The circular economy is a key topic in the manufacturing industry, one which in recent years has gained importance among companies and policymakers alike. Against the backdrop of Scotland and Brazil, Professors Susana Carla Farias Pereira, FGV-EAESP, Simone Sehnem, UNOESC, and their fellow researchers put the spotlight on the critical success factors for the circular economy journey and the role of management in dealing with these factors.
Supercharging Sustainable Supply Chain Performance with Circular Economy by CoBS Editor Megha Sureshkar. Related research: Improving sustainable supply chains performance through operational excellence: circular economy approach, Science Direct, Elsevier.
Think about your last big purchase. Perhaps it was a super-slick smartphone or an ultra-high-definition television, or some rustic furniture to give your home a new chic look that you wanted. In all probability, these were bought as replacements for previous possessions. So where does all the old stuff go? Possibly in a landfill far, far away.
Take, make, consume, and throw. Since the dawn of the Industrial Revolution, the world’s supply chains have largely been immersed in a linear model where raw materials are taken and transformed into products before being used and discarded. More than 90% of the economy still works this way today. Waste is the end point, the full stop. And this trash ends up in undesirable places, polluting the environment, threatening the ecosystems, and worsening the risks and effects of climate change.
Wait, the bad news does not stop there. Our planet’s resources are finite, and its ability to absorb the waste we generate is decreasing drastically year after year.
Diluting the toxic cocktail of negative consequences
But here is the good news: we can do better, and we have already started the transition from a profit-dictated, unsustainable, throwaway economy to a new system that works for both people and planet while bringing concrete benefits for businesses too. With the growing focus on sustainability and environment concerns, almost half of the world’s top 100 companies have already adopted a concept that aims to ensure that the materials used by them remain constantly in use. Therein lies the beauty of the circular economy – we stop waste being produced in the first place.
The circular economy holds tons of promise. Businesses can break free from linear thinking and start incorporating sustainability in their supply chains by understanding and adopting the circular economy model. But this operational excellence approach demands some solid groundwork and a sound footing to function effectively. What would that be, you may wonder?
The answer is sustainable operations. They are essential for the creation of circular economy-based production systems and focus on topics such as detailed assessment of facility compliance, resource usage and performance, and potential effects on the environment and health, just to name a few. Once those are in place, the circular economy can do wonders and enable upscaling to broader sustainable supply chain performance – a topic of great interest to Prof. Sehnem and her colleagues.
And so, the researchers climb aboard the ‘Upper Echelons Theory’ ship and venture into unchartered waters in an effort to examine and improve the performance of sustainable supply chains through circular economy approaches. In addition, they specifically compare the situation in both developed (Scotland) and emerging (Brazil) economies, identifying specificities and nuances within each of these contexts. But before we delve into the details of this investigation, the aforementioned concepts of circular economy and Upper Echelons Theory need to be grasped.
The circular economy ultimately aims to establish a new socioeconomic paradigm. It seeks to increase the circularity of resources in the production chain. That means products, materials and resources are kept in circulation for as long as possible. This approach aims to change social and economic dynamics, dissociating economic growth from the depletion of natural resources and environmental degradation.
A tale of two parts
Two types of cycles exist in the circular economy – biological and technical – based on the type of material that they regenerate, living or non-living. Biological cycles aim to regenerate ecosystems by reducing excessive extraction of natural resources, using renewable materials, and reusing energy and organic waste by means of processes such as composting. Technical cycles, on the other hand, recover and restore products through a hierarchy of circular strategies, including collection, sharing, maintaining, prolonging, reuse, refurbishment, re-manufacturing, and recycling.
Not a walk in the park
Several trade-offs are required in the process of transitioning to the circular economy. Alignment of multiple goals and negotiation with various stakeholders represent challenges and may generate tensions in the process of migration to a circular business model, as do guarantees of funding, the presence of leaders willing to engage with such initiatives, and the need to learn from experience.
Also critical to the circular economy journey are technological elements. The implementation of the circular economy requires the design of products from a circular economy perspective, taking into consideration aspects such as sustainable design, the possibility of recycling or remanufacturing and a sustainable business model. According to Katie Treggiden, author of Wasted (2020), up to 80 percent of a product’s environmental impact is baked in at the design stage. Designers have the power to change how things are made and what they are made of. Yet, an emphasis on sustainable design strategies is viewed as a bottleneck in circular economy implementation.
Additionally, in order to develop circular economy practices, there is a need to invest in industrial synergies through industrial symbiosis, an approach whereby a waste product in one industry is turned into a resource for use in one or more other industries. Critical to the success of this process are issues of technical, economic, and legal viability, i.e., functionality, convenience, and authorisation.
Other aspects are the lack of collaboration between different companies and supply networks, resistance to sharing data on internal waste streams and the lack of communication, authority, and leadership from managers. In other words, when measures only have a significant impact in the long term, they do not appear attractive from a short-term perspective. There is also a need for regulation to evolve, through laws and legal guidelines that support the circular economy and motivate the development of circular industrial processes.
A personalised lens
The central idea of Upper Echelons Theory is that experiences, values, and personalities of executives greatly influence their interpretation of the strategic situations they face and, in turn, affect their choices. For example, a chief executive’s background in operations may lead to his or her pursuit of a cost reduction strategy. By the same token, there could be a link between a chief executive’s long service in a particular industry and his or her hesitation to diversify from that industry. As such, to understand why organisations do the things they do, or why they perform the way they do, the traits of their most powerful actors – their top executives – must be considered.
