Are your supply chain practices sustainable? Does it even matter? Absolutely, it matters a lot to some extremely important stakeholders.
Corporate sustainability has become a business imperative. Consumers, shareholders, impact investors, and even your workers increasingly demand accountability. They expect transparent environmental, social, and corporate governance (ESG) reporting from the brands they associate with.
Many businesses are turning to circular economy and circular supply chain (CSC) practices to facilitate sustainability to improve ESG ratings and brand reputation. As sustainable procurement and supply chain management grows in importance, it’s important to be informed about all aspects and tactics related to sustainable business.
That’s why we created this guide—to help you stay ahead of this growing trend that will define many aspects of the future of procurement.
What is the circular supply chain?
Based on the concept of the circular economy, it’s a closed-loop system of production, distribution, and consumption designed to minimize waste and maximize resource longevity.
Waste from production and post-purchase consumption is recycled, reused, or repurposed rather than being sent to landfills. Carbon emissions are reduced, giving the atmosphere a much-needed breather (absolutely, pun intended).
That’s a simplified definition; circularity is a highly nuanced topic. But it’s a good starting point. To fully understand the circular supply chain, it’s important to grasp the overarching concept of the circular economy.
The Circular Economy
The circular economy (CE) is a business model that seeks to minimize damage to the environment by extending the lifespan of the materials used in production.
The central idea is to keep products, components, and materials in use for as long as possible. When a product reaches the end of its life, it can be remanufactured, broken down, reused, or recycled.
The circular economy is a powerful model that can help tackle major global issues. Companies are already using it to address climate change, biodiversity loss, excessive waste generation, contamination of natural habitats, and social inequality. However, old habits die hard, and adoption can be a challenge.
Adopting the Circular Economy Model
Embracing change–especially such a radical change in a short time–is challenging (even frightening) to many people. But it’s unavoidable if you want to fully adopt and implement circularity. And there are compelling reasons to consider doing so.
Adopting a CE business model forces us to reevaluate and redesign most aspects of “normal” linear production models.
The top aspects to reevaluate include:
- Raw material sourcing
- Supplier selection and evaluation
- Manufacturing processes
- Product design
- Waste management
- Consumer engagement
- Logistics and distribution
- Data maintenance
- Regulatory compliance
- Technology systems
- Collaborations and partnerships
- Overall business strategy
Does this all seem daunting or intimidating? Don’t worry; there’s no need to go it alone. Specialized experts can guide you along the way.
Circular supply chain expert consultants can play a major role in easing the transition and ensuring success. Most companies don’t have the advanced level of in-house expertise needed to manage such a sweeping change. Consultants fill that gap (more on this below).
The Circular Supply Chain: A New Business Imperative?
Adopting CSC practices is particularly helpful for procurement teams since the vast majority of pollutants a business generates are byproducts of the supply chain. Given procurement’s ability to dictate resource allocation and usage during the manufacturing and distribution process, CSC models present a spectrum of opportunities for sourcing and purchasing teams.
The US Environmental Protection Agency reports that over 90% of a brand’s carbon emissions come from its supply chain. This places pressure on procurement teams (as key players in supply chain management) to champion sustainability within their organizations.
Businesses Face Pressure to Embrace Sustainability
As concerns about climate change grow, consumers have become increasingly vocal about their expectations that businesses will embrace sustainable practices.
Survey data from 2021 indicates that 60% of global consumers consider a brand’s sustainability practices an important factor in their purchase decisions. As younger generations establish themselves as the largest consumer demographic, this sentiment will continue to grow.
The call for change generates anxiety among many C-suite executives. But when we dig deeper into the data, it’s clear that forward-looking brands use these consumer preferences to create a competitive advantage.
Clever Brands Turn Risk into Reward
Consumers don’t just sit and complain about the lack of sustainable business practices. They take action.
A 2021 survey conducted across 17 countries revealed that 57% of consumers are willing to pay more for a product from a brand that works to address social and environmental issues.
