The full potential value of the circular economy goes well beyond simply recycling used materials—whether down- or upcycling them. This value is embedded in the reuse, maintenance, refurbishment, and remanufacturing of components and products, so it is equally important to strengthen these reverse setups and capabilities. Companies have mastered the orchestration of complex, multi-tier inbound supplier networks. Now the same sophistication needs to be applied to orchestrating post-usage value streams across multiple reverse cycle partners. 

Map the system for one product 

Companies need to carefully evaluate which reverse cycle networks could create the best arbitrage opportunity. Figure 21 depicts a very simplified multi-tier supplier network for a power drill, and sketches out the different options for the reverse cycle. Would it be better to reinstall the power supply into the next drill (as a used component)? Or to use at least the cable and plug, if transformer reliability presents a problem? Or should all the components be sent to the smelter for metal extraction, as this can be done in one simple shipment instead of organizing a more complex operation involving disassembly and remanufacturing? Each of these trade-offs is highly dependent on the scale, reliability and transferability of the supply of used components. Equally important is to factor in the relative cost advantage of setting up effective post-usage loops, typically with business partners, versus making new components and using virgin materials. 

Figure 22 shows the financial and labour arbitrage of potential different reverse cycle treatments for a power drill example based on our circularity model [for assumptions, see Appendix 2]. In the refurbishment scenario, used drills (in good condition) are collected, refurbished locally, and sold at 80% of the original retail price. Interestingly, although total revenues are lower, the refurbishment operation results in an additional profit of 4 percentage points compared to the status quo, and creates jobs in the local refurbishment facility. In the recycling scenario, in addition to local refurbishment, other used drill components and materials are shipped back to China as input for making new drills, bringing the potential margin up by 9 percentage points (compared to status quo) driven mostly by materials savings. Assuming additional sales instead of cannibalization of new drill sales (i.e. the refurbished drills at competitive prices capture new customers), the profit margin would increase by 10 percentage points. 

Observations from current practice suggest that raw materials can be recycled at global levels, or at least sold on increasingly liquid markets. In contrast, component harvesting for reuse and remanufacturing as well as product refurbishment are best executed at a local or regional level, as this cuts down logistics costs and allows players to tap local engineering skills. Ricoh, Renault and Canon all have their remanufacturing facilities in Europe, for example, which helps them manage supply and demand and creates local jobs. In the US, the remanufacturing industry is estimated to provide around 500,000 jobs for products ranging from automotive, electrical and electronic equipment to furniture and construction equipment.⁹⁹ In terms of value, CLEPA (the European Association of Automotive Suppliers) puts the remanufacturing market in Europe at US$ 10 to 12 billion.¹⁰⁰ 

Establish the system at scale

How can companies unlock these profit pools? First, together with their partners in the inbound and reverse supply cycles, they need to carefully evaluate the arbitrage opportunities. What exactly are the costs involved, and what control can the stakeholders exert (whether jointly or individually)? As more products and components re-enter supply networks, liquid markets for components and materials are likely to emerge that meet the specifications and increasingly strict quality standards of modern manufacturing processes. First-mover opportunities lie ahead in all industries for stakeholders who build reverse cycle capabilities (especially for collection, remanufacturing, and refurbishment) to take full advantage of this potential, Sophisticated reverse network management capabilities are another part of the puzzle, best fuelled by investments in hardware (e.g. sorting and manufacturing capabilities) and software. The latter will need a high level of sophistication, such as materials databases, methods for monitoring the condition of used components, and inventory management tools to store BOM information. Companies working hand-in-hand with governments and industry associations will have the best chance of establishing standards to ensure product quality and supply chain transparency.

To arbitrage the residual value of a product or materials flow, companies will ideally organize their reverse cycle network across different product and materials components with the same sophistication as they have evolved for their inbound multi-tier supplier networks. Ricoh, an example of a practiced ‘reversed cyclist’, manages many different circular archetypes for their products, components and materials, maximizing their returns from each. Equipment collected is evaluated and entered into a reverse cycle based on its residual value. Depending on the state of the machine, it is either remanufactured and sold as a GreenLine device, or harvested for parts and materials. The valuable parts are remanufactured and reused in Ricoh’s products. The majority of the remanufactured parts are used in GreenLine machines. In some Ricoh laser printer models, however, remanufactured toner cartridges account for 40% of the total cartridges. In addition, 38% of Ricoh virgin toner bottles are made from recycled plastic materials. The company plans to scale up closed materials loops that involve shipping recovered materials back to Asia, where the majority of new parts manufacturing takes place. Ricoh has continually improved their resource loops setup since establishing the Comet CircleTM in 1994.¹⁰¹ When Ricoh started remanufacturing equipment in their European plants, Phil Hawkins, Assistant General Manager, Business Strategy, at Ricoh UK remembers: “We saw a universe of possibilities opening up.” Indeed, GreenLine products generate margins 1.5 to 2.0 times higher than new product lines. Beginning to navigate this universe promises to be an attractive opportunity for many companies, which many have started to capture, especially in the inner circles of component harvesting and product remanufacturing.