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Closing the Loop in Supply Chains – Part 1

What is a closed-loop system and what are its benefits?

We have come a long way from the invention of the cloth-weaving “flying shuttle” in 1733, which kicked off the Industrial Revolution. We now live in a world in which huge strides in technology have increased our standards of living, much of it through the extraction and usage of natural resources. To counteract related negative externalities, we have embraced the process of recycling material waste and end-of-life products. However, most recycling today is considered to be downcycling, since material is degraded at each iteration of the product lifecycle, resulting in lost value and a lower quality product. A simple example would be printer paper being downcycled to cardboard or toilet paper, as opposed to being recycled into more printer paper. This system of recycling is commonly known as an open-loop system, in which material is reused up to a point, after which it either ends up in a landfill or is incinerated, releasing harmful by-products into the air.

A more sustainable concept than an open-loop system is a “cradle-to-cradle” or closed-loop system, which in practice can be a regenerative force. In a closed-loop system, end-of-life products or materials can biodegrade safely back into the earth or they can be put back into a product lifecycle of manufacturing, reuse and recovery. If returning to a product lifecycle, materials or products can be recycled into the same product or can be used as inputs into processes for other products, all without any degradation of material. By using a closed-loop system, an organization can realize significant financial and environmental benefits: increased resource efficiency, reduced costs through reuse and recovery of material, decreased water usage, less waste returned to the earth and lower carbon emission levels.

What are some examples of successful closed-loop systems?

Best Buy’s recycling program allows customers to return any type of electronic product; it generates profits through two different revenue streams. First, Best Buy takes a percentage of the profits generated when their regional recycling partners sell recovered plastic, gold, lead and other materials. Second, since roughly half of all U.S. states require large electronics manufacturers to recycle, Best Buy can charge those manufacturers a fee to do it for them. The company estimates it collects more than 400 pounds of product for recycling every minute that its stores are open.

Since 2013, H&M has allowed customers to leave clothing from any brand at almost any H&M location around the world. The garment retailer has collected more than 13,000 tons of clothing; 7,684 of those tons (equivalent to 38 million T-shirts) were collected in 2014. Although this closed-loop does not generate additional revenue, it lowers costs by giving H&M immediate access to raw materials for their new products and reduces the amount of textiles that end up in landfills.

Novelis, a large aluminum producer for the automotive industry, takes used aluminum from end-of-life Ford trucks and recycles it in an infinitely repeatable closed-loop. In collaboration, Ford re-tooled its infrastructure and capabilities and began using materials with highly recyclable content, even up to 100%. For Novelis, the benefits are huge: 95% less energy produced and supply chain resource security as their outputs are coming back to them as inputs. For Ford, besides having a lower carbon footprint, they are producing lighter vehicles with better fuel economy and faster acceleration.

What challenges do supply chains face when creating and sustaining a closed-loop system?

The barriers organizations and their supply chains face when trying to implement closed-loop systems are typically sourcing materials with low recycled content, a lack of recovery capabilities and a lack of profitable end-of-life markets. To expand further:

  • Input materials must be recovery-ready in the right quantity and at the right level of quality as seen in the Novelis-Ford partnership. Ideally, inputs that go into creating a product should be the same as the end-of-life outputs from that same product.
  • For supply chains with materials that are very expensive to recycle, have significant recovery process challenges, or even lack an efficient end-of-life collection process, it may be worth it to start designing products with closed-loop recycling in mind.
  • Finding profitability in cyclical secondary markets can also be difficult due to lower margins. An example is the decline in profitability in steel and metals markets. Once very strong markets, have now resulted in a huge drop in metal recycling. However, indications are that they will be right back up in 2017.

In Part 2 of this blog series, we will take an in-depth look at how one company addressed these challenges, successfully implementing a closed-loop solution. Part 3 will explore how companies can assess their current supply chain’s closed-loop-readiness and develop strategies to adopt a thriving, profitable closed-loop system.

RBThis post was co-authored by René Bartholomew. René is a Senior Consultant with North Highland. He has 12 years of leadership and management experience in the Banking, Consumer Products, State Government and Nonprofit industries. Specific areas of expertise include business process design, performance management, process improvement and project management.

 

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