The Circular Economy – Operational & Financial Advantages

The well-established IT hardware manufacturing brands have long enjoyed the substantial procurement savings derived from recovering valuable parts from customer returned used IT systems. These organizations either developed reverse logistics operations internally or, more likely, outsourced their ‘recovery for reuse’ operations to specialist services providers. The result is considerable supply-chain cost savings, in comparison to newer entrants without such programs.

The same is now occurring in the maturing ‘Cloud Services’ industry, where well established players have already developed programs and most other ‘Cloud’ players are in the advanced stages of implementing programs. These programs allow them to leverage used IT assets to deliver operational and financial benefits, including improved ROI.

Take the industry benchmark example of Google and their Data Center case study, published by the Ellen MacArthur Foundation. Their ‘Circular Economy’ program has already delivered significant IT infrastructure procurement savings whilst reducing future supply chain currency and availability risk.

Statistics from the Google Case Study:
• In 2015, 75% of components consumed in the spares program were refurbished inventory
• Google custom builds its own servers for data centers using refurbished parts
• There is no distinction made between refurbished and new inventory – both are considered equivalent
• In 2015, 19% of servers Google deployed were remanufactured machines
• In 2015, Google resold nearly 2 million units into the secondary market for reuse by other organizations.
• Hard drive and storage tapes that cannot be resold are crushed and then shredded

When considering the immense scale of Google’s global Data Center operations, the level of financial savings these ‘recovery for reuse’ processes produce is enormous. However, these benchmark levels for component reuse are somewhat typical for the advanced recovery of IT infrastructure systems.

Major IT manufacturers also enjoy similar reuse levels for meeting demand for spares inventories, installed systems upgrades and in remanufacturing systems using both new and used components.

Few Cloud Data Center operations have the scale of Google to develop such recovery programs. This is why specialist partner organisations have expanded their operations to also support the Cloud Services Datacenter industry, beyond just their existing IT manufacturing customers.

The expenditure savings alone from recovery for reuse processing is a sufficiently compelling reason to embrace Circular Economy disciplines; however, there are additional key strategic reasons for adopting such a shift in the management of IT assets going forward. This is particularly true of organisations that use IT technology infrastructure as a core tenant of their corporate business model.

Strategic Considerations
There is a financial reality that the industry’s conventional ‘Linear Economy’ model of make, use and dispose of products is now becoming economically and operationally unsustainable.

This is particularly true of IT infrastructure products, where the primary economic lifespan of enterprise IT systems are amongst the shortest of any capital asset class. This is clearly the function within Moore’s Law, where the affordable processor speeds double very two years. Likewise, capacity densities within data storage technologies increase at a similar economic rate.

The key takeaway this paper seeks to achieve is to gain the readers appreciation that it is really only these core technology components within an entire IT infrastructure that are subjected to the very short Moore’s Law based economic lifecycle. The majority of other equipment components have a considerably greater economic lifespan. So why simply dispose of everything and buy everything new?

Rising Material Cost & Availability Risk
A recent study conducted by McKinsey & Co (2015), highlighted the sharp increase in global commodity pricing since the year 2000, which has effectively erased all the price declines that occurred throughout the entire 20th century from all the efficiencies gained in mining, design, production and logistics.

Resource Market Risk
According to the United Nations Environment Program (UNEP) 2016 Report, extraction of ores and minerals grew by a factor of 27 over this same twentieth century timescale. Consequently, business as usual is predicted to lead to extensive scarcities of non-renewable materials, especially all metal types. This shift in supply and demand necessitates considerable change in the way we use and produce goods and services in order to cater for the growing world populations.

To give a simple example on the future constraints on IT industry resources, it is worth considering that 3 billion new middle-class consumers, driving new digital industry demand will enter the global market by 2030.

So, the shift from the year 2000 was no blip, we are faced with exponential demand of resources and reducing availability, which is why the conventional linear model of make, use and dispose is really becoming confined to history.

Using circular economy disciplines, it is an imperative to find ways to create loops in that linear supply chain in order to retain value. This requires an initial feasibility study into the architecture of the IT infrastructure, to determine where supply chain loops can be created in existing hardware operations.

Circular Economy disciplines are especially effective in future Open Compute Project (OCP) operations and should be incorporated into the earliest stage of design and planning these economic infrastructures.

Circular economy disciplines ensure maxim cost efficiencies are achieved when incorporated into the design stage of an OCP based IT infrastructure strategy. Consequently, firms consult early with recovery for reuse partners to both ensure they optimize financial recovery from existing enterprise systems and incorporate reuse into their OCP plans.

International Market Risk
It is also important to consider the geographic source of raw materials required for future digital operations. Evidence suggests that the current major supply sources are in Asia, which involves conventional currency risk, but there now exists the potential addition of ‘Border Adjustment Taxes’ or duties payable on the importation of goods, possibly as high as 20%.

Consequently, organisations will be paying considerably more for goods on importation. It therefore becomes increasingly important to ensure that optimal financial, operational and future utilisation of these products components are achieved within that same jurisdiction.

Ironically, many of the used components in highest demand on the global electronics broker markets are extracted from used systems and are then often resold back into the original manufacturing operations primarily located in Asia. In the future, emerging Circular Economy operations within each major geographic region, will have a positive local economic impact in terms of job creation, supply chain savings, reduced carbon footprint and will help to balance international trade, by retaining these valuable components for further use within the region.

