Mythbusting circular economy concerns

The path to profitability for circular economy business models has not been a straightforward one, yet circular-based products and services remain a high-growth area. Gartner predicts that by 2026, circular supply chain practices will drive profit increases in 60% of global enterprises. However, supply chain leaders’ ability to drive progress is hampered by some underlining misconceptions.

A circular economy enables enterprises to decouple consumption from growth. Three principles form a basis of a circular economy: design out waste, keep materials in use (or circulation) at the highest quality for as long as possible, and return materials to the environment in a way that has a positive impact.

Recently, there are three areas of concern we see from organizations around circular strategy implementation that are fueled by misconception. To overcome current confusion, supply chain leaders must address these misconceptions, and adjust their mental models and strategies to succeed in a circular economy.

Misconception #1: Disruptive times are not the moment to experiment

With persistent inflation and concerns about an economic downturn mounting, many organizations question if now is the time to experiment with circular products or services.

However, disruptive times often can present the best opportunities to introduce new market offerings and given the particular set of disruptive factors contributing to this economic environment, circular-based products and services are beneficially positioned.

Circular refurbished products or products offered as a service, for example, can ease the pressure on inflation-strained consumers. This can help drive loyalty as well as a new revenue stream from customers that might otherwise be priced out. Beyond reaching new or expanded markets, leveraging products and materials already in circulation can help organizations secure supply, minimize raw material dependencies, and mitigate the costs and impacts associated with production and raw material extraction.

This translates into clearer visibility into supply and costs and can lead to fewer disruptions; all of which contribute to cost and risk management efforts at a time when most organizations are placing a premium on efficiency and minimizing disruption.

Misconception #2: Circular products will cannibalize market share

Some organizations are hesitant to implement circular product strategies over concerns about undermining existing market share. These are valid concerns that we see leading organizations alleviate by developing a clearly defined market strategy.

Supply chain leaders and other key stakeholders – e.g. sales/marketing, finance, product - need to perform a market and customer assessment to understand the specific circular opportunities that are a fit for which markets and consumers and via which specific channels.

If deployed with intentionality, in a well-differentiated way that is clear to both the customer and sales/distributors, circular products and services can reach new market segments and drive loyalty among sustainability-focused consumers.

Misconception #3: The near-term costs outweigh the potential long-term benefits

To understand the full spectrum of costs and benefits, supply chain leaders will need to shift their mindset to fully analyze the value of a circular opportunity based on both financial and nonfinancial benefits.

For example, there are many indirect financial benefits to a circular strategy that should be considered in the business case. This can include increased confidence in sourcing and securing materials, hedging future raw material price increases, improved environmental outcomes (like reduced waste and GHG emissions), enhanced customer insight, and increased brand loyalty.

To be clear, there are investment costs in implementing a circular economy strategy to support the systemic shifts needed in structure, processes, networks, and even partnerships. Additionally, the environmental and social impact of any circular offering needs to be assessed to ensure it does not exceed the impact of alternative offerings or a ‘new’ product. However, our research suggests that many companies are seeing revenue gains outpace related costs, and there is a clear expectation that many global enterprises will see profit increases as a result of their circular supply chain capabilities by 2026.

While no two circular economy strategies will be identical, even of enterprises operating in the same industry, these misconceptions are common across organizations. To advance circular economy strategies, leaders must address concerns head-on and demonstrate why now is the time for their organization to embrace this disruptive market force. Supply chain is essential to the operationalization of circular business models, putting supply chain leaders in an opportune position to lead.

About the author:

Anne Michelle Avolio is a senior director analyst in the Supply Chain Talent & Sustainability team. Anne Michelle’s research focus is around sustainable supply chains, circular economy and circular supply chains, and related key enabling factors like ecosystem partnerships, culture and change, and more. She can be reached at: [email protected]

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