Rethinking Sustainability in Light of the EU’s New Circular Economy Policy13 July, 2018 / Articles
With the EU’s passage of the Circular Economy Package in April, many European companies are now facing mandates to reuse the products they create for as long as possible. The EU is not alone in seeking ways to convince firms to recycle. The U.S. Chamber of Commerce supports companies in developing circular economies (CEs), and China — like Europe — has developed policies and legislation around CEs. It’s easy to see what countries think they have to gain in these efforts: The Ellen MacArthur Foundation, McKinsey, and Accenture believe that enabling CEs will lead to trillions of dollars in savings and is a particularly significant step in protecting the environment.
Yet many companies face serious challenges when it comes to executing on a circular economy strategy. They usually run into at least one of four barriers: They lack access to used products, they aren’t able to refurbish or recycle used products in a cost-effective way, their products are not designed with circularity in mind, and their customers discount the value of refurbished or remanufactured products.
We are academics and practitioners focused on product recovery economics and life cycle asset management. We began collaborating when we recognized how interlaced asset management and product recovery were in textbook CEs. We were concerned by how many businesses were unable to fully benefit from CEs, and so we began by looking at the obstacles that companies failing in CEs were meeting. Then we looked at how some companies overcame these impediments. Our combined skill sets (academic expertise on leasing, the choice of modularity and refurbishing, and practical expertise on asset management and product recovery) allowed us to identify three approaches to breaking through.
The Three Approaches
We found that companies that were successful in building CEs did three things: (1) They all implemented modular product architectures; (2) they leased, instead of sold, at least some of their products; and (3) they expanded their refurbishing operations.
Designing modular products gives firms the ability to replace some components and refurbish others, instead of refurbishing — or disposing of — entire products. It also lowers the cost of refurbishing. Disassembling products that are not modular is often too time-consuming for companies to pursue, but modular products are easier to break apart and cheaper to refurbish.
Leasing solves the problem of access by creating a reliable flow of products back for refurbishment. A scalable leasing program prevents competition from third-party resellers by controlling assets and reduces reverse logistics and refurbishing costs. It also allows firms to maintain the residual value of off-lease products and can make products significantly cheaper for customers.
Finally, investing in a refurbishing infrastructure gives a firm more control over the technical limitations associated with reconditioning or refurbishing products. It allows the firm to design products with disassembly in mind, which lowers the cost of refurbishing. Access to skilled labor is also important as it gives the firm the flexibility to refurbish as many products as possible, even when they are returned in worse condition than anticipated. Setting up a refurbishing infrastructure helps companies retain as much value in their products as possible. Customers value products that have been refurbished by the original manufacturer more than products that have been refurbished by a third party. By bringing this work in-house, firms can ensure their products are highly valued by customers.
Companies that aren’t succeeding in building CEs often adopt some of these approaches but never all three in coordination. It is the combination of all three approaches that improves access to products, reduces costs, and increases value to the consumer. Together, they create the scale needed to make CEs profitable.
Two Success Stories
We identified these approaches through our work with life cycle asset management company DLL. DLL works with many companies that are implementing CEs, and through working with its list of clients, we were able to identify three companies that had functioning CEs that we could learn from. These three approaches emerged from patterns that we saw across all three of the companies. They faced common barriers and broke through them in similar ways.
Our first example, JLG Industries, is a globally recognized manufacturer of lift equipment used in construction and maintenance. For years, the company offered limited refurbished products which were produced through an ad-hoc reconditioning process. Since JLG had little control over when refurbishable equipment would be returned, it saw little reason to build a refurbishing facility that could operate at scale.
JLG jump-started its CE execution in 2013 by launching an asset management program, which established a predictable flow of used assets and justified investment in a scalable refurbishment facility. This allowed JLG to offer refurbished products at lower costs to its customers. It then began to focus on products with simple and modular architectures, which were cheaper to refurbish than more integrated products. Soon after, it developed a financing offer for refurbished equipment, which mirrored the warranty and service experience offered for new products. This created higher residual values, reduced costs for consumers by 35%, and allowed JLG to significantly expand its market.
In another success story, Philips Healthcare convinced customers that refurbished products offered the same quality and clinical reliability as new products. The company, which is a global leader in medical devices and diagnostic equipment, designs many products modularly and has long offered customers refurbished options under its Diamond Select line. Philips wanted to increase this business to serve more cost-constrained segments of the market.
Philips was able to recover more assets faster by placing new equipment on operating leases, versus outright sales. Philips no longer had to negotiate with customers — in this case hospital administrators — to recover equipment for refurbishing; it was returned to them at the end of the lease. Through this process, it built a steady stream of high-quality refurbished equipment available at an affordable price, for the same warranty as for new equipment. As a result, Philips was able to attract a wider range of customers and expand its market.
These examples show us that companies can take specific actions to break through the barriers that prevent them from benefiting from CEs. The results of doing so are clear: Companies are able to expand their markets and reduce their waste. As more companies take on CEs, either by choice or by government mandate, these lessons offer a practical guide for taking care of business while protecting the environment.