Now that we have delved into the details of the circular economy and Upper Echelons Theory, it is time to head off and direct our attention to the results of the probe conducted by Prof. Sehnem and her co-researchers on four pivotal firms in their respective supply chains – two from Brazil and two from Scotland.
Out in the open
As previously indicated, the circular economy journey tends towards innovation, necessitating new business models for sustainability, and this innovative aspect of the circular economy often encounters internal organisational barriers. Identifying critical success factors within the circular economy journey is important in order to encourage organisations to prioritise resources and adjust their management and, in turn, achieve the adoption of circular economy principles.
The key ingredients for the ‘winning’ circular economy recipe are presented in the following list.
- Stakeholders’ belief in the idea of the circular economy
- Perception that customers are not paying for sustainability
- Need for engagement of different stakeholders
- Technological innovations appropriate to the production chain
- Reduction of asymmetries in the knowledge level of employees
- Creation of a sustainable organisational culture
- Recognition that it is difficult to change people’s behavior, especially employees and consumers
- Reduction of technological asymmetries in the supply chain
- Reduction of employee turnover
- Dealing with increasing market pressure
- People’s need to see results to believe in the idea of a sustainable world.
Companies that are more proactive – those with highest adoption of technical and biological circular economy cycles – towards the circular economy also demonstrate better management of these critical success factors. In addition, those that are most proactive in terms of the circular economy tend to have top management who are more supportive of sustainability. The exemplary case of these results is a company from Scotland that works in sugar cane production.
The firm has the highest levels in terms of taking advantage of the technical and biological cycles of the circular economy, and is also the company with the highest level of well-managed critical success factors among the companies studied. At the same time, its upper echelons represent the management who know the most about sustainability and the circular economy. For example, the founder has wide knowledge of sustainable business models and the circularity of resources. Additionally, the company’s upper echelons also present the most significant ambitions regarding the creation of a sustainable win-win context for doing business. They are aware of the regulations, constraints, and opportunities regarding operating a company in a circular economy context.
Along similar lines, firms that are less proactive in terms of the circular economy tend to face greater challenges and tensions due to unmanaged critical success factors. And companies with a less strategic approach to the circular economy and its critical success factors will also have less supportive senior management.
The findings of the research also suggest that the creation of a sustainable organisational culture is a critical factor for succeeding in circular economy implementation. Once again, the aforementioned company scores, being the only company able to manage this factor.
And then some
Executives’ experience is not necessarily pivotal in making intelligent decisions regarding the circular economy. Instead, senior managers’ level of sustainability awareness and formal education on the topic are important to their managerial approach towards the circular economy. For example, it is clear that the most proactive firm has a young manager in charge of sustainability management. This manager is a recent graduate, and has been in contact with curricula that include sustainability at their core.
Further, it is clear in the Scottish cases that institutional factors – regulatory and cultural context, for instance – are key to shaping managers’ perceptions of sustainability. Even in the case of the second Scottish firm which did not show a high level of proactivity towards the circular economy, the company would not have achieved its partial proactivity if it operated in a less sustainable national environment.
Finally, the managers of all four companies highlighted the following lessons as ‘must-know’ points to move sustainable production systems forward, and the concept of circular economy.
- The importance of engaging employees in sustainable initiatives
- A genuine belief in sustainability
- The relevant role played by the government.
Now that we have such important insights into the maturity level of circular economy adoption, the critical success factors for sustainability, and the influence of selected characteristics of firms’ upper echelons in promoting the circular economy, how can we put this information to good use?
Where do we start?
The main findings of Prof. Sehnem and her co-researchers prove to be useful for both managers and sustainability-related policy makers.
To begin with, companies can be positioned at different maturity levels in terms of the circular economy. So, it is important both for managers and policy makers to understand their firm’s current circular economy level and, based on this, plan how to achieve proactivity.
For another, companies which want to advance towards circular economy proactivity should pay attention to properly managing critical success factors, in particular, the creation of a sustainable organisational culture.
In addition, characteristics of a company’s upper echelons, such as formal sustainability education and understanding of circular economy principles by senior managers, constitute key elements of successful cases of circular economy implementation.
Lastly, for policy makers, the crucial aspect is creating an ideal setting for companies to achieve proactivity in managing circular economy practices.
Get the ball rolling
Attention to critical success factors can contribute to increasing a company’s competitive advantage, create a difference in its sector of operation and generate a better fit between the practices adopted and circular economy performance, all of which will positively affect the company’s performance. When a growing number of businesses come together in this effort, imagine the pressure it will take off our planet.
How we use resources has transformed our economy and society in the past. Resilient supply chains powered by the circular economy offers us a chance to deliver sustainable benefits for the future. Let us not waste any opportunity to fix our environmental woes. It is time to support ‘take, make, use, reuse’ all the way and elevate sustainable supply chains’ performance to the next level. Will your company be among the ones to take the leap?
- Link up with Susana Carla Farias Pereira and Simone Sehnem on LinkedIn
- Read a related article: How can supply chain emissions be reduced?
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- Apply to study for the MPGI International Master in Management
- Apply for the OneMBA at FGV-EAESP.
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