Germany, Cologne, Young woman drawing recycling symbol on glass

Why the circular economy is transforming traditional logistics

Photographic portrait of Martin Neuhold
Martin Neuhold

EY Europe West Advanced Manufacturing and Supply Chain & Operations Leader

6 minute read 04 Feb 2022
Related topics
Supply-chain
Future of manufacturing

The circular economy will transform supply chains and enable new business models. A new supply chain model shows us how.

Overview

  • The circular economy will replace linear economies, creating a connected flow of goods.
  • Logistics will become the center of future business models and will be called upon to live up to its responsibility.
  • The demand for localized, condition- and cycle-specific transport solutions is increasing, and new value-added services will be in demand in logistics.

Established supply chain principles were not the only thing to be questioned since the COVID-19 pandemic disrupted the international movement of goods. The conventional production method, in which raw materials are extracted, processed into products and disposed of as waste at the end of their lifetime, is beginning to be discontinued. In light of global challenges and the need for climate neutrality and sustainability, this linear economy is no longer tenable.

The future belongs to the circular economy. In simplified terms, the aim is to keep materials and components of all kinds in a constant and sustainable cycle. If implemented consistently, this principle could decouple future economic growth from resource consumption.

Logistics is also being fundamentally changed by this circular economy and must be repositioned. Today, it is still primarily linear as part of conventional supply chains. Primary tasks are delivery, management of subsequent waste streams, occasional recycling and some returns. In the circular economy, such linear flows largely disappear and are replaced by diverse, complex return and introduction flows.

Circularity Gap Report 2021
of the materials consumed worldwide were secondary raw materials — far too low to achieve global climate goals.

The central role of logistics in future

Logistics, as the center of future business models, will play an essential role in this. It will take on more and more important tasks — and at the same time become more fragmented and local. Both shippers and logistics service providers will undergo a transformation in the circular economy:

  • Manufacturing companies need to question their product design and rethink products to enable circularity. This applies to the product structure for a simple replacement of components as well as the breakdown into components and the use of new and sustainable raw materials. The holistic product cycle must be considered.
  • Logistics service providers must create the necessary infrastructure and offer it nationwide.

A new supply chain model to represent future flow of goods

With the transformation ahead, today’s supply chain models need to be updated. In particular, the linear one-way street structure of the supply chain operations reference (SCOR) model no longer meets the requirements of the circular economy.

The new EY Circular Supply Chain Model makes it clear that, in the future, the supply chain will no longer focus on production and benefits only. It closes the cycle from the consumer to the subsupplier, has been expanded to include new activities such as collection and processing, and includes microcirculations — so-called subsupply cycles — between the individual value creation stages.

EY Circular Supply Chain Model

Circular Supply Chain Model
EY Circular Supply Chain Model wheel showing the relationship between subsupplier, supplier, company, customer and consumer.

How EY can help

The consumer stage is now followed by a new process that includes collecting, proofing and processing. The term “Re-X” includes a wide variety of steps:

  • Recovery
  • Reuse
  • Repair
  • Refurbish
  • Remanufacture
  • Repurpose
  • Reduce
  • Recycle

This answers the question of whether a product goes directly to the secondhand market, can be refurbished or has to be broken down into its components. Depending on the answer, the product or its components are returned to the supply chain at different points. Resolving this question creates a new business field that can be occupied by logistics service providers.

 

New opportunities and business fields for logistics

 

Since logistics is the engine of the circular economy, its business areas are changing or expanding — and potential new ones are being developed. This also applies to customer relationships and points of contact. Recirculation creates new markets, for example, for spare parts or pay-per-use models, with which new customer groups can be addressed. Logisticians can evolve from service providers to value-adding members of the supply chain.

 

As the circular economy reduces the demand for primary raw materials, there are significantly fewer global procurement transports, while products remain in demand. At the same time, the demand for local and regional transport is increasing, especially due to the circulation of goods. One product will become many different products, and all of them will need their condition-specific and thus individual logistics solutions; bundling concepts will also become important. Service providers must create sustainable offers that do not have a negative impact on the carbon footprint while also gaining social acceptance.

