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Supply chain

Take the circular route to curbing over-production

Published 21 March 2022 in Supply chain • 6 min read • Audio availableAudio available

Cutting lead times, incentivizing local production and repurposing excess stock would have a huge positive impact on the environment, explain Ralf W Seifert, Yara Kayyali Elalem and Işik Biçer.

There is growing recognition that we need to move away from the take-make-waste model of production and consumption towards a more circular economy where we stop waste from being produced in the first place. Much attention has been focused on how companies can prolong the lifespan of products, by making it easier for consumers to reuse, repair, and recycle goods. IKEA has rolled out a buyback program for lightly used products, adidas has designed shoes that can be ground down to be remade into another pair once they are worn out, and outdoor gear brand Patagonia has launched a repair guide for its clothing. Yet firms would do well to take a closer look at how they can re-design supply chains to reduce the amount of production-related waste that occurs when supply exceeds demand.

Take for example a broken smartphone: the device can be repaired, sold to secondary markets if outdated or donated to other consumers for reuse. If none of these options is possible, the manufacturer could produce a new smartphone from some of the old parts. If remanufacturing is not an option, smartphones should be recycled. Only once all the above possibilities have been exhausted should the smartphone be sent to landfills. Many countries have passed legislation to support increased recycling efforts. For example, the Minnesota Electronics Recycling Act imposes strict collection and recycling objectives on producers as a percentage of their total sales. Companies have also adopted measures to make their products last longer. Fairphone is designing smartphones that are made from recycled materials and can easily be repaired. The company also recovers e-waste in the EU where it is based and partners with organizations that collect e-waste in African countries that lack recycling infrastructure.

In contrast, there is a lack of business models for reusing and recycling the waste produced when supply exceeds demand due to a lack of planning or a sudden decrease in demand. Excess inventory is instead destroyed, before reaching consumers.

Fair phone
Fairphone is designing easily repairable mobiles made from recycled materials

The excessive costs of excess inventory 

Until recently, it has been difficult to quantify the severity of production-related waste  

due to a lack of available data. In June 2021, an ITV report revealed that the online retail giant Amazon was every week destroying around 120,000 unsold items such as smartphones and other electronic devices in one of its fulfillment centers.

Using the findings from the ITV report, we used water consumption estimates needed for smartphone production to get a rough quantitative estimate of the environmental impact of production-side waste from Amazon and then scaled this to represent all online retailers. Although these values, for reference, are in terms of water consumption estimates, CO2 consumption is highly correlated to water consumption and comprises a good portion of total carbon emissions worldwide. This makes water consumption a good indicator to measure environmental costs.

This example illustrates that focusing circular economy efforts on the production-related dynamics would result in a higher payoff than focusing efforts on the consumption-side dynamics only. So, what steps can organizations and governments take to limit the waste from excess production? 

1. Decrease lead times

Long production lead time due to offshore manufacturing is a major contributor to production-related waste since companies need to determine their sourcing quantities well in advance of the selling season. With ever-increasing product choices, decision-makers are faced with significant demand uncertainty. If actual demand turns out to be lower than the estimated amount, high amounts of excess unsold inventory are destroyed even before reaching consumers.

To alleviate this problem, companies should cut production lead times by sourcing from local manufacturers instead of offshore alternatives. With shorter lead times, decisions about order quantities can be made closer to the selling season, when demand signals are less uncertain. While local manufacturers may be more costly, the improved match between supply and demand resulting from having ordering decisions placed closer to the selling season results in higher profits. Consequently, the cost of disposing of excess inventory can be drastically decreased even if individual item costs might be somewhat increased due to local sourcing.

Hugo Boss is one example of a company shortening its supply chain. The German firm is increasing production in Europe and Turkey, which are closer to its market base, to rely less on production in Southeast Asia. Daniel Grieder, CEO of Hugo Boss, claims that having factories close to Europe has been a “massive competitive advantage” for the company. Reducing production lead time by utilizing local manufacturers would thus benefit firms both in profitability and environmental aspects.

Hand made clothing
Hugo Boss is increasing its production capacity in Europe and Turkey

Increasing local production would also allow for a closer connection between local manufacturers and authorities, such that recycling, and remanufacturing, can be implemented near the market base. By promoting local production, firms would bring the facilities and know-how required to manufacture, and therefore repair and possibly remanufacture, old consumer waste products near the customer base. This would increase volumes of products passing through the circular economy loops.

The advantages associated with mitigating production-side waste would therefore sustain consumption-side waste as well. Renault Group owns several factories in Europe. The car manufacturer has recently transformed its production site in Flins in France to create a Refactory, a factory for refurbishing vehicles. This has not only contributed to the company’s sustainable development but also industrialized their circular economy efforts and positioned them in a prominent position for the growing used car market.

2. Incentivize local production

Because lead-time reduction is a very effective strategy in decreasing production-side waste, policymakers should not only promote local production but also limit offshore sourcing to achieve environmental sustainability and net-zero goals. This can be achieved by internalizing previously ignored environmental costs due to excess storage. Less popular policies might also include increasing import and export tariffs or imposing trade barriers, to promote local production which leads to shorter lead times and hence lower waste. Such tariffs would conflict with the economic development that comes from free trade yet mitigating environmental concerns will simply not be “free” nor will it be free to ignore doing so. It is, therefore, crucial to scrutinize the trade-off between trade liberalization and environmental sustainability to achieve economic growth while preserving environmental quality.

circular consumption graph

3. Increase possibilities to repurpose excess stock

If due to unforeseeable reasons, companies end up with excess inventory regardless of their production locations, companies can still liquidate this inventory. Several service companies provide business-to-business marketplaces that allow companies to sell their surplus merchandise. Direct Liquidation is one example. Another example is Walmart Liquidation Auctions which is an official channel for selling excess inventory and store returns for Walmart. Items sold through this channel include electronics, furniture, and apparel and can range in size up to truckloads of overstocked inventory. Although selling excess inventory may not be the most profitable approach if it requires the selling price to be discounted, it frees up warehouses, increases capital, and remedies for otherwise destroying the inventory.

Issue 5

Current Issue

Inventory of change

The disruption of production from smartphones to furniture wrought by the COVID-19 pandemic has brought home the importance of global supply chains to every customer. But what have been the fundamental shifts and advancements in supply chain management over the period? Inflation, e-commerce and geopolitcal conflict are all driving change. In Issue V of I by IMD, we explore what is next for supply.

Explore issue VMore about Supply chain

Authors

Ralf Seifert - IMD Professor

Ralf W. Seifert

Professor of Operations Management at IMD

Ralf W. Seifert is Professor of Operations Management at IMD. He directs IMD’s new Digital Supply Chain Management program, which addresses both traditional supply chain strategy and implementation issues as well as digitalization trends and new technologies.

Yara

Yara Kayyali Elalem

Yara Kayyali Elalem holds a bachelor’s degree in Civil and Environmental Engineering and a master’s degree in Management, Technology, and Entrepreneurship. Currently, she is pursuing her PhD in the Technology and Operations Chair at EPFL. Her PhD research focuses on demand forecasting for new products and operational flexibility strategies for sustainable sourcing.

Isik bicer

Işık Biçer

Assistant Professor of Operations Management and Information Systems at the Schulich School of Business, York University, Canada

Işik Biçer is Assistant Professor of Operations Management and Information Systems at the Schulich School of Business, York University, Canada. Before that he was a faculty member at the Rotterdam School of Management, Erasmus University in the Netherlands. He holds a PhD degree in Operations Management from the University of Lausanne, Switzerland.

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