Measuring the ROI for circularity soon may be easier

ShutterstockR. Iegosyn

Circular economy practices are taking root inside companies all over the world. Elon Musk's SpaceX is even helping shine light on the concept: last week its latest rocket mission blasted into the atmosphere reusing a refurbished rocket launcher, a move that cut an estimated 30 percent off its blastoff costs.

But while it's becoming more common to find companies dabbling with circular economy experiments, few organizations have embraced these models across their entire operation in a holistic fashion, let alone dragged along their entire supply chain.

Sure, circularity models of repurposing already used materials, sharing underused assets and extending product use by selling them as part of service contracts are allowing companies to reduce waste, water use and carbon emissions — along with expenditures on materials, energy and procurement. 

But the full value of circularity has yet to be realized or even postulated in business case return-on-investment metrics, experts say. And that's among things holding back broader adoption.

"One of the things that bars companies from capturing the full value is that the circular solutions they're putting into place generally do not span their full operations," said Kevin Eckerle, senior manager of strategy and sustainability at Accenture StrategyInstead, companies are functioning as a group of different, siloed departments, some of which chose to implement circular strategies. That siloed approach leaves value on the table.

Clear evidence of returns-on-investment might help the transition. "As the idea of circularity grows and sees more adoption. I think businesses that are somewhat on the fence need to see the ROIs in order to fully commit," said Adrian Wain, circular economy specialist with UL EHS Sustainability.

Transitioning an entire corporation to the circular model is no small feat. According to Dame Ellen MacArthur, the founder of the circular economy movement, reaping the full value of circularity requires systemic change involving every part of a corporation — from design to procurement to assembly to sales and distribution — as well as supply chains and customer relations. 

Lucky for our resource-constrained world, several organizations are developing metrics that should help sustainability professionals and other executives develop business cases for why transitioning to circularity can provide strong ROIs.

They are formulating standards for predicting savings of the size that SpaceX hopes to realize and for demonstrating business advantages of the types being reaped by early adopters of the circular economy such as Philips Lighting, which offers lighting-as-a-service, retailer H&M, which invites customers to bring their no-longer-wanted clothing to H&M stores and then repurposes them into new fabrics, and Patagonia, famous for asking customers to repair rather than replace Patagonia jackets and sports apparel — and for offering to do the repairs for free. Other practitioners are Xerox, which makes new printers from almost entirely used components, and Ricoh.

One organization developing metrics to find the businesses and sustainability advantages in these models is the Ellen MacArthur Foundation itself, whose Material Circularity Indicators project offers tools for evaluating the circularity of product lines.

Others are UL EHS Sustainability, the sustainability advising and documentation firm, and Accenture, the strategic consultancy. They are collaborating, in fact with UL EHS working to identify value metrics in the business models that Accenture has defined as circular.

Useful Indicators

  

Ellen MacArthur Foundation

Material Circularity Indicator tool for evaluating the circularity of a product.

With the help of Granta Design, the Ellen MacArthur Foundation developed the Material Circulator Indicators (MCI) methodology and a software tool for companies to evaluate a product line's circularity based on the indicators.

Luca Petruccelli, Granta's eco-design data specialist who developed the software, said the MCI tool calculates a score for a product on a scale of 0 to 1, based on these criteria:

  • Inputs in production: What percent of the material feedstock is recycled materials or reused components?
  • Utility, or intensity of use: Is a product's use increased via sharing, product as a service, or reuse?
  • Destination after use: Is the product designed so a significant portion can be recovered for repurposing?
  • Efficiency of recycling: Has it been designed for easy disassembly and recycling of parts?

"The output is a first attempt to start measuring material circularity in order to make businesses as well as customers aware of the regenerative flows that exist, or may exist, in the context of a circular economy," Petruccelli said. And the idea is gaining traction among manufacturers and other industries, he said.

However, he acknowledged the business world has a ways to go before fully adopting circularity. "What would be needed is a change in the paradigm in which many manufacturing activities are deployed every day."

Measuring material flows

UL EHS approached its work of identifying measurable business advantages in circularity using Accenture’s framework of five circular business models identified in the book "Waste to Wealth: Creating Advantage in a Circular Economy" by Accenture managing director Peter Lacy and Accenture manager Jacob Rutqvist. (See the graphic below.) UL EHS is attempting to formulate metrics for the advantages accrued from these models by those three companies.

