Edition 81
Circular Economy: Integrating Reverse Logistics into Business Strategy
by Carrie Snyder, Founder, CSS Consulting

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Have you ever been in a situation where all the players – for example, employees in a team, or departments in a company, or companies in an industry – were each doing their best, based on their individual knowledge, skills, and incentives, but the overall outcome was less positive than most of them would wish for?

A classic example in supply chains is the “bullwhip” effect, which many of us have seen first-hand. Each of the players in the supply chain independently perform seemingly rational actions from their perspective, but the overall effect – for all the players involved - is certainly undesired: small variations in demand further downstream in the supply chain ultimately leads to large swings in production upstream.

The bullwhip effect is a simple example of a structural problem. Structural problems require an entirely new way of acting and interacting: in effect, changing the system itself. In the case of the bullwhip, by implementing better communications across the supply chain players as to what demand changes are truly being observed downstream in the market, the upstream production headaches can be mitigated.

It’s important to note that, as with all structural problems, simply asking each of the players to individually become more knowledgeable or more efficient, without having them work to change underlying aspects of the system itself, doesn’t significantly improve the outcome. At best, people just run in place harder. At worst, they make the overall situation worse by trying to improve it locally.

The Linear Economy is Approaching the Limits of Its Usefulness
We, too, have another structural problem that now collectively deserves our attention, but it exists at the scale of our global economy. It wasn’t intentionally designed to be suboptimal — as most systems aren’t — but it represents a once successful way of operating that has outgrown its usefulness. And that structural problem exists in our Linear Economy.

In short, you can think of the Linear Economy as “take, make, dispose”: businesses harvest or extract materials from the ground, use them to grow or manufacture products, and then sell those products to consumers, who generally incinerate or send to landfill the materials that no longer serve their original purpose.

(A Circular Economy, by contrast, is one that designed to be restorative and regenerative, and aims to keep products, components and materials at their highest utility and value at all times, according to the Ellen MacArthur Foundation. More on this later.)

The Linear Economic model made sense at the beginning of the Industrial Revolution. The world had a relatively limitless abundance of material resources compared to its population, and a relative shortage of labor to generate finished goods from all those materials (the global population was only around 700M people in the early 1700’s). Continuing to extract raw materials whenever needed, while at the same time increasing the productivity of labor, was — and continues to be — the primary driver of global economic growth.

And the Linear Economy served its purpose; it has led to substantial material abundance for at least some of our population. However, the starting conditions for the Linear Economy – both the relatively limitless material resources and a relative labor shortage – are disappearing. Raw commodities over time are generally becoming more expensive to extract even in light of technological improvements, and we’re estimated to have a global population (i.e. potential labor force) of 9.7B people by 2050… just a short 350 years after the start of the Industrial Revolution.

Even if you’re not looking into the future, one of the most astounding things you should know about the Linear Economy is that it generates a massive amount of economic and material waste. According to a report by the World Economic Forum, a shift away from a Linear Economy to a Circular Economy by 2025 could generate an estimated $1 trillion annually in economic value globally, create more than 100,000 new jobs, and prevent 100 million tons of waste within the next five years. The US Chamber of Commerce Foundation also points out that a Circular Economy would restore the natural capital and ecosystem services that are the foundation of healthy societies and economies globally.

What are we waiting for? Let’s dig further into what the circular economy really entails.

Circular Economy: Rethinking Systems
If you recall from above, a Circular Economy is one that designed to be restorative and regenerative, and aims to keep products, components and materials at their highest utility and value at all times. This short video (3:48), called Rethinking Progress, explains the philosophy behind the circular economy.

In a Circular Economy, materials flow – not surprisingly! - circularly, as illustrated in this diagram:



A Circular Economy is implemented using five concepts, according to the Ellen MacArthur Foundation: Design out waste, Build resilience through diversity, Work towards energy from renewable sources, Think in systems, and Think in Cascades.

Design out waste. Waste in the Circular Economy is not just that within the four walls of a warehouse or a factory, or even within a company – the perspective is broad and considers multiple uses. When materials are biological (i.e. they can be introduced back into the biosphere safely), they are treated differently from technical materials (where cascading flows are created to preserve the energy, labor and materials that went into building the products in the first place). The goal is to seek opportunities for “waste = food” (one person’s trash is another person’s treasure, so to speak), across industries if necessary.

Build resilience through diversity. By diversity, we’re referring to the diversity of systems, with more connections and varying scales. Note this is a balancing perspective to the approach of a global supply chain with highly-centralized production. Just as in natural systems that can’t survive with too little or too much variation, circular economy thinking encourages finding a “sweet spot” to create resilience.

Work towards energy from renewable sources. This idea is fairly self-explanatory. As fossil fuels are just another type of material - ultimately in limited supply - moving towards renewable energy underlies the transition to a circular economy.

Think in systems. Like with the bullwhip effect, complex systems can produce unintended consequences. Understanding the parts of a system, how they fit into the whole, their relationship to one another, and how the perspectives of the parts see the other parts of the system is critical to solving the majority of real-world problems. Command and control is a less effective strategy in complex systems than is flexibility, adaptation, and prototyping.

Think in cascades. One use isn’t enough. Instead, we design cascades of flows for both biological and technical materials, to extract as much value from the products as possible.

So What’s Really New in the Circular Economy?
For those of you who have used the waste hierarchy before, the cascades in the diagram above look familiar. We all know that concepts such as repair, remanufacturing, recycling are certainly not new. So what has changed - is the Circular Economy just a new name for existing ideas?



