Circular Economy

Mar 19, 2016 | 0 comments

Mar 19, 2016 | Miscellaneous | 0 comments

Circular Economy (essay/Report) – ASSESSMENT 2

Introduction

A circular economy according to World Economic Forum (2015) is an industrial system that is regenerative or restorative by design and intention. It replaces the concept of end-of-life with restoration and shifts towards the usage of renewable energy. Additionally. The circular economy eliminates the use of chemicals that are toxic, which return to the biosphere and impair their reuse, and aims at wastes elimination through the superior design of products, materials, and models of business (World Economic Forum 2015). The traditional linear production is an alternative to the Circular economy which keeps the resources for a longer time possible in use, extracts the maximum value of resources while it is in use, and then regenerates product after recovering materials at end of each product service life. From the onset of the industrial revolution which marked the beginning of the modern practices in industrial production, the manufacturing paradigm has been majorly dominated by the linear production model. In this model, the raw materials are extracted from the natural resources in different countries and then transported to the manufacturing plants in different countries in Europe, China, and the United States, and then processed into different products (Santiago 2014). The final processed products are then shipped to different destinations where they are used and later discarded and finally replaced by newer products. However, rising resource prices recently have resulted in economic pressure on the linear production model. Moreover, fewer new deposits of resources are being discovered and manufacturers are facing augmented cost pressure in obtaining their basic raw materials (Santiago 2014). See appendix 1 for the rising cost of resources

a) The current linear situation

Because of the aforementioned trends in commodity price increase and depletion of resources, several companies need to start adopting a regenerative manufacturing model where products and their components are reused several times. The essay chose French automaker Renault which has strong linear characteristics.

Renault Company is a French multinational manufacturer of vehicles established in 1899 and produces a wide range of vans and cars (Renault 2015). In the past, the company manufactured auctorial vehicles, buses/coaches, tanks, tractors, and trucks. In 2013, it was the 11th biggest automobile manufacturer globally by volume of production and Renault-Nissan Alliance being the further largest group of the automobile. In 2013 alone, Renault-Nissan Alliance sold 8.3 million cars globally, which is equivalent to selling 1 car in every 10 cars manufactured globally (Renault 2015).

In manufacturing their automobiles, Renault Company operates in a linear model of production. The raw materials used include virgin steel which forms the bulk and petroleum based products (vinyl and plastics). Given that resources are continuously being depleted and fossil fuel prices continue to rise, Renault Company has adopted the usage of lightweight materials from petroleum to make their automobiles fuel-efficient and more pronounced (Renault 2015).

During the manufacturing process, the assembly plant which is the final phase in the manufacturing process is supplied with components by more than 4000 suppliers from outside, including suppliers owned by the company, and are brought by railroad or by trucks for assembly (Renault 2015).

In the assembly line, most of the work is done by robots than humans. Completed assembled vehicles are then painted using different paints before interior assembly made by wiring, interior lights, dash panels, seats, headliners, door and trim panels, speakers, radios, and glass. Once complete, the automobile proceeds to receive final trim components like gasoline, anti-freeze, tires, and battery. Eventually, it is checked, the engine is started and audited before released to the market (Renault 2015).

The automobiles manufacture by Renault like other vehicles uses fossil fuel as impact on the natural environment. They mostly use green energy, are made of steel, and release toxic gases into the atmosphere. The end products of these products if not recycled leak back to the system. If only in 2013 the number of vehicles manufactured by Renault- Nissan was 8.3 million, therefore the quantity of emitted toxic gases released waste materials and stalled vehicles that need recycling are enormous. This calls for a circular economy as a model of production. Moreover, it creates several externalities such as health treatment from harmful gases released into the atmosphere, the need to incur extra costs of buying fuel, servicing the vehicle, and paying for the insurance (Renault 2015).

b) The re-designed circular model

Because of the volatile resources market and worries of resource depletion, the need for a new economic model for Renault’s automobile company is eminent. Renault Company needs to find ways of reusing their products and components. The regenerative design or the circular economy which restores global climate change. Previously solar energy, material, and labor inputs is the best option for their business.

Renault company plant located in Choisy-le-Roi, near Paris needs to remanufacture transmissions, automotive engines, injection pumps, and other vehicle components to the market. By remanufacturing, the company will use almost 90% less water, 80% less energy, and also generate about 70% less detergent and oil wastes compared to what new production produces. This will also deliver higher margins of operations as a whole (Santiago 2014).

