Circular business models throughout the supply chain
Hi everyone, and welcome to the third blog post of a Circular Victory! Last week we looked at the Circular strategies that we can apply in order to live a more sustainable and Circular lifestyle. These Circular lifestyles are applicable for both companies and people. And this week, some of our readers/listeners reached out to give an example of where they had applied a Circular strategy in their life!
Feedback from our audience
Jack and Rita talked to me about their “reusing” stories this week. Jack is based in London and loves Depop (https://www.depop.com/). Depop is an online marketplace where you can buy and sell secondhand clothes. Interestingly, that is also linked to a network platform where others can see the kind of clothes you are interested in. It is described as a “peer-to-peer” shopping app. Depop has some great items and Jack has managed to get some awesome trousers and a jumper from the platform. In doing so, he got two advantages with one purchase! Jack got some awesome clothes at a cheaper price and made his fashion consumption more Circular. We heard a similar story from Rita, a listener from Portugal. She follows a few Instagram pages that post secondhand clothes. She found a great top there that will help her to dress professionally and comfortably for work. She also got a great deal and helped make the world a more sustainable place.
We also got a story in the “refurbishment” category. Miguel told us a story about refurbishing a side table instead of buying a new one. By sanding and painting an older table in white, it became an almost new item that can brighten up their living room again. They could have easily thrown the side table away and bought a completely new one, but by refurbishing their existing table, they saved money and took a step to make their house more Circular!
It was great to hear some feedback from my listeners, so I certainly encourage you to reach out and share your stories at acircularvictory@gmail.com or through my LinkedIn at Victor Lanckriet.
Circular business models
Last week, we talked about the 5 R’s of the Circular Economy: Reduce, reuse, refurbish, repair and recycle. We looked at these strategies in our personal life, but they also apply to companies! When companies are applying these strategies, it will lead to them working on five types of business models. These business models are spread all throughout the supply chain, as you can see on the image below.
Figure 1 The Five Circular Business Models (Lacy, Long and Spindler, 2020)
These five business models are:
- Circular Inputs
- Resource Recovery
- Sharing Platforms
- Product as a Service
- Product Use Extension
We will now look deeper into these business models!
Circular Inputs
“Circular Inputs” is found at the very beginning of the supply chain. Here companies will aim to base their production in renewable, recyclable and biodegradable resources. It is often important to already keep these types of resources in mind during the design phase so that companies can easily incorporate these sustainable materials. Circular Inputs is very closely related to the Resource Recovery business model. They can essentially be the place where the Circular supply chain returns back into itself. Resources that have been recovered at the end of one life cycle can be introduced in the next product in the Circular Inputs stage.
Resource Recovery
In this model the goal is to recover the value and resources that are still part of a product and the end of its life cycle. Once these materials are recovered, they can become part of a new product. This is the idea of the cradle-to-cradle concept. This already exists to a certain degree in traditional recycling, but with the advent of new capabilities and technologies more and more resources can be recovered. Even more importantly, the resource can often be recovered at a quality that is as good, or sometimes even better, than it was in the initial stage. In order to do this, companies can either go back to the design stage and develop products that are easily recycled in a closed loop system or specialised firms can step in. This is especially good for companies that produce (and take back) a large number of products or firms who can efficiently reclaim materials from their products.
Product Use Extension
The Product Use Extension category is quite self-explanatory. The intent is to prolong the amount of time a product can spend on the market. Products are improved and maintained throughout their lifecylce through repairs, upgrades, remanufacturing and remarketing. One of the techniques here is “targeted upgrades”, where specific components of the product get updated, rather than the whole product.
Sharing Platforms
This is a model we already see in the street quite often, with ride-sharing and bike-sharing companies. These platforms allow collaborative use between consumers. This sort of app can redistribute overcapacity or underutilization, which maximises the utilisation per product and the value it creates for the consumer. This is ideal for companies whose products sit idle for a lot of the time. It might even increase their customer base, as the barrier to start using the product, as well as the price, is a lot lower. Currently this model is mainly employed by third parties who increase the utilization rate without manufacturing anything themselves (think about Uber and Lyft for example). This puts a strain on traditional manufacturers as certain client groups are opting to no longer purchase their product. The traditional manufacturers are not seeing any of the extra returns these third parties are generating.
Product as a Service
In a Product as a Service system, there is a complete shift away from ownership. Instead, the role of the product becomes fulfilling a need. Companies offer lease or pay-per-use arrangements and essentially promise to carry out a certain task, rather than offer a specific product. For example, Philips has a system where they guarantee light in a building and that’s what the customer pays for. Philips promises to take care of installing the lamps and maintaining the hardware.
An added bonus of this model is the way the incentives change. Extended product life cycles, upgradability and the possibility to share are no longer a risk for cannibalization, instead they are means to increase profits and decrease costs. In a linear model, durable products can cut into the profits of a company down the line. Customers only pay once, so if the product lasts for ten years, the company will have to wait at least ten years until they can sell again to that particular customer. Therefore, it can be smarter from a financial perspective to make your products so that they will fail sooner. Such instances of “planned obsolescence” have been a much discussed subject in the smartphone industry. Clearly, such practices will lead to higher consumption rates and therefore more waste in a “take, make, dispose” model. In a Product as a Service system, payments will be recurring periodically over the whole lifecycle of the product. This means that companies will keep making money over time, even with a product designed for durability and upgradability. The risk of cannibalization due to product durability is eradicated in a Product as a Service system.
Weekly challenge
It has become a bit of a tradition to give you all a challenge every week and of course, such a challenge cannot lack in my third post! Throughout this post I have been explaining the five different types of business models that will be most prevalent in the Circular Economy. Next week, I will be highlighting some specific examples of businesses that employ these models. Before that post, I would love to hear some of the examples of business that you have been noticing around you! I promise that once you start looking at the business you interact with throughout the next week, you’ll notice that some of them are already starting to move in a Circular direction.
As always, the aim of this blog is also to start conversations amongst my audience. I would love to hear from you if you have discovered any of these business models around you! If you have, share your story with me through acircularvictory@gmail.com or message me on my LinkedIn, Victor Lanckriet.
Thank you for reading and I’ll be back next week!
