How the Internet of Things can drive the circular economy

Dame Ellen MacArthur and her foundation colleagues visited the Bay Area, and I had the opportunity to participate in a workshop with them.

Workshop slogan: ‘We are called to be architects of the future, not its victims’ [R.Buckminster Fuller]

Most people know Ellen as the fastest person ever to sail nonstop single-handed around the world in 71 days on her trimaran B&Q/Castorama back in 2005. Being out there with no sleep (she mentions the longest stretch of sleep on her trip was 3 hours max), where the closest humans around where the people in the manned space station above her, apparently had a lasting impact on her view on the topic of finite resources.

Translated into our world where

• Elements such as gold, silver, indium, iridium, tungsten and many others vital for industry could be depleted within 5 to 50 years
• Commodity prices overall rose by almost 150% from 2002 to 2010, erasing 
the real price declines of the last 100 years
• Demand for commodities is expected to skyrocket by 30% to 80% by 2030

Ellen’s foundation drives the idea of ‘circular economies’.

The circular economy is a generic term for an industrial economy that is, by design or intention, restorative. Compared to using materials in our linear ‘take-make-dispose’ economy, the circular economy is much more than recycling. It looks at all the options across the chain to use ‘…as few resources as possible in the first place, keep resources in circulation for as long as possible, extract the maximum value from them while in use, then recover and regenerate products at the end of service life’ [Aron Cramer, BSR]

When asked, Ellen instantly lists great existing circular economy examples and mindsets like

• Rolls-Royce
  • Known for the ‘power by the hour’ service model, Rolls-Royce moved from selling plane engines to just selling the thrust from the engine as a service. Still owning the engine enables Rolls-Royce to re-use engines and parts much more effectively than individual plane operators could do
• Caterpillar
  • Able to offer customers significantly lower prices on remanufactured parts when compared to their new products while tested to the same standards as new products, and are sold with the same warranty
• Disney
  • Turning organic waste into energy, which is known as anaerobic digestion; turns out to be a great way to extract value from food scraps and treated sewage that would otherwise wind up in a landfill.
• Novelis
  • Recycling more than 50 billion used beverage cans in 2014 and continues to be the world’s largest supplier of aluminum beverage can sheet, now made with some of the highest levels of recycled content.
• And many more…..

One thing is clear for Ellen. If we remain in our ‘business as usual’ mode, price volatility will continue to surge, alongside the probable inflation of key commodities.

Today the automotive industry consumes about 15% to 20% of the global steel production, in 2004 the price of steel rose 60% in one year and did not significantly decline until 2008. Without circular economics sudden exposure to price fluctuations is a permanent condition of doing businesses. Business leaders need to search for better ways to avoid these risks, and need to move to industrial models that decouple revenues from raw material input.

Recent research by the Ellen MacArthur foundation & McKinsey claims a $630 billion savingsbusiness opportunity in the European Union alone by moving to a circular economy. Other estimates predict that a transition to a circular economy is estimated to provide $1 trillion globally in annual savings by 2025. It contains solutions for recycling, re-manufacturing, take-back and reuse.

In our discussion I took 3 main take-aways for the path forward:

• New research on circularity indicatorsjust published
  • Looking at the BoM (bill-of-material) hierarchy is essential  – it allows the analysis of additional risk indicators that reflect critical material supply risks (abundance risk, environmental country risk, sourcing and geopolitical risk, and monopoly of supply), while still respect existing key performance indicators like compliance (e.g. REACH, RoHS, etc.), carbon footprint, price variation and supply chain risks.
• A circular economy starts with ‘beginning of pipe’, where the decisions have to be made during the sourcing and design process
  • Product design and proper sourcing for circularity is a critical – ensuring the usage of re-usable and pure materials is a key
• Internet of Things(IoT) is a pre-requisite
  • Appropriate levels of asset tracking are required to maximize the value manufacturers, their customers, and/or third party providers can recover from products at the end of first and subsequent uses; IoT is an enabler of that –> see project Mainstream

It is already a given to many industry experts that we have to rethink how we use materials and limited resources to mitigate risks from material price volatility and material supply.

The circular economy is a global economic model that aims to decouple economic growth and development from the consumption of finite resources. In a circular economy you keep products’ components and the materials within them at their highest value and utility at all times. More and more companies see tremendous opportunity in this model, allowing them to capture additional value from their products and materials, while hedging against price volatility and resource limitations.

Building the circular economy will take time and will not happen overnight, but do we have a choice?

This article is published in collaboration with SAP Community Network. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Thomas Odenwald is Senior Vice President of Sustainability at SAP.

Image: A staircase looking like a snail is pictured in a Munich building ‘Haus der Bayrischen Wirtschaft’. REUTERS/Michaela Rehle.