Moreover, McKinsey surveyed over 550 executives and institutional investors about ESG and its impact on business valuation. Here’s what they found:
- Respondents would be willing to pay a 10% premium (median response) when acquiring a business if it had a positive ESG profile.
- 25% of respondents would pay a premium of 20 to 50%
- 7% would pay a premium above 50%
Let that sink in. Take a moment... OK, let's move on.
Value Creation and Cost Saving
Consumers’ willingness to pay more for sustainable products is forcing fundamental changes in how businesses function. One common misconception is that it costs more to produce sustainably, but that’s not the case.
In the circular supply chain, you purchase fewer resources because you reuse previously sourced materials. But what about the costs associated with recycling materials?
One study found that effective ESG programs can counterbalance rising operational costs and generate a 60% boost in profits. When you connect these data points, adopting a circular supply chain starts to make sense.
Procurement's Hidden Opportunity
Procurement professionals can view the circular supply chain as a hassle or an opportunity. The former is counterintuitive as the writing is on the wall; we’re entering a new era of commerce where brands’ operating practices will receive increasing scrutiny.
A recent Gartner survey found that 74% of supply chain leaders expect profits to grow over the next two years as a result of applying circular economy principles.
Priorities for Early Adopters
Companies that have already begun implementing elements of circularity into their supply chains are often motivated by the same objectives.
The same Gartner survey found the following to be the highest priorities among respondents:
- Integrating circular products and services into their product roadmap (54%)
- Upscaling existing manufacturing sites to accommodate circularity (42%)
- Developing strategies to incentivize consumers to purchase circular products (41%)
- Building company-owned sites for repair, remanufacture, and waste management (36%)
Those who take a proactive approach stand to gain favor and influence within their organizations. By taking the lead in transitioning to a circular supply chain, procurement departments can increase their value to the business exponentially. This is procurement’s opportunity to shed the stereotype of being a cost center and emerge as an undisputable value and revenue driver.
Teams that undergo a successful transition enjoy larger budgets and more influence within their organizations. Additionally, procurement departments that invest in sustainable supply chain initiatives are more attractive to potential employees and impact investors.
Benefits of Adopting Circular Supply Chain Practices
Adopting a circular supply chain business model carries many additional benefits. Below we cover key advantages gained from going green.
By reducing the amount of waste generated in their supply chain, businesses save money. This could be achieved through recycling, using recycled materials, or reusing materials. Moreover, as the rate at which companies purchase carbon credits grows, the circular supply chain can eliminate much of that cost.
Better Risk Management
Circular supply chain practices can reduce risk by ensuring resources are obtained from reliable sources. This includes eliminating working with suppliers who are not socially responsible or those with a questionable reputation.
Increased Innovation & Efficiency
By utilizing circular supply chain practices, businesses can gain insight into their suppliers, suppliers’ networks, and their respective industries. This facilitates and encourages innovation, as businesses can find new and creative ways of utilizing resources.
Implementing circular supply chain practices allows businesses to reduce the number of steps and handoffs involved in the supply chain.
Improved Brand Reputation
By adopting circular supply chain practices, businesses can gain a positive reputation for being socially responsible and environmentally conscious.
Brand reputation matters to all stakeholders of a business, including customers, investors, employees, suppliers, and regulators.
A company with a good reputation will be more likely to attract customers and investors, retain employees, establish good relationships with suppliers, and receive favorable treatment from regulators.
This, in turn, rewards companies with higher levels of customer loyalty and customer satisfaction–both of which are related to increased profitability.
Compliance with Environmental Regulations
The volume of environmental regulations has grown steadily over the past century, with a marked increase in new US legislation starting in 1970.
On January 1, 1970, the US National Environmental Policy Act (NEPA) went into effect. NEPA has been called the Magna Carta of environmental legislation; it paved the way for a continuous stream of subsequent legislation.
If past trends are any indication, environmental regulations will continue to pop up in the US, Europe, and elsewhere (see chart below). This will place new administrative burdens on companies. By adopting a circular supply chain now, you will more easily avoid non-compliance penalties in the future and gain a competitive advantage today.
