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The metaverse will be subject to stringent UK regulation, making tech giants behind the virtual worlds open to billions of pounds of potential fines, according to the experts whose work underpins the forthcoming Online Safety Bill.

The warning, which is supported by the British government, comes just days after Meta, the company formerly known as Facebook, flagged potential regulatory risks from its metaverse strategy to investors in a securities filing. Meta has already spent $10bn building its unprofitable augmented-reality division, seeking to create an avatar-filled virtual world.

"Technology companies can't use the metaverse to escape regulation," said Lorna Woods and William Perrin, the academics responsible for creating the model underpinning the Online Safety Bill. "The feeling is that Meta has moved the debate on to a new type of service that avoids regulation. But that isn't the case at all in our view. The Online Safety regime applies."

UK ministers, including Chris Philp and Nadine Dorries, have also previously warned that the new law would apply in the metaverse, whatever future form it took.

Meta said that safety and privacy will be baked into its metaverse designs and that it had already committed $50mn into research in this area.

Microsoft chief executive Satya Nadella has also painted his company's $75bn purchase of video games company Activision as central to the future of online interaction as people spend more time in the metaverse.

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Meta said in its annual 10-K report on Thursday that its metaverse efforts may be subject to new laws in the US and worldwide "including in the areas of privacy and ecommerce, which may delay or impede the development of our products and services, increase our operating costs, require significant management time and attention, or otherwise harm our business".

Virtual worlds, where users' lifelike 3D avatars can express themselves in a fuller range of human speech and gestures, present an even greater content-moderation challenge than the hundreds of millions of written posts and images that flow through Facebook, WhatsApp and Instagram every day.

Meta's virtual reality boss, Andrew Bosworth, has admitted that virtual reality can often be a "toxic environment" especially for women and minorities. He said in an internal memo from March seen by the Financial Times that moderating user behaviour "at any meaningful scale is practically impossible".

"The big caveat is we don't know what the metaverse is, so it's based on our best guess of what it might look like . . .[but] we need to think about what mitigations or solutions look like that are different in the metaverse, particularly in real time, compared to text or image-based static platforms," said Woods, who is a professor of internet law at the University of Essex.

Further complicating the path to the metaverse are Meta's hopes of incorporating blockchain-based digital payments, which it has warned investors will also involve a high degree of legal uncertainty and technical risk.

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Metaverse 'cannot escape' UK online rules, say experts

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The metaverse will be subject to stringent UK regulation, making tech giants behind the virtual worlds open to billions of pounds of potential fines, according to the experts whose work underpins the forthcoming Online Safety Bill.

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Crypto people say they're building it. Gamers might already be living in it. The art world is cashing in on it. Web veterans are trying to save it. But what is it?

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Credit... Jon Han

The biggest ideas in tech often lurch into the lexicon before they are truly coherent. Jargon appears out of nowhere, underexplained and overused: the internet of things, the sharing economy, the cloud.

In some rare cases, the terminology sticks. A lot of people talk a lot about a lot of loosely related things, and then those things merge into a single semi-comprehensible thing. Then we live our lives within that thing forever. Remember hearing about "the internet"? Get ready for "the metaverse."

The term comes from digital antiquity: Coined by the writer Neal Stephenson in his 1992 novel, "Snow Crash," then reimagined as the Oasis in the Ernest Cline novel "Ready Player One," it refers to a fully realized digital world that exists beyond the analog one in which we live.

In fiction, a utopian metaverse may be portrayed as a new frontier where social norms and value systems can be written anew, freed from cultural and economic sclerosis. But more often metaverses are a bit dystopian - virtual refuges from a fallen world.

As a buzzword, the metaverse refers to a variety of virtual experiences, environments and assets that gained momentum during the online-everything shift of the pandemic. Together, these new technologies hint at what the internet will become next.

Video games like Roblox and Fortnite and Animal Crossing: New Horizons, in which players can build their own worlds, have metaverse tendencies, as does most social media. If you own a non-fungible token or even just some crypto, you're part of the metaversal experience. Virtual and augmented reality are, at a minimum, metaverse adjacent. If you've attended a work meeting or a party using a digital avatar, you're treading into the neighborhood of metaversality.

Founders, investors, futurists and executives have all tried to stake their claim in the metaverse, expounding on its potential for social connection, experimentation, entertainment and, crucially, profit.

Matthew Ball, a venture capitalist and prolific essayist, describes the metaverse not as a virtual world or a space, but as "a sort of successor state to the mobile internet" - a framework for an extremely connected life. There "will be no clean 'Before Metaverse' and 'After Metaverse,'" he writes. "Instead, it will slowly emerge over time as different products, services and capabilities integrate and meld together."

Speaking to CNET in May, Mark Zuckerberg shared his own Facebook-centric view: "We want to get as many people as possible to be able to experience virtual reality and be able to jump into the metaverse and to have these social experiences within that," he said, referring to the company's experimental virtual reality environment, Horizon, which he hopes people will explore using Facebook 's Oculus headsets.

In a June interview with VentureBeat, Jensen Huang, the chief executive of Nvidia, which makes computer chips, shared more of a vibe than a vision: "We'll be able to almost feel like we're there with each other."

If all that sounds too heady, for now this might do: The metaverse is the internet, but so much more. And though it may still be in the future, if it materializes at all, it seems closer than it's ever been.

Roblox, a platform where independent developers create games popular with children, has been described as a metaverse.

Earlier this year, in the midst of a crypto boom, the price of a currency called MANA began climbing the charts in Coinbase, a popular exchange for digital currencies.

MANA is the currency of a virtual world called Decentraland, where in March plots of digital land were going for the equivalent of hundreds of thousands of dollars. (After two years bouncing around 10 cents, MANA briefly broke $1.60 in April, pushing the combined value of all the tokens past $2.4 billion.)

By size, Decentraland is more of a commune - as of July, just a few hundred people are logged in at a time, down from a March peak in the low thousands - made up of user-generated NFTs. Its creators have described the platform less as a place than as infrastructure upon which to build a place. (Decentraland's currency and land contracts run on the Ethereum blockchain.)

Denizens of Decentraland are constantly creating scenes and experiences for other users, like concerts and art exhibits. There are casinos where you can gamble in MANA, with croupiers who are paid in MANA to show up for work. The sense that Decentraland is a work in progress pervades the sparsely populated grid of half-developed plots and themed zones. Between events, users are mostly left to wander and wonder: What now?

Speculators seem less confused; after all, Decentraland is first and foremost an experiment in scarce digital property. This month, Republic Realm, which calls itself a "digital real estate firm," purchased an NFT of a 259-parcel virtual estate in Decentraland for more than 1.2 million MANA, or, at contemporaneous exchange rates, more than $900,000.

Sotheby's, which acquired a small plot in Decentraland's arts district and constructed a replica of its London galleries, recently closed its first show in the metaverse. Michael Bouhanna, who ran the sale, estimated that 90 percent of the galleries' 3,200 visitors had little sense of what Sotheby's is or does, but said the exercise was useful for helping existing customers conceptualize NFTs, which the auction house is already selling.

What separates Decentraland from its predecessors like Second Life, a virtual world owned and operated by a private company called Linden Labs, is that it is indeed fairly decentralized. The plan, according to Decentraland's founders, was always for its users to take ownership of the world, building and doing what they please.

By contrast, Dave Carr, a spokesman for the Decentraland Foundation, said, "Fortnite is a centralized experience," meaning that it functions top-down, with major decisions coming from its developer, Epic Games. "Here, you feel like you have a definite part in it."

In Decentraland, there are casinos where you can gamble in MANA, with croupiers who are paid in MANA to show up for work. Credit... Decentral Games

"It took off in a way none of us quite anticipated," said Donald Mustard, the chief creative officer of Epic.

As millions of players flocked to Fortnite Battle Royale, a game mode that is a bit like "The Hunger Games," the company rushed to add social features, like voice chatting and dance parties. In financial documents made public in federal court in May as part of an antitrust suit against Apple, Epic said Fortnite made more than $9 billion in revenue in 2018 and 2019 combined. Players spend money to dress up their characters in superhero costumes and banana suits.

Now, Epic markets Fortnite as not just an interactive experience but as a metaverse.

"It's more than a game," Matthew Weissinger, the vice president of marketing at Epic, said in court. "We're building this thing called the metaverse - a social place."

A Travis Scott concert held within Fortnite last April drew more than 12 million concurrent views, the company said. And nearly 50 percent of players are using the game's creative mode, which allows users to populate their own islands with buildings and games, said Tim Sweeney, the chief executive of Epic.

For Mr. Sweeney, the formation of the metaverse also entails a fight for its independence. Without specifically referring to Epic's lawsuit against Apple, which is set to be decided in the next few months, he alluded to it several times.

Defining the metaverse was difficult, he said, but he knew what it was not: "The metaverse is not an App Store with a catalog of titles," Mr. Sweeney said. "In the metaverse, you and your friends and your appearance and cosmetics can go from place to place and have different experiences while remaining connected to each other socially."

Could it be possible one day to have a tunnel from Roblox to Fortnite and other games, connecting them all in some sort of futuristic world? Mr. Sweeney said yes.

There are millions of games created on Roblox each year. Here, a shot of the prison-escape game Mad City.

Roblox, a platform where independent developers create games popular with children, may be the nearest and most expansive vision of the metaverse.

In the first quarter of 2021, people spent nearly 10 billion hours playing Roblox, according to the company's earnings report, and more than 42 million users logged in each day. Players also spent $652 million on the site's virtual currency, Robux, which can be used to purchase hats, weapons, hot air balloons and other digital items for their characters. After going public on March 10, the company's valuation shot to $45 billion; as of this week, it's closer to $50 billion.

Dave Baszucki, Roblox's co-founder and chief executive, whose shares in the company were suddenly worth $5.5 billion when the market closed that day, expressed his appreciation on Twitter.

Mr. Baszucki declined to be interviewed for this article, but he has spoken widely and ambitiously about Roblox as a metaverse. He has said his goal is to reach billions of people with Roblox, not just children. At an investor presentation in February, he said the company holds its business meetings on the platform.

"Just as the mail, the telegraph, the telephone, text and video are utilities for collaborative work, we believe Roblox and the metaverse will join these as essential tools for business communication," Mr. Baszucki said. "Ultimately, someday we may even shop within Roblox."

Indeed, in May, a digital Gucci bag sold on the platform for more than $4,100, exceeding the price of the physical object. (There's also a darker side to Roblox, not condoned by the company, that includes strip clubs, sex parties and Nazi re-enactments.)

There are millions of games created on Roblox each year, and much of the money they generate - through the sale of digital items and upgrades - goes to independent developers. In some cases, game makers in their teens have become millionaires.

Ammon Runger, a 16-year-old, and his colleague Stefan Baronio, 23, have made six-figure salaries producing the prison-escape game Mad City, which attracts more than 200,000 players a month. Mr. Baronio bought a new car and paid for college with the money. He said the experience has been "life changing" but stopped short of calling Roblox a metaverse.

"I definitely feel like they're getting there, but I still think they're pretty far away from it," Mr. Baronio said. Half of the platform's players are 13 or younger, the company said.

In any case, the company is forging ahead. Craig Donato, the chief business officer of Roblox, said that 17- to 24-year-olds are the platform's fastest-growing consumers, and the company is adding more languages as it expands its user base around the world.

Mr. Donato said that during the pandemic he spent so much time meeting in the company's virtual office that upon returning to the physical space, he had to remind himself that he could not do the same things as his Roblox character.

"I was like, 'Gosh, I have to make sure I don't jump out the window,'" he said.

While there is a lot of corporate interest in the metaverse, skeptics abound.

Strauss Zelnick, the chief executive of the game publisher Take-Two, said in a May earnings call that he was "allergic to buzzwords," and suggested the metaverse could be all hype. "If you take metaverse, SPAC and cryptocurrency, in five years, will any of this matter? I'm not sure it will," he said.

Then there are those who wonder whether interest from the tech sector is simply opportunistic, or missing the point entirely.

Evo Heyning, for instance, has been working and playing in the metaverse for two decades. The State Department even hired her to help build its presence on Second Life.

In earlier virtual worlds, Ms. Heyning said, "it was always seen as people participating in a new type of public commons. Now, obviously lots of companies are going to assert dominance."

Hopes and assurances from tech executives are nice, but private platforms are private platforms. "Right now, I can create an avatar, but I can't jump from one world to the next," Ms. Heyning said, describing a concept known as "interoperability." The metaverse, in her view, isn't a single firm or organization's product or space, or even all of them together -it's the way they're connected.

In pursuit of that connection, Ms. Heyning, 45, has joined a few volunteers to form the Open Metaverse Interoperability Group, which seeks to establish technological standards for "bridging virtual worlds," in the hope that metaverse players will adopt them.

Robert Long, who is also part of the group, compared his hopes for the fledgling metaverse to the early web. "There is no single owner of the whole thing," he said. "It's decentralized in the same way the web is, with lots of different people hosting it. We're looking for the HTML of the metaverse."

Kayvon Tehranian, a founder and the chief executive of Foundation, a marketplace for NFTs, also sees building the metaverse as a chance to get right what he believes former stewards, and users, of the internet got wrong. The key, he said, is blockchain technology. How people engage with the metaverse is secondary.

"The fact that we're surrounded by a global layer that's there at all times," Mr. Tehranian said, referring to the Ethereum blockchain, "where there's no central party that determines whether or not something is available or not?" That, he said, is the antidote to the digital world we already live in - one that he describes as akin to a metaverse but "with dictators" (Apple, Google, Facebook).

His metaverse hews to a particular definition of freedom. "The thing I really care about is that you as an individual own objects," he said. "Property ownership is a tool. It works. It brings financial incentives."

This may sound, depending on your ideological orientation, more dystopian than utopian. To Mr. Tehranian, it's merely realistic.

"We're still talking about human nature, which is greedy and selfish," he said.

Indeed, many are looking at the metaverse as a financial opportunity. Mike Winkelmann - a.k.a. Beeple, the guy who sold an NFT of his artwork for $69 million - is working on a start-up called Wenew, which will sell NFTs associated with moments in time, creating, in the company's words, "the memory palace of the metaverse." (Its early offerings include moments from the tennis star Andy Murray's career.)

Despite his stake in the crypto-oriented vision of the metaverse, Mr. Winkelmann's sense of what it might be, or already is, remains wide. Whatever the metaverse is, it's not just virtual reality, or augmented reality, or the blockchain and NFTs, or virtual worlds and games.

"People are very much looking at it as this 'Ready Player One' thing, or a V.R. thing," he said.

"That's just about how close that screen is to your face," he continued, holding his phone up to his eyes. "This doesn't change the fact that a lot of these things are happening in a space that is already virtual."

It's just going to continue the blend, he said, until we're all wearing goggles, or living in tanks of goo, after a gradual and disorienting transition from the internet of today, which is, perhaps, more metaversal than it gets credit for.

"It's a primitive version of what's coming," Mr. Winkelmann said.

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Are We in the Metaverse Yet? (Published 2021)

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Crypto people say they're building it. Gamers might already be living in it. The art world is cashing in on it. Web veterans are trying to save it. But what is it? Send any friend a story As a subscriber, you have 10 gift articles to give each month.

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News, analysis and comment from the Financial Times, the worldʼs leading global business publication

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In an uncertain world, many organizations have incorporated strategic foresight and futures design into their work to support operational functions such as innovation, R&D, marketing, M&A, and strategy. Foresight and futures thinking looks at what is happening today and how trends may develop in future years in order not only to shape operations and strategy in the present, but also to future-proof the organization in a systematic, logical way.

Design combined with foresight and futures thinking-bundled into McKinsey's Design x Foresight approach-can help organizations develop a view that goes beyond major trends and reaches for new thinking and solutions. Foresight and futures thinking has created significant value for organizations as they seek to future-proof their businesses. In one longitudinal study, "future-prepared" firms, defined as those with a corporate foresight practice, posted 33 percent higher profitability than the average company and 200 percent higher growth.

A new report uses McKinsey's Design x Foresight to envision the Asian consumer in 2030 (see Sidebar, "Design x Foresight: Methodology"). Among many insights surfaced were the potential of a dual identity that is both physical and digital, the notion of a "social credit" based on personal skills emerging as a new form of currency, and the cascading consequences of advanced mobility. Using this approach can help us to address areas that may be overlooked by a more general "major trends view" and to be pioneers in new thinking and solutions that can help organizations navigate the future and its uncertainties.

Spotting and tracking peripheral changes and signals can focus attention on possible innovations before they become obvious trends. We identified six clusters of signals and trends and key findings for each:

Commerce and economics. Consumers develop clear intentions around where and from whom they buy products and services.

Consumer values. Asian consumers are becoming more comfortable seeking digital solutions for maintaining and establishing relationships with their relatives and others.

Platform landscape. Consumers trust data and technology on platforms to give them a seamless flow of experience and support their decisions.

New lifestyle levers. Consumers are becoming more adaptive, diversifying their daily routines in response to demographic and economic shifts.

Macro-level levers. Large-scale change can occur with a push from local authorities and pull from shifts in the international layer.

Accessibility and labor. Consumers can overcome physical distance and difficulties with technology. Meanwhile, a lack of labor in certain types of jobs has not intensified.

This work builds on a recent McKinsey Global Institute report that highlighted a sharp upward shift in income pyramids, demographic trends that were shifting sources of consumption, and a diversification in consumer behaviors, often related to the spread of digital consumption channels and models.

Two key cohorts that could be considerable sources of consumption in Asia are Generation Z (people born roughly between the late 1990s and the early 2010s) and seniors. To highlight possible futures for Gen Z, we chose to focus on Indonesia, which is notable for its young population. Its young people are critical for Indonesia's prosperity now and in the future, and they have the potential to offer significant returns for the country's social and economic development. Our study of seniors turns to Japan, which is the world's most distinctly "super aged" society. By 2036, people aged 65 and over will represent a third of the population.

For each cohort, we developed four scenarios along two axes identified in workshops and discussions with McKinsey experts: community versus individual values and physical versus digital purchases and ownership:

Community values vs. individual values. In scenarios characterized by community values, individuals have a tendency to be conscious of their place in broader society and to be mindful of how they are seen by the world around them. They tend to be more connected to elders and children and to prefer established borders, institutions, and traditions. They can also be bound to their social class and prefer to stick with what is tried and true. In scenarios more characterized by individual values, individuals put more emphasis on self-fulfillment (not out of selfishness but with appreciation that every individual has a right to be happy), and they are more open to change and less worried about what others think. These individuals like to stand out, are proactive about change, and tend to see themselves as global citizens rather than belonging to a particular community.

Importance of physical vs. importance of digital. Digitization is irreversible, and the future will be more digital overall than it is today. However, even in this digitized future, there is a scenario in which consumers emphasize the physical world-for instance, where there are earned skills that machines cannot replace and where there are great benefits from using physical means to connect and interact with the world. In contrast, there is an "uber-digital" scenario in which consumers embrace technological progression and development to discover new opportunities for growth and gain a sense of belonging. In this scenario, the digital world may be where they primarily operate and feel at home, and the physical world is secondary.

Would you like to learn more about McKinsey Design?

Generation Z will change consumption patterns

Three themes are particularly prominent in our study of Gen Z in Indonesia. The first is new forms of ownership: many Asian consumers seek to fulfill their needs within their given budget by considering alternatives to traditional ownership of goods, such as rental, subscription, and secondhand goods. Second, consumption is shifting from physical to digital goods, and dual physical-digital identities are emerging. Finally, systemic shifts are expected in how people work, views of government, and new societal rules and systems supporting such change.

These changes will open up new opportunities for companies-for instance, scope to develop new retail experiences blending the engagement stimulated by physical shopping with the huge range of choice offered by e-commerce. Another opportunity appealing to Gen Z is for insurance companies and financial services players to develop products that support shared ownership of property.

We developed four scenarios for Gen Z in Indonesia.

Metaverse

In the metaverse scenario, younger generations spend most of their time online in a virtual shared space that is a global community. They put on their visual aids and sounds and connect to various "verses" where they work together, take classes, socially interact, and furnish with virtual products. Among the many new opportunities enabled by the metaverse is a new retail experience that blends the engagement of physical shopping with the huge range of choice offered by e-commerce. Retailers and e-commerce platforms can leverage their networks of vendors and management experience to develop the capabilities needed to run metaverse shopping platforms, including tools that enable consumers to try out and test products. Consumer companies can create virtual versions of their current products that are enhanced for metaverse life, as well as variants and upgrades of those current products. Manufacturers can release conceptual products and prototypes in the metaverse to test-market reactions and collect feedback before putting into production, thereby reducing R&D cost and market uncertainty. Consumer products and service providers can create digital-only versions of goods and services that cater to the personalized virtual experience, including personalized games and furniture in virtual homes. New platforms integrating digital DIY products can spread as the metaverse lowers the barriers against amateurs producing content themselves.

Accessible gratification

People want physical goods not only to make their lives more meaningful but also to show others what they value-vacation houses, luxury cars, high-quality fashion items, or well-designed home furnishings-and even make them envious. Social media is a way to show off what they want and what they have. In the accessible gratification economy, people can own high-end global brands and enjoy high-end services even at middle incomes. Rules-based sharing matters because access to goods and services is about choice as well as cost-effectiveness. Even exclusive products are offered only on a sharing basis. Overall, consumers can manage their budgets, exercise choice, and at the same time avoid building up debt. Companies that are successful in diversifying services and products and adapting prices to individual consumers will be able to expand their customer base. For companies to use their resources and succeed in this way, they must be flexible and open to new business models. Luxury and high-brand companies can consider fractional ownership programs of their products to increase the chance of their brands being adopted; at the same time, they strengthen brand value with the authenticity that only physical experiences can provide. Companies that provide spaces such as hotels, restaurants, or transportation can offer their spaces in smaller pieces with dynamic pricing. As shared ownership takes a larger part of the market and is supported by systemic change, insurance companies consider developing new products that support the modernized ownership of individual properties that are shared among not only family members but also friends and acquaintances who hold the same beliefs and interests. Financial institutions deploy and offer a new type of mortgage program for a group of people for one property or an individual for shared ownership in a property.

