An increasing number of countries and economies think circular economy is a good idea. Sebastien Bozon/ AFP

Large manufacturers are looking to increase profits by reducing waste

Jana Kasperkevic May 22, 2017
An increasing number of countries and economies think circular economy is a good idea. Sebastien Bozon/ AFP

People buy a lot of stuff. As the global middle class grows from 2 billion people in 2010 to 5 billion in 2030, we are bound to buy even more stuff. That means companies will have to produce more even as natural resources are dwindling. As a result, many manufacturers are trying to come up with a long-term sustainability strategy to replace the old “take, make, dump” business model.

A new survey of 50 senior executives found that almost half of them are looking to implement circular economy initiatives — the idea that resources can be recycled and reused as a way to reduce costs. Another 19 percent are doing so to increase revenue, according to the survey from the The Conference Board. The business research organization plans to release the report today.

In addition to the survey results, The Conference Board also looked at what kind of challenges large companies — like DuPont, HP, Kimberly-Clark and Philips Lighting — have encountered as they adopted a circular economy business model.

The idea that you have to choose between being profitable and having a sustainable mission is “antiquated,” said Thomas Singer, a principal researcher at The Conference Board and the author of the report.

Singer reviewed the practices of several companies, including Philips.

“They kind of looked [at their company] and said: OK if we want to be around for another 50 years or so and be relevant, we need to reconsider how we do business. If we expect 3 billion plus more people to join the middle class, if we expect that there will be different strains and stresses on the raw material,” said Singer. “The concept of circular economy, at the end of the day, is about decoupling growth from the use of raw materials to certain extent. [It’s] being able to do more without necessarily relying on taking more in terms of raw materials.”

One of the efforts at Philips is to think of light as a service rather than a product. This means making sure that its light fixtures work, using IT to learn customer’s usage patterns, and including the cost of electricity in the customer service agreement. If the lighting leads to higher electricity consumption than promised, Philips will reimburse the customers for the difference. This creates an added incentive for Philips to create lighting systems that rely on fewer natural resources.

Phillips found that these sustainability efforts account for about 8 percent of its revenue. By 2020, the company hopes to increase that to 17 percent, according to Singer.

This kind of thinking has become popular around the world with countries implementing new recycling and waste reduction goals. In 2012, Germany introduced the Circular Economy Act to “promote circular economy in order to conserve natural resources.” The European Commission has also adopted a circular economy policy that would establish certain waste, recycling, and durability targets for the member countries. In U.S., the Environmental Protection Agency has implemented a policy aimed at decreasing waste and encouraging recycling and reuse of materials.

It has yet to be seen what kind of an effect such policies might have on companies whose supply chains span the world. However, certain companies are looking at circular economy initiatives not just as ways to adhere to regulations or reduce waste, but also as a way to make money.

The survey found that about 35 percent of the survey’s respondents consider new revenue streams as one of the benefits of circular economy initiatives.

circular economy, cost, benefits, revenue

 Still, getting buy-in, both within a company or with partners, is a major issue. Collaboration can make or break these sustainability efforts, Singer said.

“If you are relying on external partners and you are relying on third parties and collaborating with them, any breakdowns in communications that happen can cause your mission to fail,” he said.

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