Originally posted by Harvard Business Review.
Atalay Atasu is Dunn Family Professor and Professor of Operations Management at Scheller College of Business, Georgia Institute of Technology. His research expertise is on environmentally and socially responsible operations, closed-loop supply chains, extended producer responsibility, and the circular economy.
Vishal Agrawal is Associate Professor of Operations Management at McDonough School of Business, Georgetown University. His research expertise is on sustainable operations, business model innovation, and servicizing.
Michael Rinaldi is Assistant Vice President, Sustainable Business Development at Rabobank, a global leader in food and agriculture (F&A) financing and sustainable banking. Michael focuses on coordinating and supporting tactical commercial dialogues on sustainable business opportunities between global clients and the bank.
Rob Herb is VP, Global Asset Manager at DLL and consults with manufacturers on life cycle asset management initiatives and usage based models, driving the adoption of refurbishment and redeployment plans for capital equipment
Sezer Ulku is Associate Professor at McDonough School of Business, Georgetown University. His research expertise is on product development and modularity in product design.
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
Read the full article here.