Physio-digital utopia

Even in an increasingly digitized world, people have a strong appreciation of the physical world, which continues to offer attributes that are elusive online-human authenticity, emotion, and importantly, actual physical human contact. Physical goods can be touched, felt, smelled, and tasted. Local culture, art, daily rituals, and community ties are still strong elements of what defines an individual life. Digital tools will continue to be ubiquitous, but they will be used to fulfill physical desires and needs. The talent-sourcing industry can consider building job marketplace services based on the interpersonal skills required by, for instance, nurses, educators, and personal assistants, ensuring improved matching of skills to employment and oiling the wheels of the gig economy. The services, healthcare, and education industries might consider developing premium service add-ons based on high-quality human intervention to raise perceived quality of service and increase customer satisfaction. Given a shift in consumer preference toward products built to last (rather than inbuilt obsolescence) argues for a new business model if companies are to maintain their profits. Makers of luxury goods from fashion items to musical instruments may require systems and platforms to make profit from reselling. Consumer goods companies may need to build services around products to maintain revenue streams and customer touchpoints as they sell fewer products in the future.

Universal accessibility

Meet your future Asian consumer

Our digital world opens up broad and diverse educational and training opportunities to those with low incomes, enabling them to gain skills they could not have learned before so they can transition into higher-paying work that will boost their incomes-so long as they have the literacy to explore the opportunities that are increasingly on offer. As automation spreads, positive outcomes result when people have the right education and skills. Automation will replace many low-paid and often dangerous physical jobs, freeing the people who performed them to develop themselves. Armed with the right education and skills, people will not only see their incomes rise, but also will begin to redefine how to be happy. Access to education and job opportunities is fueling the expansion of the middle class-and in the process boosting consumption. Purchasing power that once resided largely in Indonesia's largest cities is spreading to smaller cities and even rural areas as incomes rise and digital technologies open up opportunities and the ability to buy at lower price points. Consumer product companies and brands need to find new ways to serve new markets and consumers with a combination of an expanded physical footprint and digital channels. Financial institutions and insurance companies also need to identify new customer customers and serve them at lower income levels than they did before.

Seniors will become a major market in Asia, especially Japan

The population of Asian seniors, defined as individuals aged 60 and over, is expected to grow by more than 40 percent between 2020 and 2030, according to the United Nations. MGI finds that their consumption could potentially increase twice as fast as the consumption of the rest of the population in the period to 2030. In Japan, seniors could contribute to more than 60 percent of overall consumption growth. Three themes stand out. First, exponential growth in spending on the self will occur, as seniors desire to remain healthy and therefore independent. Second, seniors are increasingly using technology to enjoy improved connectivity-think senior-friendly interfaces and autonomous transportation. The final theme is hyperlocal buying. Seniors are increasingly engaging in grow-your-own projects, enrolling in group buying, and exercising their bartering skills. These trends are opening opportunities for companies-for instance, preventive medicine and digital health monitoring, as well as a range of technologies that support independent living in the home, from AI-powered companions to crypto-based digital payment systems for use by communities.

The following are the four scenarios for seniors in Japan.

Garden of Eden

This scenario is characterized by the many ways people use a new abundance of free time courtesy of reduced working hours or retirement, the absence of duties such as laundry and cooking, and improved longevity and health, thanks to healthcare that prolongs life expectancy and medicines that cure or more easily treat disease. Consumer data are monitored and used autonomously to improve the health, safety, and quality of people's lives. Because people are healthier and live longer, they have more space to explore options for how they want to spend their time. Companies have a range of opportunities. One is providing the systems and infrastructure to support preventive medicine, which is becoming mainstream. Consumer goods companies that provide interfaces to monitor and track consumer vitals and activities can enter different markets and find new partnerships. Pharmaceutical companies and the food industry can provide new products for prevention. Consumers are more open and interested in new vaccines or supplements that delay or prevent certain diseases to extend a healthy life span. The education system can develop programs for educating professionals specializing in or dedicated to preventive medicine, and the insurance industry might reconsider the eligibility criteria for purchasing their products. Seniors who have money need insurance protection but may not fit today's assessment criteria. Health indexes can be used as references to personalize the products. With seniors living longer, many services can be tailored to them. Personal trainers and physical therapists, especially specialists with knowledge of senior physical health, are in high demand to keep the elderly healthy and in good physical condition.

Autonomy @home

This describes an intensified home environment where consumers are equipped to conduct many activities that assist the self-governance of their lives. Consumers allocate their resources to home Internet of Things devices that monitor their environment and health. Seniors can engage in physical activities with support from augmentation technology. The motivation to use such technologies is not only to have a good quality of life as an elderly person, but also to maintain connections with children. One major area for potential growth is all the components of an on-demand home environment for seniors that enables them to maintain their physical well-being and remain safe. Real estate companies and developers can increase the value of property by installing central care systems for seniors and marketing to them and their caregivers (where they have them). Home appliance companies can design add-on at-home care support systems. With money to spend and good health, many seniors are highly sociable. This is an opportunity for the entertainment, hospitality, retail, and travel industries. Travel companies can design packages that offer seniors caregivers and mobility equipment to make trips viable and enjoyable.

Security through sharing

In this scenario, many seniors are economically insecure. They may have been displaced by automation and AI technologies or left high and dry because pension systems have been suspended and they lack sufficient savings to feel comfortable for their retirement. They respond to this through extreme measures to lower the cost of living by embedding sharing into many aspects of their lives, including community subscriptions (shampoos or vehicles, for instance) and even living spaces. They maximize consumption efficiency to sustain constrained household budgets. Digital tools help; increasingly tech savvy seniors use digital information and education to equip themselves with skills that can provide an income where necessary. As the sharing economy matures and diversifies, more platforms or services will bundle consumers with the same needs or preferences to maximize the use of the sharing services. There has been a shift from individual and family consumption to group or organizational use. Owners of facilities such as a nursing home or even a shopping complex can consider the use of sharing services to lower their operational costs even while improving the satisfaction of their users. Consumer products companies can consider ways to sell their products to consumers through corporations or nongovernmental organizations running the communities. Offerings better suited for B2B2C must be in place. Community owners are the interfaces of consumers and can sometimes work as small retailers to distribute products. Community consumption becomes a new business model.

Social credit

In this scenario, seniors develop mutual-support networks. Even as the digital world spreads, they are seeking community and connection to rediscover and redefine who they are and their values. The barter economy of centuries ago undergoes a revival for building infrastructure. Seniors build up credit by offering skills, services, or goods (like fresh produce), exchanging what they offer for what they need from others in their network. For companies, seniors' skills can be deployed in the workforce. Financial institutions can rediscover customers from their existing customer pool based on their social credit values. Some people with niche expertise can be quite affluent and afford services they couldn't afford to pay for with their salaries before retirement. Advertisement and marketing companies and departments might reconsider their strategies to identify and target customers by taking account of their skills as a form of wealth. Social platforms and C2C service providers can identify new influencers on social credit platforms to establish new social commerce opportunities. The return to community changes patterns of consumption. Communities now produce everything from local produce to artisanal brands, creating demand for new marketplaces that enable the exchange of goods and services. Digital currency systems used by communities are another area of potential growth.

Discussion Paper - McKinsey Global Institute

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Imagining your customers’ possible futures: A Design x Foresight approach

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In an uncertain world, many organizations have incorporated strategic foresight and futures design into their work to support operational functions such as innovation, R&D, marketing, M&A, and strategy. Foresight and futures thinking looks at what is happening today and how trends may develop in future years in order not only to shape operations and strategy in the present, but also to future-proof the organization in a systematic, logical way.

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Something was missing from the alternative universe recently trumpeted by Mark Zuckerberg: brands. Facebook's simulations of the metaverse seemed largely free of advertising.

That absence seemed at odds with the rest of a presentation that was in part a big advert for the rebranding of Facebook as Meta, an empire that is and will be fed by advertising. Indeed, when not cartooning the future, Zuckerberg spent a lot of time name-checking companies already working with Facebook's virtual and augmented reality products and enthusing about the opportunity the metaverse offers for new business models.

Given the metaverse's limitless real estate, companies are bound to look to fill its three dimensions with their logos and products. We know that because it already happened once - in the early virtual world called Second Life.

Launched in 2003, Second Life took off a few years later as companies raced to build virtual showrooms and boast about its potential. IBM created IBM Land; General Motors constructed Motorati Island. From BMW to the BBC, organisations sought to shape their image in this new online world.

Second Life still exists. According to Philip Rosedale, founder of Linden Lab, its creator, a million users still frequent the virtual world, which grew to be roughly the size of Los Angeles. Most businesses have lost interest. Still, while briefly hawking their wares in Second Life, they should have banked some useful lessons. One is that immersive virtual worlds can be an inefficient vehicle for traditional advertising, but they could be an interesting channel to stimulate and accelerate leadership skills.

"In general, marketing control is moving away from brand and towards customers, and in online spaces that's even more important," says Bernadett Koles of Iéseg School of Management, who studied Second Life.

Social media, still in an early stage when Second Life peaked, has since shown brands they need to work with customers rather than broadcasting to them. Money will of course be made in the metaverse, by Facebook above all. "The harvesting and capture [of data] is going to be a huge business," says Lee Howells of PA Consulting (which itself dabbled in Second Life). There will be plenty of new ways to make money, too. For instance, in the overlapping virtual world of online gaming, Koles is studying how players buy "cosmetic" products to prettify their avatars, even though the enhancements do nothing to improve online performance.

But studies of Second Life suggest companies also reaped some less obvious benefits from the platform. Virtual reality "is a first-hand experience, as close as you get to being in a company and experiencing it in person", points out Koles. How deep companies want to dive into the metaverse will depend on the task.

Scenario-planning could be one application. The humble business school case study started as an analogue simulation of actual management problems. Companies felt their way through the pandemic by wargaming short- and medium-term outcomes. In a virtual world, such challenges can be expanded and made more realistic.

Second, researchers who looked at Second Life found it gave people a chance to try out different identities and novel approaches. Just customising avatars stimulated their imagination. Playing with different options opened them to new possibilities when they emerged from the virtual world.

Third, as experience of remote working has underlined, virtual co-operation and collaboration can be more inclusive, allowing a more diverse range of people to participate. Microsoft's more modest step towards a workplace metaverse, adding avatars to its Teams collaboration tool, hopes to build on what workers have already grown used to.

Not all these uses will require full immersion. Some people will not even want to dip a toe. "Who wants to spend time as a high-end emoji in a virtual office??" commented one sceptical FT reader about the Microsoft initiative. Second Life creator Rosedale says Facebook and others will also have to leap some daunting technological obstacles to realise their vision. "It's like crossing a chasm," he told The Sunday Times's Danny Fortson on a recent podcast. He thinks that, for now, the metaverse will remain a niche.

Eventually, though, it could be a good niche for companies. To profit from it, they need to see virtual worlds less as a channel for aggressive marketing than as rich places to experiment, to collaborate, and to develop leadership and management skills. Expect the much-maligned team-building away-day of 2025, or sooner, to take place in virtual reality. Then tell your team to doff their VR headsets and bring the lessons they learnt back into the real world.
andrew.hill@ft.com
Twitter: @andrewtghill

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How business can make the most of the metaverse

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Something was missing from the alternative universe recently trumpeted by Mark Zuckerberg: brands. Facebook's simulations of the metaverse seemed largely free of advertising. That absence seemed at odds with the rest of a presentation that was in part a big advert for the rebranding of Facebook as Meta, an empire that is and will be fed by advertising.

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This article first appeared in The State of Fashion 2022, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here.
As digital environments come of age, they are transforming from linear and transaction-focused spaces into multi-dimensional, experiential and collaborative virtual worlds. Tech-savvy and younger cohorts are spending increasing amounts of time in these spaces - from social media and gaming to virtual realities - and are adopting multiversal identities along the way. At the vanguard, digital assets in the form of virtual fashion and non-fungible tokens (NFTs) are offering new ways for consumers to shop, exchange goods and inhabit those identities.

Hyper-interactive and creative digital environments are a natural evolution of how people use technology and reflect the ever-growing amount of time consumers are online. Gen-Z spent an average of eight hours per day on screens in 2020. Part of the appeal of virtual worlds is the chance to engage with others and build communities - a need that was exacerbated when global Covid-19 lockdowns put an end to most in-person social contact. As digital spaces become more dynamic, some consumers are participating in "digital campfires," around which they can connect with others who share their values, have conversations, tell stories and co-create.

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These soaring levels of engagement have spawned a new generation of digital fashion creatives, who are pushing the limits of possibility online. Brands, meanwhile, see the emerging "metaverse," in which people work, play, socialise and shop, as an opportunity to engage more deeply and creatively with their customers and unlock new value streams.

"There are more and more 'second worlds' where you can express yourself [but] there is probably an underestimation of the value being attached to individuals who want to express themselves in a virtual world with a virtual product, [through] a virtual persona," said Gucci's executive vice president of brand and customer engagement, Robert Triefus, citing the 19 million visitors who came to the Gucci Garden within the Roblox gaming metaverse.

The $176-billion gaming industry, which attracts more than three billion players globally, has a long history of community-building. Meanwhile, the metaverse is becoming a big business, with funding pouring in from investors. Epic Games raised $1 billion in April 2021 to accelerate its work in building connected social experiences across a metaverse of linked games and services.

As gaming increasingly becomes an extension of the real world, and with the pandemic supercharging participation, it has become a prime target for fashion brands.

As gaming increasingly becomes an extension of the real world, and with the pandemic supercharging participation, it has become a prime target for fashion brands. In many cases, engagement has taken the form of collaborations with gaming platforms to design virtual fashion assets. Ralph Lauren partnered with South Korean social network and avatar simulation app Zepeto to create a virtual fashion collection, giving users the opportunity to dress their avatars in exclusive products, or appearance-altering "skins." Gucci has created digital assets for gaming platform Roblox, as well as for Pokémon Go and Animal Crossing. Some brands have set their sights even higher. After unveiling its Autumn/Winter 2021 collection in the form of a fully-fledged video game, Balenciaga teamed up with gaming giant Fortnite to unveil a collaboration including shoppable virtual clothing and physical products. It advertised the partnership across traditional and metaverse channels.

The opportunities in gaming are extensive and offer a platform to engage younger consumers, as well as create buzz with cohorts that would not usually interact with brands in physical formats. Tapping into in-game merchandise further allows brands to monetise digital assets where it is the norm to pay for elevated experiences.

Virtual clothing is picking up momentum across a range of digital environments. "Gamers are famous for buying skins in games [but] we have two sets of [broader] customers," said Daria Shapovalova, co-founder of DressX, a platform that estimates the total addressable market for digital fashion at $31 billion and has more than 100 partner designers offering digital fashion items. "First, there are those Millennials who immediately understand the idea of digital fashion and are active shoppers of luxury goods; they want to try something new, so they use it to elevate their social media. Then there are Gen-Z customers who are on platforms like Snapchat or TikTok, where video is becoming the main communication tool rather than the still image."

Indeed, for some consumers, digital fashion is the natural extension of applying social media filters on platforms like Instagram and Snapchat, says Simon Windsor, co-founder and joint managing director at Dimension Studio, an agency that worked with Balenciaga on its video game. "We're just at the tipping point of this new era... It starts to change the meaning of fashion itself."

Beyond social media and gaming, artificial intelligence (AI) and augmented reality (AR) technologies present additional opportunities for new business models leveraging virtual fashion. Online fashion wholesale platform Ordre uses 360-degree view technology to present seasonal collections through online showrooms, offering a complementary channel to facilitate management of luxury wholesale networks. Elite World Group and Tommy Hilfiger have recently partnered on various virtual ventures, including avatars of models walking 3D virtual runways.

Much of the excitement around virtual environments is directed towards NFTs, which have seen an explosion of interest over the past year. NFTs are unique crypto assets whose authenticity and ownership are verified on blockchains and are bought, sold and exchanged in the metaverse, often with cryptocurrency. Their uniqueness means that the value of some NFTs can skyrocket: one created by digital artist Mike Winkelmann - also known as Beeple - was sold at Christie's auction house in 2021 for a record-breaking $69.3 million. NFT platform OpenSea exceeded $1 billion in sales in the first seven months of 2021.

Proponents of NFTs argue that the recent boom is no flash in the pan. "This is fundamentally going to change digital ownership, creative structures, the creative economy, how we view money even," said Karinna Nobbs, co-chief executive and chief experience officer of NFT marketplace The Dematerialised. "This is bigger than the internet."

In fashion, NFTs have a wide range of use cases, ranging from product authentication (see "Product Passports") to serving as collectable pieces in their own rights. With consumers seeking to collect and invest, digital fashion creators such as The Fabricant, DressX and RTFKT are finding audiences for digital clothing authenticated by NFTs. Meanwhile, some companies are tapping into the excitement around NFTs by experimenting with alternative engagement models: Adidas attracted headlines when it collaborated with The Fabricant and model Karlie Kloss to launch a competition for creators to make their own NFT versions of the WindRdy parka jacket.

In 2021, there was a wave of NFT engagement among luxury players, often via the gaming universe. For its 200th anniversary, Louis Vuitton launched a video game with collectible NFTs partially designed by Beeple. The game contained NFT art that could be acquired by players in a story echoing the journey of the brand's founder. Burberry created NFTs within the Blankos Block Party game, featuring digital vinyl toys that live on a blockchain. Adorned with Burberry's TB summer monogram, the limited-edition Burberry Blanko Sharky B NFT can be purchased, upgraded and sold. The collaboration also includes branded in-game NFT accessories, including a jetpack, armbands and pool shoes.

Beyond gaming, Farfetch has partnered with digital fashion platform DressX. Dolce & Gabbana collaborated with Unxd, a curated marketplace for digital luxury and couture, to create an inaugural nine-piece collection of NFTs sold alongside physical couture.

With no shortage of marketing hype, there are indications that digital fashion assets can generate significant revenue streams. Dolce & Gabbana's collection fetched the equivalent $5.7 million. Still, monetisation opportunities are likely to be contingent on the psychology of scarcity and limited editions driving NFT mania - together with the security of authentication and the potential for community-building that they provide. The most likely fashion segments to lead the way are luxury and streetwear.

What is undisputable is that fashion industry leaders are interested in exploring the potential of virtual fashion.

"We say to any fashion brand we work with: it's experimental. It's not always going to work and we can't guarantee it will work," said Amber Slooten, co-founder and creative director of The Fabricant, a digital fashion house that helps brands create their own virtual products and has worked with brands including Adidas, Marques Almeida and Buffalo London.

Amid the hype, there are also reasons to exercise caution. One concern is the environmental impact of the blockchain technologies that underlie NFTs and, in particular, the energy required to validate transactions. Cyber security is also a potential cause for concern (see "Cyber Resilience"), with counterfeiting and security breaches a significant threat. A recent cyber attack on the artist Banksy's official website caused a collector to pay £244,000 ($334,000) for a counterfeit NFT.

"To assume that... NFTs or more generally blockchain won't be an incredibly volatile environment for the next five years is to have forgotten the lessons of history when it comes to the internet," said Ken Seiff, a managing partner at Blockchange Ventures, a venture capital firm investing in early-stage blockchain technology.

At a minimum, fashion's foray into the metaverse promises new routes for consumer engagement. This will support creative branding strategies, enable immersive consumer experiences and generate excitement among highly sought-after consumer groups.

Looking ahead, the buzz around NFTs will continue to build as increasing numbers of fashion brands seek paths to differentiation and launch creative experiments. As consumers spend more time interacting online, their interest in collecting and displaying digital objects is likely to deepen. However, they will also seek out opportunities for co-creation and will expect brands to engage with digital assets in a format that is native to the spaces they inhabit, rather than content that repeats across channels.

The crypto fashion opportunity will demand significant investment, experimentation and a new playbook. Brands will need a strategic mindset and a willingness to develop partnerships and harness a variety of talent to deliver high-quality content, either in-house or via third-party collaborations. In an arena characterised by a large amount of hype, it will pay to seek out business cases that spark excitement but remain on-brand.

To do this, it may be necessary to take a new lens on ROI, focusing on less measurable benefits such a brand awareness and marketing impact, as well as setting flexible targets that are calibrated to potential, rather than focusing exclusively on the bottom line. Flexibility will be key, and brands should remain cautious in deploying their capital. However, the risks should not deter them from engaging with this rapidly growing digital universe.

Editor's Note: This article was amended on Dec. 19, 2021, to clarify Farfetch's collaboration with DressX.

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The Year Ahead: Building Brands With a Metaverse State of Mind

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By experimenting with NFTs, gaming and virtual fashion, brands will unlock value streams in the metaverse that engage young consumers and will find new routes to creativity, communities and commerce.

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Gucci's Robert Triefus on Testing Luxury's Allure in the Metaverse

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This article first appeared in The State of Fashion 2022 , an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, BoF: As blockchain technology burst into the digital art world with the emergence of NFTs, Gucci was quick to get involved, auctioning off an NFT for charity in June 2021.

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The idea is not science fiction, of course, because all the technologies are already there. What we have yet to achieve is the complete integration of them all, and Chen is keen for his company to play a big part in easing the transition.

What uCloudlink offers is the ability to find solutions for one of the biggest hurdles: the inconsistent speed of internet connections.

Despite all the technological advances in the world today, that annoying loading circle still plagues our digital life. The root problem is that we are not all connected to one single network: we are all switching between different Wi-fi signals and data services. What makes it worse is that typically, we rely on one service provider at a time, and every service provider has its own blind spots.

uCloudlink, founded in 2014, has long been at the forefront of connectivity breakthroughs. Through its Cloud SIM technology and strategic partnerships, it connects mobile networks across multiple carriers and allocates network resources to users without the need to change the smart SIM cards in their mobile phones.

Its products have been embraced by high-flying business travellers, who previously had to endure high roaming charges and the hassle of juggling numerous SIM cards.

Chen says that once 5G becomes prevalent, internet users will grow more demanding about accessing reliable connectivity.

"The new applications 5G will bring are augmented reality and VR, and also 4K [4,000 pixel] and 8K ultra-high-definition [screens]," he says.

"Imagine if the 5G signal drops and your device slows down to 4G, the result will be very obvious. The time lag is going to make your head hurt, and your experience will drastically change when 8k drops to 1K or 2K.

"And we will have autonomous driving, which will also require reliable connectivity without interruption."

We have only to look at what is happening now to get some idea of what the future holds for us online.

Up to 90 per cent of American adults say the internet has been "important" to them since the start of the Covid-19 pandemic, a survey carried out in April by the United States think tank, Pew Research Centre shows.

The study, which examined how people's use of the internet has changed, and their views on how useful technology has been during the outbreak, shows that 58 per cent of respondents call the internet "essential" - up slightly from 53 per cent in April 2020.

Up to 81 per cent of Americans say they have used video calls to talk to others during the pandemic, 40 per cent have used technology or the internet in ways that were new or different to them, and 29 per cent of broadband users have improved the speed, reliability or quality of their high-speed internet connection at home since the start of the outbreak.

