The challenges and opportunities of Circular Supply Chains

The supply chain disruptions caused by the COVID pandemic lockdowns and the war in Ukraine have uncovered the vulnerabilities of the Just-in-Time supply chain model and global logistics.

In a way, it illustrates the consequences of choosing between efficiency and robustness.

• If you choose efficiency, you will reduce cost, time and waste, but you will be more vulnerable to shocks.
• If you choose robustness, you will have to build in redundancy loops and buffers, which in turn will drive costs up but will create more resiliency to shocks.

Circular Business Models are in essence more resilient because they promote self-reliance, local loops and regenerative practice. Yet, according to the Circularity Gap report [1], less than 9% of our economy is circular.

Hurdles to Circular Supply Chains

This HBR article [2 ] explores the challenges preventing the wider development of circular supply chains.

First, the article explores a number of successful examples (aluminium cans, office furnitures, and clothing). In these 3 examples, they highlight the importance of (1) sharing the value of waste to promote the participation of different actors in the chain (i.e. paying them), (2) establishing effective take-back channels for reverse logistics, (3) nailing re-marketing strategies to debunk the myths on remanufactured/refurbished items, and (4) redesigning items for circularity.

Second, the article explores some systemic hurdles that are delaying the transition to circular supply chains:

• Products are not designed to be easily disassembled and they may source materials from thousands of suppliers
• The pursuit of economies of scale have favored the centralization of manufacturing centers, which rely on global supply chains (long lead time, offshore supply). Global Supply chains rely on sourcing specialized pre-made items fabricated elsewhere (think car equipments and assembly).

The transition to more decentralized and more local manufacturing centers will require dismantling existing infrastructure, and creating new one, which will be costly. Companies will also have to forego the efficiency of economies of scale, which will also be costly. Deciding to transitioning is even harder when the benefits are elusive (you don’t see them immediately).

Supply Lattices

On the circular economy show from Ellen Mac Arthur Foundation [3], Bill Mc Raith, former CSO of PVH (US company that owns fashion brands including Calvin Klein and Tommy Hilfige), introduced the concept of supply lattices. I believe this concept can help uncover the benefits of transitioning to new supply models, more local and more circular.

Supply lattices build complementary supply chains that can source goods onshore, nearshore and offshore to accommodate dynamic business needs while avoiding the waste created by minimum order quantities, or by anticipated order (before you know the actual demand). Offshore global sourcing options seem low costs because they do not internalize the cost of (1) their vulnerability, (2) the lost sales caused by excess pre-orders of eventually unsuccessful products, or (3) opportunity cost of failing to recapture the profits out of a product at the end of its life.

Supply Lattices help shift the focus from (i) cost only to (ii) cost and attribute:

• Onshore. Higher production costs but capacity to respond immediately to demand dynamics
• Offshore. Lower costs. Much Longer lead time. Inelastic response to demand changes.
• Nearshore. Intermediary costs & time

Tools, technology and data will be crucial enablers of the transition to enable companies to dynamically maximize profitability by playing with the attribute of each element of the supply lattice.

This concept of supply lattice supplants the concept of supply chain, because it is not linear. It is more like a supply system that relies dynamically on managing the attributes of several layers in a complementary way. By itself, supply lattices are not circular, but they can be designed with circularity in mind to address the pitfalls of traditional supply chains.

For companies to achieve their circularity and zero-waste targets by 2025 or 2030, supply chains need to evolve to circular models now. So, let’s build the supply chain lattices now to build more resilient and maybe one day anti fragile [4] supply models.

References

[1] Circularity Gap report 2021

[2 ]HBR article.Why are circular supply chains so rare?

[3] Circular Economy Podcast. Supply Lattices.

[4] Book Antifragile. Nicolas Taleb. Beyond robustness and efficiency comes the concept of antifragility, definitely worth a read.