The pressure is growing on manufacturing organizations to improve their environmental performance. The rise in regulations and consumer sentiment is forcing companies to look at their entire strategy and consider options for sustainability in manufacturing. It is becoming clear that business as usual will not be good enough, and to flourish, companies must develop sustainable business models for manufacturing moving forwards.
But this should not necessarily be viewed as a burden amidst the apparent doom and gloom of externality and environmental challenges from tightening government regulations. There is a strong and compelling business case for sustainability as a corporate advantage.
This business advantage can be challenging to quantify, but one of the clearest frameworks comes out of New York University that calculates the return on sustainability investment, as well as to quantifies the monetary financial benefits of investing in sustainability. The rationality is that when companies embed Environmental, Social, and Governance risks and opportunities in their strategy, they can improve on many factors and manage risks better.
They can engage with stakeholders and become more efficient in their operations. It is also good for talent management because more and more of the younger generation search for meaning and purpose in the workplace. They are much more inclined to work for an organization they know has strong environmental aspirations or is developing different products and services that are helping to solve sustainability challenges.
In the latest PTC Talks webinar Dr Jan Konietzko, lead of sustainable products and circular economy at Cognizant, explained how sustainable business models for manufacturing could improve a company's operational and financial performance. "Across the board, sustainability can be quantified by what benefits it delivers, and when you invest in these aspects, you are driving revenue, growth, greater profitability, and higher corporate valuation," he says. "It is clear, it is good for business."
Why do manufacturers struggle with a cloudy view?
Manufacturers classically make products and sell them. This classic linear value chain starts with the extraction and then goes through processing, production, and sales before passing the product to the user, maybe a second user, and finally, the waste bin. Even though many companies are moving away from this business model, it is still the dominant one, which delivers a clouded view. A manufacturer does not have a clear view of where the raw materials come from because there are several tiers in between, creating a lack of transparency. There is also a clouded view when the product passes the sales horizon because, with a sales model, the manufacturer transfers ownership and loses control of the product.
Why use a product-as-a-service business model?
Suppose you contrast that with an emerging business model in the form of a product as a service. This model enables several use cycles under the company's control, allowing them to retain the product's value after it has been sold. Organizations can invest in a better customer experience when providing the products as a service. They can get products back when they are no longer used, put them into the subsequent use cycle, and monetize them again. It creates a business incentive to monetize products, components, and materials over time, where the value is controlled and recaptured over the product lifecycle.
It also provides transparency to allow companies to work with suppliers and the upstream supply chain; to redesign products based on what they learn from the use phase about when products fail or how much maintenance and repair needs there are. Then manufacturers can organize return flows, which allows the cloud to be lifted with more transparency into the raw material base used to provide the products.
How can it facilitate the circular economy?
Moving to a product-as-a-service business model is also a cornerstone of implementing a circular economy. Around the world, the circular economy is high on the policy agenda and seen as an essential vehicle on the journey to a net-zero future. It allows companies to maximize the value of products, components, and materials through the five Rs of reuse, repair, refurbish, remanufacture, and recycle.
At one end of that scale, only a little is required to reuse a product, but at the other end, recycling it requires considerable energy and cost. The goal of a circular economy is to minimize natural resource extraction by making products more productive with materials to maximize their value. So why is the product-as-a-service model an enabler for circularity? The answer is that it means companies do not sell the product anymore, but they provide them as a service; they still own them. If they still own them, they have a business incentive to ensure that the products they put on the market last as long as possible and can be monetized for as long as possible. It is a long transformation journey, but it provides the incentive and is a crucial element of a circular economy.
How can this be implemented in practice?
Moving to a circular business model can be daunting, but it all begins with a lifecycle perspective, which means understanding the complete value chain starting with material extraction. Along each of these stages in the lifecycle, there is some form of resource extraction to make it happen, and at each stage, there are some emissions, waste, and pollution.
From an environmental point of view, this is a lifecycle perspective; there is a method called lifecycle assessment. It is a scientific method that has existed for many years and helps assess a product's or service's environmental impact along the whole lifecycle. This lifecycle perspective is the first step to implementing sustainable and circular business models and obtaining better visibility into the upstream and downstream supply chains. It helps companies understand impacts and where there are hotspots; this is sometimes referred to as environmental intelligence.
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