Circular Procurement A New Mission Beyond Savings

Transcription

1 Circular Procurement A New Mission Beyond Savings A report on supply chain agility in the age of disruption by Vishal Patel, Director of Solutions Marketing, Tradeshift PURPOSE In this report, we explore how procurement and supply chain organizations can and must play a more central role in making the circular economy a reality. The concept of a circular economy has been gaining steam over the last couple of years but deserves more attention and action. This effort must come from those within large organizations responsible for key procurement and supply chain decisions such as how to plan, source, make, deliver, and return (or perhaps reuse). This is no easy feat, but economic growth will make it a necessity. By 2050, the world economy is expected to quadruple, and the global population is projected to grow from the 7.3 billion it is today to close to 10 billion. As the population grows so will demand for food, housing, energy, clothing, and electronics. This will inevitably put extreme strain (and most likely cause severe shortages) on the planet's resources. Being able to stretch available resources as far as possible is imperative, but how do we get there? * The Circular Economy and Benefits for Society - A study report at the request of the Club of Rome

2 We were fortunate to have two leading sustainability minds with us at the Tradeshift Sanctuary in Davos earlier this year - Ida Auken (former Minister of Environment, Denmark) and William (Bill) McDonough (a globally recognized leader in sustainable development). This paper covers highlights from their discussion with Tradeshift CEO, Christian Lanng, and more. The circular economy is a move away from the traditional take, make, waste model to one in which products are intentionally designed to produce less waste and/or be reused/ remanufactured. It is a transformation of epic proportions and one involving a fundamental shift in how businesses (and government) think, collaborate, and share information. What is the circular economy? The circular economy is an industrial system that is restorative by intention and design. The idea is that rather than discarding products before the value are fully utilized, we should use and reuse them. William McDonough, Ida Auken and Christian Lanng at the Tradeshift Santuary, Davos. Circular Procurement A New Mission Beyond Savings 2

3 PUTTING THE RE BACK IN RESOURCES Sustainability is much talked about, but the popular approach needs a rethink. In his remarks, McDonough mentioned the mental model in which we actually frame sustainability, versus how we should. Much comes down to the need to integrate environment, society and business/ economy. However, throughout history the focus has been primarily on business/economy and secondarily on society and environment (Figure 1). Only in a circular economy can society and the environment benefit exponentially from business, by putting the re back in resources, i.e. enabling resources to remain in the system for much longer, creating a looped model. The model we must move towards forces us to consider the full lifecycle of a product, and it s impact on society and the environment before, during and after use. But, this way of thinking goes beyond products, it is overall a more sustainable way of life. The question is how to go about this. It requires businesses to fundamentally shift how they think about their products and services within the Current Reality context of the impact and benefit to society and environment. This will be difficult given how heavily ingrained cost-based models are. This shift will have a huge impact on procurement practices and policies, supplier relationships and overall supply chain transparency. Procurement organizations and suppliers play a key role in helping to make the right choices early on in the product design phase so that all materials are carefully selected based on repairability and reusability. CIRCULAR PROCUREMENT The idea of circular procurement is one that procurement leaders must consider. It is a practice that encourages buying decision makers to prefer products which are designed and made taking into account their full lifecycle as well as the potential of reuse and recycling of those products. It demands that procurement as a function move beyond the traditional focus on achieving savings targets and transactional efficiency. While these are important, procurement is much more than Where we need to be Environment Business / Economy Society Environment Society Business / Economy Fig.1: Sustainability Mental Model Circular Procurement A New Mission Beyond Savings 3

4 that. It is the gatekeeper to a tremendous resource that is rich with knowledge, information and innovation suppliers. A focus solely on driving savings and process efficiency is often to the detriment of achieving strategic, high-value impact from suppliers. If businesses are serious about implementing circular procurement practices (such as Philips) their procurement organizations have to think about suppliers more as partners. They must think about longer term relationships and developing new business models based on services or usage as opposed to outright ownership. We already see these models being wildly successful in the consumer world with platforms such as Airbnb, Zipcar, and Lyft (note that technology plays a critical role in making this possible). Procurement must also figure out how they can foster innovation within their supplier ecosystem. Procurement can lead the charge by challenging suppliers (existing or new) to come up with innovative solutions that support the circular economy. However, the traditional sourcing process may not work here; it will require a much more collaborative and integrated approach an approach that does not prioritize short-term cost reduction but instead long-term sustainability. That said, the outcome may be a lower total cost of use. Overall, the circular economy and circular procurement is not so much about reducing (usage of fossil fuels, CO2, costs, etc) it's more about innovating. As such, it requires a shift from a cost-focused supply chain to a value-focused one (figure 2). According to Ida Auken, the companies that do not embrace these concepts are unlikely to be relevant in the future due to the disruptive impact and competitive advantages of those that do. Figure 2: Cost vs. Value Focused Supply Chain Circular Procurement A New Mission Beyond Savings 4

