who do not need to take full ownership of the products. This is a new circular dynamic in a traditionally asset-based economy. One that may prove to be more efficient for businesses and less impactful on the environment.

Where HPE is putting hardware on the market, it offers customers the opportunity to take back the used equipment and recycle it or – even better – reuse it by operating an asset recovery service and a lease programme. Of the servers that are coming back to HPE, 77% is being refurbished and resold and 88% goes back on the market after end of lease. It also allows customers to demo equipment for an average of three to four months, before deciding to either keep or return it; when returned, the equipment is prepared for reuse and circled back on to the market with the same guarantees as a new product. By not discarding them as waste, but considering them a valued inventory and a business opportunity in itself, the lease programme contributes to an increasingly popular circular economy.

These developments will continue, as customer demand will change. IT companies will need to adjust fast to an economy of ideas where speed and agility is needed and new business models, circular in nature, are given an opportunity to prosper.

Supply chains can be more or less compliant with the principles of the circular economy, because we are in a transition towards a circular economy. The reasons urging for a shift to a circular economy are both environmental and business related. From the environmental perspective, the importance of reducing pollution and the consumption of natural resources is widely acknowledged, and it is a priority on the agenda of policy makers.

From a business perspective, innovative business models based on services rather than product ownership and innovative consumption patterns – such as the sharing economy – are gaining an increasing importance. Moreover, current trends suggest there will be rising prices and an increasing competition for raw materials. The circular economy represents an answer to these challenges and an opportunity to find synergies between the protection of the environment and the growth of profit.

In terms of impacting the financial supply chain, first of all, a circular physical supply chain implies opportunities in terms of profits and reduction of the costs. For instance, remanufacturing could imply savings in terms of production costs that range from 30% to 90% of the cost of producing a new unit product from virgin materials. At the same time, in a truly circular supply chain, new mechanisms for value sharing among the supply chain partners are necessary.

At the same time, in a truly circular supply chain, new mechanisms for value sharing among the supply chain partners are necessary.

The Ellen MacArthur Foundation provides some very good examples of companies that are effectively managing the shift to a circular economy. These include Rype Office, that is exploiting a completely new business model for office furniture aligned with the principles of the circular economy, and Mud Jeans, that uses the principles in the different and challenging context of clothes. These are only two of several possible examples. In general, the transition to a circular economy is ongoing, and there is good evidence of successful businesses implementing the circular economy principles.

But if corporates want to truly exploit the potential of the circular economy, they should think in terms of systems and embed the principles of the circular economy at the strategic level of business model innovation. They cannot implement the circular economy principles by simply trying to make a production process green, or a closed loop supply chain more efficient. These principles should be embedded at the very early stages of product design, supply chain design, and definition of the commercial strategy.

Footnotes

1. Find out more about the Ellen MacArthur Foundation
2. Ellen MacArthur Foundation, Stiftungsfonds für Umweltökonomie und Nachhaltigkeit (SUN), McKinsey & Co., Growth Within: a circular economy vision for a competitive Europe (June 2015).