These opinions are likely to be shared by internet users around the world, and Chen predicts the growing demand for connectivity will only accelerate in the "new normal".

"People are increasingly accustomed to remote working and learning, and even after the pandemic we will spend longer periods at home being online," he says. "As we rely more on remote communication, we will need more reliable connectivity."

Chen's views about future working practices are supported by a number of studies, including a World Economic Forum survey, which found that 66 per cent of workers want employers to be more flexible about requiring staff to be office based.

Up to 30 per cent of the 12,500 adults working in 29 countries, who took part in the survey carried out by global market research firm Ipsos between May 21 and June 4, say they would consider looking for another job if their employer ended the option to work remotely.

Meanwhile, "The Future of Work After Covid-19" report, published in February by management consulting firm McKinsey, shows 20 to 25 per cent of workers in advanced economies and about 10 per cent of workers in emerging economies will be likely to work from home three to five days a week in the post-pandemic era.

At June's annual trade show, World Mobile Congress Barcelona, uCloudlink revealed its new HyperConn technology solution - which can provide improved connectivity in the home. It uses AI to identify all available networks at a given location - including mobile signals and fixed broadband coverage - and automatically switch between them for the best connection.

When used at home, it connects to a host of devices with a family router and analyses the activity of Internet of Things - the network of everyday physical objects embedded with sensors, software, and other technology that can send and receive data from other computing devices over the internet - to precisely allocate internet resources to each device.

Chen compares uCloudlink's solutions to the Global Positioning System (GPS) that helps drivers identify the best route to avoid road congestion.

In anticipation of the increasing widespread use of 5G, the company has released - under the brand name GlocalMe - Numen, a HyperConn-enabled 5G mobile Wi-fi device, which can provide a reliable data connection at all times by connecting to all available networks such as fixed broadband, Wi-fi, 4G and 5G.

In August, the company announced a partnership with Japanese telecoms service provider AIR-U, to bring its new industry-leading ATab-1 CLOUD Air-WiFi Tablet to the country, with students being one of the target audiences.

Students can use the embedded HyperConn functionality to access mobile broadband services from any provider in the country without being locked into a contract. Its embedded AI capabilities will determine the most effective network coverage for them at any given location and ensure they enjoy an uninterrupted experience when joining remote classes.

The technology has helped to create a fair and equal learning environment for everyone, as every student will be able to enjoy the same level of reliable connectivity.

uCloudlink hopes the tablet will showcase how the company's solutions can help address the shift in demand among internet users from inbound travel to domestic use, such as remote work and online learning.

Japan is a major market for uCloudlink, with its other local partners including Nippon Telegraph and Telephone, and Softbank.

The pandemic also means travellers are more reliant on connectivity than ever before. "Digital health information will be the fact of life," Chen says. "You need to show your health code everywhere you go; you will be asked to show your vaccination record everywhere, or check your result [for the] Nucleic Acid Amplification Test [a diagnostic test for the virus that causes Covid-19].

"That means while you are enjoying your travels, you are constantly monitoring your health status, and paying attention to what's going on around you. We will need the internet more than ever to access information important to our health."

Chen believes that the global travel industry will recover next year, which will drive greater demand for reliable connectivity. His view is supported by IATA's year-end report published in October, which predicts a gradual recovery of the airline industry during the year, with revenue passenger kilometres reaching about 60 per cent of pre-pandemic levels.

uCloudlink hopes to serve the needs of internet users both at home and on the road as the new normal takes hold and has announced a number of new partnerships in Europe, Asia and the United States.

These deals come as new research shows that foreign travel to Europe is increasing. A study by the travel data provider, ForwardKeys, reveals that international flights to Europe in July and August were at 39.9 per cent of pre-pandemic levels, compared with 26.6 per cent during the same period in 2020.

uCloudlink is also increasing its presence in Asia. It announced an agreement in September with the high-end Chinese mobile Wi-fi brand Baiyitong to jointly develop and launch HyperConn-enabled devices in mainland China, which will serve various users' needs, including demand for online studying and remote working. Another business agreement in Vietnam was announced this year.

These new deals add to uCloudlink's already extensive network of partners, which includes telecoms service providers in markets such as Hong Kong and South Korea, as well as airlines, the global car rental company Avis and online travel agent Trip.com.

Chen says whether people are on the road or at home, connectivity will inevitably be an integral part of life. "Metaverse means the convergence of virtual and physical worlds, and the foundation of that is good connectivity," he says.

"If we don't get on [Chinese instant messaging app] WeChat for a day, we feel out of touch. In the future, you might feel out of touch without connectivity for an hour.

"Our mission is to connect all the networks in the world together, to make connectivity more reliable, to make connectivity more efficient and make life easier."

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Seamless metaverse grows nearer as digital connectivity improves

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The idea is not science fiction, of course, because all the technologies are already there. What we have yet to achieve is the complete integration of them all, and Chen is keen for his company to play a big part in easing the transition.

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In recent years, supply chains have become substantially more challenging to manage. Longer and increasingly interlinked physical flows reflect the rising complexity of product portfolios. Market volatility, which has been exacerbated by the COVID-19 pandemic, has elevated the need for agility and flexibility. And increased attention on the environmental impact of supply chains is triggering regionalization and the optimization of flows. As a result, companies and stakeholders have become more focused on supply-chain resilience.

Supply-chain management solutions based on artificial intelligence (AI) are expected to be potent instruments to help organizations tackle these challenges. An integrated end-to-end approach can address the opportunities and constraints of all business functions, from procurement to sales. AI's ability to analyze huge volumes of data, understand relationships, provide visibility into operations, and support better decision making makes AI a potential game changer. Getting the most out of these solutions is not simply a matter of technology, however; companies must take organizational steps to capture the full value from AI.

The changing face of supply-chain management

The supply chain is the web linking together multiple functions, including logistics, production, procurement, and marketing and sales (Exhibit 1). Integrated planning enables companies to balance trade-offs across functions and optimize earnings before interest, taxes, depreciation, and amortization (EBITDA) for the organization as a whole.

The experience of one large building-materials company highlights the evolving nature of supply-chain management. The company recently broadened the mission of its supply-chain function along four dimensions: increase operational sustainability; provide premium service levels and implement demand sensing for short-term changes; integrate its manufacturing and logistics supply chains; and make the business more resilient. As part of this effort, the organization expanded its central supply-chain team and created a chief supply-chain officer role who reports directly to the CEO.

Such approaches have stretched supply-chain functions, which must now operate as a "central cross-functional brain" within large corporations. In many organizations, supply-chain management has shifted to concentrate on dynamically optimizing the company's global value rather than simply improving the performance of local functions. In several process industries (such as chemicals, agriculture, and metals and mining), sales-and-operations planning has evolved into integrated business planning. The recent supply-chain disruptions and demand triggered by the COVID-19 pandemic have further amplified the need for companies to develop their central-planning muscles.

Enhancing the relevance and size of supply-chain or business-plan teams is not enough to achieve better performance. Companies must tackle several additional challenges:

predicting demand across multiple product segments and geographies

dynamically identifying trade-offs with hundreds or thousands of interlinked variables and innumerable technical constraints

integrating AI solutions (such as processing optimization, predictive maintenance, or master data quality) to manage the wider value chain

ensuring that plans get executed and can adapt to variability effects (such as demand shocks, production stoppages, and transportation disruption) in a timely manner

Would you like to learn more about our Metals & Mining Practice?

A crowded solution landscape

The good news is that AI-based solutions are available and accessible to help companies achieve next-level performance in supply-chain management. Solution features include demand-forecasting models, end-to-end transparency, integrated business planning, dynamic planning optimization, and automation of the physical flow-all of which build on prediction models and correlation analysis to better understand causes and effects in supply chains. Successfully implementing AI-enabled supply-chain management has enabled early adopters to improve logistics costs by 15 percent, inventory levels by 35 percent, and service levels by 65 percent, compared with slower-moving competitors.

Given the significant value at stake, multiple solutions have emerged. Both incumbent IT vendors and market disrupters are entering the game. New offerings include demand planning (which has been revolutionized by integrating machine learning and harnessing new sources of data); real-time inventory management, thanks to the IoT and connectivity; and dynamic margin optimization of end-to-end chains with digital twins. For example, retail and e-commerce are at the forefront of demand prediction.

Selecting the right solution is critical. To manage the complexity of today's supply chain, new solutions need to be smartly designed and adapted to specific business cases. They also need to fit well with the organization's strategy. This alignment enables companies to tackle key decision-making points with an adequate level of insight while avoiding unnecessary complexity. However, implementation can require significant time and investments in both technology and people-meaning the stakes are high to get it right.

Embarking on an AI-driven transformation

Transforming a supply chain is an ambitious undertaking, and companies should be fully aware of the challenges (see sidebar "Navigating implementation challenges"). However, the potential benefits are significant: companies that are able to manage four specific areas in tandem will be positioned to achieve far greater visibility and better decision making-all powered by AI (Exhibit 2).

1. Value-creation identification, strategy, and road map

As a first step, companies need to identify and prioritize all pockets of value creation across all functions, from procurement and manufacturing to logistics and, ultimately, commercial. Less than one-third of companies perform an independent diagnostic at the outset, but this exercise can ensure companies have an accurate list of all the value-creation opportunities.

Clearly defining a digital supply-chain strategy helps support the company's business strategy and ensures better alignment with its digital program. In addition, a solution-agnostic assessment enables companies to identify the process redesign, organizational changes, and capabilities required to boost performance as well as create a strategic road map.

2. Design of target solution and vendor selection

The complexity of supply chains-from demand forecasting to planning optimization and digital-execution tracking-means that finding one provider that can meet all of these needs is increasingly unlikely. Executives should recognize that the right answer for their company won't necessarily be the one recommended by the providers, whose goal is often to push for a single end-to-end solution.

Solution design and vendor selection can help support the digital supply-chain strategy. Often, the best approach is a combination of different solutions from different providers, implemented by different systems integrators. Companies that select a suite of solutions must make integration a top priority.

3. Implementation and systems integration

Many companies haven't had sufficient experience in implementing organization-wide technology. Once companies select solutions, the risks are falling behind the implementation schedule and coming in over budget while losing focus on the primary objective: to properly address value-creation levers from the first pitfall. Only 25 percent of supply-chain leaders reported feeling their objectives are aligned with the incentives of their systems integrators.

Companies should take a holistic approach to implementation and systems integration. By optimizing the end-to-end value, companies can implement solutions that deliver value in the short term and are more sustainable over the long term (see sidebar "An end-to-end approach to supply-chain optimization").

4. Change management, capability building, and full value capture

Even while focusing on tech solutions, companies must attend to vital supporting elements, such as organization, change management, and capability building. Our research suggests this task is a common challenge: for example, only 13 percent of executives report that their organizations are sufficiently prepared to address their skills gaps.

To ensure adoption of new solutions, companies must invest in change management and capability building. Employees will need to embrace new ways of working, and a coordinated effort is required to educate the workforce on why changes are necessary, as are incentives to reinforce the desired behaviors.

Supply-chain management has never been more formidable, but help is on the way. AI will be able to provide teams with deeper insights at a much higher frequency and granularity than ever. However, this visibility alone will not be enough to capture more value from AI-based supply-chain solutions. Any sizable technology investment must be matched by organizational changes, business process updates, and upskilling efforts. Only then will companies capture the expected ROI.

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Succeeding in the AI supply-chain revolution

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In recent years, supply chains have become substantially more challenging to manage. Longer and increasingly interlinked physical flows reflect the rising complexity of product portfolios. Market volatility, which has been exacerbated by the COVID-19 pandemic, has elevated the need for agility and flexibility.

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In May 2021, a cyberattack shut down the operations of a major gas pipeline along the East Coast of the United States. A month earlier, a combination of weather and underappreciated fluid dynamic forces left a giant super cargo ship wedged sideways in the Suez Canal, bottling up a critical global trade route. In February, a rare deep freeze and power outage in Texas disrupted some petrochemical plants, creating shortages of key plastics and resins for a range of industries. Meanwhile, automotive companies around the world have had to curtail production due to a shortage of semiconductors.

These incidents are not just a string of bad luck, but rather the latest reminders of the fragility of global supply chains, an issue that the COVID-19 pandemic has catapulted to the top of CEO agendas. Industry value chains often span thousands of companies, and their configurations reflect specialization, access to consumer markets around the world, long-standing relationships, and economies of scale.

Recent events have underscored that supply chains created for "just-in-time" delivery of goods now need to prepare for "just in case" eventualities. Disruptions to the system, once seen as rare occurrences, now must be considered probable. Research from the McKinsey Global Institute (MGI) finds that over the course of a decade, the average company can expect to lose nearly half of one year's profits from supply chain disruptions.

Companies are actively considering ways to reduce such vulnerabilities, including holding more inventory, building redundancy among suppliers, and moving production closer to where goods are sold. The pandemic has also prompted policymakers to consider a broader range of goods and technologies critical for national economic security. As a result, global trade flows may shift significantly. MGI research estimates that 15 to 25 percent of global goods trade could shift to different countries over the next five years.

Supply Chain Disruptions Prompted a Wave of Protectionist Measures

Supply chain disruptions over the past year took many governments by surprise. Although customs agencies collect detailed data on imports, no government systematically analyzes those data to identify potential vulnerabilities-a lack of scrutiny that itself creates vulnerability. Analysis would have revealed a broad range of essential goods and inputs sourced in Wuhan, where COVID-19 first revealed the power of its punch, including key pharmaceutical ingredients and antibiotics, masks and personal protective equipment, and automotive parts. As supply chain disruptions spread beyond China during the pandemic, US reliance on a broad range of critical goods produced in other countries became more apparent.

Over the last twenty years, industry value chains have become highly specialized, with production of crucial components sometimes concentrated in just one or two countries. UN Comtrade data show that China and India, for instance, export 42 percent of global antibiotic ingredients (API products) by value, with China exporting 75 percent of streptomycin and 52 percent of penicillin. Consumer electronics also feature components from highly concentrated production. Taiwanese exports of electronic integrated circuits (semiconductors) account for forty-three percent of the global value of such parts, and Taiwan and South Korea produce most of the world's advanced chips. China exports three-quarters of all personal computers and two-thirds of all mobile phones globally. In total, research has found 180 products with a value of $134 billion in 2018 that are exported almost exclusively by a single country. Shocks in any of those countries could lead to bottlenecks, unless alternatives can be found quickly.

Global Trade Alert reports that during the first ten months of 2020, a total of 2,031 policy interventions affecting international commerce were imposed by governments around the world. That is an increase of 74 percent over the same period in 2019, and 147 percent higher than the average for 2015-2017. Three of every four of these interventions restricted cross-border commerce. Examples include curbs on exports of medical supplies, equipment, and medicines, and many of those limitations have no expiration date. More recently, there has been a spate of restrictions over vaccine exports. While these reactive measures may have helped alleviate domestic shortages during the pandemic (although leaving other nations worse off), they do not address the underlying problems in supply chain resilience and will leave nations vulnerable to future shocks.

How Governments Can Support National Supply Chain Resilience

Building national resilience in supply chains requires taking a more comprehensive and analytical approach instead of simply blocking trade. The first step is to review vital supply chains to identify vulnerabilities. In the United States, President Biden issued an executive order in February mandating a national review of several critical supply chains, including for semiconductors, high-capacity batteries, rare earth minerals, and pharmaceuticals. Other governments have taken similar actions. Once potential vulnerabilities have been identified, policymakers must weigh the benefits and costs of actions to mitigate specific risks. Resilient supply chains should be diversified (including cross-border) and transparent, with built-in redundancies and the capacity to flex production in response to shocks.

Policymakers have a wide range of options for enhancing national supply chain resilience. Many critical goods or inputs can be stored in a national stockpile similar to companies holding more inventory. Creating incentives for domestic production to augment supplies from foreign manufacturers is another possibility. Governments can establish a national supply chain risk monitoring function to analyze trade data and scan for potential disruptions.

Last September, Australia, India, and Japan announced the Resilient Supply Chain Initiative to address "the pressing need for regional cooperation on supply chain resilience in the Indo-Pacific." This has resulted in several global consumer electronics companies announcing plans to build production facilities in India, including Foxconn, Samsung, and Apple. The European Union has announced an Action Plan on Critical Raw Materials. In the United States, the proposed American Jobs Plan includes more than $500 billion to " revitalize manufacturing, supply chains, invest in R&D, and train the workforce." The more recent Endless Frontier Act is a bipartisan, bicameral proposal to spend $110 billion promoting US innovation in key industries.

For the United States to capture more global value chain production, US companies will need to further embrace productivity-enhancing technologies to become more globally competitive. According to the World Economic Forum, only seven of the sixty-nine "Industry 4.0" leading manufacturing sites around the world are in the United States. With advanced production techniques, the United States could compete with China and other manufacturing nations on unit labor costs (which adjust wages for productivity) and increase manufacturing GDP annually by up to $450 billion.

The last chapter of globalization, defined over the past quarter century by the creation of long, complex global value chains optimized for just-in-time manufacturing, has come to an end. Going forward, companies will prioritize building resilience in their supply chains, and policymakers will play a more active role in supporting domestic production of goods critical to economic security. Trade flows and value chains could shift to include different sets of countries. This does not mean the world will de-globalize, or even that globalization will slow. Services trade and cross-border digital flows are likely to continue to grow and perhaps become a defining feature of the next chapter of global trade.

. . .

Susan Lund is a PhD economist and a partner at the McKinsey Global Institute. Her research focuses on technology, trade, and the workforce. She has lived and worked in Africa and Asia, and currently resides in Washington, DC.

This article first appeared in the Georgetown Journal of International Affairs.

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Building national supply chain resilience

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The COVID-19 pandemic has exposed the fragility of global supply chains and highlighted the public health and national security implications of supply chain vulnerability. Policy reactions have focused on limiting exports and encouraging domestic production. But building supply chain resilience will require a more rigorous assessment of risk and a strategic set of policy actions.

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Economic recovery is gathering steam, but supply-chain disruptions could stand in its way. While the COVID-19 pandemic remains the biggest threat to economic growth globally, 28 percent of executives in our latest McKinsey Global Survey cite supply-chain disruptions as a top risk, nearly edging out the most common threat to growth: weak customer demand.

To read the survey, see "Economic conditions outlook, June 2021," June 29, 2021.

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Economic recovery is gathering steam, but supply-chain disruptions could stand in its way. While the COVID-19 pandemic remains the biggest threat to economic growth globally, 28 percent of executives in our latest McKinsey Global Survey cite supply-chain disruptions as a top risk, nearly edging out the most common threat to growth: weak customer demand.

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Diagnosing the pain in your supply chain

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Product shortages and supply chain disruptions continue to drive headlines. On this episode of The McKinsey Podcast, Dan Swan and Knut Alicke, partners in McKinsey’s supply chain practice, describe the key cost, labor, and transportation issues facing CEOs and supply chain managers. In their convers…

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Companies have to modernize their supply chains. That was obvious even before congested ports and parts and labor shortages began to snarl supply chains at the start of the COVID-19 pandemic two years ago.

Companies' ability to forecast demand and determine how to meet it has been further challenged by supply chains' increasingly global scope. And supply-chain leaders haven't done themselves any favors by clinging to manual systems and antiquated software, including one widely used application that's so old the provider will soon stop supporting it.

Innovators have begun to embrace next-generation systems, and the rest of the field is starting to follow. New applications incorporate AI, machine learning, and data analytics to speed up decision making and pave the way for autonomous planning. In our survey of dozens of supply-chain executives, 90 percent said they expect to overhaul planning IT within the next five years. Four out of five expect to or already use AI and machine learning in planning, a key driver for supply-chain IT implementations.

Modernizing can make supply chains more resilient and efficient. But it's a major investment-and success isn't guaranteed. According to executives we polled, 60 percent of supply-chain-planning IT implementations take more time or money than expected or don't achieve anticipated business outcomes.

Supply-chain leaders haven't done themselves any favors by clinging to manual systems and antiquated software, including one widely used application that's so old the provider will soon stop supporting it.

Companies can improve the outcomes of upgrade efforts by incorporating three critical elements into the process of adopting new supply-chain-planning IT systems: a forward-looking process design, well-defined vendor selection, and an implementation road map that prioritizes getting basic features right before adding more complicated use cases. To maximize the sizable investment that an upgrade represents, companies must reinforce those elements with the appropriate organizational change, business process updates, and upskilling.

Why it's hard to update supply-chain-planning IT

Despite the advantages that modern supply-chain-planning IT systems offer, an overwhelming majority of enterprises still use manual or outdated methods, as illustrated in Exhibit 1.

Close to three-quarters of supply-chain functions rely on the simplest method: spreadsheets. In addition, more than half use SAP Advanced Planning and Optimization (APO), a popular but antiquated supply-chain-planning application that SAP introduced in 1998 and will stop supporting in 2027. The portion of APO users in certain industries is even higher-75 to 80 percent of all the automotive, retail, and chemical companies we polled.

Supply-chain leaders know that current methods need to change and are taking steps in that direction. Of the executives we surveyed, 90 percent plan to implement a new solution in the next five years, and 23 percent have already done so.

When they upgrade, supply-chain leaders are adding advanced-technology capabilities. Twenty percent of executives we surveyed have implemented AI and machine learning for some type of supply-chain-planning activity, and another 60 percent plan to in the future (Exhibit 2). Top applications for AI and machine learning include demand planning, sales and operations planning, and control tower, among others.

Multiple supply-chain-software vendors offer applications with AI and machine learning. Based on our survey, we see companies shifting from current solutions to future solutions that incorporate those advanced technologies, as illustrated in Exhibit 3.

However, several challenges stand in the way of implementing new planning systems.

Upgrades are time-consuming and expensive

Companies hang onto older systems because of the time and money needed to replace them, even if upgrades would bring substantial benefits. The resources required for an upgrade depend on the complexity of the company's supply chain. Companies average 2.8 years from vendor selection to complete rollout. Industries with highly complex supply chains, such as pharmaceuticals, typically spend four to six years and €55 million to €110 million ($62.5 million to $125 million) to fully implement a new supply-chain-planning system. Industries with less-complex supply chains, such as consumer-packaged goods, can spend two to three years and about €15 million ($17.5 million) on a new system.

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Vendor selection is critical-and difficult

When they upgrade planning IT systems, supply-chain leaders evaluate two potential vendors on average to ascertain which system best meets their specific planning challenges. But some talk to as many as eight. Supply-chain leaders typically vet vendors using functional requirements, how a system integrates with existing supply-chain applications, and up-front and operating costs.

