Ever since the Industrial Revolution sparked the development of modern industrial production practices, the paradigm of manufacturing has been dominated by a linear model. In the linear production model, raw materials are extracted from resource countries, transported to manufacturing powerhouses, such as China, and processed into various products. The finalized products then get shipped to the United States, Europe, and further destinations, where they are used, discarded and eventually replaced by newer iterations.
This linear model for industrial production has recently experienced economic pressure from rising resource prices. In the past, discovery of new resource deposits and advances in mining have generally led to a declining trend in resource prices.
In the 21st century, however, resource prices have outpaced global economic growth and continue to rise. As prices continue to increase and less new resource deposits are discovered, manufacturers will face augmented cost pressure to obtain their basic raw materials.
Furthermore, McKinsey & Company predicts that by 2030 three billion people from developing countries will rise into the middle class, which will create an unprecedented global demand for energy and resources. From basic economics, it follows that this extraordinary demand for materials resources will tend to further increases in commodity prices, which will further intensify the cost of future manufacturing.
Due to the aforementioned trends in resource depletion and subsequent commodity price increases, some companies have started to adopt a regenerative model of manufacturing in which products and components are reused multiple times. The French automaker Renault adopted this circular approach to produce its automotive engines, which has helped the company reap immense benefits economic benefits:
- Renault’s Choisy-le-Roi plant near Paris reduced its energy use by 80% and its water use by 90% by adopting remanufacturing practices.
- Renault also has established joint ventures with steel recyclers, waste-management companies, and fluid producers to identify opportunities for these circular production benefits throughout its supply chain. Renault has already been able to cut significant costs in multiple parts of its supply chain using this approach.
McKinsey & Company, in collaboration with the Ellen MacArthur Foundation and the World Economic Forum recently conducted a study on the notion of a circular economy. The results of the study indicate that a circular economic model would not only reap immense environmental benefits, but also result in vast materials and costs savings. The study estimates that adopting a circular economic model could lead to over $1 trillion in cost savings for materials alone by 2025.
The main driver of economic benefits in the circular model stem from the ability to restore materials that are disposed off in a linear production model. The restoration of these materials leads to multiple cycles of product use. The process of product restoration is more energy and cost efficient than producing everything from scratch. The following graph describes the central ideas of the circular economy model:
The benefits provided by the circular economy seem to create a win-win situation for consumers and manufacturers alike, but significant challenges remain in adopting the circular approach.
A major business challenge in adopting a circular approach is outlining complex supply chains of today’s modern products. Simple products, such as cordless drills, may contain 80 components produced from 14 raw materials that are sourced from seven different countries. Overcoming the supply chain challenge involves adopting material accounting methods so that manufacturers can develop a holistic understanding of how materials are sourced and processed. This holistic understanding will then allow them to identify areas to adopt remanufacturing practices and create mutually beneficial partnerships with their suppliers. A major technical challenge of adopting a circular approach is the increasing complexity of modern materials. Modern products contain a mixture of many different materials so that they can have complementing properties, such as durability, and flame resistance. Furthermore, currently only very few cost-effective processing methods that allow manufacturers to recover materials for remanufacturing exist. For example, a mobile phone contains ~$16 worth of precious metals, such as gold, silver and palladium, but current processing techniques only allow recovery of ~$3 worth of those precious metals. Yet, as manufacturers start to realize the benefits of the circular approach, they will create a need for remanufacturing processing techniques. That need will then lead to more research & development efforts that will crystallize into more effective processing methods.
An effective transition from a linear economy to a circular economy entails a substantial departure from the industrial status quo and will require collaboration from various interdisciplinary parties to be successful. In addition to manufacturing companies, policy makers and investors have to support the idea to drive large-scale changes in current practices. Moreover, research & development in new remanufacturing processing methods has to be incentivized to address outstanding technical challenges. A successful transition to a circular model would enable vast amounts of innovation across a variety of industries, resulting in truly exciting developments in the manufacturing sector.
Cross-posted from BERC Blog, published online by the Berkeley Energy & Resources Exchange, a network of UC Berkeley scholars and industry professionals.