Attracting Impact Investors
As public awareness about environmental and social issues grew over the last few decades, so did the prevalence of sustainability-focused impact investing.
But what is impact investing? It’s a financial growth strategy focused on investing in organizations with a mission to tackle environmental and social issues. There are no official criteria for a company to fall into this category.
The idea is that when companies execute ESG programs properly, they create social and environmental impact while increasing profitability. Growth in impact investing is rising and is forecast to continue to grow.
Impact Investing Growth Rate: 14% Year-over-Year
Investor confidence over time, illustrated by research conducted by The Forum for Sustainable and Responsible Investment, paints a clear picture. In 1995, sustainability investing in the US was around $640 billion. By 2020, it had grown to $16.6 trillion, representing a 14% compound annual growth rate over 25 years. Companies that embrace sustainability measures, such as adopting circularity in the supply chain, will find it increasingly easy to attract investors.
Adopting Circularity: Considerations and Obstacles
Adopting a circular economy business model requires procurement teams to take a holistic view of their operations. To drive the effort, they must engage multiple stakeholders.
And, they must prepare to face a range of considerations and potential roadblocks. Below, we cover these in detail to help prepare you to kick-start your efforts.
Enlisting an Expert Consultant to Manage the Transition
Perhaps the most prevalent concern is a lack of internal expertise to drive the initiative. But, as they say, there’s no need to reinvent the wheel–you just realign it. In other words, you don’t have to undertake such a sweeping transformation alone.
We recommend enlisting the guidance and support of a circular supply chain expert consultant to lead the way. Unless you have the in-house expertise to manage the project, you risk wasting extensive time and resources by going it alone. You also place the entire project’s success in jeopardy.
A consultant will provide valuable insight and advice as you implement circularity in your supply chain. They’ll also anticipate and mitigate potential risks that untrained professionals would likely miss. Furthermore, an expert consultant can provide a clear roadmap for the project, maximizing efficiency and minimizing the costs associated with adoption.
Securing Buy-In and Aligning Goals
While the benefits of a circular supply chain are widely recognized, procurement teams may still face resistance from stakeholders. Your team must be able to effectively articulate the value to be gained to convince others to support the initiative.
It’s essential to align goals across stakeholders, ensuring that each has a shared understanding of the end game and its associated rewards.
Obtaining the Necessary Data
A circular supply chain is only as strong as the data which supports it. So, procurement teams must be armed with the data required to accurately measure progress and performance.
The right data empowers you to identify areas for improvement and spot inefficiencies. Keep in mind that the right data will not come from a single source; you’ll need data from your internal systems as well as from suppliers, partners, and customers.
Managing Complex Relationships
Procurement teams must be able to effectively manage relationships with everyone involved in the supply chain. This includes understanding how procurement’s actions affect everyone involved in the process.
Furthermore, they must be able to collaborate with all stakeholders to ensure the smooth and efficient flow of information and materials. A good place to start is by focusing on developing and managing healthy relationships with vendors and suppliers.
Developing Strong End-of-Life Disposal Plans
When developing a circular supply chain, it is essential to consider the end-of-life disposal process. In the circular economy, end-of-life materials are disposed of in an environmentally safe and cost-effective manner.
Responsible material disposal requires robust planning that takes into account multiple factors. These include:
- The types and quantities of materials to be disposed of
- Transportation requirements
- Local waste disposal regulations
- Available disposal methods
Establishing Traceability and Transparency
To ensure the successful implementation of a circular supply chain, all materials must be traceable from the time they enter the cycle until the end of their life.
Without this visibility, it’s impossible to measure efforts as you’ll have blind spots in the supply chain. By gaining this visibility, you gain valuable insights that can drive high levels of quality and safety during the production and distribution processes.
This insight also empowers you to enforce accountability and identify areas for improvement as your program matures.