Implementations don't go as planned

Of executives we polled, 45 percent said the biggest barrier to launching a project was a lack of consensus on a new system's technical and process requirements. Another 35 percent said the impact of a new planning system did not meet expectations, and 28 percent said they struggled to create a compelling business case to justify switching to a new system.

Successfully implementing supply-chain-planning IT

When planning IT implementations fail, 60 percent of the time it's in one of three ways: they aren't completed on time, are over budget, or don't deliver the expected outcomes. The failings are indicators that processes are poorly designed or lack needed capabilities, or the change was poorly managed.

Companies can surmount the challenges and increase the chances that a supply-chain-planning IT system will succeed if they incorporate three key elements into the implementation process (Exhibit 4).

A well-articulated planning-process design

Adding automation doesn't magically fix broken processes. To get the most out of new systems, companies first have to put well-defined planning processes in place. For that, they need to understand their objectives and create detailed descriptions of planning activities that a new system will cover to meet those goals. To craft the right end-to-end processes, companies can ask the following questions:

What are our main pain points?

What would our ideal supply-chain-planning system look like?

Which parts of the current system need to change to turn it into our ideal system?

What performance indicators should we use to measure success?

From there, they can determine which low-level processes could be automated to free staff up to deal with more complex issues, such as managing inventory or replenishing raw materials. They can also determine where to implement AI for highly complex tasks that people often struggle with, such as forecasting customer demand.

Leaders can review existing steps in the planning processes to determine how new systems could support each one. For demand planning, for example, a new system could provide initial forecasts based on advanced analytics that experts review and adapt to create a single forecast for all downstream activities. For supply planning, a new system could support pinpointing and planning for potential bottlenecks. Embedding a control-tower framework into their supply-chain IT can solve short-term demand-supply imbalances by providing forward-looking insights into potential stockouts.

A well-defined vendor-selection process

Once leaders have identified the processes that a planning system must cover, they can create a framework for evaluating prospective vendors. The vendor-selection process has three parts:

A list of business requirements. A succinct set of requirements covers the full scope of the application as well as must-have and nice-to-have features.

Clear evaluation criteria. Vendors with systems that meet the basic business requirements can be evaluated against more detailed aspects of the process design, for example, for how specific features or tools match the company's needs.

Two or three "must have" use cases. The supply-chain team can ask prospective vendors to demonstrate how their systems would handle priority use cases during a sales presentation to see how well the app performs. In demos, users can ask vendors to simulate common pain points or problems they deal with to get a realistic idea of how the system would operate in their environment.

Navigating the labor mismatch in US logistics and supply chains

Rather than let leaders be the only ones involved in vendor evaluations and demos, companies could consider including employees who provide a frontline perspective, such as those who use the existing planning system or who would use the new software. At a US biotechnology company that was upgrading its supply-chain-planning IT system, supply and demand planners participated in vendor demos since they would be the most frequent users of a new platform.

A multiphase implementation road map

The survey of supply-chain executives confirmed that lengthy software implementations are a major pain point. Fixing that requires creating a well-defined, multiphase implementation road map. Such a road map prioritizes testing and rolling out must-have features before adding those that are nice to have. It ensures that work on the implementation can be done at an agile or sprint pace with repeated rounds of design and testing. And it includes all the change-management components needed to get supply-chain planners and other users of a new system involved in the implementation as early as possible to make the transition as smooth as possible.

When the aforementioned US biotech company began to upgrade to its new system, the implementation team worked in six-week sprints, starting with a minimum viable product with only standard functions to make it simple for users to understand and test. After each sprint, any bugs that testers encountered were collected in an issue log and addressed in order of importance. Testers also provided input on which features they needed for the system to go live and which could be added to a backlog to be tackled later in the development cycle.

The final step in launching a new system is running it in parallel with the existing system long enough to ensure that it works in a real-world setting and to continue to make improvements before phasing out the old system.

Switching to a new system isn't just about the technology. Companies need to prepare staff to use it to ensure they're engaged and that new processes and ways of working stick. One way to do that is to have one team, region, or business unit start using the new system to show other teams or units how things work and communicate the system's benefits. Senior leaders should serve as role models to reinforce new ways of working, which signals the commitment to the transformation.

Additional considerations

For a transformation to succeed, companies also need to do the following:

Keep the customer at the center of change. Set clear objectives at the beginning of the transformation that spell out how it will improve the customer experience. For every decision, ask, "How would this change affect our customers?"

Build in-house capabilities. Training personnel on the new ways of working that a new system requires makes the vendor hand-off easier and faster and leaves the organization less dependent on long-term outside help.

Use in-person and online learning. To make working in new ways stick, use experiential learning, the influence model, and create safe spaces for learning. It also helps to build trainings around user journeys.

It may feel daunting, but upgrading supply-chain-planning systems is doable with the right approach. And the potential benefits are significant: better planning processes, systems that are a closer match for the company's needs, and ultimately, a more efficient and resilient supply chain.

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To improve your supply chain, modernize your supply-chain IT

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Companies have to modernize their supply chains. That was obvious even before congested ports and parts and labor shortages began to snarl supply chains at the start of the COVID-19 pandemic two years ago. Companies' ability to forecast demand and determine how to meet it has been further challenged by supply chains' increasingly global scope.

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KEY INSIGHTS

Cleaning up the supply chain for coloured stones is particularly challenging; while a handful of players control most of the world's diamond output, gems largely come from myriad small artisanal mines.

Industry watchdogs say efforts to improve oversight are falling short.

High-tech innovations like blockchain have gained buzz, but in practice the options are limited, the technology nascent and implementation needs to start at the mine.

Last month, the world's finest jewellers sought to dazzle their wealthiest clients with glittering new high jewellery collections, launched alongside this season's haute couture in Paris.

Brands vied to outdo one another with one-of-a-kind pieces dripping with diamonds, rubies, emeralds and sapphires. Among the most decadent items on display was a 6,225-carat raw emerald, cloistered in a black room in Chopard's Paris boutique designed to bring out the stones intense green colour.

The so-called Insofu emerald is one of the largest and highest-quality gems of its kind ever discovered, but equally exceptional is the fact that once the stone is cut and polished it will still be possible to trace its history back to the mine in Zambia where the stone was discovered.

It's the highest-profile example yet of new DNA-tracing technology developed by Swiss jewellery house and gem authenticator Gübelin's transparency tech subsidiary, established to tackle the fact that lurking behind the gem sector's glitz is a murky industry facing mounting pressure to clean up its act.

While much attention on jewellery's negative impact has focused on diamonds and gold, sparkly gems can also hide nasty truths. Sales of stones, including emeralds, jade, sapphires, lapis lazuli and rubies have been linked to funding armed conflict, terrorists and military dictatorships. Mining can be a dirty and dangerous business, and corruption and human rights abuses can extend through the supply chain. Stones typically go through the many hands of miners, sorters, cutters, polishers and merchants across different countries before they are set in jewellery, making it difficult to trace their origin and guarantee an ethical supply chain.

Those challenges risk taking the shine off gems for a growing number of consumers, as environmental and social issues become an increasingly important factor in purchasing decisions; by 2025 as much as 30 percent of all fine jewellery purchases will be influenced by sustainability concerns, according to The State of Fashion: Watches and Jewellery report published by The Business of Fashion and McKinsey & Co last year.

Big jewellers say they carefully manage their sourcing practices and don't buy stones from high-risk countries, but industry watchdogs say tainted stones still make it onto the mainstream market.

For instance, trade in the world's most highly prized rubies from Myanmar has been fraught for years because of political conflict that triggered successive embargoes, including fresh sanctions introduced by the European Union, US and UK following last year's military coup. But that hasn't stopped rubies from the country finding their way to the jewellers of Place Vendôme, according to a December report by non-governmental organisation Global Witness.

Gems smuggled out of the country are easily absorbed into global supply chains, where they find buyers in international jewellers like Richemont-owned Van Cleef & Arpels, Graff, and LVMH-owned Bulgari, the report alleged. Bulgari and Graff denied that they sourced stones from Myanmar. Van Cleef & Arpels declined to comment, but in its response to Global Witness the company said it was committed to international due diligence and responsible sourcing standards.

"Companies worldwide are hiding behind the complexity of gemstone supply chains," Global Witness said in a December post around the report's launch. "These gemstones are sold as symbols of human connection and affection, yet the supply chain is steeped in corruption and horrific human rights abuses."

Gem-dealers say the report misjudges Myanmar's importance in the ruby trade, with most stones on the market today from stocks mined years ago and the largest and most sought-after rubies typically bought at antique shops or auctions. But even those in the industry acknowledge the mechanisms currently in place to ensure stones are ethically sourced need improving.
An Imperfect Model
While many consumers are familiar with the conversation around ethical diamonds, the challenge is much greater for coloured stones because of their fragmented distribution; only a handful of players control the vast majority of the world's diamond output (Alrosa and De Beers mined roughly half of the global total in 2020). By contrast, most coloured gemstones come from myriad small artisanal mines scattered all over the globe.

Efforts to improve oversight have been largely funnelled through the Responsible Jewellery Council (RJC), an industry body that certifies its members are meeting responsible business standards. Standards for coloured gems were added in 2019. But this kind of model of voluntary self-regulation has been criticised for failing to drive real accountability or change.

"There are no strict penalties for companies," said Clare Hammond, a senior campaigner at Global Witness. "We do not see a mechanism in place that incentivises compliance." A report published by Human Rights Watch in 2020 called out other weaknesses in the RJC's standards, including no requirements for full traceability, transparency or robust on-the-ground human rights assessments.

RJC executive director Iris Van der Veken acknowledged that the organisation has not taken public steps to penalise companies for noncompliance, "but I can tell you at this moment there are certain cases we are investigating," she said. The organisation has defended the robustness of its standards, which it says are based on international frameworks for good business practices and due diligence.

Regulators, on the other hand, are beginning to take a more stringent view, with a growing number of countries looking to toughen up due diligence requirements that could make companies liable for abuses in their supply chains. That leaves the gem sector in need of new solutions.
Technology, Traceability and the Need for a New Approach
High-tech innovations, like blockchain-backed traceability platforms have gained a lot of attention, but in practice the options are limited, the technology nascent and its implementation faces significant hurdles.

Gübelin-owned Provenance Proof, the company responsible for DNA-tagging Chopard's Insofu emerald, is among the gem sector's leaders in the space. The CSI-style technique it developed to "inject" emeralds at the mine with tiny, DNA-based nano-particles that can endure through cutting and polishing is now used by gem-mining giant Gemfields for all its premium emerald production, or about 20 percent of its output.

For gems that don't have natural fissures that enable nano-tagging, Provenance Proof has also developed a blockchain-based platform for the gem sector. Since its launch in 2019, it has processed more than 2 million gems, with miners, cutters and polishers all logging pictures and information to create a tamper-proof record of the stones' provenance. The end-consumer can access all the information on their smart phone.

But for blockchain-based technologies and other traceability innovations to really move the needle, they need to be adopted much more widely and applied at the point of origin. That means the gem sector needs to get much closer and more familiar with its supply chain, right down to the mine level.

"Jewellers need to take responsibility for their own supply chains and act in ways that they are certain of and comfortable with," said Susan Wheeler, an American jeweller and founder of the Chicago Responsible Jewellery Conference. "All jewellers need to be aware of what and who is in their supply chains."

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Gem Traders Turn to DNA Tracing, Blockchain to Clean Up Supply Chains

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KEY INSIGHTS Cleaning up the supply chain for coloured stones is particularly challenging; while a handful of players control most of the world's diamond output, gems largely come from myriad small artisanal mines. Industry watchdogs say efforts to improve oversight are falling short.

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Brands across many industries report manufacturing and shipping delays at every level of their supply chains.

Delays at US ports are costing importers billions of dollars and spreading to new cities.

Many shipments are delayed by three weeks or more, meaning some seasonal items will miss their prime sales window.

The fashion industry has gained some clarity on its supply chain issues in the last couple of weeks, and the outlook isn't good. The problem is twofold. First, manufacturers are struggling to keep up with demand for essential items we rarely think about, from plastic fasteners to semiconductor chips. That delays production of finished goods - imagine nearly finished shirts and dresses sitting in a factory's storeroom for want of buttons or clasps.

The more serious issue right now though starts once finished items are shipped from factories. Around the world, clothes, shoes and accessories are sitting in warehouses while freight forwarders scramble to secure shipping containers. Once en route, boxes are getting held up at ports and air terminals, which have too few berths and healthy workers to process surging cargo volumes. The problem, which first came to many brands' attention at the end of 2020, has become an expensive headache, with container shipping rates in early March having more than quadrupled since last June, according to Panjiva, a trade data company. Nike said last week that port congestion contributed to lower-than-expected North American revenue in its most recent quarter.

There aren't any easy fixes. G-III, which licenses brands like Calvin Klein and Dockers, said it re-routed shipments from congested West Coast ports to the East Coast, where traffic is lighter. That's expensive and takes time, but the company "put some of the liability of timing on our vendor base," CEO Morris Goldfarb said last week. Wholesale retailers have similarly borne the brunt of Nike's shipping woes, as most of the brand's delayed inventory was destined for multi-brand partners (whether wholesale retailers will continue to accept these costs if supply chain problems persist into the summer remains to be seen). Consumers may not notice all of the delays; The Children's Place said it had plenty of unsold inventory from last year's back-to-school season that it could dust off this summer while it waits for new supply to arrive.

The Bottom Line: Fast fashion and luxury brands that rely more on air freight might get some relief as international travel picks up (the same planes that carry passengers also carry cargo). But for most of the industry, Nike CEO John Donahoe put it best in an analyst call last week: "We adjust and we win."
IS FASHION MAKING ANY PROGRESS ON SUSTAINABILITY?

Fashion's negative environmental and social impact is well documented, but establishing what progress is being made to fix it is extraordinarily difficult.

This week BoF is launching a new report, breaking down how fashion's largest players stack up on sustainability.

Stay tuned for our series of features exploring The BoF Sustainability Index: The Sustainability Gap and the second annual BoF Professional Summit: Closing Fashion's Sustainability Gap on April 14.

The next decade will be crucial to stave off the risk of catastrophic climate change and meet the 2030 milestone to achieve sustainable development goals laid out by the UN. The fashion industry has an important role to play, both because of its cultural influence and sizeable negative impact. But while more and more fashion brands are marketing sustainable collections to values-driven consumers, is this really moving the needle, or is it just greenwashing? BoF's latest report, The BoF Sustainability Index, aims to offer a transparent and trusted benchmark to take stock of advances, objectively identify shortcomings and lay out a clear framework for future progress.

The Bottom Line: Stay tuned for BoF's comprehensive analysis on how fashion really measures up when it comes to sustainability.
-Sarah Kent contributed this item E-COMMERCE BOOMS IN SOUTH KOREA

Seoul Fashion Week runs March 22 to 27 in an all-digital format.

Korea's retail sector has bounced back from the pandemic relatively quickly.

Korean e-commerce giant Coupang held a US IPO earlier this month.

Seoul Fashion Week is online-only this week, but it's perhaps a less jarring departure from the norm in a country where consumers have long been digital pioneers. GlobalData estimates e-commerce sales grew by more than 20 percent last year, topping $100 billion for the first time. Korea also has outsized influence over global culture and fashion, from K-Pop to K-dramas and K-beauty. But Korean fashion brands that have gained ground overseas, such as We11done and Pushbutton, tend to show in London and Paris instead.

Until recently, Korea's large but fragmented e-commerce market was dominated by international giants, including Alibaba, Amazon and eBay. The rise of Coupang, the seller of everything from fashion to electronics that has a $75 billion market capitalisation after going public in New York earlier this month, has changed that picture. So has Shinsegae, the luxury department store that is a frontrunner to buy eBay's Korean business.

The Bottom Line: Korean consumers' ease with online-only shopping before 2020 helped the country's retail sector weather the pandemic better than many other economies. That's given Korean e-tailers and fashion brands a solid base to pursue international expansion.
-Zoe Suen contributed to this item The Week Ahead wants to hear from you! Send tips, suggestions, complaints and compliments to Was this BoF Professional email forwarded to you? Join BoF Professional to get access to the exclusive insight and analysis that keeps you ahead of the competition. Subscribe to BoF Professional here. brian.baskin@businessoffashion.com.

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The Supply Chain Crisis: What Brands Are Doing About It

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Brands across many industries report manufacturing and shipping delays at every level of their supply chains. Delays at US ports are costing importers billions of dollars and spreading to new cities. Many shipments are delayed by three weeks or more, meaning some seasonal items will miss their prime sales window.

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When Nordstrom created its first C-suite role focused squarely on the supply chain earlier this year, it signalled the "increasingly critical role" the unglamorous topic of logistics had come to play in the department store group's business.

For the newly created post, it tapped former Amazon VP Alexis DePree. The appointment followed a series of ambitious moves by the retailer to accelerate its shift to digital, which now accounts for the majority of its sales. Among other efforts, the company significantly increased the number of products available for two-day delivery and next-day pickup in key markets, adding substantial complexity to its operations.

Nordstrom isn't the only company taking such steps. Big brands and retailers have dramatically increased their recruitment of professionals focused on supply chain and logistics in the last year-and-a-half, a reaction to the major disruptions caused by the pandemic and wider industry shifts.

This month, luggage brand Away named Charles Liu its first-ever chief operating officer, tasked with focusing on the company's supply chain and business technology teams. In August, Revlon tapped former PPI Beauty chief operating officer Thomas Cho to become its chief supply chain officer, or CSCO. Between October 2020 and this November, job postings for supply chain managers skyrocketed 47 percent across industries in the United States, according to careers site Indeed. Roles for supply chain specialists jumped 79 percent, Indeed said.
An Evolving Need
Even before the pandemic, the fashion industry was grappling with increasingly complex supply chains that demanded new expertise to manage.

Now, port snarls, soaring shipping costs and product shortages have turbocharged that need. On top of that, the rise of e-commerce and new expectations around corporate social responsibility mean that more companies require a supply chain executive in the C-suite who can create a comprehensive strategy connecting merchandising, product design and human resources with product procurement.

There's just not enough time for inefficiencies anymore or to have a silo mentality.

"At first it was all about 'how do I move product most effectively and get it where I need it in time?'" said Craig Rowley, a senior client partner at business consulting firm Korn Ferry. "Today, it requires an individual to think strategically about the business."

For instance, Revlon's new chief supply chain officer Cho acts as a "centralised command and control centre" for departments including manufacturing, procurement and sales, operations and planning, helping the company coordinate quickly to respond to crises, he said.

"There's just not enough time for inefficiencies anymore or to have a silo mentality," Cho said. "In the past, supply chain and manufacturing used to be fragmented but to compete in the world now they have to be seamless."

Historically, fashion's supply chain managers have served in middle management functions, often sitting several levels down from the C-suite. The industry's recent hiring spree points to the role's growing importance and the challenges associated with attracting people with the right know-how for the position.

"Sometimes these title shifts - or evolutions in titles - are created by what you need in order to get that calibre person into the organisation," said Paula Reid, president of executive search firm Paula Reid & Co. "Where do you find room for them and how do you carve out the differences in what you want them to concentrate on?"

Hiring the right CSCO can play a critical role in setting up an organisation's talent development strategy and beefing up expertise for years to come. An effective CSCO could create a plan to cross-train early career professionals in areas like distribution, logistics and finance that could put them on track for supply chain management, said Lisa Butkus, partner and head of the retail and luxury goods practice at executive search firm Hanold Associates.

Sometimes these title shifts - or evolutions in titles - are created by what you need in order to get that caliber person into the organization

"Having a chief supply chain officer close to your CEO can help educate them on the pressures and demands and where they need to [deploy] resources," she said. "A CSCO would work in partnership with HR leaders to [determine] how to recruit and engage talent and make the strategy sustainable."
What to Look for in a CSCO
For companies ready to make the investment in a supply chain chief, they will want to enlist candidates with a mix of both technical and strategic leadership skills.

"Companies have to look at the profile of this leader broadly because you need someone that has experience in supply chain operations, been responsible for [profit and loss] at some point or led a business unit," said Butkus. "They need to have that entrepreneurial mindset that allows them to tap into a lot of different skill sets and help develop people."

But it's a talent profile that's tough to find.

"I would [estimate] that a third to a half of supply chain leaders in America are really great at delivery and execution but not so great at strategic thinking - because not everybody can do that," said Rowley.

Retailers could recruit from the consumer goods sector where companies like Procter & Gamble and Kimberly-Clarke have a longer history of hiring for the role. But, many will need to groom their CSCO internally, said Rowley and Butkus.

Things are not going to get easier ... it's going to be tougher.

Nordstrom's DePree came from Amazon where she oversaw the tech giant's sorting centres and was also vice president of global supply chain operations. Her resumé includes nearly a decade in various distribution leadership roles at Target.

Macy's CSCO Dennis Mullahy, who joined the company from the arts and crafts chain Michael's Stores in 2019, is a retail vet with more than 30 years of experience, including a stint at beauty purveyor Ulta. Tory Burch recruited Chris Callieri from Adidas in 2018 to head up supply chain management. Before joining the sportswear giant, he led the supply chain and operations practice at retail consulting firm HRC Advisory. Revlon's Cho served as CSCO at beauty company Mary Kay Cosmetics and was twice a COO.

While the recent stream of crises have meant that supply chain leaders are "constantly fighting fires," when the macroeconomic picture stabilises, fashion firms will need CSCOs who can identify new innovations and plan everything from where to place distribution centres to how a company can cut costs and minimise climate impact when manufacturing and moving product, Rowley said.

"We're moving away from decentralised to more centralised [management] models because things are not going to get easier ... it's going to be tougher," said Cho.
Related Articles: How to Hire a Chief Diversity Officer Why Fashion Needs Chief Brand Officers How to Be a Post-Pandemic CEO

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The Chief Supply Chain Officer is the New C-Suite Star

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When Nordstrom created its first C-suite role focused squarely on the supply chain earlier this year, it signalled the "increasingly critical role" the unglamorous topic of logistics had come to play in the department store group's business. For the newly created post, it tapped former Amazon VP Alexis DePree.

