Company supply chains reflect their business model. Traditional business models have been described as ‘take, make, waste’. Circular business models, on the other hand, have been likened to ‘turning trash into treasure’. Instead of accepting waste as an inevitable consequence of selling goods, circular business models strive to eliminate waste or recover discarded materials to use again.

Why are circular business models and supply chains gaining traction in the business world?

According to the Global Footprint Network, our annual consumption of Earth’s resources is about 75% more than its capacity to regenerate. In response to these environmental pressures, consumers are increasingly choosing products that reflect their values regarding sustainability.

According to Joe Donnachie, Supply Chain Finance Manager at Octet, shifting consumer demand is an important driver of business model transformation and the move away from linear supply chains.

“The overarching sentiment is that it’s no longer acceptable for businesses just to carry on and disregard measures to make them more sustainable,” says Mr Donnachie. “Consumer ethics are really coming into play, with some demonstrating that they’re willing to pay more for a product, knowing that it has been delivered via a more sustainable supply chain.”

Of course, transforming from a linear supply chain to a circular model is easier said than done, and so businesses face a number of challenges.

Complexity of supply chains. There is significantly more complexity and size involved in a circular supply chain than in a linear one. For example, you may not currently oversee the recovery of materials at the end of a product’s life cycle. It may be necessary to develop a reverse logistics strategy. In the same way, durability and recyclability might need to be accommodated during the initial product design phase.
Lack of integration between all supply chain stakeholders. In order to create a circular supply-chain model that works, every upstream and downstream stakeholder in your supply chain needs to be on board. This requires a great deal of collaboration, communication and investment in supplier relationship management.
Cash-flow pressures. Initiating a circular supply chain can put a strain on cash flows as a company transitions to a new business model. One common circular business model involves providing consumers with products as a service, such as on rent or rent-to-buy agreements, rather than purchasing them outright. This requires a larger working capital buffer because of the longer payback period involved.

Mr Donnachie says that it’s possible for circular business models and supply chains to be more profitable than linear models, but it requires a perspective change.

“Circular models require a significant rethink in how waste is handled across the organisation’s entire supply chain.”

In order to transform into a circular model, Mr Donnachie says that boards and executives will have to actively communicate and champion the change.

“The transformation needs to be explained effectively to investors and customers, especially around the changing mindset. It should be clear that while financial returns will not be the same during the teething period, the business will be on its way to a financially sustainable model. Also, it can’t just be top-down messaging. It is imperative that everyone buys into the change and gets on board.”

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