EINDHOVEN, The Netherlands, November 19, 2014 /PRNewswire/ --
The business we are in is about helping our customers thrive in tough, competitive marketplaces.
(Photo: http://photos.prnewswire.com/prnh/20141119/717640 )
This means having to understand their immediate business needs from every angle.
But we also need to look at the bigger picture and help them find the best long term route to resilience and ongoing commercial success.
One of the big issues relates to our environmental impact and how we can build commercially attractive sustainable businesses.
We live on an ever crowded planet forecast to rise from seven billion people to 9.6 billion by 2050[1].
The good news is that increasing numbers of people in the rising markets, many with disposable income for the first time, could boost demand, creating new business opportunities for all of us.
By 2025, the management consultancy McKinsey has estimated that annual consumption in the emerging markets would rise to $30 trillion, up from $12 trillion in 2010, and account for nearly 50 percent of the world's total, up from 32 percent in 2010[2]
The bad news is that planet earth cannot supply the resources industry will need indefinitely to meet this kind of demand.
By mid-century, some environmentalists say, we might need five planet earths to sustain our needs if nothing is done to improve our resource efficiency[3].
At present, about 80% of the waste from consumer goods such as food, beverages, packaging, clothes and shoes ends up in incinerators, landfill and wastewater[4].
The squeeze on the planet's finite resources is already here. Commodity prices experience more price hikes and volatility today than in the past century, with many resources harder to extract or find.
And some experts warn we may even be running out of some important materials.
Professor James Clark, for example, from York University in the UK says if used at current rates such precious materials as gold, silver, indium, iridium and tungsten will be depleted in the next five to fifty years[5].
Clearly, we all need to think innovatively about ways to develop goods that can be recycled and reused in as many closed loops as possible.
In this context, the idea of the circular economy - a more regenerative model which encourages manufacturers to recycle, reuse or remanufacture products - is gaining ground.
A recent report, Towards the Circular Economy was discussed at the 2013 annual gathering of the world's leaders in Davos organised by the World Economic Forum, for example, predicting that a fully circular global economy could generate as much as a trillion dollars a year in cost savings.
Speaking at Davos, McKinsey's Managing Director Dominic Barton lamented the current waste: "Every day we are losing the equivalent of $3-4 billion worth of materials. If that was a financial loss, it would represent a continuous series of black Fridays..."[6]
Already in our business we are seeing rental and circular methods becoming more attractive to our customers facilitated by such financial solutions as Lifecycle Asset Management (LCAM), in which manufacturers can extend the life of their products through reuse, remanufacturing and recycling.
Our industry might be able to help drive positive change even further. Our financial solutions can help manufacturers move their customers from asset owning to paying for a service. This will, circular economist theorists believe, provide a number of benefits:
However, to get there people will have to move away from owning things and towards paying for a service in large numbers. Encouragingly, we are already seeing a strong push in this direction with the rise of the sharing economy, a sector capable of generating $3.5 billion a year according to Forbes while growing at a rate of 25% per year,[7]
A US survey by Crowd Companies and Vision Critical polling 90,000 people found that they liked the new services because they were convenient and cost efficient, with sustainability as an added bonus[8].
In the mobility sector, for example, new collaborative models like Uber - in which individual drivers get matched to people who need a ride - is worth close to $17 billion[9]; while Airbnb - which has stormed into the hotel sector matching people's homes with visitors who want somewhere to stay - has attracted around 15 million users so far; and could be worth as much as $10 billion.
But in order to transform the traditional manufacturing model of selling assets, companies like DLL must deliver service-based solutions across the board that drive healthy new revenue streams for producers and result in attractive prices for their customers.
In this world, customers might, for example, accept not owning a forklift machine but be pleased to gain a lifting service instead, a solution a European manufacturer we work with has actually started to offer its customers; those in the agricultural and food industry might no longer own a harvester but acquire the means to harvest corn; or, in health care, hospitals may no longer own a MRI machine but have a top quality tumour scanning service. All of this enable manufacturers to build new, successful circular economy revenue models.
