Why ‘Go Circular’ and ‘Go Local’ strategies don’t always pay off

Dr B K Mukhopadhyay (The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m. bibhas@gmail.

com) Dr. Boidurjo Rick Mukhopadhyay (The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University) PART 1 – Toward the model of ‘Make, Use, Return’ T he central idea around the circular economy is to move from ‘Take. Use.

Dispose’ towards a more ‘Make. Use. Return’ model, by marrying resourcefulness, design thinking for products built to last and recyclable, retrieving raw materials, and change in ownership models.

In 2015, the Ellen MacArthur Foundation demonstrated that a circular economy could boost Europe’s resource productivity by 3 per cent by 2030, generating cost savings of €600 billion a year. Illustrations of what’s happening in the Circular Economy – A Let’s look at how companies can extract additional value from leakages or waste in the production process. a) Clothing businesses have actively taken steps towards embracing circular economy practices, while some firms in the apparel industry have formed coalitions to promote non-toxic chemicals and improve cotton farming, and others are developing standards for garments that are reused or recycled.

B) Recovering the material value of bottles, from mixed recyclables or bottle-to-bottle recycling, could lead to a much higher payout. Metals, meanwhile, are commonly extracted from tires in open backyard fires—at great cost to both human health and the environment. Aggregating tires for use as industrial fuel could increase their value almost tenfold while crumbling them to make road-paving material yield even more.

C) Dell has incorporated recycled plastics into its products, using the world’s largest takeback program of used electronics. Their cloud service lines provide customers with computing capabilities while eliminating the need for physical assets, reducing costs and carbon footprints. Unlike in today’s ‘buy-and-consume’ economy, durable products are leased, rented, or shared wherever possible.

This deliberate graduation transition from ‘cradle to grave’ to ‘cradle to cradle’ calls for a new contract between businesses and their customers based on product performance. However, business circularity comes with a cost! Having said all the above pluses, some markets would rather stick with the ‘linear’ economy due to increased externalities, high transaction costs, and low volume. Several studies conducted by the Stockholm Resilience Centre, MacArthur Foundation, and World Resources Institute shed certain interesting perspectives.

Cost 1: Environmental Externalities Externalities [ e. g. , extraction and the use of resources cause environmental costs] often fall outside of the current market mechanism and therefore, remain unpriced, and costs-wise, it would seem a lot cheaper to use secondary than primary resources.

However, as long as externalities are not fully taken into account, the financial costs of using primary resources will in many cases be less than the costs of secondary resources. Cost 2: Growing transactional and operational costs This adds to the burden and acts as a barrier to the circular economy. These costs include the costs of tracking down second-hand goods, finding suitable partners, organizing reverse logistics, and negotiating the terms of the collaboration.

The shift to a CE also implies an expansion of reuse and recycling activities, which are more labour-intensive. This will drive up operational costs related to collecting, sorting out, and processing disposed goods. Cost 3: Volumes are too low for circular markets .

The circular economy depends on markets for secondary resources and second-hand goods. Many of these markets are still absent due to insufficient demand or supply. There are scenarios where potential demand for circular goods is in place, but a lack of knowledge, willingness, and/or value chain coordination hinders the manifestation of circular supply.

However, the volume will be less of an issue for value chains that depend on physically scarce resources and/or that are less immune to geo-political supply risks. In other words, as the price of such goods and services goes up, markets will gradually be more inclined to go for a ‘reuse and recycle’ mindset. So, in summary – to support more intensive value chain cooperation; secondary markets need to quickly emerge.

PART 2: ‘Go local, go fresh, support local communities’ The usual benefits that come with local sourcing are firstly, reduced logistics costs and related expenses which in the long run also improves environmental impact and reduces ‘fair treatment’ (or the lack of) of supplier or labour challenges often involved in cross-border logistics. Secondly, avoiding risks related to currency volatility which affects large retail chains significantly as they cope with this across different markets and political regimes. Thirdly, sourcing locally creates an opportunity to work closely with local players who tend to be more reactive to demand changes than suppliers who are located far away.