Accenture Strategy

From Waste to Wealth: Creating Advantage in a Circular Economy

Wain said Philips, H&M and Patagonia are ideal to study in identifying these metrics because of their well-developed product lines using thse circular business models. Yet even these leaders, he said, need insights beyond waste reduction.  

"These companies are really good at sustainability — they are the leaders," Wain said. "But in our discussions, we all agree that at the moment measuring sustainability only addresses how fast you can reduce the impact of a linear economy, for instance reducing waste or carbon reduction."

The three companies have taken circularity to sophisticated levels and so have a host of areas where efficiencies and returns on investments might provide competitive advantages — such as swift material flows, reduced costs of goods, increased customers sales.

Accenture Strategy

Xerox and Ricoh are other practitioners of these business models. Xerox issues new printers made of components that are almost all repurposed from used printers; Ricoh leases its printers, constantly enhancing them with new technology but repurposing standard, unchanging parts like steel casings.

Some metrics relevant to these business models are:

  1. Products as a service — Time between maintenance or upgrades.
  2. Remanufacturing — What portion of a product is suitable for remanufacturing or repurposing, including components in electronics, cloth in apparel, steel in such things as washing machines.
  3. Product life extension — Customer loyalty gains; savings on materials, transportation, energy, distribution.
  4. Circular supply chains — Savings in procurement costs and inventory of raw materials.
  5. Recovery and recycling — Ease of recovery and recyclability are pertinent. 

What may enhance all of these is Internet of Things technologies — such as wireless sensors that collect data about equipment or products and communicate to central locations or with other distributed equipment. IoT could accelerate the circular economy transformation, many believe, by allowing "things" to essentially express when the end of their product life cycle is coming near and their availability for new uses. That information would, in turn, be picked up by other systems or equipment in need of those items.

 

IoT as a circularity accelerator 

One way in which the Internet of Things could accelerate circular economy adoption is by making tracing and tracking of materials and materials flows easier, more evident and more measurable.

At Philips Lighting, which offers many of its lighting solutions in the circular model of a lighting service rather than hardware — including providing lighting for entire cities — IoT is considered an enabler.

"The way IoT adds value is in avoiding unnecessary performance tracking," said Nicola Kimm, global head of sustainability, environment, health and safety for Philips Lighting. "Also, in different consumer and workplace applications, it allows us to add to performance, such as the human element in lighting that responds to circadian rhythms." 

Kimm said, "With IoT, we can track our assets, we can track product lifecycles, can track location," and speed up delivery and provide ongoing high quality of lighting services, accordingly. So, for instance, when Philips provides lighting to a city, it uses IoT to efficiently determine that lights are in working order and identify which might need maintenance or that are near the end of their working lifecycle before replacement.

Philips' hospital equipment division also uses a product-as-a-service model for both hospital lighting and equipment; this allows customers to benefit from continual upgrades to the latest technologies while allowing Philips to make ongoing use of its components and systems. 

Another way Philips uses IoT for its lighting services is to customize settings for certain work settings. "IoT can be used in small systems as in human lighting, in which the hue and dimming match the circadian rhythms of people working in the factory or office," Kimm said.

UL EHS Sustainability maintains that the data gathered by all of these services should be measured. (See the figure below.)

UL EHS

The Role of IoT in the circular economy success.

Whether IoT will be the factor that tips the scales towards wholesale adoption of circular economy models by manufacturers is debatable. But Philips has concluded that circularity in and of itself is worth the adoption learning curve. It already has reaped benefits that soon will be text-book evidence of returns achievable in circularity. For example, the information is helping inform product design more overtly. 

"We are now implementing circular design rule in our sustainable design procedure, so that more and more products will be designed for disassembly and reuse in changed designs," Kimm said. "The idea is this is a growing business where we start to track the revenues, where the end-of-contract becomes a new product." 

That, in turn, is a valuable competitive advantage. "It is what cannot be exactly replicated," she noted. "It has to do with technical abilities … all of the components are designed in a way you can replace some parts" and have a high-value new product.

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