Key Considerations
According to the McKinsey publication on the Circular Economy (October 2016)
“The circular economy isn’t the latest sustainability fad and shouldn’t be thought of as a recycling or green program. It requires top-down management and change across a company, including reevaluating product design, business models, and the supply chain”.

McKinsey also point out a common misconception:
“The Circular Economy is not just about recycling. Recycling is the least value-capturing loop in a circular economy because it is only incrementally better than disposal.

The Value chain ‘Loops’ in order of financial and operational benefit
1. Remanufacture of systems to meet specific configuration requirements
2. Refurbishment of components to complete systems upgrades
3. Refurbishment of components to supply spares inventories
4. Remanufacture of non-required systems for external market sales
5. Refurbishment of non-required components for external market sales
6. Recycling of non-required components with no market demand

These Value Chain ‘loops’ are prioritized on the basis of delivering the greatest supply-chain procurement savings and the highest financial recovery from external resale of used IT assets.

The Migration Path to the Circular Economy

1. Controls

A key issue for ensuring that optimal financial recovery has been generated from this end of life equipment has often been the fact that these assets no longer have any value attributed to them. Therefore, they no longer come under the standard finance department asset management controls.

In a 2016 Wisetek survey, 24 out of 30 participating CIO’s admitted they did not have full track and trace downstream reporting of how their used IT assets were being disposed. The only evidence to ensure ‘fair’ financial recovery for used assets was through competitive bids. In the November 2016 report on indicators for the Circular Economy by the European Academies Science Advisory Council (EASAC), they consider a key indicator in how effective an organisation is in its Circular Economy disciplines is for the finance team to implement material flow accounting controls. This would track the level of remanufacturing, reuse, resale externally and recycling outcomes of all used IT infrastructure and end user assets.

The entire ‘control’ programme would commence with a physical audit of all IT infrastructure asset components, by scanning serial numbers into an asset register database. Particular attention must be given to all data carrying devices. These would be logged into a data security ‘chain of custody’ register for future reconciliation. This forms a checklist of all data devices to ensure that each one has either been certified erased or evidentially destroyed.

This exercise would also provide the operations team with an accurate Bill of Materials (BOM) from which a disposition table can be constructed to determine which components are required for reuse processing, made available for external resale or responsibly recycled.

This information forms the basis of implementing and managing circular economy disciplines. This updated system then enables the operations team to control all remote site equipment return notices and collections. The supply-chain team can also gain early insight into what components are returning from production sites for inclusion in their inventory planning.

2. Data Security

The Control system, as mention previously, provides a security checklist to reconcile that all used data devices are accounted for and that critical data has either been erased or the devise was evidentially shredded using surveillance cameras and its video file is retained. This is a corporate safeguard to protect against data breaches emanating from used data storage systems, end user systems and all other forms of data carrying devices.

3. Recovery Operations

The system also controls the entire recovery process; firstly the processing center can ‘receive ’deliveries from site and reconcile each systems at the component level. This completes a secure chain of custody. Secondly the supply-chain team can now instruct the disposition routing for each component, following precision dismantling of each system rack.

Components are routed into four main streams:

a) Recovery for reuse processing internally to meet immediate demand.
b) Recovery for reuse processing internally to meet near term demand
c) Recovery for Resale externally
d) Recycling and Reporting

4. Reuse Processing:

a) Stream material is inspected, tested, upgraded if applicable, repackaged for shipment into spares inventory or it then enters the remanufacturing assembly line with the possible addition of new technologies incorporate into the new configuration. The entire system then receives final testing, prior to be packaged and shipped to site.

b) Stream material is inspected and tested, before being routed for short term retention. If not required after a predetermined period, it is transferred to the external resales stream C for cataloguing.

c) Stream material is inspected, tested, catalogued and packaged for shipping.

d) Stream material is transferred from the recovery for reuse ESD manufacturing facility to the recycling center for separation into commodity fractions and bulk shipped to downstream refiners. Full downstream process tracking and reporting is compiled for sustainability reporting.

Sustainability

From the highlighted Google case study, they can now justifiably state that they manage their IT Electronics hardware disposals to meet the highest global sustainability standards. Without doubt the most environmentally efficient disposal of used electronics is the recovery for reuse of materials and components for their originally intended purpose. They also quite rightly highlight this as part of their sustainability and Corporate Social Responsibility commitments. This supports their reporting requirements for inclusion in their annual report.

Likewise, our hardware manufacturing clients are also leaders on the Dow Jones Sustainability Index, which is very popular amongst the powerful ethical investor community and market analysts alike.

However, in this paper, we went to great lengths to avoid majoring on the environmental credentials of implementing Circular Economy disciplines, because the strategic business motives of gaining competitive costs advantage from IT based services and reducing future supply chain risks are quite simply more compelling as they deliver a strong cost advantage.

However, the EASAC 2016 report does clearly identify that;

“Linkages exist between the circular economy; human well- being and sustainable economic development”.

That is certainly something most compelling of all!

About Mike Higgins

Mike Higgins is the Chief Sales & Marketing Officer for Wisetek