Slowly, but what appears to be influentially, a growing body of thoughts is suggesting that the fundamental precepts of commerce to date should be changed, including a model where the manufacturer/selling company actually retains ownership of a product after it is "leased" to consumers, all in the name of Sustainability.
This very much new age thinking comes under the umbrella of what is being called the "circular economy," a concept that dates all the way back to the mid-1970s but which has gained currency in recent years based on work by consulting firm McKinsey, The Ellen MacArthur Foundation, others.
A recent report sponsored by the Foundation suggests the world should "imagine an economy in which today’s goods are tomorrow’s resources, forming a virtuous cycle that fosters prosperity in a world of finite resources." The need to rethink the traditional "take-make-dispose" model is growing increasingly urgent, it says, as the world appears to be running into constraints on the availability of resources/commodities, driven by the rapid growth of emerging economies such as China, Asia, Indonesia and many more.
As literally billion of citizens in those countries advance economically, the demand for goods and underlying inputs will strain resource availability and drive prices much higher under the current status quo in a way that will negatively impact both consumers and manufacturers.
The basic thinking can be summarized as follows: While major strides have been made in improving resource efficiency and exploring new forms of energy, less thought has been given to systematically designing out "material leakage" and disposal. In other words, too much material goes into products that end up in landfills or other points of no return in its lifecycle, rather than being captured and re-used. When the toaster dies, it should not end up in the trash can, but rather returned somewhere so that plastics and metals used in its manufacture are harvested and reused.
The "end of life" paradigm that is associated with most products would be replaced with "restoration" practices.
The report says that "any system based on consumption rather than on the restorative use of non-renewable resources entails significant losses of value and negative effects all along the material chain."
This is every bit as much a business issues as it is a Sustainability one, according to the report. Current input costs continue to rise overtime and just as importantly are increasingly volatile, as shown in the graphic below. This plays havoc on a company's bottom line.
Source: McKinsey
As noted above, circular thinking really begins in the product design phase, where the goal is simply to "design waste out."
Eventually, waste will not exist, the thinking goes. Products are designed and optimized for a cycle of disassembly and reuse. "These tight component and product cycles define the circular economy and set it apart from disposal and even recycling where large amounts of embedded energy and labor are lost," the report says."
A second key point involved maintaining a strict differentiation between consumable and durable components of a product. Consumables in the circular economy will largely made of biological ingredients or "nutrients" that are at least non-toxic and possibly even beneficial for safe return to the environment.
Durables such as engines or computers, on the other hand, will be designed from the start for reuse.
Thirdly, the energy required to fuel this cycle will be renewable to decrease resource dependence and increase overall system resilience.
Products will be Leased Instead of Owned?
Perhaps most controversial in the circular economy thinking is the undercurrent that a key to making this work is that producers of products should in many cases retain ownership of them, so that consumers in effect lease the goods from the manufacturer and have some legal obligation to return those products to the manufacturer's reverse logistics stream.
It says the conceptual groundwork is already being laid for such a change, noting that we are "in midst of a pervasive shift in consumer behavior. A new generation of customers seems prepared to prefer access over ownership. This can be seen in the increase of shared cars, machinery, and even articles of daily use."
It notes not unreasonably that even powerful movements like cloud computing are furthering this trend, as businesses move away from owning their own big computer systems, and consumers may eventually rely on simple web devices attached to the cloud for their own computing needs, rather than continually buying and replacing home computers.
In one of the potential examples of how circular thinking could work, the report says that its research has shown that high-end washing machines would be accessible for most households if they were leased instead of sold.
How? The idea would be that more commercial type units would be leased rather than individuals buying the basic consumer models. The result, the report says, is that customers would save roughly a third per wash cycle, and the manufacturer would earn roughly a third more in profits, saying that "over a 20-year period, replacing the purchase of five 2,000-cycle machines with leases to one 10,000-cycle machine would also yield almost 180 kg of steel savings and more than 2.5 tonnes of CO2 emissions savings."
In a related article from McKinsey, the company says that "In a resource-constrained world, value creation moves toward the owners of the resources. Companies should therefore consider developing new business models that enable them to retain ownership of the materials used in their products so that they can recycle or reuse the product at the end of its life cycle."
It says in fact that chemical-catalyst manufacturers have done this for decades, essentially selling the functionality of catalysts to customers without transferring ownership of the materials themselves. This makes sense in this industry, because the catalysts are often not consumed in the manufacturing process.
But McKinsey says even steel makers might consider such an approach, suggesting they could retain ownership of the steel they sell and thereby reduce their exposure to prices for iron ore and coal. This of course raises a key question about this concept, which is how such ownership would be managed across different components in a product from different suppliers, and the multiple tiers of the supply chain. Who would own the steel in an automobile eventually lease to a customer - the steel maker or the auto OEM?
Regardless of this and other big questions and issues, it is clear an entire new generation of waste processing companies and new harvesting technologies would need to be developed. McKinsey, however, says that already "Great technological advances have been achieved in recycling, organics processing, and waste- to-energy conversion, and these have revealed opportunities in material and component recovery. Modern facilities recover much more material than was possible using manual systems, and they produce recyclates of a quality well above that required by most recycling protocols."
Are you familiar with circular economy thinking? What is your take? Can you see an era anytime soon where many companies will actually lease rather than sell many consumer goods? Let us know your thoughts at the Feedback button below.
The full report from the The Ellen MacArthur Foundation is available here, with free registration: Towards the Circular Economy
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