Renault company can also maximize the number of their products consecutive cycles (cycles of repair, reuse, and remanufacture) the time their automobiles and their components spend in each of them. If appropriately designed, each additional cycle eliminates a certain measure of the net energy, material, and costs of labor of creating a new component or product. For example, Renault can lease their batteries for electric cars for easy recovery so they can be recycled or re-engineered for additional duty. By keeping close control, it will help Renault Company in ensuring the quality of the products and providing an opportunity of strengthening their ties with their customers.

More broadly, the company needs to redesign certain components of their products to make them easier to be reused again or dissembled. Another good target for the company is the components for re-use of closed-loop by converting components and materials from vehicles that are worn out into inputs for the new vehicles. To realize and operationalize these efforts, Renault Company can form a joint venture with a waste management company and steel recycler company to bring on board their expertise into the design of their products. Jointly, these steps will help Renault company to save some production costs by maintaining tighter control of their raw materials throughout the life cycles of their vehicles (Hanh, Markus and Martin 2014).

Renault Company also needs to work with their suppliers in identifying circular benefits that distribute value across the company’s supply chain. For instance, Renault company needs to help their provider of cutting the fluids (lubricants and coolants used in the machine) to shift to a performance-based model from sales. By changing the nature and terms of their relationships, Renault Company will motivate their suppliers to redesign their surrounding processes and fluid for greater efficiency. The ultimate result will be a higher percentage reduction in the waste discharge volume. The new arrangement will ultimately benefit both companies since the suppliers of Renault company will move up the supply chain to gain more profits, will the total ownership costs of Renault for cutting fluids will also fall how by a higher percentage (Ellen Macarthur Foundation 2012).

A “take back” system can also be adopted by the company for its products. Their clients and exchange used vehicles either for charity donation or cash. The company then refurbishes the collected used vehicles and components and resells or recycles them and recovers raw materials that can be used in making new vehicles. This can result in saving the cost of materials up to 10% (Webster, Blériot & Johnson 2013).

c) The transitional phase between the current linear situation and the re-designed circular model

Given the circular economy potential in replacing the untapped value through arbitrage of resources, many challenges might hinder the company from taking off faster. The essay identified three barriers that can slow down or hinder the realization of the potential.

Geographic dispersion

According to World Economic Forum (2015), the major barrier for corporate decision-makers is found around them in the extensive manufacturing and supply footprints the companies have created in the linear economy to thrive. This challenge is also evident in the simple products. For example, the automobiles manufactured by Renault Company contain more than a hundred components derived from different raw materials sourced in many countries. Therefore, closing component and product loops for most of their products are difficult, even though it is an attractive arbitrage opportunity.

Furthermore, having good standards for reusable materials needs global support which in most instances is not present. Policymakers and investors need to support the ideas for it to be successful, which is lacking. Ellen MacArthur Foundation (2012) indicated that whether companies try creating closed global loops or geographically open cascades, there is always a risk that an effective and efficient collection, recycling process, and reuse will break down. Particularly this is true in the developing countries, where recycling and collection of end-use materials that are valuable falls frequently to the informal sector. Therefore, or Renault company to attempt creating closed global loops will be ineffective especially in developing countries (Santiago 2014).

To address the challenge of geographic dispersion, Renault Company’s senior executives will have to start thinking hard on the possible mechanisms of adopting reverse –network activities. That is moving from the products to the components and finally to the materials. However, this option will face my thorny trade-offs. The company will also need to consider refurbishing in the region of usage or manufacture of their parts and then sell them in the global markets. It is very cost-effective to establish post usage loops with the company’s suppliers and business partners as opposed to manufacturing new components using virgin materials (Hanh, Markus, and Martin 2014).

Similarly, skills in reverse logistics such as collection, sorting, refurbishing, and manufacturing will be critical in addressing the critical issue of geographic dispersion. Renault Company will have to adopt the “take back” system which will optimize the supply and demand of the manufactured automobiles. The take-back system will require sophisticated capabilities in reverse-network management such as tracking the condition and location of used automobiles and their components in addition to storing information on bill-of-materials (Ellen MacArthur Foundation 2012).