While some of the enablers are indeed familiar, based on my involvement in the emerging Circular Economy dialogue, I believe there are three drivers that make the Circular Economy now worth paying attention to:

• Advocacy: Non-profits such as the Ellen MacArthur Foundation are now demonstrating a clear business/economic case for businesses and governments globally to move from a Linear Economic model to a Circular Economic model. Evidence of increased investment in the Circular Economy includes: the Circular Economy discussion at the World Economic Forum in Davos, investment of €24B by the EU in the Circular Economy, specialized Circular Economy events such as the US Chamber of Commerce Foundation Circular Economy Summit, and China’s 5-year Circular Economy plan).

• Technology: Technological developments such as the internet of things (IoT), big data, mobility (enabling the sharing economy), as well as improvements in additive manufacturing (3-D printing) and materials chemistry, now make it increasingly attractive to track assets, eliminate waste, and extract value through circular models.

• Business Strategy-Level Change: The Circular Economy specifically promotes new circular business models for companies, such as selling services for access to a product versus selling the product itself. These business models reinforce circularity – for example, when a company retains product ownership, their incentives to design for long-use, repair and recycling are increased.

Rethinking the Purpose of Reverse Logistics
It’s easy see how reverse logistics fits in a Circular Economy. Bringing products back for their next use is a central focus of the reverse logistics profession. But to be honest – and I say this having been a reverse logistician myself! - the reverse logistics industry will need to adapt a completely new mindset to move to a circular economy.

In particular, reverse logistics has generally adopted – and understandably so – an approach of reduction. After all, reverse logistics processes are most likely triggered when something goes wrong, such as: the customer changed their mind about purchasing the product, there’s excess stock that’s not selling, an order was shipped incorrectly, the product broke during use, and so on.

When you’re in the team that is usually called in only when something goes wrong, you tend to adapt certain behaviors. In particular, I find that there are two things reverse logistics professionals are excellent at:

1. Becoming experts in their craft (we’ve got a difficult enough time already just cleaning up the messes – the last thing we want is an outsider, who doesn’t understand the uniqueness of reverse logistics, telling us how to do our jobs!), and

2. Having a relentless focus on increased efficiency (because if we absolutely have to deal with returns, then we must above all demonstrate to the business that returns are generating as minimum a cost as possible)

Remember the bullwhip effect example from above? As I mentioned there: “As with all structural problems, simply asking each the players to individually become more knowledgeable or more efficient, without having them work to change underlying aspects of the system itself, doesn’t significantly improve the outcome. At best, people just run in place harder. At worst, they make the overall situation worse by trying to improve it locally.”

[Before you send me an indignant email: yes, there are indeed exceptions to the reverse logistics approach of reduction (and if you are one of those exceptions, thank you!). But I’d encourage you to listen carefully at the next reverse logistics gathering – are most of your colleagues usually talking about deliberately increasing reverse volumes?]



The industry’s current approach of “reduction” won’t be sufficient as we move to a Circular Economy. In a Circular Economy, reverse logistics won’t just be what happens when things go wrong – reverse flow will actually become an integral, desired part of business strategy. Reverse logistics will no longer focus on reducing the returns rate – in fact, the objective, upfront, will be for everything to be eventually “returned” for its use next cycle; today’s products as tomorrow’s resources. And the Circular Economy may no longer even have “reverse” logistics if there isn’t a closed loop – just “logistics” that move materials on to their next intended use.

As you might suspect, it won’t be enough to focus solely on incremental improvements in efficiency. And it won’t be enough to stay in the reverse logistics silo. To capture the true opportunity of the Circular Economy vision, systems - including business models - will need to be strategically, deliberately designed for material production, use, and reuse to occur in cascading flows.

This is the mindset shift that reverse logistics will need to make as a central player in the Circular Economy: from being the experts at their profession with a relentless focus on increased efficiency – to becoming cross-functional, cross-industry leaders initiating systemic change.

Conclusion
Up until now, as a society, we have designed our overall economy to function linearly. And as with anything human made, it’s now in our power to redesign it in a way that better suits us all.

The exciting news is that reverse logistics can play a key role as systemic change leaders in creating a Circular Economy. The question for you now is – is the reverse logistics industry willing take on this new, expanded purpose?

Are you interested in finding out more about the Circular Economy and the potential opportunities for your business? Sign up at cssconsultingllc.com/reverselogistics for a free list of Circular Economy Learning Resources, which I’ve specifically created for reverse logistics professionals.
RLM
Carrie Snyder is the Founder of CSS Consulting, a Circular Economy consulting firm, and an Instructor at the Harvard Extension School, teaching the course “Introduction to the Circular Economy.”

During a multi-faceted 15-year career at Cisco Systems, a common thread developed for Carrie concerning the question of “what happens to products after they are sold to our customers?” To this end, she developed extensive expertise in product take back, reuse, repair/refurbishment and resale. At one point she was part of a group that transformed what was an USD$8M cost center for Cisco into a USD$100M profit center, and later on, Carrie was the Director responsible for a closed-loop supply chain and related sales program supporting over $1B in sales.

Carrie brings her both extensive cross-functional business expertise and academic interests to help organizations develop their business strategy relating to the Circular Economy. Connect with her on LinkedIn at http://www.linkedin.com/in/snydercarrie.

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