In his role as Principal Consultant at Frazer-Nash, Carl provides strategic consulting for business, asset management, and the circular economy. In this article, He explains how to think about the circular economy, its positive competitive impact, and how asset management plays a pivotal role.
What is the circular economy?
A common approach when thinking about various themes is to define the theme within a boundary definition. These boundaries are defined to help frame the immediate problem being addressed. Successful organisations respect that their horizons continually change, and take measures to adapt.
There are many definitions of a circular economy, and these often reflect a choice of boundaries. Carl offers the following definition to provide a steer.
”The circular economy is an economic and societal shift towards sustainability and regeneration, through maintenance and rebuilding of natural and capital stocks.”
Ultimately, the circular economy is an adaptation of the existing economy. It is the outcome that matters, and that can only be explained in context.
How to think about the circular economy
Context is everything. So rather than going into detail around somewhat vague definitions, it would be more useful to explain the differences in outcomes between organisations that work, and don’t work, in the circular economy. The latter focuses on revenues and profit, and ignores externalities such as the environment and society. The former focuses on revenues and profit, and positive impacts on externalities. Organisations that work in the circular economy consider outcomes that contribute towards rebuilding natural and social capital stocks.
To help understand from where thinking could begin to navigate the process of being part of the circular economy, there are a few dimensions* other than financial that need to be identified:
- Which natural and social capitals does the outcome of your organisation’s purpose regenerate and restore?
- How effectively are you able to achieve this? For example, showing the integrity of how the output of one activity is the input for another, as well as considering the reliability, continuity, and resilience of those relationships and activities to happen.
- How effective is your operating model in optimising value and utilisation of material resources in relation to the above? Considering effectiveness can include different scales and multiple business models that can be operated by different organisations. Optimising the impact of the wider system rather than focussing on the impact of just a part.
- The frequency and prioritisation with which you examine the context in which value is created and exploited in the face of changing circumstances, i.e. internal and external impacts that might cause some instability in the circularity.
For this to start making sense, more context is required. This can be achieved by introducing some other enabling concepts, for example, the discipline of asset management. This is the discipline that optimises the life and value of assets and infrastructure, which can then be interpreted further by thinking about applying the concept to a particular sector; in this example, the railways.
By applying the concept of asset management within the railway industry, Carl extends the circular economy definition:
“The circular economy is an economic and societal shift towards sustainability and regeneration. It does this by maintaining and rebuilding natural and social capital stocks. The maintaining and rebuilding of these stocks can be greatly accelerated through the deployment of systems thinking. By way of example, and within an asset management context, organisations can make existing assets last longer, design products that can be refurbished over multiple life cycles, shift operations to service models, create syndicates, networks or value chains that offer greater sustainability and regenerative outcomes compared to their competition.”
In the context of asset management, this is all about performance over the life of the asset.
To put those four dimensions above into context respectively, for example, considering a railway system; the actors, stakeholders, and beneficiaries all need to be considered.
- The natural and social capitals that the railway enables could include supporting people to go to work, and travel to become educated. This would also include rail being an enabler to socialise, become knowledgeable about how to design, develop, and operate and maintain railway systems that are fit for a future circular economy, whilst offsetting the negative impact of alternative transport modes. These natural and social capitals need to be meaningful and purposeful at a regional and/or national level. This is scalable across the supply chain, for example, a member of the supply chain can show how it is contributing towards these ends.
- The value of the interdependent stakeholders and actors in the supply chain can be shown. An example could be establishing remanufacturing centres (and all that comes with that), that returns products back up to, or more importantly, improves, performance capability compared to the original design. Additionally, interdependent supply chains might work across sectors that extend the utility and value of the products or services, e.g., relying upon assets that have come to the end of their purposeful life after, say, seven life cycles in one sector, only to be used as a material resource in another.
- Adopting wherever possible, or moving towards, closed loop systems and sub-systems as services, e.g., ‘product as a service’ where it has been considered how value can be maximised and the utilisation of material resources joined up with other partners that represent a resilient network of multiple actors and stakeholders across a local and global supply chain. Showing how risks are mitigated by avoiding fragile global supply chains in relation to pending global materials shortfalls, and pending and potentially prohibitive price increases. In this case, the power of standardising rail systems interfaces becomes a critical enabler for the circular economy.
- Railways are an important part, but they are just one form of transport system which relies upon external factors, such as the supply for power. Power is a fundamental requirement that supports wider and, in some cases, more important interdependencies. Focusing on just one area ignores the general and wider fabric which forms the fundamental building blocks and interplay of the society in which we want to live.
The outcome of the above is how much of those natural and social capitals have been identified (from the purpose of the railway) that have been rebuilt and restored until the next intervention. Importantly, also recognising where the opportunity for that intervention should no longer be constrained to a contractual boundary in which revenues and profits are created from a single point of sale where the burden is left with the investor.
Having railway sector enablers would also help. For example, system interfaces are critical in the rail sector: demonstrating how one system connects with the other. Introducing industry standards for physical rail system interfaces provides the opportunity for innovation. In this case, how many lifecycles for which the asset is designed can be an innovation challenge to the industry as part of the competition process, if interfaces are going to change infrequently. Or better still, as the systems’ interface hardly changes, procurement would favour an ‘as-a-service’ offering from the supply chain, which opens new markets and new opportunities. Such a change in policy can drive competition in providing increasing value, ultimately supporting the increasing of value to those externalities without detriment to performance.