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Circularity Gap Report 2022 Live Launch: Unleash the power of the circular economy

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Circularity Gap Report 2022 Live Launch: Unleash the power of the circular economy

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On 19 January 2022, Circle Economy launched the Circularity Gap Report 2022. This year, we were celebrating five years of Circle Economy’s Circularity Gap Reports. Read the full report: www.circularity-gap.world/2022 We were honoured to be joined by fantastic speakers and panellists: - Walter R. Sta…

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ABSTRACT
The 'Circular Economy' has become a new buzzword in debates about sustainability. Circularity, however, is usually presented in terms of scientific and technological challenges that often neglect the socio-political aspects related to the transition towards more sustainable futures, such as participation, co-creation and social justice. We argue that the Circular Economy agenda might greatly benefit from the field of Responsible Innovation. This argument is at the centre of the EU funded project, 'A Just Transition to Circular Economy' (JUST2CE), which aspires to address the present shortcomings of Circular Economy literature and practices. JUST2CE aims at understanding, in a critical way, under which conditions a responsible, inclusive and socially just transition to a Circular Economy is possible and desirable, what technical, political and social factors can enable or hamper such transformation and how these aspects can contribute to the development of transitional policy measures.

A powerful new buzzword

The 'Circular Economy' (CE) has become a powerful new buzzword within political and academic debates about environmental sustainability and climate change. Proponents see the CE as a new paradigm that is able to square the circle of economy-society-nature interactions (Ellen Macarthur Foundation ). The core idea is that, rather than discarding products at the end of their useful life, they should be designed in such a way to be re-employed in a cascade of subsequent or feedback uses (Ghisellini, Cialani, and Ulgiati ; Genovese et al. ). While its theoretical foundations have been debated for some time, being rooted in a wide array of academic disciplines, CE has only recently been pushed into the public discourse, with news media devoting increasing attention to it.

This increasing visibility of CE in the public sphere is accompanied by several attempts by national governments and international organisations to develop strategies for the implementation of CE practices at micro, meso and macro levels. Recently, the European Commission has adopted a 'Circular Economy Action Plan', which is also central in the European Green Deal (EGD). The measures proposed in the plan are aimed at closing the loop of product life cycles through greater recycling and reuse, with the objective of bringing benefits for both the environment and the economy. It is important to note, however, that the European Commission and its member states mainly rely on self-regulatory, bottom-up approaches for the practical implementation of the Action Plan, given the prevailing pro-market approaches in this geographical area, whereas countries like China are implementing large-scale top-down circular economy initiatives (Liu et al. ).

Importantly, however, it is also evident that the translation of such concepts into practical economic initiatives produces very diverse outcomes based on competing ideological perspectives. Scholars with different academic backgrounds have enquired about the type of governance and political regime that the CE implies. Among others, Hobson () warns that CE may become yet another instance of neoliberal environmental governance, practiced through the eco-labelling of products and ecological modernisation, where the responsibility for societal change moves not only from public to private institutions, but also to the individual in her role as consumer rather than as citizen. Friant, Vermeulen, and Salomone () point up that, given the ambiguity of the concept, different actors and sectors are articulating circular discourses which align with their interests, and which often do not sufficiently examine the ecological, social and political implications of circularity.

The assumptions behind CE agendas can be also questioned from a scientific perspective. As pointed out by Giampietro and Funtowicz (), the current characterisation of the CE concept is full of contradictions: while the concept acknowledges the dependence of the economy on biophysical flows, the proposed solution ignores the thermodynamic constraints ruling such flows. Furthermore, the implementation of CE practices and strategies in the current economic system might also have controversial rebound effects, hampering the achievement of advances towards more sustainable futures (Zink and Geyer ). As such, the CE agenda can be seen as the ultimate version of the 'decoupling' notion (Fletcher and Rammelt ). For its proponents, decoupling entails increasing the efficiency and productivity with which value is derived from natural resources in order to reconcile endless economic growth with environmental sustainability. Despite its biophysical impossibility, the decoupling narrative is being increasingly employed as tool that can effectively veil the fundamental tensions between the current capitalist economic model, environmental sustainability and poverty alleviation (Hickel and Kallis ; Parrique et al. ). Therefore, if CE framing doesn't consider systemic socio-ecological implications, the term could easily become discredited as a new sophisticated form of greenwashing, yet embedded in the growth-capitalistic rhetoric (Genovese and Pansera ).

Ultimately, CE provides an avenue for blurring the tensions between conflicting policy goals: with economic growth being continuously coupled with environmental protection, the success of the current CE narrative could be employed as a tool for stabilising existing institutions, through a depoliticisation of the sustainability debate through the promotion of implausible socio-technical imaginaries. In this sense, as Kovacic, Strand, and Völker () have rightly noticed, CE policy as the one promoted by the EU can play the role of a new policy 'nexus' able to combine the compelling urgency of addressing environmental issues with the ideological mandate of pursuing economic growth. This is potentially highly problematic because as they state, 'the apparent consensus around the circular economy and the consensus logic of nexus policies not only exclude controversy from the circular economy imaginary, but also annul the capacity to diagnose policy ineffectiveness, and possibly failure' (Kovacic, Strand, and Völker , 137). In short, many of the problematic aspects of current discourses around CE are rooted in its framing as a purely technical endeavour.

Moving beyond technocratic framings of Circular Economy

While CE is often presented as an interdisciplinary field, techno-managerial aspects dominate. Science, technology and, above all, innovations are considered absolutely central for the transition towards a CE. Nevertheless, the viability of CE at a socio-political level has been not sufficiently explored. As a consequence, CE remains an essentially apolitical agenda, despite the fact that its implementation could have profound political implications. According to many analysts, given the right economic incentives, a transition to a CE can automatically happen in Western market economies; the role of people, class relations and power asymmetries, local communities, care and social reproductive work, and nonhuman nature (plants and animals in particular) is generally overlooked (politically and in research) (Genovese and Pansera ). The details about how such a revolution in the way we produce and consume would happen, are generally vague and, probably intentionally, underspecified. Therefore, there is a risk that economic imperatives to 'close the loop' as quickly and efficiently as possible conflict with the inevitable frictions and demands of democratic governance. A key issue that is often ignored is: who is going to decide where and how to implement closed-loop production and consumption systems? Since CE does not question issues of justice and power relations, the societal implications (e.g. the levels of freedom and democracy) of such a paradigm transition are not explicit, suggesting a predominantly technocratic agenda underlying the CE.

In response to a technocratic transition to circularity, a number of critical voices have called to re-politicise CE. In this sense, interesting insights come from Responsible Innovation (RI) scholars (Inigo and Blok ), environmental governance studies (Friant, Vermeulen, and Salomone ; Korhonen, Honkasalo, and Seppälä ), STS scholars (Kovacic, Strand, and Völker ) and post-normal science (Giampietro and Funtowicz ). But still many questions remain answered, such as: Which theoretical frameworks inform the dominant and alternative perspectives on CE? Which ideological positions underpin them? Which are the industrial sectors driving CE research and policy developments, and which ones are instead neglected? What is the role of science and technology institutions in such a transition? Which stakeholder groups are included and in which roles, and which are excluded and why? This list is far from exhaustive. Many questions about labour organisation, international trade and the North-South relations that govern globalised supply chains also need to be posed to lead to a CE that will possibly enable not only a truly sustainable economic system but also more just and responsible futures.

Why do we need a responsible Circular Economy?

CE requires much broader analytical lenses

than are currently deployed, given the profound

'transformative change' advocates speak of

A CE is not simply going to emerge through policy shift alone. A just transition towards a CE will have to be,

imagined and built, fabricated and realised, coded and created. This will involve the channelling of enormous amounts of creative labour and inventive praxis. It will also involve the construction of public spaces and public institutions where new knowledge practices can meet. (White )

An important aspect that is usually neglected by CE literature is the dimension of responsibility in science, technology and innovation, e.g. who decides (and how) about different technological paths and how this process is done responsibly. That's why we advocate for a new and alternative agenda for CE that is informed by the debates that emerge within the field of RI. CE is likely to require important technological innovations in many fields and innovation has the power to create futures that can be full of opportunities as well as unexpected consequences.

Given the profound 'transformative change' CE advocates speak of, CE requires much broader analytical lenses than those deployed so far. Analysing such a transition through the lens of RI would illuminate how the innovations required to create a CE are socially and politically entangled, whether unintentionally or by design. Furthermore, to the date, most CE projects have focused on 'how' to produce circularly but not really on 'what' or 'how much' to produce. The 'what' question relates to issues of democracy (at both society and workplace level), planning, participation, gender and global justice that are in turn connected to the capacity of any society to reflect about what kind of futures its members desire. These are questions asked in the literature on RI (Inigo and Blok ). In general, the dimensions of public engagement, anticipation and reflexivity are absent from CE literature and practices. Many CE practices unreflectively embrace a technocratic governance that abstracts away the complexity of human and social factors (Sadowski ). How bottom-up practices (including social activism) can re-appropriate and reshape the CE discourse is crucial to enable a fair and just transition. The 'how much' question relates to the need to decouple economic growth from welfare to keep global consumption of natural resources within limits that are compatible with the ecosystems that sustain life on the planet. This also implies questioning the need for endless and unchecked economic growth (de Saille et al. ) and thinking of participatory production planning and wealth distribution mechanisms that would combine an awareness of environmental limits with a fair and just access to natural resources (Bruynseels ).

A Just Transition to Circular Economy

With support from the European Union's H2020 programme, the recently launched project 'A Just Transition to Circular Economy' (JUST2CE) seeks to broaden the foundational assumptions and practices of CE. The project involves universities, companies, civic society organisations and public institutions from Europe and Africa to address the above-mentioned neglected dimensions of CE and to contribute a multi-layered conceptual framework of a just and responsible CE transition. Among a number of different themes (e.g. gender and feminist perspectives, political ecology, sustainable supply chain management, labour and geopolitical North-South relations), JUST2CE is firmly committed to embed the principles of RI within the field of CE.

To this end, JUST2CE considers that different types of uncertainty linked to the CE and ethical concerns have to be integrated in a wider reflection on the broader societal and community-based goals. Such uncertainty requires reflexive research that builds on the concept of irreducible pluralism and proposing participation (co-production) as an interface to engage with the multiple epistemologies and corresponding - and often contradictory - facts (Pereira and Funtowicz ). Adapting ideas drawn from the RI literature, the project will seek to provide a useful starting point for better incorporating different forms of knowledge, including traditional and indigenous (Ludwig and Macnaghten ), into CE discourses and to respond to the concerns and priorities of local communities. We are very much aware that engaging into a re-politicization of the CE would also entails the generation of what Rayner () defined as 'uncomfortable knowledge' associated with irreducible uncertainty and epistemic pluralism especially when dealing with 'wicked problems'. But we also think that promoting responsible science and innovation requires engaging with political controversies and conflict negotiation.

The central idea underpinning responsible CE, as illustrated by the aspirations of the JUST2CE project, is that a successful transition towards a sustainable CE does not merely depend on the development of new technologies - artefacts or processes - but also on governance processes that recognise the socio-political nature of technological innovations. Realising this transition will require a reconfiguration of governance and knowledge production processes so as to enable democratic and participatory means of designing and managing technology. The JUST2CE project seeks to understand the conditions under which such reconfigurations are possible.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The work underlying this perspective has been partially fudned by the following European Commission's research programmes: H2020-MSCA-ITN-2018 scheme, Grant Agreement 814247 (ReTraCE project); H2020-MSCA-RISE-2018 scheme, Grant Agreement 823967 (ProCEedS project); ERC Starting Grant PROSPERA (GA 947713).

Notes on contributors

Mario Pansera is currently employed as Distinguished Researcher by the UVIGO and Assissant Prof at the UAB. He's PI and project coordinator of JUST2CE. In July 2020 he was awarded an ERC Starting Grant for the project 'Prospering without growth: Science, Technology and Innovation in a post-growth era'. He also leads the post-growth innovation lab at the UVIGO Campus of Pontevedra and WP leader in the ITN Marie-Curie ReTrace on Circular Economy. His work focuses on Responsible Research and Innovation (RRI) and Innovation for Sustainability. He gained a PhD in Management at the University of Exeter Business School in 2014. After his Marie-Curie post-doctoral fellowship in Brussels, he worked as a research fellow at the University of Bristol from 2017 to 2020. Mario is international faculty at the Graduate School of Business of the University of Cape Town in South Africa where he teaches Responsible Innovation in the ExeMBA.

Andrea Genovese is Professor of Logistics and Supply Chain Management, Head of the Operations Management and Decision Sciences Subject Group. He has leading expertise in sustainable supply chain management, with particular emphasis on the development of Decision Support Systems for dealing with complex problems arising in the coordination of production and distribution units. Prof. Genovese has published in leading international journals in the field of supply chain and operations management and serves as associate editor for Socio-Economic Planning Sciences. He is currently supervising a number of Early Stage Researchers and doctoral students in the area of decision support for green and circular supply chain management, and leading the ProSFeT (H2020-MSCA-RISE), ProCEedS (H2020-MSCA-RISE) and ReTraCE (H2020-MSCA-ITN) projects in the area of Circular Economy.

Maddalena Ripa, PhD holds a PhD in 'Environment, Resources and Sustainable Development' at Parthenope University of Naples (Italy). More recently she got interested in analysing how quantitative evidence and complexity are mobilised in sustainability issues through the distinctive 'sociotechnical' lens of Post Normal Science (PNS) and Science & Technology Studies (STS), both calling for epistemological relativism in technological change and its imbrications with society and the natural environment. She worked as a researcher within the research group on Integrated Assessment: Sociology, Technology and the Environment - IASTE at the Institute of Environmental Science and Technology (ICTA) of the Autonomous University of Barcelona (UAB). Currently, she's research fellow at the UAB Business Department.

1 JUST2CE has been funded with 3.6M euros within the Call 'Greening the economy in line with the Sustainable Development Goals' (Call identifier: H2020-SC5-2018-2019-2020) under the Topic: 'Understanding the transition to a circular economy and its implications on the environment, economy and society'. The project is expected to start in September 2021 and end in 2024.

References

Ellen Macarthur Foundation. 2015. Growth within: A Circular Economy Vision for a COMPETITIVE EUROPE. http://www.ellenmacarthurfoundation.org/books-and-reports#.

, W. J. V. Vermeulen, and . 2020. "A Typology of Circular Economy Discourses: Navigating the Diverse Visions of a Contested Paradigm." Resources Conservation and Recycling 16: 104917.

, , , and . 2017. "Sustainable Supply Chain Management and the Transition towards a Circular Economy: Evidence and Some Applications." Omega 66: 344-357. doi:https://doi.org/10.1016/J.OMEGA.2015.05.015.

Ghisellini, P. , , and . 2016. "A Review on Circular Economy: The Expected Transition to a Balanced Interplay of Environmental and Economic Systems." Journal of Cleaner Production 114: 11-32. doi:https://doi.org/10.1016/J.JCLEPRO.2015.09.007.

, A. Honkasalo, and . 2018. "Circular Economy: The Concept and Its Limitations." Ecological Economics 143: 37-46. doi:https://doi.org/10.1016/j.ecolecon.2017.06.041.

, , , , , and . 2016. "Uncovering Key Factors Influencing One Industrial Park's Sustainability: A Combined Evaluation Method of Emergy Analysis and Index Decomposition Analysis." Journal of Cleaner Production 114: 141-149. doi:https://doi.org/10.1016/j.jclepro.2015.06.149.

, , , J. Spangenberg, and A. Kraus-Polk. 2019. Decoupling Debunked. Evidence and Arguments Against Green Growth as a Sole Strategy for Sustainability. A Study. Edited by the European Environment Bureau EEB. EEB. https://eeb.org/library/decoupling-debunked/.

, and S. Funtowicz. 2015. Science, Philosophy and Sustainability: The End of the Cartesian Dream. London: Routledge.

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Politicising Circular Economy: what can we learn from Responsible Innovation?

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ABSTRACT The 'Circular Economy' has become a new buzzword in debates about sustainability. Circularity, however, is usually presented in terms of scientific and technological challenges that often neglect the socio-political aspects related to the transition towards more sustainable futures, such as participation, co-creation and social justice.

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LONDON, United Kingdom - Earlier this year, H&M announced its aim to be 100 percent circular and renewable by 2030. The ability to recycle this quantity without degradation would mean endless yet sustainable fast fashion. But is it really feasible for one of the world's largest fast fashion retailers - which reported revenues of over $2 billion in 2016 - to "close the loop" in a little over a decade?

By 2030 it is predicted that we will be using two Earths worth of resources and the demand for clothing is expected to have risen by 63 percent according to the Copenhagen Fashion Summit's recent Pulse of The Fashion Industry report written in collaboration with the Boston Consulting Group. As we hurtle along this trajectory, can we afford to put all our bets on being able to make current rates of fashion consumption sustainable?

Though improving recyclability is commendable and necessary, the circular economy is being marketed as bite-size incremental change rather than the systemic overhaul it is in reality. Consequently, steps towards a circular system made at a self-elected pace are in danger of becoming a method of guilt-free acceleration of consumerism. Closing the loop isn't a reality yet, so shouldn't we be reaching for the brakes instead of the accelerator?

The performance economy (otherwise known as the functional service economy) is a worthy alternative. Though an essential component of the circular economy, it is often sidelined for its seemingly disruptive nature. Its pioneer, Walter Stahel, explains that in retaining goods and selling performance, rather than goods themselves (in other words, access over ownership business models), companies can incentivise a shift from linear to circular business models.
How it works
In a performance economy, consumers pay only for the value they extract from a good (the performance) as and when they use it, incentivising companies to refocus on what benefits the customer actually wants. The Ellen MacArthur foundation outlines several case studies, one example being a project initiated by architect Thomas Rau that purchased light as a service from Philips.

For the project, the use of artificial light was minimised by design: lighting was positioned closer to where it was needed; sensors were fitted so that artificial light was responsive to the fluctuation in natural light; and the building was designed to maximise natural light. Philips retained ownership of the parts so that they could be maintained efficiently and Rau had the option to upgrade the system with Philips recovering the parts that were no longer needed. Overall, Philips increased profits by providing long-term performance using fewer resources and Rau received more affordable light.

Washing machines offer another example of better performance for consumers at an overall lower cost by eliminating the waste, design obsolescence and idle capacity prevalent when selling goods. Many washing machines are designed for low cost rather than ongoing performance, reducing the average lifetime between a high performance and a standard machine from 10,000 hours to 2,500 hours. Businesses like Bundles, which offer a 'pay-per-wash' service instead of selling machines, give consumers better performance at a lower cost.

The focus on performance encourages innovation around fashion as an experience.

But what would the future of fashion look like within a performance economy? First, we must get to grips with what high performance means for fashion. It's not just about keeping us covered and warm, but about experience, creative expression, novelty, quality and craft. In a performance economy, businesses are motivated to invest in creating not just physical durability but also emotional durability - lasting desirability. Through providing shared wardrobe access, much greater choice and curation can be provided at a lower cost. From a consumer perspective, Rent The Runway is the most prominent example of the post-ownership wardrobe. Having reached EBITDA profitability at the end of 2016 and over £100 million in revenue thanks to their "Unlimited" wardrobe service, Rent The Runway has validated this business model.
Challenges in adoption
There are multiple challenges in adopting a performance economy. A wardrobe service must work with multiple designers to provide a curated choice of clothing. For a true performance economy, these creators should retain their creations and earn when they are in use so that they gain the monetary incentive for longevity. This means a new system of collaboration that could take an array of forms. Businesses involved will need to be agile as well as being able to afford the upfront costs of retained ownership

Additionally, a number of innovations conducive to a performance economy are currently unexplored by fashion rental companies. Design for post-ownership is underdeveloped. This could involve high performance recyclable materials, pre-empting damage, design-led methods of repair, and a design processes involving continuous modification. It could also involve technologies such as blockchain to track goods and importantly, measurement and feedback systems to continuously improve performance.

Though economically viable, the performance economy requires a shift from manufacturing to labour intensive, localised, processing, caring and mending, posing a problem in developed countries where labour is expensive. Stahel says sustainable taxation could be used to accelerate the change to a performance economy and create jobs. He proposes that renewable resources are not taxed but non-renewables are, and that labour, which is increasingly abundant due to population growth, is treated as a non-renewable. As the Paris Agreement comes into action, to curb emissions, more sustainable oriented taxation and legislation are likely to come into action and businesses should be prepared.

In a performance economy, at the end of their consumer life, goods would still be recycled and made into new clothes. Though customers' use of garments would likely have to adhere to terms of use and can be penalised for misuse, the creator of the clothes would remain responsible for prevention of damage, washing and mending. Crucially, the focus on performance encourages innovation around fashion as an experience, which could even end up moving consumers away from the current materiality of clothing.

However, if virgin resource extraction remains unrestrained, resources will become increasingly scarce, resulting in price surges and volatility. Companies that sell electrical appliances must now, by European law, provide a free take-back service when they sell a new version of the same product, or join the Distributor Takeback Scheme. This type of legislation could be applied to many other industries.
Increasing demand
The shift towards a performance economy may seem idealistic, but on the demand side, the post-ownership movement is growing strong with 58 percent of millennials in London interested in renting clothes, according to a study conducted by Australian mall operator Westfield. As with cars, Gen-Y and Gen-Z are happy to be rid of the burdens of ownership. For millennials, experience over ownership is the new norm, and with far less spending power, as with homes, clothes ownership may soon be seen as an unnecessary luxury of their parents' generation. The post-ownership movement also ties nicely into the wellness trend, as these cohorts tend to seek enriching experiences rather than materialism.

Access over ownership could become the new reality and fashion brands and retailers should consider what it would mean for their businesses. The performance economy has the potential to increase profits but the sharing economy presents risk. A peer-to-peer rental or resale platform could be significantly disruptive to fashion brands and retailers if successfully scaled.

But why is the performance economy so superior to selling goods with a more circular approach? The crux of the matter is that through retaining ownership, creators remain accountable for the goods they create, avoiding an unreliable general public. The efficiencies gained throughout the lifespan of the goods and beyond becomes profit, incentivising responsibility from creators.
Unreliable consumers and the limitations of recycling
Additionally, our technological ability to achieve full recyclability is also questionable. H&M is a leader in textile recycling but there is still a mountain to climb. The complexity of the mix of materials used in certain garments is a major challenge but this could mostly be overcome by changing the way that garments are designed. In 2016, 25 percent of their materials were from recycled or sustainable sources.

The more pressing challenge is the degradation of fibres, ease of the recycling process and eventual biodegradability. Currently only 0.1 percent of clothing that is donated by consumers as part of its much-publicised collection drives is actually recycled. That is why H&M is investing into new solutions: fabrics made from manure, citrus and grape waste. But to scale these ideas will take time.