 

At the same time, new logistics-related business areas are emerging. For example, returned goods must be individually disassembled, processed or repaired, and returned to the secondhand market for further use as raw materials or spare parts. Logistics service providers are already in a central position and can take on these new tasks instead of merely transport and storage. Such value-added services also have higher margins than the traditional business. The automotive industry can serve as a role model. Services such as the pre-assembly of components have been established there for a long time.

Challenges in the circular economy

However, if the logistics functions are not able to take on an additional role in the circular economy in the future, other providers will take this place and shape the game as new players. In the circular economy, manufacturing companies are not the only ones faced with the difficult task of redesigning their products so that they can have a longer service life and be dismantled more industrially.  Logistics managers will also have to deal with shorter cycles and a larger number of players.

All this leads to an even higher speed in transport and storage, which must be planned and controlled. Comprehensive digitalization is a basic prerequisite for this. The complete exchange of information of data streams of many process participants is crucial.

Due to its central position, logistics — on the basis of regulatory provisions — must create the technological foundation to be a data supplier and hub. In line with Industry 4.0, large amounts of information will flow back and forth between the interface partners, partly in real time. Logistics must secure the collection and distribution of data and verify that a smooth, transparent and legally compliant data transfer can take place.

Necessary steps for transformation

In future ecosystems, manufacturers, logistics service providers and newcomers will compete for new value creation steps. The winners will be those who can make the processing costs attractive with a high degree of data-supported automation.

For a circular strategy to succeed, all ecosystem partners, including suppliers and manufacturers, must commit themselves to this process and act as a common unit. While each company can take the path to digitalization on its own, the circular economy is so complex and has so many players that no company alone can become holistically circular. The ecosystem partners should split the upcoming tasks effectively, since the complexity of the new material flow means no company can do everything by itself.

For a circular strategy to succeed, all ecosystem partners, including suppliers and manufacturers, must commit themselves to this process and act as a common unit.

Martin Neuhold

EY Europe West Advanced Manufacturing and Supply Chain & Operations Leader

Scaling can be successful if manufacturers from different industries have access to the same ecosystem and logistics service providers in the sense of the shared economy. If such an overarching ecosystem does not emerge on the market, each industry must build its own structures with common service providers. Only if volumes are bundled across the board and logistics resources are used wisely can the circular economy function economically and sustainably.

Many of the necessary structures for movement of physical goods and processing steps have yet to be created — in particular local and regional collection and sorting points as well as processing plants and workshops. In addition to Industry 4.0 as a basic prerequisite for a successful transformation, digital twin technology — scenario formation for predictive recirculation — or blockchain technologies — smart contracts for dealing with increasing interfaces — can act as an enabler.

A lot still needs to happen with respect to the legal framework. Associations are calling for an equivalent treatment of primary and recycled raw materials, which would also facilitate the flow of goods. In order to accelerate the promotion of renewable raw materials in the packaging industry, there is already a regional example of a German packaging tax, but this is only the beginning. If tariffs on new goods are increasingly eliminated, states will focus more strongly on the import and export flows of used goods as sources of income. Companies must take such changes in customs and tax issues into account when calculating their landed costs.

In summary, the transformation pushed by circular economy requires a rethinking of the current flow of goods and the creation of transparency in the existing infrastructure. Based on this, new and holistic supply chain processes and flows must be designed and set up, always taking the customer into account. The principle of survival of the fittest applies — whoever acts first and creates the product and infrastructure necessary for the individualized flow of goods in the circular economy determines the logistics and customer relationships of tomorrow.

Article contributors: Tomas Henninger and Daniel Stommel

Summary

Provided the industry resolutely tackles new challenges and the authorities create the necessary foundations, the circular economy offers great opportunities and the prospect of profitable and sustainable growth for logistics.

About this article

Photographic portrait of Martin Neuhold
Martin Neuhold
EY Europe West Advanced Manufacturing and Supply Chain & Operations Leader
Initiates sustainable changes with heart and mind, helps people and organizations succeed. Lives with his family in the Black Forest and enjoys mountain biking there.
Related topics
Supply-chain
Future of manufacturing

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