by Colin Elkins, VP of Manufacturing Industries, IFS
The circular economy is predicted by Accenture to be the most influential change in the global economy in centuries. Accenture highlights the fact that business stakeholders and consumers alike are demanding more environmental, social and governance (ESG) efforts, and that of course means organizations are coming under increasing pressure to demonstrate their commitment to more sustainable operations.
There are huge sustainability advantages of adopting a circular approach, not least in the manufacturing sector. Manufacturing is a classic industry which has huge role to play in the circular economy. It has also had to weather the impact of recent economic pressures such as input cost increases and extreme resource volatility. This is why more and more manufacturers are turning to the circular economy, not just to satisfy sustainability-conscious customers, but also to tap into the $4.5 trillion of additional economic output that Accenture predicts the circular economy will generate by 2030.
But realizing these potential gains requires changes. As product lifecycles inevitably will increase, manufacturers will need to rethink their operations. Increasingly, companies and brands are turning to technology and this is where their Enterprise Resource Planning (ERP) software will play a critical supporting role. There are three key areas of operations that will be subject to change with the circular economy and where technology will be key to success.
1. Remanufacturing – but going back to the beginning is not as simple as first thought
As more companies strive towards resource-efficient manufacturing, overlooked processes such as remanufacturing are gaining traction. Unlike reconditioning, this technique returns a part or component to its original specification and allows companies to sell them at the quality and performance of a new resource. But that’s not all. Industries that rely heavily on the process such as automotive and electronics, have seen the economic and environmental benefits firsthand. For instance, companies such as power management provider, Eaton, have made the decision to expand remanufacturing programs as they realize its potential to reduce the environmental impact of new production.
But to operationalize the circular economy, remanufacturing requires a consideration of several situation-dependent repair and refit processes. Manufacturers can receive units back in various quantities and this can create fresh difficulty in receiving, triaging and remanufacturing at scale.
For instance, dependent on the unit’s condition, units can be released for a standard remanufacturing process or may require a triage before being sent to a repair desk. Matters become further complicated when it comes to returning units as some customers require exact units back, while other products may be covered by warranty or a service contract.
At each stage, it is crucial that the manufacturer ensures the agreement terms are adhered to financially and in terms of turn-around, replacement unit or other contractual requirements.
2. Lifecycle extension – scaling up more complex products offers new green opportunities
When it comes to the lifecycle extension of larger, higher-value assets such as heavy manufacturing equipment, some users, rather than buy in new, seek the assistance of original manufacturers to overhaul and rebuild their assets. Due to the size, complexity and project-centric nature of overhauls and lifecycle extensions, larger assets require additional considerations. Unlike in the case of repairing and remanufacturing individual components, larger assets can be rejuvenated and upgraded with new electronics or even substantially reconfigured to deliver entirely new products. These valuable aftermarket services allow companies that own and operate the assets to retain much of the value added to the raw materials.
Rebuilding and overhauling these larger assets is not only more environmentally responsible than recycling raw material, but they also provide an opportunity for the original equipment manufacturer (OEM) to add new, greener technology to remanufactured equipment. For example, heavy-equipment manufacturer Volvo Construction Equipment is using telematics-based services to boost existing machine productivity while simultaneously lowering a machine’s carbon footprint.
3. Sustainable packaging needs to be signed, sealed and delivered
The move towards circular product value chains is still in its infancy stage but considerable progress has already been made. For instance, dedicated organizations such as Loop are being set up to introduce re-usable packaging to popular brands such as Nestlé’s Häagen-Dazs ice cream. According to a Reusable Packaging Association study, this trend towards reusable material handling is being replicated in transport packaging – with 85 percent of users, manufacturers and service providers expecting to see increased demand for reusable packaging in the next 12 months.
As more governments introduce packaging regulation, the importance of circular economy is being recognized worldwide. In 2019, the Canadian government passed the initial phase of a Strategy on Zero Plastic Waste, which seeks to keep plastics in the economy instead of being disposed of in the environment. Governments are also putting in place regulations to cement the future of circular economy. For example, McKinsey reports that 16 U.S. states have already enacted statewide regulations around packaging waste to target single-use plastics, shopping bags, and increasing recycling targets. Several more bills are pending to be approved over the next 3 years.
ERP at the heart of circular operations
The previous strategy of using manufacturing software to simply add value to raw materials and help companies sell them at a profit is clearly no longer sufficient to support a circular economy model. Instead, ERP software needs to evolve to help manufacturers manage the entire lifecycle of their products – from maintaining, reconditioning, recycling and supporting the product over an extended lifecycle. For instance, the software can incorporate environmental footprint management tools to capture the environmental footprint of the product over its lifecycle and present information for decision support. This information can include the percentage of postconsumer waste used in a product and will help manufacturers see where they can implement more sustainable practices.
Enterprise software must also provide visibility into the total product lifecycle cost and revenue profile—from new product development to cost of the sale, through to product replacement. In many cases, contract or warranty management software functionality will be essential in ERP software so a manufacturer can ensure they are invoicing appropriately for repairs or refurbishment and respecting warranties and maintenance agreements in place with each customer.
Product provenance – traceability forwards and backwards
New packaging traceability can be also supported with the right ERP software. For instance, the software can use geolocation or bar code scanning to help manufacturers account for and track ownership of assets. Regardless of whether a manufacturer deals with packaging that is returned to be used again or products or components to be refitted, reverse logistics is probably the single most significant functionality to facilitate the circular economy model.
As the pathway material takes in returning to the manufacturer varies, and can change over time, ERP software will also need to evolve to support reverse logistics associated with the new return considerations. These can range from managing the various methods of recognizing returning inventory, including return material authorizations to keeping track of material returning from field service reverse logistics channels as technicians service equipment and replace parts or components.
Make sure you have the keys to unlock the potential of the circular economy
The social and economic benefits of the circular economy are plain to see. Manufacturing will be at the core of the circular economy, and the most forward looking manufacturers will be starting to adopt processes such as reverse logistics, full asset lifecycle support and sustainable packaging. But their enterprise software will either be an enabler of this change or a limiting factor—manufacturers with the right infrastructure will be best placed to benefit their customers, business stakeholders and the environment in the years to come.
Feb2021, Software Magazine