5 THE ROLE OF GOVERNMENT Given the amount of change required and the potential impact, should government play a big role in supporting the circular economy? Should the government play a role in creating platforms for innovation? Having very relevant experience, Auken provided great perspective. For example, when it comes to regulation and innovation, her opinion is government has a role to play in driving innovation but mainly solving for certain well selected challenges. She also noted the need for balance. Too much regulation can squash innovation. Politicians like her often need to play the role of facilitator in order to drive change, but for Auken, one of the most important things is to listen to and involve the people. According to her, if we are to really move towards a circular economy, perhaps politics and the staid pace of government need to be disrupted a bit. THE BENEFITS ARE BIG According to Mckinsey, for Europe alone a circular economy could result in overall benefits of 1.8 trillion by 2030, or twice the benefits seen on the current linear development path ( 0.9 trillion). Many new business opportunities will bubble up as a result of improved product design and a focus on new production technologies and materials. Small and Medium-Sized Businesses have an opportunity to differentiate through better product design and more durable, efficient and reusable products. From an enterprise (and procurement) perspective, there is a huge potential to reduce total cost of use or ownership in the short and long term. Beyond that, buying/sourcing in this manner would have to be done less frequently and would result in greater insights into future costs. Ideally, it also reduces waste managementrelated costs. In fact, there are some examples where the results are turned into opportunity. GM has used surplus soundproofing material to make self-heated, waterproof coats that transform into sleeping bags for the homeless. P&G uses toothpaste waste to make a jewellery cleaning product. The possibilities for innovation are endless. But how to enable this? GOING CIRCULAR MEANS GOING DIGITAL One of the key pieces to achieving all of this is technology. Without a higher level of technologyenabled collaboration, knowledge sharing, transparency and accountability, the road to a circular system is going to be tough. It is clear digitizing the supply chain is a key enabler for this transition. Cloud-based, networked and open platforms are all fundamental enablers as are the basics, such as digitizing transactions and communication. Manual and fragmented systems for procurement, supply chain visibility, payables and receivables will make this transition much harder. Businesses need to be able to manage all their supply chain relationships and collaboration with ease while having access to real-time information around material flows, reverse supply chains, material marketplaces, spend patterns, product lifecycles, services and much much more. At the end of the day, the growth of the circular economy depends heavily on disruptive innovation from a product and execution perspective and on the adoption of practices such as circular procurement. It will also largely depend on the ability to bring together ecosystems of buyers, suppliers, customers, partners, and distributors to collaboratively bring new products and services to market. Circular Procurement A New Mission Beyond Savings 5

6 How Tradeshift fits into your supply chain The future of business belongs to companies that are able to adapt to the accelerated change in sourcing, production and distribution that we are witnessing today. By focusing on the fundamentals of business processes collaboration, transactions and relationships and bringing these interactions into the cloud in digital form, we believe that businesses can overcome the traditional challenges of enterprise software. ABOUT TRADESHIFT Tradeshift is a global network and platform that connects buyers and suppliers. We transform the way companies buy, pay, and work with suppliers. Tradeshift connects 800,000 companies across 190 countries. We re headquartered in San Francisco with offices in Copenhagen, New York, London, Paris, Suzhou, Tokyo, and Munich. These challenges include introducing digital processes between companies, bridging cloud and on-premise, connecting processes across application silos, and bringing relevant data into the hands of decision makers in real time. With Tradeshift you can build the foundation for providing the data needed to drive change in the supply chain and adopt new technologies faster and more successfully than your competitors. LEARN MORE» Circular Procurement A New Mission Beyond Savings 6