Even if we do manage to close the loop, we are letting resources be abused. Consumers are generally unable to measure efficiency gains and afford the upfront costs of buying for long-term value. Despite the best instructions, it's difficult to use, maintain and repair with best practice for longevity as it simply isn't the average person's priority. The Fashion Revolution organisation says consumers wear items an average of just four times before discarding them. A recent study by UK supermarket and clothing retailer Sainsbury's found that 75 percent of consumers in the UK discard clothes as domestic waste even though 95 percent of these items can be reused or recycled.

We need to accept that non-biodegradable resources are here to stay but that an item of clothing doesn't have to be life-long love affair by a single owner. We should instead be designing a system that caters for dynamic rather than static wardrobes. Static wardrobes lead to idle capacity - the clothes that are sitting in our wardrobes. However good our recycling processes get, the problem of exclusive ownership over extensive wardrobes would remain unsolved.

We need a drastic overhaul of the system and improved recycling doesn't cut it. Neither does the unrealistic mantra of more conscious ownership: buy less and cherish forever. Ultimately we need to understand that consumerism is not the only option to sustain an economy and alternatives are not just necessary but have the potential to provide a better option for all.

Sara Arnold, founder and chief executive of Higher Studio
On the surface, my start up, HIGHER, rents clothes, but the motivation has always been to practice an alternative to consumerism that can cultivate creativity in a more responsible way. With mass extinction and climate change under way, over-consumption is the underlying factor we must tackle, especially within fashion. Until now, I haven't had the chance to fully explain my point of view. Working with Robin Mellery-Pratt from the BoF editorial team to formalise my thoughts and present them to the global fashion community was invaluable. This is an opportunity to raise awareness of the reasoning behind what I'm doing and enter a dialogue with like-minded people. It is a call for guidance and support to progress these ideas as well as to encourage others to follow. I would like to be part of a collaborative ecosystem shaping a more creative and sustainable fashion future. The opportunity to voice opinions shouldn't just be for established professionals but also for emerging talent paving their way with bold ideas. Initiatives such as Future VOICES are imperative for the industry to nurture innovation and embrace change. The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion. Related Articles:
[ In Copenhagen, Gearing up for a Circular Fashion System ]

[ Just Fix It: How Nike Learned to Embrace Sustainability ]

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Op-Ed | An Alternative To Consumerism Does Exist: The Performance Economy

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LONDON, United Kingdom - Earlier this year, H&M announced its aim to be 100 percent circular and renewable by 2030. The ability to recycle this quantity without degradation would mean endless yet sustainable fast fashion.

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How Can Fashion Embrace the Circular Economy?

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OXFORDSHIRE, United Kingdom - Despite the wealth of reports finding that millennials and members of Generation Z say they prefer fashion made in a more ethical and less environmentally destructive way, they can't seem to get enough of ultra-fast fashion brands like Boohoo and low-price private-label basics from retailers like Amazon.

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LONDON, United Kingdom - E-commerce is booming. But the welcome boost to fashion's bottom line is creating a mountain of waste - and consumers are starting to notice.

In Europe alone, Bernstein projects the growth rate of online fashion will triple this year to account for more than 20 percent of total sales - the equivalent of five years of growth in about six months. Those orders will largely be packaged in cardboard or plastic, then loaded onto gas-guzzling trucks, planes and ships. Many will then be returned, requiring another journey halfway around the world before often winding up in a landfill.

Tackling these issues is a growing priority for many companies, as consumers and regulators demand action on waste and climate. Though manufacturing is still responsible of the lion's share of fashion's overall impact, as e-commerce continues to grow and become an even bigger part of consumers' lives, it is facing mounting scrutiny.

"We see a clear link between sustainability and continued commercial success," said Kate Heiny, director of sustainability at Zalando.

Last year, the German e-commerce giant found more than 60 percent of its emissions were the result of customer deliveries and returns, though that calculation didn't include the footprint of the third-party brands it stocks. That's something the company plans to incorporate going forward, making deliveries a much smaller proportion of overall emissions. Still, They were largely responsible for the 6 percent increase in the company's footprint in 2019.

"The holy grail of our strategy... is to decouple economic growth from environmental impact," Heiny said.
The Packaging Problem
When The Iconic, an Australian online retailer, committed to using more sustainable packaging, it didn't expect the process to take 18 months or require an overhaul of its signature branding.

The company initially considered compostable packaging, but abandoned those efforts because most Australians don't have convenient access to composting facilities. Eventually, it settled on recycled pouches made from 100 percent post-consumer plastic waste.

We see a clear link between sustainability and continued commercial success.

That still came with compromises. The packaging has to be dropped off in special collection bins to ensure it will be recycled (though these are more common than composting sites). And The Iconic's traditional branding, a white logo on a black background, proved hard to print on the new material - the black never really looked black and the white ink had a tendency to run. The company flipped the colourway.

"That's an incredibly iconic part of our brand, those black bags, so to change to white was a huge deal," said Jaana Quaintance-James, chief sustainability officer at Global Fashion Group, which owns e-commerce platforms including The Iconic and Zalora.

As a starting point, brands should be thinking about the materials they're using. Can they be reused, recycled and repurposed, and have they been manufactured in a responsible manner to begin with? Can they be made lighter so they require less energy to ship and is there a way to eliminate single-use plastic? There are a growing number of options available, though they can be more expensive and require careful analysis to understand whether they really do represent a better alternative.

Plus, the packaging has to look good.

"We still need to create some theatre for the customer because you don't have the store touchpoint," said Robert Lockyer, founder and chief executive at luxury packaging provider Delta Global. "You can still do that and have a sustainable offering."
Lean Logistics
For retailers like Zalando, packaging is a major source of waste, but shipping is the biggest driver of direct emissions. Reducing the number of journeys between warehouses and customers' homes, and finding cleaner modes of transportation, is key to reducing e-commerce's carbon footprint.

It makes commercial sense too. A brand that doubles the average number of items customers purchase per order, and manages to send those items in a single shipment, will reduce average emissions per item by 30 percent and cut shipping costs by more than 50 percent, according to a 2017 report by Bain & Company.

That's not always easy. Large brands might stock items in different warehouses. Holding up a multi-item shipment because one product is out of stock isn't always an option when customers expect their orders to arrive as quickly as possible. It can be difficult to bundle orders to individual customers in many different locations as well.

To simplify the final leg of delivery, commonly referred to as the "last mile," Zalando has trialled private delivery and return points at people's houses, as well as in local shops, that consolidate pick-ups and drop-offs in one location. Elsewhere, the company is partnering with regional carriers to use more environmentally friendly delivery methods like cargo bikes or electric vehicles. Where it can't reduce its impact, it offsets the emissions.

Getting delivery right is only half the battle. Returns rates for online apparel purchases are notoriously high.

Some companies have also taken a bet - seen by some as risky - that customers will tolerate slower delivery times in order to reduce the environmental impact. The Iconic used to offer express delivery for free, but now it charges for the service. Simply encouraging customers to opt for slower shipping has resulted in sizeable emissions reductions, it says.

"If you provide free express shipping people will of course take it, but what's shown by that shift is people really didn't need it that fast so the benefit from a carbon reduction perspective was significant," said Quaintance-James.

Getting delivery right is only half the battle. Returns rates for online apparel purchases are notoriously high, meaning more miles travelled for each package. Then there's the problem of what to do with unsold items, which may no longer be in style or season.

According to returns technology company Optoro, more than 5 billion items worth around $400 billion are returned every year in the US alone. The company estimates that generates around 5 billion pounds of waste to landfill and 15 million tons of carbon dioxide.

Many companies now provide much more detail about how a product fits at the point of purchase. Some are experimenting with software that allows customers to better see how a garment will look on them, but many consumers still buy items online in multiple sizes, intending to return any that don't fit later.

Brands are getting more sophisticated in how they handle the inflow. Optoro uses machine learning to figure out the best destination for unwanted items, which could include sending them back to the store or on to an outlet store or a charity shop. The company says its seen an inflow of inquiries following the outbreak of Covid-19, and forecasts a looming challenge for brands who have benefitted from an uptick in online sales and sought to entice customers with an extended timeline for returns.

"We predict there's going to be a flood of returns coming back in the near future, once people start to bump up against extension windows," said Optoro's Senior Vice President of Marketing, Larissa Summers.
Future-Proofing
For all the advances, many retailers are just getting started. Companies need to act quickly to understand where they can make the biggest difference and which partners to work with to drive change.

Beauty brand Tatcha has committed to ensure all the packaging for its products is recyclable, reusable, refillable or compostable by 2023. Behind that strategy lies a complex matrix of decisions that takes into account the characteristics of each product and how to holistically reduce its impact. That could mean deciding to use a different shipping method to offset the impact associated with weightier glass packaging or experimenting with new materials.

We need a different type of infrastructure.

"One of the things that makes it challenging is thinking what resources do we need, what's the cost, what's the implications for our partners and suppliers?" said Tatcha's Chief Marketing Officer, Sarah Curtis Henry. "There's a whole ecosystem we work with."

For the industry to really move the needle will require working with non-traditional partners. For instance, effectively shifting to packaging that generates less waste requires investment in recycling technology and infrastructure. Similarly, experiments with reusable packaging are only really effective if brands can figure out a way to incentivise consumers to actually return it and the logistics to get it back in circulation.

"We have a circular economy product in a world that is designed for linear stuff," said Jonne Hellgren, chief executive and co-founder of reusable packaging service RePack. "We need a different type of infrastructure."

On the other hand, many see a window of opportunity opened by the current crisis, as consumers and executives re-evaluate the business models they want to support.

After the financial crash in 2008, there "was a very clear shrinking of the market for sustainability; it was very much seen as a discretionary spend at that point," said Stuart Lemmon, managing director for North Europe at sustainability consultancy EcoAct. "We are not seeing that with Covid... Clients, even those badly hurt by lockdown, are really prioritising sustainability, and particularly their response to climate change."
Related Articles:
[ Will Fashion Ever Be Good for the World? Its Future May Depend on It ]

[ Fashion's Growth-Focused Business Model is Not Sustainable. What's the Solution? ]

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E-Commerce Is Helping Fashion But Hurting the Planet

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LONDON, United Kingdom - E-commerce is booming. But the welcome boost to fashion's bottom line is creating a mountain of waste - and consumers are starting to notice. In Europe alone, Bernstein projects the growth rate of online fashion will triple this year to account for more than 20 percent of total sales - the equivalent of five years of growth in about six months.

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Cláudia Terezinha Kniess (Universidade Federal de São Paulo, Osasco, Brazil) (Universidade São Judas Tadeu, Sao Paulo, Brazil)

Abstract

Keywords

Citation

Brito, J.L.R.d., Ruiz, M.S., Kniess, C.T. and Santos, M.R.d. (2022), "Reverse remanufacturing of electrical and electronic equipment and the circular economy", Revista de Gestão, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/REGE-02-2020-0011

Publisher
:
Emerald Publishing Limited

Copyright

License

Published in Revista de Gestão. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode.

1. Introduction

Issues like recycling and sustainable development are growing in importance. They are more prominent in developing countries, where there are many informal recycling activities and few environmental laws to regulate waste management ( Guarnieri, Silva, Xavier & Chaves, 2020).

The continuous increase in the generation of solid waste in a society with high consumption affects the population's quality of life negatively, besides causing considerable damage to the environment ( Campos, 2014a).

The trend towards depletion of raw materials and inefficient waste management practices are some of the factors that are forcing companies to face these challenges and rethink their business models, leaving the traditional linear process and adopting the principles of a circular economy ( Rosa, Sassanelli & Terzi, 2019). According to the Ellen MacArthur Foundation ( EMF, 2013), in the last 150 years of industrial evolution, this linear model of production and consumption prevailed, where goods are manufactured from raw materials, sold, used and then discarded as waste.

Among the goods that people generally discard after use are electrical and electronic equipment (EEE) and its waste (WEEE) ( Islam & Huda, 2018). The recovery of waste from these products has aroused the interest of society ( Atlason, Giacalone & Parajuly, 2017; Mathieux, Recchioni & Ardente, 2014), since they contain both toxic and valuable materials ( Islam & Huda, 2018, 2019; Zhang, Geng, Zhong, Dong & Liu, 2019). There are metals, such as copper, gold and silver, as well as critical materials, such as tungsten, niobium and cobalt. Hence, in the last two decades, many countries have established ways to recover these strategic and critical materials from electronic waste ( Guarnieri, Silva, Xavier & Chaves, 2020).

Reverse logistics is one of the recovery processes that enable the reverse flow of WEEE and EEE, at the end of its useful life, which have the possibility of postremanufacturing reuse along the supply chain, or by end consumers ( Ilgin & Gupta, 2013).

This study analyzed the reverse remanufacturing chain of this equipment and its waste, within the product chain of Recicladora Urbana [Reurbi], located in the city of Jacareí, State of São Paulo, Brazil, and its interaction with the circular economy. It is a relevant study, since the objective of waste management has changed, in recent years, from safe disposal to more attractive options and from an environmental and economic standpoint in order to recover energy and materials ( Engeland, Belien, Boeck & Jaeger, 2020). This goal fits the concept of circular economy, where the value of products, materials and resources is kept in the economy, as long as possible.

EEE, whose WEEE we assessed here, are classified into four goods, as defined by the Brazilian Agency for Industrial Development ( ABDI, 2013), as shown in Table 1.

We divided the article as follows: after this introduction, Section 2 presents the theoretical background; Section 3 addresses the methodological procedures; section four presents the results and discussion and section five discusses the final remarks.

2. Theoretical framework

2.1 Waste generation and the national policy for solid waste

The term "sustainability" relates to the continuity of an organization in different sectors (private, public or third sector); it is the result of the balance between the three classic dimensions of sustainability - environmental, economic and social - known as the triple bottom line ( Elkington, 1998).

Sustainability is related to sustainable development, which regards the rational use (extraction and use) of nonrenewable natural resources, in order to meet the needs of human beings, without squandering, and create wealth for future generations ( Florissi, 2009).

In Brazil, urbanization was not followed by public policies to regulate cities' growth, thus leading to an urban territorial expansion towards the periphery, creating large metropolitan regions ( Santos, 2020). This phenomenon was due to factors such as the migration of populations from rural areas into urban areas and the growth of industrialization in large cities in the last century. As a result, cities gained importance, as they became an area for wealth and job creation. However, over the years, they began to face a series of challenges because of the large number of inhabitants, which gave rise to several negative aspects such as environmental degradation, social exclusion, insecurity, traffic jam and increased generation of solid waste, such as WEEE ( Abiko & Moraes, 2009).

The Brazilian Association of Technical Standards (ABNT) defines solid waste in NBR 10004: Solid Waste - Classification as the waste resulting from industrial, domestic, hospital, commercial, agricultural, service and sweeping activities ( ABNT, 2004).

The Ministry of the Environment ( MMA, 2016) observes that the correct disposal of solid waste is a primary condition for a sustainable city, as the search for environmentally, socially and financially appropriate solutions in this area reflects society's demand, which requires changes fostered by high socioeconomic and environmental costs. If handled properly, solid waste acquires commercial value and become new raw materials or new inputs, when returning to the production chain.

In Brazil, the National Solid Waste Policy (PNRS) guides solid waste management. As established by Law nº. 12,305/2010, the PNRS defined a set of principles, objectives, instruments, goals and actions that should be adopted for an environmentally sound management of solid waste. It establishes shared responsibility for products' life cycle and charges local governments - Federal District and cities - for the integrated management of solid waste generated in their territories.

One of the relevant concepts for solid waste management is reverse logistics. PNRS requires manufacturers, importers, distributors and traders to structure and implement reverse logistics systems by returning the products after consumers' use, thus ensuring the reuse or environmentally correct waste disposal.

Rogers and Tibben Lembke (1998) mention one of the classical definitions of reverse logistics, by The Council of Logistics Management. It is the process of planning, implementing, and controlling the efficient and economic flow of raw materials, inventory of materials in process, of finished products and information related to this flow, from the place of the product's final consumption back to the origin of production, with the goal of recovering values or encouraging the appropriate product discard. Reverse logistics offers great potential for cutting costs, increasing revenues and creating additional profitability for companies and their supply chains ( Srivastava, 2013).

Engeland, Belien, Boeck, and Jaeger (2020) created an expanded concept of reverse supply chain (RSC) of waste, as a network composed of all entities involved in the stream of discarded products that leave the point of consumption. It includes collection, transportation, recovery and disposal of waste, and its goal is to recover or create value and encourage a proper final disposal. Reverse logistics is one of the elements of an RSC ( Ilgin & Gupta, 2013).

The potential recovery of valuable material resources and sustainable business practices over the past 20 years revealed that the concept of reverse logistics has been accepted and practiced in manufacturing industries ( Islam & Huda, 2018). It is recognized as an important part of the circular economy, by providing the reevaluation of WEEE and inserting it in a new production process ( Guarnieri, Silva, Xavier & Chaves, 2020). Therefore, it is crucial to improve the collection, treatment and recycling of products at the end of their useful life ( Qiang & Zhou, 2016).

WEEE generation can be increased, mainly of those from information and communication technology (ICT) equipment, due to the planned obsolescence of EEE ( Zuidwijk & Krikke, 2008). Planned obsolescence is the production of goods with an economically short useful life, which forces consumers to repeat purchases several times ( Bulow, 1986), since a new generation makes an older one economically obsolete, although it is not physically obsolete yet ( Lee & Lee, 1998).

Among the elements that affect the process of reusing WEEE negatively is the fact that companies with an environmental license for processing and treating it do not process circuit boards, motherboards and computer video cards. These components have 17 metals in their composition and are sent to countries, like Germany, Belgium, China and Japan, to remove these and other components with high market value. In Brazil, collectors gather the material to pass it on to scrap dealers and to companies that disassemble it for recycling; this market is another element that hinders reverse logistics and does not stimulate EEE control for returning it to the manufacturer ( Xavier, Carbajosa, Guarnieri & Duarte, 2013).

In addition to reverse logistics, the PNRS also introduced shared responsibility during the product life cycle, establishing obligations to the various actors:

[...] a set of individual and linked attributions of manufacturers, importers, distributors and traders, of consumers, and of those in charge of public services of urban cleaning and solid waste management, for minimizing the volume of solid waste and reducing the impacts to human health and environmental quality that result from products' life cycle, under the terms of this Law [...].

Therefore, shared responsibility involves all actors in the various solid waste chains, seeking to optimize the use of recyclables, minimize the volumes of waste and guide an environmentally appropriate disposal of unsuitable waste.

Another item of PNRS is the sectorial agreement. Its purpose is to implement a nationwide reverse logistics system for EEE and to regulate this process through a sectorial agreement, term of commitment or regulation.

2.2 EEE reverse remanufacturing and WEEE collection

The recovery of products and components seeks to add environmental and economic values to the product's disposal phase, and end-of-life strategies are alternatives that support it. The literature discusses different end-of-life strategies, as well as their main characteristics. Reuse, repair, reform/refurbishment, recycling and remanufacturing are among the most used ( Saavedra, Barquet, Rozenfeld, Forcellini & Ometto, 2013) and can create profitable business opportunities ( Srivastava, 2013). For remanufacturing or recycling companies, the RSC is the most important, as it recovers parts or materials from end-of-life products from the chain. In RSCs, environmental laws and guidelines are as important as minimizing costs and maximizing profits ( Ilgin & Gupta, 2013).

The perspective of remanufacturing is to restore products to become new, providing consumers with the same quality and guarantee offered by the manufacturer of the original equipment ( Ilgin & Gupta, 2013; Saavedra, Barquet, Rozenfeld, Forcellini & Ometto, 2013). It is a relevant strategy for saving resources and improving the performance of a product's life cycle ( Ardente, Peiró, Mathieux & Polverini, 2018).

EEE reverse remanufacturing regards the recovery of products and components of this equipment. The remanufacturing process starts with the collection of the housing or core (used product). The following steps are the complete disassembly of the product, cleaning of parts, inspection and storage of parts, reconditioning and change of parts, and product reassembly. In addition, tests are carried out throughout the process to ensure product quality ( Saavedra, Barquet, Rozenfeld, Forcellini & Ometto, 2013). For Zhang, Geng, Zhong, Dong, and Liu (2019), if this waste is not properly treated, the valuable materials within it will be lost, implying that more raw materials will have to be extracted and processed for making new products.

The main actors involved in EEE reverse remanufacturing are as follows: (1) the Brazilian Electrical and Electronic Industry Association ( ABINEE, 2017) and Green Eletron, which represent manufacturers and importers; (2) collectors' cooperatives and independent or informal collectors, acknowledged as relevant actors for implementing PNRS; (3) disassembly companies, which sort, decharacterize and sell parts of EEE and WEEE and (4) actual recyclers of metals, plastics and components.

As for the collection of WEEE, Demajorovic, Augusto and Ventre (2016) consider that cooperatives can help overcoming some challenges that are present in the reverse flow of post-consumption materials in Brazil. This view assumes that cooperatives can take over the activities of collection, separation and marketing of these materials, when companies that generated it have no interest in carrying out these processes. For these authors, this relationship may contribute to support cooperatives' operations, which is one of the main problems of nearly all of them; however, sectorial agreements, foreseen in PNRS, may affect the results of collectors' cooperatives negatively.

According to their research, legislation, despite being critical, still does not encourage companies to seek reverse logistics solutions effectively. In addition, distributors, wholesalers, retailers and commerce that make up the reverse chain are still far from the debate. Their participation would be essential to expand waste delivery to cooperatives. Collectors' cooperatives are important for managing solid waste; hence, a partnership between these organizations, manufacturers and importers of electrical electronic products can contribute to making reverse logistics feasible, minimizing environmental impacts and providing better working conditions for the collectors who work there. Cooperatives that are already structured and equipped with appropriate equipment and infrastructure can carry out the activity efficiently and safely, bringing benefits to partners and society.

Although the current management of recovery processes of end-of-life products depends mainly on conventional techniques for waste collection and processing, the growing discussion on circular economy provides options such as reuse, reform and remanufacturing, which are increasingly relevant for electronic products ( Atlason, Giacalone & Parajuly, 2017).

2.3 Circular economy and WEEE reuse

The traditional economy, known as linear, describes systems that generate products and waste, which ultimately result in disposal and pollution, being harmful to both human health and the environment ( Sikdar, 2019). The production system associated with the traditional economy is running out of resources, causing price volatility, uncertainty and economic crises ( Fischer & Pascucci, 2017).

Pearce and Turner (1990, as cited in Su, Heshmati, Geng & Yu, 2013) showed the need to create a closed economic system, where the economy and the environment were not related by linear interconnections, but by a circular relationship. They proposed a closed circuit of material flows in the economy, which they called "circular economy."

