Closed loop supply chain: concept and relevance in the market
In the last few years, the debate on sustainability has grown, and consequently the impacts caused by the industry on the environment have never been so commented on: excess debris, irregular disposal, waste, excessive extraction of raw materials, among others. Themes that have led the industry to reinvent itself, seeking more sustainable initiatives for the supply chain.
As a prominent theme of this movement, the concept of Circular Economy (CE) is developed as a very interesting alternative to the linear economic model “extract, produce and waste”.
American companies, for example, are responsible for producing approximately 7.6 billion tons of solid waste per year – and circular supply chains, if adopted, contribute to reducing these discharges. For example, recycled materials can be reused for the development of new products.
In this article, we will discuss a model that takes the concept of CE to a more advanced level: The Closed-loop Supply Chain.
Concepts and trends
Also known as a closed supply chain, the Closed-loop Supply Chain model aims to reduce the volume of raw materials needed in the production line, through the recovery and reuse of post-consumer materials.
According to researcher Luk N. Van Wassenhove, author of the book “The Evolution of Closed-Loop Supply Chain Research”, it can be defined as:
Design, control and operation of a system to maximize the complete creation of value over the life cycle of a product with dynamic recovery of value from different types and volumes of returns over the life cycle of the product”.
That is, extract the full value of a material throughout its life cycle, as shown in the diagram below:
The key for this model to be successfully implemented is in an element prior to the production line: product development. Most of the products that circulate on the market today were not designed to meet the environmental needs of waste recovery. In other words, it is not possible to transform, recycle or reuse them in order to reinsert them in the production line.
Given the increasing complexity of the supply chain, companies that take the initiative to adopt this model start with few products in their catalog. Dell, a computer manufacturer, for example, started using at least 10% recycled plastic in the manufacture of one of its computer lines in 2014. Natura, a Brazilian cosmetics company, recently used packaging made of PET bottles collected in Brazilian beaches to create the bottles of its Kayak Oceano perfume line.
When talking about closed circuit chains, we also mention reverse logistics: a procedure that allows the consumer to return a product (or its packaging) to the company after consumption, allowing the manufacturer to dispose of it correctly or reinsert it in the production line.
Commonly mistaken for reverse logistics, green logistics encompasses all initiatives related to minimizing the ecological impact of any and all logistics activities, whether direct or reverse flow, creating a balance between economic and environmental efficiency.
One example is the giant FedEx, which has invested in this kind of policy in order to reduce fuel consumption and increase the efficiency of its fleet. The company has already succeeded in reducing the emission of carbon dioxide by 40% through the use of electric and hybrid trucks and adopting the “reduce, replace, revolutionize” approach to reflect its search for the best ways to reduce the environmental impacts of its operations.
As for the beverage industry Ambev, the company started a shared fleet program since it was identified that the trucks were empty during their trip back. To reduce the consumption of diesel the company now transports cargoes from partner companies as part of the investment in green logistics.
A fundamental part of this type of strategy is technology, a frequent theme on our blog.
Advantages of the closed circuit chain
The benefits of a closed-loop supply chain are not immediate. At first, the company might account for more costs than savings in adopting the model due to investments in reverse logistics, adaptations in the production line and development of more environmentally friendly products and packaging, among other initiatives.
However, according to authors Roger and Tibben-Lembke (1999), in the medium and long term, it results in improved competitiveness and financial return. Other considerable benefits of the closed-loop supply chain are:
The author Dowlatshahi concluded that some companies gained about 40% to 60% in cost, after using component remanufacturing using only 20% of the effort to manufacture a new product.
The adoption of sustainable practices changes the organizational image for consumers and partners, increasing the capacity to generate business and subsequently obtain profit. Companies that have social and environmental commitments and are able to build an environmentally friendly reputation have a return of customers and partners of up to 35%.
The stages of closed-loop supply chains
According to the Van Der Linde Porter hypothesis developed in an article by Harvard Business in 1995, environmental standards encourage the search for technological innovations for better use (and reuse) of inputs (raw materials, energy and labor).
According to the Thomas Insights portal, closed-circuit supply chains are divided into seven basic steps. The first three are very familiar, while the other four are determinants for the functioning of a more sustainable production:
Step 1: Production
Step 2: Distribution
Step 3: Sales
Step 4: Repair – Instead of discarding as waste, product defects pointed out by consumers are processed by the return sector. Repair is then performed.
Step 5: Reuse – Encouraging the reuse of defective material that cannot be repaired.
Step 6: Recycle – Recycling is a fundamental part of the closed loop model. The parts and materials go straight back to the beginning of the production process.
Step 7: Disposal – As a company adapts to a closed circuit model, the process evolves and the company saves on costs by reusing material instead of disposing of it, minimizing its impact on the environment.
How to implement the concept in the purchase of indirect materials
For an industry to adopt the concepts covered in this article, countless transformations in different sectors must be implemented. From the development of greener products to the operation of reverse logistics.
However, there are some attitudes that can be adopted independently by the purchasing department to make its activities more environmentally friendly, such as the creation of policies focused on sustainability that include criteria for selecting sustainable suppliers.
To better understand what kind of criteria to adopt, read our article “The advantages of sustainable purchases and how to implement this concept”. There you will also find an exclusive sustainable assessment spreadsheet to help you transform your department.
Ecologically correct practices such as the adoption of methodologies like the Closed Loop Supply Chain contribute to greening conventional supply chains.
The offer of sustainable products and services guarantees a better reputation, greater competitive power and is articulated as an innovative theme from a corporate sustainability perspective. It is up to the companies, however, to adopt a guideline on sustainability for all, so that the supply sector can integrate the theme into their routine.
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