Map the external value chain
A circular procurement project is all about achieving shared goals. That will require cooperation. To determine what this cooperation should look like, it is important to get an idea of the parties involved, both within your internal organisation and in the external value chain. It may help you to sketch an outline of the value chain.
Analyse how the external value chain is composed, from the production of raw materials to waste management. Map this value chain and the relations between parties. Also try to identify the revenue models, and therefore the interests, of the various value chain partners. Next, make a graphic representation of the new (circular) value chain that you have in mind. Use this as a basis for the discussions with market players.
How deep you can penetrate into the value chain also depends on the complexity of a product and therefore on the complexity of the value chain. The value chain for a complex product (e.g. a mobile phone) consists of thousands of parties, while the value chain for a relatively simple product (e.g. a desk) is not so complicated.
When mapping the interests, you should also take the technical life cycle into account. Although it may be possible to completely close the value chain for products with a relatively short life cycle (e.g. workwear), in terms of organisation this may not yet be practical for products with a relatively long life cycle (e.g. a cycle path). In the long term, the continuity of market parties is difficult to guarantee. Moreover, a product's life cycle is inherently linked to the business model. You should therefore take the underlying incentives of the various business models into account.
This means that the complexity and the life cycle of a product determine the way you cooperate with the external value chain. There are three options (+ source: Copper8, 2018), that are illustrated in the figure below:
- Close the value chain - for relatively simple products with a short life cycle. Examples: paper, coffee cups, catering;
- Deeper in the ‘linear‘ value chain - where cycles can be closed at component or material level, such as office furniture, clothing and multifunctional devices;
- Different perspectives round the table - to make a product as circular as technically possible, taking into account the potential for reuse, such as buildings and roads.
The way in which you involve the external value chain also depends on the complexity and technical life cycle of the product you are procuring. Source: Copper8 (2018), Circular Procurement in 8 Steps.
Procurement projects often involve conflicting interests. An internal client may demand maximum quality for a low price. On the other hand, a contractor may want to generate the highest possible turnover, in order to benefit from products of sub-optimal quality that may need to be replaced sooner.
In a circular economy we strive for maximum value retention and we therefore demand maximum quality. A financial incentive will motivate suppliers to deliver maximum quality during a product's life cycle. This means there are two important conditions to make a circular procurement project successful:
- Create a common interest for client and supplier, based on the retention value of products and (raw) materials.
- Safeguard this common interest with a financial agreement ensuring minimum costs for purchase and usage of the product, e.g. Total Cost of Ownership (TCO).
For example, when an organisation needs new office furniture, the office furniture, including maintenance and take-back service, is procured for a period of ten years. Evaluation of the procurement project includes the total price of delivery and maintenance and any proceeds from take-back.
In this model both parties benefit from high quality. The client has good quality furniture for a period of ten years and the supplier earns more if no maintenance is required.
- Before you start a procurement project, first map the external parties involved.
- Make a graphic representation of the new (circular) value chain that you have in mind. Use this as a basis for discussions with market players about cooperation within the value chain.
- Create a common interest that ensures both client and supplier benefit financially from value retention of the products supplied.
Step 4 from the eBook Circular procurement in 8 Steps (pp.75-84) details how to organise your cooperation with the external value chain.