This not only improves lead time but also allows time and space for developing customized products when required. In addition, local suppliers also have information on new patterns of demand changes and market trends that could help business growth planning, sales projection, and importantly getting the timing of launching new products right. While the above sounds good also for good PR and improving the image of the companies (local or international), it can be a double-edged sword for the very same reasons.

E. g. , if there is a fallout with local suppliers, the effect can be felt at different levels of production, stakeholder network, and also public image.

More so, if the supplier was a key player in the region, cutting off ties would mean a fall in product quality due to the lack of the right materials or in worst cases, product lines made redundant altogether. Additionally, although working with local suppliers offers a range of benefits in regard to market knowledge, customized product delivery – it can also resist change and innovation at certain stages to avoid risks of jeopardizing existing market configuration. Although it might be ‘logical’ to switch to local suppliers from imported products or dwell on a longer supply chain with established partners, the choice is not always simple.

Price and standard of products are key, and also whether there is state support to motivate local sourcing. Sourcing locally certainly also has dimensions of capacity building, local job creation, and boosting the regional economy that contributes to both regional and national economy in the medium to long term. Pressure on small firms ‘Buying fresh’ is a customer need today, and therefore a brand that sources locally, e.

g. , food, will experience increased sales. In the US, a report from the Department of Agriculture shows that the sales of locally produced food hit $12 billion in 2014 which is projected to be $24 billion in 2021.

The majority of customers are willing to pay more for local products. This stands true for locally raised products from fields, bee yards, and bakeries to small factories that have experienced a shift in customer demand patterns. At the same time, due to the increased demand, farmers and grocers have been struggling to work together.

This is because small farms are stretched to capacity for meeting increased demand, so there is a push for further investment to help them scale up and sustain operations. Also, depending on the nature of the contract – it might put the local suppliers at risk if they are working with one big retail chain, for example, if the contract prohibits them from supplying to a competitor of the retail chain. This is a very common problem.

For such B2B models, it is important that the volume of order and contractual agreements work for both parties (equally), which is not always feasible to work out. For example, US coffee chains have historically procured from Guatemala and Colombia for cheaper and high-quality coffee while maintaining their global presence and a happy scorecard for their ever-expansive shareholders and country managers. The decision to procure locally or internationally goes beyond some of the salient points mentioned earlier, it also depends on how manageable and economic the manufacturing costs are relative to the immediate competitors.

The more economical the manufacturing costs are, the higher the chances of procuring large quantities in bulk which is a good option for start-ups, for example. Ensuring a high-quality standard is often one of the biggest issues, for example, research by Harvard business review looked at the implications of sourcing locally by the restaurant industry and how it might actually increase costs. Chipotle, which sources locally, had to hire food safety experts while also investing $10 million to help smaller suppliers meet required safety and quality standards.

So, on one hand, we have McDonald’s or KFC in the US that source all their chicken from a selected range of five or six big suppliers, e. g. , Tyson Food, and they have food inspectors on-site in chicken farms and processing centres; on the other hand, Chipotle who sources food locally may not possibly monitor all local suppliers on-site at every location.

Therefore, there may be a bit of autonomy and trust (risk) on the part of local suppliers to ensure quality control guidelines. In this particular industry, data shows that most local suppliers lack historical success in ensuring quality testing of their products while on the contrary large suppliers, such as Tyson Food, have demonstrated certain consistency over time. Clearly, there are benefits in terms of building operational efficiency gains, supporting the regional economy, logistics synergy, and let’s not forget PR leverage – but by going circular and pro-local sourcing, businesses have various types of costs to pay.

These strategies are not quick-fix solutions but ideally get embedded in organizational strategy and culture, which then become more of long-term practice. The increased stakeholder participation and closer value chain integration are two areas of focus for such firms going forward. .