The circular economy aims to increase the efficiency of resource use, focusing mainly on urban and industrial waste, to achieve a better balance and harmony between the economy, the environment and society ( Ghisellini, Cialani & Ulgiati, 2016). It is an approach that fosters the responsible and cyclical use of resources ( Moraga, Huysveld, Mathieux, Blengini, Alaerts, Van Acker, Meester & Dewulf, 2019) and is a concept driven by the European Union and by other governments, such as China, Japan, the United Kingdom, France, Canada, Netherlands, Sweden and Finland, as well as by several companies ( Korhonen, Honkasalo & Seppälä, 2018).

It consists of a continuous cycle of positive development that preserves and values natural capital, improves resource creation and reduces systemic risks by managing finite stocks and renewable flows, working effectively at any scale. This economic model seeks to untie global economic development from the consumption of finite resources ( EMF, 2015).

One expectation about the circular economy is that it promotes economic growth by creating new businesses and job opportunities, decreases the cost of materials, reduces price volatility, improves security of supply and, at the same time, reduces pressures and environmental impacts ( Kalmykova, Sadagopan & Rosado, 2018). It is an evolving theme, which enables reconciling environmental preservation and economic growth ( Silva, Shibao, Kruglianskas, Barbieri & Sinisgalli, 2019).

The literature on circular economy does not show a consensus about one single definition. Kirchherr, Reike and Hekkert (2017) gathered 114 definitions in their study. They proposed to define it as an economic system that replaces the concept of end-of-life products through reduction, alternative reuse, recycling and recovery of materials in the production, distribution and consumption processes. It operates at three levels: micro (products, companies and consumers); meso (eco-industrial parks) and macro (city, region, country and beyond). The goal is to achieve sustainable development, by creating environmental quality, prosperity and social equity, for the benefit of current and future generations, leveraged by new business models and responsible consumers. We adopted the CE view in this research.

According to EMF (2015), the circular economy is regenerative and restorative by its design, with the aim of keeping the value and usefulness of components and materials, as long as possible. This concept distinguishes the technical cycle from the biological cycle; as the technical cycle relates to the management of finite material stocks, the use replaces consumption. In this cycle, technical materials are recovered and restored. The biological cycle, on the other hand, incorporates the flows of renewable materials, consumption and renewable (biological) nutrients, which are regenerated, and only occur in this cycle. There are three basic principles for its implementation: (1) designing non-generation of waste; (2) building resilience by encouraging diversity and shifting to renewable energy sources and (3) thinking systemically and in cascades ( EMF, 2013).

On the relationship between circular economy and WEEE, Rosa, Sassanelli and Terzi (2019) detected benefits in adopting the circular economy, which they classified according to the triple bottom line:

1. Economic: overall cost reduction (improved sales and profit margin); reduction of business risks; opening new revenue sources and reduction of products/processes' complexity.

2. Environmental: compliance with environmental regulations; reduction of environmental impacts; improving resource efficiency and improving supply chain sustainability.

3. Social: improving brand reputation and value; reaching new markets and countries; enhancing health and safety at the workplace and development of innovative skills and knowledge.

Using waste as a resource is one of its main elements, as well as preserving and extending the use of products. This involves recovery options, such as repair and reuse, and product design that allows extending their life. In addition, corporate reputation is more and more important. For these reasons, private companies are designing reverse logistics structures, thus participating in waste management ( Engeland, Belien, Boeck & Jaeger, 2020).

Both circular economy and reverse logistics appreciate WEEE reuse, as it is an appropriate way to deal with the input supply chain, through increasingly available technologies, and to maximize the reuse of waste or part of it after the life cycle. The economic development of these industrial processes creates the opportunity for inserting these materials in a circular economy ( Akcil, Agcasulu & Swain, 2019), since its strategies encourage the extension of products' useful life, among other actions ( Vanegas, Peeters, Cattrysse, Paolo Tecchio, Ardente, Mathieux, Dewulf & Duflou, 2018).

3. Methodological procedures

This was an exploratory research study with a qualitative approach ( Martins & Theóphilo, 2009), and it was based on the study case method ( Yin, 2015). We carried out the following stages: definition of the study object; bibliographic survey; documentary survey; technical visit to Reurbi; contacts with experts; creation of research instruments and research execution.

We created five research scripts for the interviews, with open questions. Three of them, which we applied to Reurbi, Sinctronics and Green Eletron, had a common structure: (1) general data on the organization and its representative (the research respondent); (2) reasons to work with end-of-life EEE and WEEE, in addition to information on volumes of material traded and market situation; (3) institutional aspects - norms, taxation and regulations/control and (4) WEEE's sectorial agreement and the resulting opportunities and challenges.

The script applied to Coopernova Cotia Recicla was simpler, with three blocks of questions emphasizing mainly its relationship with Reurbi. Finally, the script applied to the Secretariat of Environment (SMA), in Jacareí, addressed institutional issues related to environmental requirements that Reurbi should comply with, and the potential competition between two initiatives, since the City Hall has a WEEE collection program in the city. Table 2 presents the script used in the interviews.

We interviewed representatives of five organizations: Reurbi; Sinctronics; Green Eletron (manager of reverse logistics); Cooperative Coopernova Cotia Recicla (nongovernmental organization [NGO]) and SMA of the city of Jacareí, as shown in Table 3.

The interviews lasted one hour, on average, and were later recorded and transcribed to facilitate the analysis. We did not get permission to record the interview at SMA in Jacareí. The names of all respondents were preserved. After transcribing the interviews, we triangulated that information with data from bibliographic and documentary surveys.

4. Results and discussion

4.1 Characterization of EEE reverse remanufacturing chain

The reverse remanufacturing of EEE and WEEE is a set of consecutive steps that make up the reverse flow of this equipment, at the end of its useful life and of its waste from end consumers to the manufacturer/importer/distributor and formal recyclers.

The EEE reverse manufacturing chain has two types of flows from the return by the consumer. The first refers to the flow managed by a system implemented in a local or regional structure, which involves the delivery of EEE in disuse and WEEE, at commercial receiving points. Later, they are sent to the manufacturer, importer and distributor, or to a formal recycler and then to the processing industry, in the case of waste or for other uses in the case of remanufactured equipment. The producer, importer and distributor can also send waste to a formal recycler, who will forward it to the processing industry. In the second flow, EEE and WEEE are received from other collection points, municipal programs, seasonal programs, voluntary receipt and technical assistance and then forwarded to formal or informal recyclers and finally, to the processing industry.

There is a higher incidence of WEEE flow from informal recyclers to the processing industry due to the large number of these recyclers throughout the country.

According to Islam and Huda (2019), this waste has a complex material structure and involves multiple actors in the reverse chain; therefore, identifying the flow of materials within waste management is an essential task, under the holistic concept of a circular economy, a closed loop supply chain and sustainable development.

4.2 Recicladora Urbana in EEE reverse remanufacturing chain

Reurbi collects and decharacterizes end-of-life EEE and WEEE, both from the perspective of business-to-business (B2B) and business-to-consumer (B2C) markets. Reurbi was founded on August 2, 2010, under the corporate name Soatech Comércio e Reciclagem de Eletroeletrônicos Ltda. The company addresses the following activities: (1) collection of WEEE and reception of EEE in disuse or at the end of life; (2) decharacterization of WEEE and remanufacturing of EEE; (3) sale of parts, components and waste and (4) sale and donation to NGOs and charities.

The company is certified by Brazilian System B, is a member of the Ellen MacArthur Foundation and contributes to the circular economy by following the environmental practices of the Sustainability Laboratory (LASSU) of the Polytechnic School of the University of São Paulo (USP). The firm also innovates with the "Remakker" product to assist third sector entities with socio-environmental awareness in using refurbished computers in their technology parks.

As a formal recycler, Reurbi collects or receives EEE (computers, tablets and printers) at the end of their useful life and WEEE from consumers. After remanufacturing, EEE is sent to NGOs, hospitals, call centers and other organizations. In the case of WEEE and parts and components from disassembled EEE, these are sent to industrial companies Sinctronics and Flextronics (plastics recycling), Gerdau and Arcelor Mittal (aluminum and steel recyclers) and GM&CLog (cable recycling).

According to R1, since transport logistics is the factor that most affects the cost of company's operations, when receiving a proposal for collecting end-of-life equipment or WEEE, the first procedure is to carry out a preliminary assessment, considering the distance from the collection point to the disassembly unit in Jacareí. If it is convenient, the firm adopts the following actions: (1) contact the organization interested in the disposal; (2) carry out the inventory; (3) analyze the logistics required for collection and the costs involved and (4) define the amounts to be charged. Saavedra, Barquet, Rozenfeld, Forcellini and Ometto (2013) mention this last action as a major challenge for remanufacturing, due to the difficulty of predicting the volume and timing of return, and the product quality, thus making difficult the remanufacturing operational planning.

Reurbi follows the environmental practices of the LASSU of the Polytechnic School of the USP and presents its remanufactured EEE (mainly computers) as "Remakker" products, which are mainly intended for third sector entities. Also according to R1, these practices are in line with the disassembler's mission, which is to provide companies, organizations and government with conditions for safe, guaranteed and certified compliance with the sustainable management of WEEE, according to the PNRS.

In addition to collection, transportation, control and inventory, segregation and decharacterization of EEE and its waste, the company also does the "sanitization" of data and properties contained in the equipment, according to international standards, which apply to reverse manufacturing and to an environmentally sound disposal of materials after processing. The partial or total reuse of a product can be environmentally effective in terms of impacts eliminated during manufacturing, saving resources and, at the end of its useful life, avoiding discard ( Ardente, Peiró, Mathieux & Polverini, 2018).

One of the goals of a circular economy is to improve resource efficiency, which will make the economy less dependent on virgin materials, normally imported, through reduced consumption, reuse and recycling, and minimization of waste streams that leave the economy ( Engeland, Belien, Boeck & Jaeger, 2020).

Regarding the flow of reverse remanufacturing of EEE and WEEE at Reurbi, after receiving end-of-life EEE and WEEE, the company checks, lists and weighs the products. Next, they are screened to separate the equipment that can be reused from waste.

Equipment with potential reuse is tested and, if remanufacturing is feasible, is decharacterized for subsequent packaging. After this screening, WEEE is weighed, cataloged, separated by types, disassembled and the different components are separated and sent for decharacterization. At this stage, the reusable parts are inserted in the remanufactured EEE and packaged, weighed, undergo a traceability audit and then stored for subsequent referral to social projects or for resale.

In this process, it is important to define a metrics that can assess the ease of disassembly, thus checking the feasibility of dismantling components without destroying them, so that they can be reused, repaired and remanufactured, according to the circular economy ( Vanegas, Peeters, Cattrysse, Paolo Tecchio, Ardente, Mathieux, Dewulf & Duflou, 2018).

One of the problems faced by the company, mentioned by R1, is the illegal collectors or scrap dealers, who compete directly with the business. According to H. K T. Campos (2014b), waste in Brazil generally combines formal actors in regular collection and informal actors in selective collection and waste recovery. The big challenge is to integrate the informal, ensuring appropriate working conditions, increasing collection efficiency and improving waste treatment methods.

Another issue mentioned by R1 is the low value paid per kilogram of parts and components recovered from EEE and its waste (steel, plastics and aluminum). As transport costs from the collection points to the recycling unit are high, it is economically unfeasible for a disassembler to survive operating only in the EEE segment. This is one reason why Reurbi only collects in very specific situations, which depend on the company, on the amount of EEE and WEEE discarded, on the distance and on the required logistics. Another limiting factor for production capacity is EEE's processing time, due to the diversity of parts and components. Mathieux, Recchioni and Ardente (2014) mentioned the need for a standardized method to measure the extraction time of the main product components in order to improve the process.

Reducing disassembly time and related costs will increase the economic feasibility of extending product's useful life and of implementing a circular economy in industrialized regions. Furthermore, disassembly has the potential to increase the recycling yield and purity of precious and nonprecious metals and critical plastics ( Vanegas, Peeters, Cattrysse, Paolo Tecchio, Ardente, Mathieux, Dewulf & Duflou, 2018).

R1 also emphasized that one of Reurbi's differentials in the market is the creation of "Remakker" products, especially refurbished notebooks and desktops that return to the remanufactured market, with guarantees similar to those of new products. These are characteristics of a circular economy ( Vanegas, Peeters, Cattrysse, Paolo Tecchio, Ardente, Mathieux, Dewulf & Duflou, 2018).

R1 sees the possibility of compensation for the services provided by disassemblers, after signing the sectorial agreement, as an opportunity for the company to achieve a more economically sustainable performance in the EEE segment.

4.3 Interrelationship of Reurbi with the actors of EEE reverse remanufacturing chain

The main suppliers of used equipment and WEEE for Reurbi are banks, industrial companies, schools, medical clinics and domestic users. Among the organizations that receive remanufactured EEE are the Young Apprentices Program, the NGO Recode and Techsoup Brasil.

The Young Apprentices Program is an initiative of a social organization that seeks to train autonomous, aware and connected young people capable of reprogramming the system they live in by using technology. It works in partnership with community centers, libraries and public schools to prepare multipliers through its own methodology that replicate the programs for the final audience. These organizations form a large network of educators, teachers and librarians to promote a new awareness and create opportunities for young Brazilians ( Andrade, Santos & Jesus, 2016).

Techsoup Brazil is an initiative of the Telecenter Association for Information and Businesses [ATN], which, in partnership with Techsoup Global Network, helps nonprofit organizations to get technological products and resources for their activities. The program's main task is the donation of software licenses to third sector entities that develop social projects. Techsoup Brazil has partners, like Microsoft, Symantec and Google, which make their products available for donation (Association in Support of Children with Cancer AACC, 2019). Other organizations, such as the Red Cross and the United Nations Educational, Scientific and Cultural Organization (UNESCO), are also among the recipients of EEE remanufactured by Reurbi.

In a broader context, Reurbi also interacts with regulatory and waste management entities, such as the Brazilian Institute for the Environment and Renewable Natural Resources (IBAMA), which is the Federal government body for environmental license issuing, and the State of São Paulo Environmental Company (CETESB), the agency that issues state environmental licenses.

5. Final remarks

According to the results, the market for remanufactured end-of-life EEE is small. The main recipients are third sector organizations that develop social programs for young apprentices and schools with few financial resources, but concerned about inserting their students in the digital world.

We also observed that disassemblers donate remanufactured EEE to an NGO, in exchange for the indirect benefit of tax deduction of the Tax on Circulation of Goods and Services [ICMS]. The most common market for remanufactured EEE is the resale, after repair, of a piece of equipment that is returned to manufacturers and importers, still during the warranty period, because the customer identified a problem. However, there are still some difficulties, such as the lack of legislation on remanufacturing, a disadvantage that prevents it from being a more structured market in Brazil ( Saavedra, Barquet, Rozenfeld, Forcellini & Ometto, 2013).

We observed that there is no consolidated market for parts and components of postconsumption EEE, and disassemblers send these materials to recycling companies. We highlight the case of printed circuit boards, motherboards and video cards that have precious metals in their composition, but due to the volume and investments required for establishing treatment plants in the country, they are exported to countries like Belgium, Germany, South Korea, Japan and China, where companies extract these metals. For H. K T. Campos (2014b), local characteristics of the waste, qualification, cost, availability of local workforce and technological adequacy should be considered when choosing reuse.

The recycling companies Flextronics (plastics), Gerdau and Arcelor Mittal (aluminum and steel) and GM&CLog (cables) receive parts and components from WEEE handled by Reurbi. This fact confirms the study of Ardente, Peiró, Mathieux and Polverini (2018) on the importance of reuse and remanufacturing, through its inclusion in the concept of circular economy, and Moraga, Huysveld, Mathieux, Blengini, Alaerts, Van Acker, Meester and Dewulf (2019) for whom circular economy is a policy for minimizing the burden on the environment and stimulating the economy.

The establishment of an EEE managing company, Green Eletron, in São Paulo, with plans to operate nationwide, is an interesting initiative, as it aims to create a collective system to operate the reverse logistics of small and medium EEE (notebooks, printers, tablets, cell phones and their accessories), for ABINEE member companies and for others that meet PNRS requirements. This initiative is expected to grow and succeed from the signature of EEE's sectorial agreement.

Therefore, we can assume that there is a great market potential related to the reverse logistics of WEEE and end-of-life EEE, as a source of raw material, and which still has to be explored in Brazil, creating new jobs and income. As raw materials are crucial for industrial growth and competitiveness, regarding critical metals, the circular economy is vital for processing, reusing, recycling and recovering sustainable technologies ( Akcil, Agcasulu & Swain, 2019).

The results contribute to the dissemination of WEEE recycling and EEE remanufacturing initiatives, which were structured after the implementation of PNRS, in 2010. This shows that both the market (user industries of EEE and consumers of these products) and regulation bodies (federal and state governments) are shaping a distinct management model at national level.

In addition, the prospective approach, which attempts to combine the views of the different actors that interact with Reurbi in the EEE remanufacturing chain, brings to the academic environment the discussion of issues related to PNRS implementation, especially those regarding the sectorial agreement, which are still deeply rooted in the industrial and government environments. Thus, publishing articles that outline the main reflections on the results achieved here can encourage new debates and open opportunities for new studies on PNRS implementation.

As a practical contribution of this research, we mention the dissemination of processes for remanufacturing EEE and for recycling its waste, stimulated by the PNRS and within a circular economy policy. According to Atlason, Giacalone and Parajuly (2017), in a movement towards a more circular business economy, these efforts seek to reduce, narrow and close resource loops. These strategies ensure the wide circulation of resources in society, in the form of products, components and materials.

Considering that Brazil is a great WEEE generator, its proper disposal and that of end-of-life EEE is one of the recurrent topics in the country's sustainability agenda, whether in companies or in academia; thus, it is essential to expand the debate between the actors in the EEE reverse remanufacturing chain and in universities.

Given the challenges and opportunities for the sector, we can also infer that new businesses will emerge. However, this does not mean that they will succeed, as this requires a better assessment of some factors, such as signing of the sectorial agreement and the consolidation of Green Eletron as a manager of EEE reverse logistics in the country, as recommended by the National Industry Confederation (2017).

One limitation of the research is that we only addressed the WEEE reverse remanufacturing chain managed by Reurbi; hence, it is not possible to extend these results to an industrial sector.

References

Further reading

Corresponding author

© 2022 Emerald Publishing Limited

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Reverse remanufacturing of electrical and electronic equipment and the circular economy

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Cláudia Terezinha Kniess (Universidade Federal de São Paulo, Osasco, Brazil) (Universidade São Judas Tadeu, Sao Paulo, Brazil) Abstract Keywords Brito, J.L.R.d., Ruiz, M.S., Kniess, C.T. and Santos, M.R.d. (2022), "Reverse remanufacturing of electrical and electronic equipment and the circular economy", Revista de Gestão , Vol. ahead-of-print No. ahead-of-print.

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Exploring ethical consumption of generation Z: theory of planned behaviour | Emerald Insight

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Exploring ethical consumption of generation Z: theory of planned behaviour - Author: Elmira Djafarova, Sophie Foots

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Digital supply network design: a Circular Economy 4.0 decision-making system for real-world challenges

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Demystifying the metaverse: what business leaders need to know and do

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What kind of metaverse strategy, if any, should your company have? Get started answering that question with this rundown. Learn the key metaverse concepts, then start taking practical action.

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There may be no consumer technology prospect driving more discussion and investment right now than the metaverse, and for good reason. The metaverse - essentially a parallel reality consisting of connected and interoperable worlds, brought to life by technologies including augmented and virtual reality, with commercial activity underpinned by the blockchain - has the potential to alter, not only our consumer lives, but our entire way of living.

In a not-too-distant future, people may spend significant proportions of their time working, learning, playing and, of course, shopping in the metaverse, where virtual assets - from apparel to real estate - may take on both social and economic value that meets or even exceeds that of physical possessions.

Most of the chatter about the metaverse is positive. Technologists see it as a new frontier in our relationship with technology. Marketers view it as a greenfield for additional product categories and revenue streams. Investors see it as a new realm for return on capital. And for those of us who study the future of industries, there's a general air of enthusiasm around what we see as a historic evolution of the internet of today.

But as with any significant technological advancement, there are three crucial questions that retailers and their backers need to ask before plunging into the metaverse.

Is it possible? Even by virtue of the rather clunky and primitive metaverse-like technologies we use today, it's clear that building an immersive digital universe is indeed possible. And with the current pace of innovation, we'll very soon have the hardware and plumbing required to power this.

Is it probable? More immersive, engaging and real-feeling experiences are a logical evolution of our online lives. And with the biblical sums of capital pouring into new players, platforms and projects, the metaverse is almost certain to take shape on an accelerated curve.

And finally, is it preferable? This third and perhaps most critical question is one I have barely heard asked. While the metaverse may indeed be possible and probable, the question is will it ameliorateor exacerbate the problems that society currently faces, from poor mental health to the climate crisis?

This is not simply a moral question, but one that has serious business implications for retailers, already under increased scrutiny for their environmental and social impact, particularly if they view the metaverse as a bridge to younger generations of consumers who increasingly consider a brand's position on environmental and social issues as they make purchasing decisions.

Today, experts not only note increased sleeplessness, loneliness, depression and suicide among teenagers, but are also able to draw correlations to increased use of social media, a virtual display-case for lifestyles that can result in heightened feelings of inadequacy and anxiety. Now consider that, in the metaverse, you are likely to be judged not just by how you look in the real world, but by how your avatar is adorned, by your virtual sneakers or virtual cosmetics. Your address on a platform like Decentraland may matter as much as your real-world address.

While it's easy to be seduced by the upsides of any technology we mustn't forget that in 2006 Mark Zuckerberg said simply "Facebook is about real connections to actual friends," a notion so utopic-sounding that 2.8 billion people signed up. What Zuckerberg didn't mention was that it would come with a cesspool of online bullying, misinformation and political division, a hellscape that brands like Lush, for example, have recently quit, with Lush chief executive Mark Constantine telling the Guardian in late 2021 that he would happily lose the company's 10.6 million Facebook and Instagram followers, and the estimated $13 million in revenue they represent, rather than be an accessory to Facebook's malign effects on society. As we hurtle into the metaverse, brands will have new opportunity to choose the platforms and protocols they subscribe to and should do so thoughtfully.

What about the impact on creativity? Some celebrate a move to virtual goods as the "democratisation of design" giving anyone with an imagination and access to simple technologies the ability to become a fashion designer. But look at what democratisation of recording technology did for the incomes of musicians and songwriters or the overall quality of music. If anything, we've learned that more doesn't always equate to better and that democratisation is sometimes Latin for commoditisation.