Understanding Limitations and Remaining Realistic
While a circular supply chain is an important and effective step toward a more sustainable business, it is important to acknowledge that it’s not a silver bullet solution.
It’s a much more sustainable approach than the linear supply chain, but it’s still based on the consumer economy which, by default, generates waste.
Adopting circularity will generate brand loyalty and market trust, reduce costs, increase revenue, reduce environmental damage, and attract top talent. Nevertheless, it’s not the solution to the entire problem but rather one piece of a complex puzzle. Be sure not to promise the moon or exaggerate when gaining consensus. It’s important to be realistic; the benefits are many so this won’t be an issue unless you allow it to.
Last-mile delivery is a measure of the speed and efficiency of the final stage of delivery for goods. It’s an indicator of the time and cost (financial and environmental) associated with moving a single product unit from a distribution center to its final destination.
Last-mile delivery receives significant scrutiny because all carbon emissions from that stage of the supply chain are attributed to a single product unit (or a relatively small shipment of units). During last-mile delivery, emissions per unit are far greater than those generated when transporting 20,000 units on a container ship.
Procurement teams can use last-mile delivery to drive consumer loyalty and satisfaction. For example, they can employ sustainable practices such as using electric vehicles, renewable energy sources, and reusable packaging. Finally, they can also leverage digital solutions and wireless networks to optimize delivery routes and reduce unnecessary stops and emissions.
Action Items to Kick off Your Efforts
Adopting a circular supply chain approach can allow businesses to reduce costs and increase sustainability, but how do you get started? Here are some immediate actions you can take to kick off internal advocacy for embracing the circular supply chain.
Start with Your Consultant
As mentioned above, an expert consultant can make this entire process painless, streamlined, and ultimately successful. Plus, they can help with all the items below, and all that come after. We suggest you start by identifying the best consultant to manage your project and onboarding them as your first step.
Educate Other Teams about the Benefits Involved
Outline the economic and environmental benefits that come with making the transition to a circular supply chain. Highlight the cost savings that can come from resource efficiency. And when communicating these to internal stakeholders, be specific about the potential environmental and financial impacts.
Prioritize Sustainability when Selecting Vendors and Suppliers
When assessing potential vendors, look for those with a proven commitment to sustainability and a circular supply chain approach.
Ask questions about their processes and policies and look for evidence that they are actively seeking to reduce waste and increase efficiency. Shareholders may ask for this information, so it’s essential to gather it up front.
Uncover Additional Benefits in Internal Processes and Policies
Evaluate existing procurement policies and processes to find areas where transitioning to a circular supply chain could bring benefits.
Sometimes, the slightest changes have the greatest impacts and are hidden in plain sight. Use a keen eye when reviewing existing processes.
Monitor and Measure the Success of Your Transition
Establish metrics and KPIs to track the success of the transition. As always, detailed measurement and analysis lead to data-driven, reliable decision-making and program refinement. But which KPIs should you track?
1. Cost Savings: Track the cost savings or cost reductions achieved through the transition to a circular supply chain. Reporting these results will put stakeholders at ease and remove barriers to further progress.
2. Sustainability Rating: Monitor sustainability ratings and scores, such as the Carbon Disclosure Project’s CDP rating system, to measure progress towards greener supply chains.
3. Resource Efficiency: Measure the efficiency of resources and materials used throughout the supply chain, such as energy, water, and raw materials. Track and record metrics before and after your transition to help stakeholders visualize your impact.
4. Revenue Growth: Track revenue growth and profit margins before and after your initiative. This will help you accurately measure and articulate the impact on the company’s bottom line.
5. Carbon Footprint: Monitor your company's carbon footprint to track the progress and success of the transition. Need help measuring? Use this handy calculator.
Addressing Common Concerns and Objections
Transitioning to a circular approach to supply chain management represents a significant change for a business. While the benefits far outweigh any drawbacks, objections will inevitably arise from the change-averse in your organization. Challenges and objections will be inevitable, but you can be prepared.