Indeed, our own research has found that there are practical advantages for manufacturers and dealers in selling remanufactured or refurbished goods known as Second Life assets as part of their portfolio. Recent research[10] suggests, for example, that manufacturers achieve higher margins for these assets over new products. It also enables sales teams to offer customers who are looking for a better deal on price an alternative, thus preventing them from going to a different supplier. Some manufacturers also say that spare parts and service businesses make a significant contribution to their P&L.
It is not completely new. Anyone who has sold office equipment such as copiers knows full well the benefits of offering customers a leasing option, by which they buy the service not the machine.
What is revolutionary is that in the age of collaborative consumption, these service-based solutions might spread into new industries and product areas, bringing a more robust, circular economy closer in sight.
Take Philips, for example. They now sell lighting as a service (pay per lux), where customers pay for the light they need on a leasing basis, facilitated in this case by DLL.
CEO Frans van Houten says: "In many cases, we also take the equipment back when it's the right moment to recycle the materials or upgrade them for reuse."[11]
They have the same deal with municipal customers for streetlight installations in Singapore and more recently a contract in Buenos Aires to "replace the majority of the 125,000 existing streetlights there with LED luminaires over the next three years. We install the equipment, maintain it, and make sure that it runs for a very long time."
Van Houten explains why this mind shift is needed: "We can't think in terms of designing products that we throw over the wall to customers, but instead we need to design products that are upgradable and maintainable and that can be mined for materials and components that can be reused. Our mind-set needs to be 15 years out - not just "now" - and it requires us to think in an end-to-end way, involving our suppliers and sales force."[12]
In the trailer business, a German manufacturer we work with is able to extend the product life of its range from the current average of 12 years to 15-20 years by offering refurbished trailers on an operational lease basis that have the look and feel of a three month old model.
Side by side with this, the same company also developed an end of life treatment business, by which raw materials extracted from old trailers are recycled and used for making new trailers. This applies not only to steel and aluminium but also to circuit boards, brake callipers and tires.
The prize of a healthy closed loop system is in sight. The case for it is clear. The key to this future though also lies with the ability of manufacturers to change their relationship with their customers, based on a new leasing service model. In this way, innovative financial solutions could be a key driver of sustainable business transformation.
Bill Stephenson, CEO & Chairman of the Executive Board of DLL
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1. Kochhar, Rakesh, 10 projections for Global Population in 2050, Pew Research Center, February 3, 2014. http://www.pewresearch.org/fact-tank/2014/02/03/10-projections-for-the-global-population-in-2050/ [ http://www.pewresearch.org/fact-tank/2014/02/03/10-projections-for-the-global-population-in-2050 ]
2. Winning the $30 trillion decathlon, McKinsey Quarterly, August 2012. http://www.mckinsey.com/insights/strategy/winning_the_30_trillion_decathlon_going_for_gold_in_emerging_markets
3. Braungart, Michael & McDonough, William, The Upcycle: Beyond Sustainability - Designing for Abundance (North Point Press, 2013).
4. Towards the Circular Economy, Volume 2, Ellen MacArthur Foundation.
5. Towards the Circular Economy, Volume 1, Ellen MacArthur Foundation.
6. Confino, Jo, Business leaders in Davos keen to mainstream circular economy, January 27, 2014. http://www.theguardian.com/sustainable-business/business-leaders-circular-economy-mainstream-davos
7. Andjelic, Ana, Why brands should pay more attention to collaborative consumption, May 8, 2014, http://www.guardian.com; Geron, Tomia, Airbnb and the unstoppable rise of the sharing economy, Forbes magazine, February 2013.
8. Wirthman, Lisa, How to make the most of the sharing economy, 10 July 2014, Forbes.com.
9. Wirthman, Lisa, How to make the most of the sharing economy, 10 July 2014, Forbes.com.
10. Selling new by offering pre-owned assets; Improving pre-owned solutions by understanding the buyer, DLL White Paper, 2014.
11. Q&A Frans van Houten, Towards the circular economy, McKinsey Quarterly, February 2014. http://www.mckinsey.com/insights/sustainability/toward_a_circular_economy_philips_ceo_frans_van_houten
12. Q&A Frans van Houten, Towards the circular economy, McKinsey Quarterly, February 2014. http://www.mckinsey.com/insights/sustainability/toward_a_circular_economy_philips_ceo_frans_van_houten
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