Complex materials

Another challenge involves the proliferation and complexity of modern formulations of products, which are rarely made public or labeled and therefore difficult to identify even for the manufacturers themselves. For instance, companies have broadened their spectrum of materials they use in complex and creative ways. Additionally, the proliferation of materials also comes about as a result of management inattention or sheer habit. For example, companies often add materials to innovate or add costs and later fail to revisit their decisions (Webster, Blériot & Johnson 2013). These problems which are also existent in the automobile components industry have increased exponentially the complexity of the material, which can make it hard for Renault company to collect and classify them on the required scale to demonstrate returns to attract investors or even create arbitrage opportunities. Additionally, Renault Company has no cost-efficient way of using physical or chemical processes in extracting embedded raw materials to reuse them without degrading the products.

To counter the challenges, Renault company needs to invest in infrared and laser technologies in quickly sorting some components made of plastics. Moreover, there will be a need for cooperation of companies in the pre-competitive sphere (World Economic Forum 2015).

Status quo

The final challenge that Renault Company might face from changing from a linear production model to a circular economy is the difficulty of breaking the ingrained habits. Many aspects of the current operations of the company are a reflection of the decisions that were made a long time ago.

The industrial landscape is dotted with misaligned incentives, and this makes it hard in creating, capturing and redistributing value. For instance, Santiago Miret (2014) pointed out that the customers are used to evaluation of product expense only at the sale point, even if it is costlier. Leasing models in many industries are unheard of, though they have benefit potential to both companies and customers. Renault Company can lease their high-end automobiles to big companies and this can lower the costs of use for their customers over five years by one-third. Moreover, during this time, the Renault Company who are the manufacturers would roughly earn one-third more in profits since they will be able to lease their fleets of automobiles multiple times before refurbishing them.

The habits that are ingrained within a company also thwart changes. The senior executives of a company will worry about the higher capital levels that are needed to change products and the friction of shifting away from the familiar sales to approaches that are user-based. Renault Company will also need to create a control plan of monitoring sales of their new products to create confidence that it can guarantee strong coverage across various segments of customers.

Hanh, Markus, and Stuchtey (2014) also pointed out that there exist misaligned incentives between companies. It is always tricky dividing the gains accrued from optimized designs of more circular processes and products given the different motivations that are involved. Establishing a closed-loop model for the automobile industry to return the used Renault automobiles and their components back to the manufacturers will be effective. However, in some markets, the share of used Renault automobiles and their components completing the circle back to the manufacturer is not achievable. The reason is that the vehicle dealers prefer to dispose of the used vehicles themselves by selling them as second-hand vehicles to maximize their sales than to promote new products. Therefore, to address such challenges, the companies need to develop profit-sharing models across their value chains.

Conclusion

In conclusion, the essay discussed the circular economy from a linear model of production. The essay used Renault Company as a case to highlight how its linear production can be shifted to a circular economy. Furthermore, the possible challenges that might be faced during the transition have been discussed and they include geographical dispersion, the complexity of products, and the status quo. A transition that is effective from a linear model of production to a circular economy often entails a substantial shift from the industrial status quo and requires collaboration from different parties to be successful. Additionally, investors and policymakers need to support the idea to drive changes on a large scale. Furthermore, research and development in new methods of manufacturing processing have to be incentivized to address the potential technical challenges. Transition to a circular economy that is successful would enable significant innovations across different industries, and this will result in exciting developments in the sector of manufacturing

References

Ellen MacArthur Foundation (Cowes, Isle Of Wight) 2012. Towards the circular economy. Isle of Wight, Ellen MacArthur Foundation.

Hanh Nguyen, Markus Zils, and Martin Stuchtey 2014. Remaking the industrial economy | McKinsey & Company. 2015. [ONLINE] 

Renault 2015. [ONLINE] Available at: http://group.renault.com/en/. [Accessed 17 April 2015].

Santiago Miret 2014. The future of manufacturing: From linear to a circular « The Berkeley Blog. 2015. [ONLINE] Available at http://blogs.berkeley.edu/2014/02/24/the-future-of-manufacturing-from-linear-to-circular-2/. [Accessed 17 April 2015].

Webster, K., Blériot, J., & Johnson, C 2013. A new dynamic: effective business in a circular economy.

World Economic Forum (WEF) 2015.Towards the circular economy – Reports – World Economic Forum. 2015. [ONLINE] Available at: http://reports.weforum.org/toward-the-circular-economy-accelerating-the-scale-up-across-global-supply-chains/from-linear-to-circular-accelerating-a-proven-concept/. [Accessed 17 April 2015].

Appendices

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