Below we provide some of the most common concerns and objections you’ll encounter. We’ve positioned each concern as a question you may be asked. We then give you responses that will help you navigate and overcome each objection.
Can we do a phased transition? What resources are available to help manage it?
A phased transition is preferable as it will allow us to focus on one step at a time and better manage the complexity of the process.
We’ll rely on industry publications and reports, professional consultants and advisors, training programs and workshops, and online tools and resources.
We plan to factor the price of a consultant into the overall budget and then rely on their expertise to advise us on additional resources or tactics to ensure a smooth transition.
What return on investment can be expected from a circular system?
A well-implemented circular economic system can yield a variety of returns on investment. These include lower production costs, greater resource efficiency and reduced waste, improved brand reputation and customer base, access to new markets and customers, and a variety of tax incentives.
How will this drive sustainability and what are the long-term benefits?
It will drive sustainability by reducing the amount of waste generated. Reusing existing resources will reduce the volume of materials we must procure, generating significant cost savings. Plus, it will improve our brand reputation, generate customer loyalty, and open access to new markets and customers. Finally, we’ll become eligible for a variety of tax incentives.
How can technology help to manage and monitor circular processes?
Technology will help us streamline the entire transition. Automated systems and software can be used to track and analyze data related to the production and distribution of goods, identify cost savings opportunities, and manage and optimize supply chain operations.
Plus, we can use software to manage vendor relationships, identify the most reliable, sustainability-focused suppliers, and evaluate them to ensure accountability.
Does a circular system provide advantages in terms of risk mitigation?
A circular system reduces risk by creating a self-sustaining system that is more resilient in the face of market volatility and environmental pressures. It will allow us to become less reliant on factors outside our control and put more control over the entire supply chain into our hands.
What positive impacts can a circular system have on other processes?
There are many. A circular system can improve the visibility and traceability of inventory. It can expedite delivery times and lead to better quality control through tighter process management. Moreover, it can increase efficiency in resource utilization (e.g., energy consumption). Finally, it can facilitate the adoption of renewable energy sources for production and distribution.
How will we identify and prioritize areas to focus on?
We will start by reviewing our entire end-to-end process to identify opportunities for optimization. We’ll also consider the materials we use, the stages of the chain, our stakeholders, and the processes involved in the supply chain. After taking inventory of these things, we’ll prioritize with the help of a consultant and additional resources.
What are some of the barriers to transitioning to the circular economy?
Some of the main barriers include a lack of knowledge and understanding of the concept, limited technological capabilities, and resistance from shareholders who don’t understand the benefits. We’ll need to educate them and to address the lack of knowledge, we’ll bring in outside expertise to advise us.
How can we measure the success of our transition?
We need to track metrics such as waste reduction, resource efficiency, cost savings, customer satisfaction, and customer loyalty. Additionally, we’ll look at the sustainability performance of our suppliers and the environmental impact of their products. To the extent needed, we’ll look to replace suppliers that don’t meet sustainability standards.
How will we get our suppliers and partners on board?
We should communicate with suppliers and partners early and often in the process. We can provide clear incentives and rewards for meeting targets and ensure that collaboration is at the heart of the process. Additionally, we can look for opportunities to build their capacity, provide training, and ensure that all suppliers and partners understand the benefits they stand to gain.
How can we ensure compliance with regulations while transitioning?
We can start by researching and understanding the laws and regulations that apply to our industry, and actively monitoring changes in legislation. Additionally, we can engage with our suppliers and partners to ensure that their circular supply chain complies with relevant regulations, and take steps to ensure that their systems and processes are secure.
The use of a circular supply chain in procurement is becoming increasingly essential for businesses to remain competitive and profitable in today’s market.
It offers a range of benefits, including cost savings, improved sustainability, and market differentiation through enhanced brand reputation.
Companies must recognize the importance of a circular supply chain and make long-term investments to reap the full benefits.
With the proper implementation, a circular supply chain approach can result in a more efficient and sustainable procurement strategy as well as a more reliable revenue stream over the long term.
Suggested Additional Reading
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