And, while it's dirty, it's certainly no secret that the global retail industry is one of the planet's heaviest polluters. The apparel industry alone generates 8 percent of the world's greenhouse gases. For this, the metaverse offers little real remedy, because the sheer power and cloud computing requirements to mount such a persistent, all-encompassing, collective reality will be astronomical. Studies of gaming platforms, for example, have estimated that if only 30 percent of video-gamers move to cloud-based gaming platforms by 2030, carbon emissions, resulting from the increase in required computing power, would increase by 30 percent. Now imagine the toll taken by an entire planet moving to a cloud-based metaverse. It's likely that any possible environmental gains from things like lower reliance on daily commuting to work or lower consumption levels of physical apparel would be erased entirely.

And speaking of virtual apparel, what would this mean for the tens of millions of garment workers around the world who depend on physical manufacturing jobs for their survival? Does anyone really think we will turn these people into digital clothing designers? Or will we simply consider them the blacksmiths of the modern era and move on?

The metaverse brings us, as a society and a retail industry, to an important crossroads. There is little doubt that it offers great promise for financial gain, but just as we eagerly calculate the upside, so too should we be estimating the social and environmental costs and doing what we can to avoid them.

Retailers will undoubtedly play a pivotal role in financing the metaverse. And it's that role that gives them power - the power to insist on a metaverse that's safe, secure and sustainable. With construction of the metaverse well underway, it's time to embrace that power and bake environmental and social responsibility into our strategies from the start.

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The Question No One Is Asking About the Metaverse

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There may be no consumer technology prospect driving more discussion and investment right now than the metaverse, and for good reason. The metaverse - essentially a parallel reality consisting of connected and interoperable worlds, brought to life by technologies including augmented and virtual reality, with commercial activity underpinned by the blockchain - has the potential to alter, not only our consumer lives, but our entire way of living.

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Benefits: why do we need to switch to a circular economy?

To protect the environment

Reusing and recycling products would slow down the use of natural resources, reduce landscape and habitat disruption and help to limit biodiversity loss.

Another benefit from the circular economy is a reduction in total annual greenhouse gas emissions. According to the European Environment Agency, industrial processes and product use are responsible for 9.10% of greenhouse gas emissions in the EU, while the management of waste accounts for 3.32%.

Creating more efficient and sustainable products from the start would help to reduce energy and resource consumption, as it is estimated that more than 80% of a product's environmental impact is determined during the design phase.

A shift to more reliable products that can be reused, upgraded and repaired would reduce the amount of waste. Packaging is a growing issue and, on average, the average European generates nearly 180 kilos of packaging waste per year. The aim is to tackle excessive packaging and improve its design to promote reuse and recycling.

Reduce raw material dependence

The world's population is growing and with it the demand for raw materials. However, the supply of crucial raw materials is limited.

Finite supplies also means some EU countries are dependent on other countries for their raw materials. According to Eurostat, the EU imports about half of the raw materials it consumes.

The total value of trade (import plus exports) of raw materials between the EU and the rest of the world has almost tripled since 2002, with exports growing faster than imports. Regardless, the EU still imports more than it exports. In 2021, this resulted in a trade deficit of €35.5 billion.

Recycling raw materials mitigates the risks associated with supply, such as price volatility, availability and import dependency.

This especially applies to critical raw materials, needed for the production of technologies that are crucial for achieving climate goals, such as batteries and electric engines.

Create jobs and save consumers money

Moving towards a more circular economy could increase competitiveness, stimulate innovation, boost economic growth and create jobs ( 700,000 jobs in the EU alone by 2030).

Redesigning materials and products for circular use would also boost innovation across different sectors of the economy.

Consumers will be provided with more durable and innovative products that will increase the quality of life and save them money in the long term.

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Circular economy: definition, importance and benefits | News | European Parliament

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The circular economy: find out what it means, how it benefits you, the environment and our economy.

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While current headlines about product shortages and empty shelves have highlighted the importance of the supply chain, that process began in early 2020. Companies that had labored to create a lean global supply chain needed to scramble to adjust to the effects of the pandemic. Beyond that, sustainability has also become a top priority on the CEO agenda, making the supply chain an integral part of managing an organization's carbon footprint. Consider, finally, the imperative to incorporate digital technologies, and one could argue that managing the supply chain in the current landscape is one of the most complex roles in an organization.

Henkel's Dirk Holbach has an ideal vantage point to weigh in on all of these issues and more. As the chief supply-chain officer for the Laundry & Home Care business unit at Henkel, a global consumer-goods company based in Germany, he manages an operation that spans 125 countries. In his two decades with Henkel, Holbach has helped to guide the business unit's supply-chain function through both expansion and disruption. McKinsey senior partner Frank Sänger sat down with Holbach to talk about how the organization responded to the challenges presented by the pandemic, how to build resilience into the supply chain in a shifting environment, and how Holbach has taken the lead on sustainability and diversity.

McKinsey: In your two-decade career at Henkel, how have you seen the company's operations evolve? What factors have shaped Henkel's supply chain the most over this period?

Dirk Holbach: During the past 20 years, the supply chain has gone from being regarded as a must-have cost center to a more purpose-led, agile, sustainable function. It has become more intelligent, digital, and resilient. We have invested in setting up the right organization, rebuilt our footprint, implemented digital, and developed sustainability capabilities. We are increasingly becoming a mission-critical growth driver and engine for our business.

A key part of this effort was to empower our teams. Over the past several years, we have invested heavily in talent and the tools to support them in their roles. Without the right investment in people development, you can have the greatest system, the greatest footprint, or even the greatest digital technology-but at the end of the day, it will not yield the expected benefits over time.

McKinsey: COVID-19 has led to major reforms in supply chains all over the world but has also brought disruption along the way. What strategies have you implemented in the past two years that helped the company to stay ahead of the competition in such difficult times?

Dirk Holbach: We have taken a systematic approach to managing resilience in the supply chain. During the crisis, it was a steep ramp-up of measures. In many countries, we were fortunate to have not only well-prepared and well-organized teams but also robust processes and systems in place.

Being able to adjust our capabilities and processes is ingrained in the organization, and this was a muscle that helped us a lot during the pandemic. For instance, in April of last year, when the first demand shocks hit our system, we introduced a new element in our S&OP [sales and operations planning] process in just a few days-basically a daily management of capacity and demand by country supported by some digital capabilities using our existing analytics platform.

Certain elements proved more effective in the short term to manage the crisis. Since then, we have assessed our organization and strategy and identified gaps where we had not been prepared well enough. We then embedded these findings into our latest resilience framework, which we are institutionalizing now.

We have now dedicated resources in the central team to look at all the different components of that framework and are making sure the organization is pulling the right levers at the right locations in order to strengthen our supply-chain capability.

McKinsey: How has the pandemic changed the way your organization views supply-chain risk and resilience?

Dirk Holbach: Our framework isn't super complicated. From the system and process angle, we look at three different enablers: people and visibility, redundancy, and flexibility. And here we really have defined systematically the areas in which we are purposefully investing.

For people, it's about the mindset and ability of everyone to quickly sense and react, learn and adjust, and encourage and empower the teams to do so despite being a multinational company. Many things are, of course, defined, regulated, and standardized in processes. In certain situations, you need to think beyond. This mental approach is extremely important. We enable that thinking by aiming to have all relevant data available on the spot, ideally-and if relevant-in real time to support effective decision making.

When it comes to redundancy, for instance, one principle is that we manufacture a certain product technology in two locations so that we have a backup. If one location goes down, at least I can manage the supply for a couple of weeks. We cannot replicate capacity ad infinitum, but that is one very simple principle.

The other strategic lever is flexibility. Talking about product platforms, exchangeability and formula flexibility are important. We are continuously working on that lever because materials are pretty short at the moment. We focused on building the ability to react and adjust formulations in a way that we can fulfill our consumer and customer requirements but still continue to manufacture.

At the end of the day, it's always about trade-offs. Of course, you can build redundancy in your system, but that is not for free. It costs money. This is a kind of insurance premium: you are either willing to pay or not.

McKinsey: We have spoken about the challenges created by the pandemic. Do you also see opportunities that have been created?

Dirk Holbach: I always like to say that in every catastrophe you will find at least one opportunity-and usually more. We learned quite a lot during the past two years. And we leveraged capabilities in a much faster and different way than we ever had expected.

People tend to see the issues and the problems. But I think it's very important that you turn quickly to a forward-looking mode and ask yourself, "What are we doing now, and how can we do even better afterward?"

For instance, we used digital technologies to run remote installations of new filling lines site tests, even without the OEMs or vendors on site. We used HoloLens and other tools. We took these steps because, due to safety measures and travel restrictions, we had no other choice. That's why new capabilities and mindsets are so important: what is possible now, compared with two years ago, is very different.

You must be able to keep up with the competition. When you have moving targets and a relevant standard of performance, that makes it difficult to measure and follow. But it continuously gives you new opportunities to perform in a dynamic marketplace.

For the next few years, we have to take a different approach to these just-in-time global supply chains. We have to be smarter. You may run into a cost and benefit discussion on the business side, but I perceive a readiness to invest in resilience.

McKinsey: Do you have any specific advice to other organizations to minimize their exposure to supply-chain disruptions, which have become increasingly frequent and severe?

Dirk Holbach: I would mention several things. First, invest in visibility. Visibility means understanding at any point in time what's going on in your extended supply chain. That is definitely a must, because without it you won't know what to do.

The second element is people. Again, continuing to set up the business to be more centrally standardized and organized, adding to strong regional and local teams empowered to make fast decisions within a given framework. We might never get back to a prepandemic level of supply-chain stability, so it's critical to take everyone along and to help teams to be mentally ready-things we are constantly working on. In my point of view, it is crucial to find ways of operating in such an environment, to learn from mistakes, and to do better the next time.

Last would be to review your product sourcing. This item is a bit linked to the two other buckets. I discussed the redundancy piece and also the flexibility. But let's say that you then look at the components. Do you have dual, multiple sources and setups at that end?

In general, people, industries, and players tend to forget relatively quickly, especially in the FMCG [fast-moving consumer-goods] context. That, for me, is a big "watch out" so that we don't fall too quickly back into normal. Even after COVID-19, we will have other things that affect and disrupt our supply chains.

McKinsey: Let's transition to the topic of digital. Henkel has been at the forefront of digital innovation in the industry, establishing industry-leading lighthouses and covering those at the World Economic Forum. How do you prioritize Industry 4.0 technologies for Henkel?

Dirk Holbach: We started that journey eight years ago. We wanted to do something good for the environment and measure the energy consumption of our factories in a global and standardized way.

Over time, we learned that a couple of elements help us to drive that effort. I elevated the role responsible for digital transformation onto my leadership team and committed the necessary resources. We started to systematically review technology areas that we believe could benefit our organization and settled on four areas: automation, robotics, analytics, and visualization, as well as the connectivity between these areas and the application and use cases.

We defined a dynamic road map, a funnel with a portfolio of application cases, and different maturity stages. It's important for companies to clearly define focus areas and build a road map. Try not to do everything at the same time. We manage fewer than 25 different application cases in different maturity stages at a time, excluding the ones that are running and implemented.

Usually, we try to learn and try out applications relatively fast and then scale up quickly. If we see that a certain application use case delivers value for us, we use it wherever it makes sense on the global scale. That approach-to avoid focusing on big, complex business and benefit cases-helps to secure the funding for these initiatives because initially you will usually look at a pretty specific and well-defined area of benefits and activities. It's easier to determine what you need to invest and what you get out of it. Then, you secure funding and build your success stories internally over time to be able to scale up the solutions.

A strong connection between the global and local team is also very important. We use a top-down, bottom-up approach to identify ideas that fit into our framework and strategic focus areas. Last, you cannot undertake this effort without a decent underlying IT infrastructure. You need to have not only a strong central IT department but also focused IT-related capabilities within the supply-chain operations. The ability to define requirements and demands through an operations lens and translate that to IT solutions is critical. Having this deep business understanding paired with Industry 4.0-related knowledge within my team accelerates progress significantly.

McKinsey: You mentioned the digital journey started with the focus on sustainability. Henkel has been included in the list of the world's 100 most sustainable companies presented at the World Economic Forum. What can industry do to become more sustainable, especially in supply-chain logistics?

Dirk Holbach: Sustainability is part of Henkel's DNA; it goes back even to the company's founder. We have been tracking our sustainable performance for more than 30 years and reporting on it. On Scope 1 and Scope 2 emissions, we have decreased our CO ₂ footprint in our Laundry & Home Care business by 65 percent over the past 15 years. The rest we will manage over the years to come. It's well under control and manageable.

COP26 in Glasgow illustrated the size of the challenge: despite all the great things we have done in the past, we must be much faster. In German, we say, "It's five before noon." We clearly have to accelerate.

When you take a deep dive in the supply-chain area, looking into the area of logistics, this is the first bigger challenge. Like many others in the industry, we partner with other companies to operate our own logistics fleet. So we have to engage with our partners in the right way, and we need to be clear on our expectations. It starts with how we contract those services and what we specify as relevant performance. It's not only operational performance but also costs and CO ₂ emissions.

On the other hand, if we take the laundry and home-care industry, just 2 percent of the upstream CO ₂ footprint comes from our own production facilities. The remaining 98 percent is outside the total life cycle. The majority comes from packaging and raw-material creation, as well as from the use and reuse of the materials. It's super important that we partner with our suppliers of these raw materials in the right way to drive progress. A few weeks back, we invited all of our key raw-material suppliers to a virtual session and shared our vision for how we want to drive the transformation of our material sourcing over the next years. The conversation covered what we have done, what we expect, and what we can do by working together.

On the downstream side, we have seen a decrease in the amount of materials used for washing. Twenty years ago, we were at 150 grams of laundry detergent per wash load. Now, our most compact version uses 15 to 17 grams-a factor of ten. In our dishwashing detergent, we are using smart chemistry to clean products in a way that doesn't require heating the water to 50 degrees or 60 degrees Celsius. However, we still need to further educate consumers when it comes to washing, water usage, and temperature. We need to continuously develop and create smarter products, addressing exactly these critical fields.

McKinsey: And how is digitizing the supply chain helping you to achieve your sustainability goals?

Dirk Holbach: In 2013, we started our digital journey precisely to measure energy consumption at our factories on a real-time basis. Creating that transparency along the way helped us to significantly use technology for a purpose-to drive sustainability performance and reduce our footprint. We are going beyond that. We are using machine-learning algorithms to optimize some of our energy-intensive processes, such as laundry-powder production.

Across the upstream and downstream value chain, digital capabilities will further increase the visibility and traceability of products-for instance, raw materials. Our consumers and customers are more and more interested in sustainability-and for good reasons. When I buy a product, I ask myself where it is coming from and where it has been produced. We are building capabilities that will help us answer those questions in a much better way.

McKinsey: Before we close, let's discuss diversity, which I know is a focus area for both Henkel and you personally. Henkel was recently listed by Forbes as one of the best companies to work for in terms of diversity. Is the level of diversity in the supply-chain function where you want it to be, and what are you doing to improve it?

Dirk Holbach: I'm a great believer in diversity across many dimensions-not just gender but also personal and cultural background. Especially in times of uncertainty, a diverse team will bring you a higher likelihood of different and maybe disruptive ideas and ways to handle a crisis.

At Henkel, diversity and inclusion is a very prominent topic. We have made great progress in our supply chain over the past ten years. Although Henkel is based in Germany, we employ people from more than 125 nations. More than 85 percent of our people work outside of Germany.

I have personally been driving this topic since 2011. For instance, when it comes to gender, we more than doubled our percentage of women in management positions in the supply chain during this period. But we are not where I personally want us to be.

We have been building up the bench, and we have made great progress in the supply chain already, but we need to further drive this transformation.

McKinsey: Any other advice that you have for other supply-chain leaders?

Dirk Holbach: Don't believe what brought you here today will help you achieve targets in the future. Past experiences and legacy practices are great; don't throw them away. Build them into your future strategies. But do not expect that they will work as a plug-and-play model in the future, because circumstances will be changing continuously. So be ready and learn. Be open. Try to integrate new findings into your experiences. Be prepared to develop at a different speed than you did in the past.

With the supply chain, you're talking about big organizations and operations. But supply chain is a people business. Despite all the technology, processes, and standards, it's super critical that we have the right people at the right spot. We take care of them because they are our most precious resource.

Over the past two years, supply-chain terminology has gained a completely different prominence in mainstream media and companies-really moving from this perception as a cost center to a solution provider and growth engine for many businesses. And hopefully that will attract more talent to supply chain and operations. It's a cool place to work if you like challenges.

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Achieving supply-chain resiliency in consumer goods amid disruption

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While current headlines about product shortages and empty shelves have highlighted the importance of the supply chain, that process began in early 2020. Companies that had labored to create a lean global supply chain needed to scramble to adjust to the effects of the pandemic.

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Building a digital bridge across the supply chain with nerve centers

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Many companies operate some type of supply-chain control tower, but upgrading to a digital, end-to-end nerve center can manage risk even more effectively, while boosting output and productivity.

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The COVID-19 crisis put every organization under pressure. But when your products are used every day by a quarter of the world's population, your supply chain needs to keep running regardless.

In a recent interview, McKinsey senior partner Daniel Swan talked to Shane Azzi, senior vice president and chief supply chain officer at Kimberly-Clark, about the challenges of the pandemic, his organization's response, and what it all means for the future of the supply chain.

Daniel Swan: You have an interesting background, having spent time in the military before your corporate career. Has that experience informed your approach to leading supply-chain organizations or to leadership overall?

Shane Azzi: In the military, you learn the importance of articulating your objectives and stating clearly what it is you are about to do. Having that really clear point of view about what needs to be done has been especially important during the pandemic.

Another key lesson is about listening to the front line. While giving clear direction, you also need to be well in tune with your operation and its capabilities.

It's been a challenging period. Running a supply chain during this global health crisis has certainly felt a bit like a military operation at times. But all supply chains need a level of structure and discipline to work well, so that part of my background has definitely helped me over the years.

Daniel Swan: The past 18 months have been just about the scariest environment imaginable for every supply-chain executive. Can you tell us what you and your team are most proud of having accomplished during the crisis?

Shane Azzi: It's certainly been an unprecedented time, and I'm not sure any of us want to experience anything similar in a hurry. First and foremost, the thing I'm most proud of with our team has been our ability to put safety at the forefront. We prioritized the safety of everyone, from the front line of our operations to our partners, our customers, and the suppliers we work with. This enabled us to continue producing the essential products that our customers and consumers depend on every day.

These were uncharted waters at the beginning, so another thing I'm proud of is our ability to move fast. We had to do things at a speed and with a level of ambiguity we'd never experienced before. Ultimately, I'm happy that we were able to support our customers at a time when they really needed us. Every day was a different challenge, but we rose to the occasion. I could not be prouder of the way our teams worked together: keeping people safe, keeping our supply chains operational, and doing our best to deliver our essential products to our customers and consumers in trying times.

Daniel Swan: The crisis has shifted the supply chain from being a niche topic to being the subject of conversations everywhere-from the dinner table to the boardroom. Do you think that change is here to stay as companies recognize the role the supply chain plays in their overall performance?

Shane Azzi: The supply chain has certainly moved from being a back-office function to having a seat at the table. And there is an opportunity within that-as difficult as it is-when you are under duress. Supply chains have been forced to navigate severe disruption, and this feels like it will be with us for some time. There's no easy path to get global shipping back to normal, for example. Things take time to rebalance. Then there's disruption on the demand side, plus inflationary pressures.

Altogether, you have some pretty significant dynamics, and as businesses, we need to work through the risks and implications. There is a real opportunity now for supply-chain leaders to step up and take a more proactive role in identifying these risks, addressing them, and helping to build strategies that are more resilient. A big part of building a more resilient business starts by thinking about how our supply chains operate. Roughly 18 months ago, I barely used the term "resilient" when talking about supply chains, and now it's becoming one of my favorite words.

Daniel Swan: Can we dig into that a little? We all know that a lot of supply chains have historically focused on productivity. Has this crisis changed your view-or the organization's view-on the risk that you're willing to take and how you think about the resilience that you need to build into the supply chain?

Shane Azzi: You must be able to identify the risk before you can do anything about it, so the first step toward resilience is understanding your exposure. I think what we learned-and continue to learn through the ongoing disruption-is that you've got to have visibility to what you are trying to manage.

Then it's about making the choices to insulate yourself from the disruption. We can't do everything, so it's about being clear about where the risk sits and being really targeted in our actions. That's probably an area where we've had to work hard because, like many companies, we don't always have the full picture.

That's why digital becomes such an important part of the solution-because you've got to have that end-to-end picture. We must be able to see emerging risks further upstream and downstream than ever before.

Daniel Swan: Could you give us some examples of the actions you are taking in the digital arena to drive transparency, improve resilience, or increase productivity?

Shane Azzi: We've been on this journey for some time, and we're really starting to lean into digital: what it does, what its implications are, and so on. The need for digital solutions is very clear, given the amount of information we need to first absorb, then process in near real time. Digital strategies support the resilience we require-it's a mindset that revolves around action, reaction, and counterreaction.

We've been working in the area of digital manufacturing, where we have a pretty well-defined program. Right now, we are working through the whole area of logistics-and planning in particular. We are making our planning systems capable of taking information from much further upstream in our supplier base.

We've already done some good work over a number of years around demand sensing. Now the focus is on connecting this more so we can reprocess some of our planning decisions almost instantaneously. That ability to replan the business becomes incredibly important when you want to respond to changes at a faster rate.

The pandemic has really shown us that it's one thing to have your arms around your own operations but another when you have to deal with industry-wide issues. Digital facilitates our ability to see the level of information we need to operate effectively and efficiently across the chain.

Daniel Swan: This idea of an end-to-end approach to the supply chain is a powerful one, especially when you accept that end to end involves a lot of elements that are outside your organization's direct remit. Can you comment on the progress that you have made in that area?

Shane Azzi: This is definitely a hard one to crack because it requires a level of collaboration that is probably deeper than we've gone and more instantaneous than we've been in the past. We've had to get much more real time in understanding the material flows of our suppliers-for example, particularly where we have extended-lead-time supply chains. Given the current state of ocean freight around the globe, we need a really clear understanding of our suppliers' production schedules and logistics plans and when they will actually be able to get containers on the water.

We are already using digital platforms to monitor in-transit shipments within our own network, and this is about extending that approach to long-lead-time supply chains and ocean freight. It is taking the control-tower concept that we already have, which gives us great visibility inside our own operations, and extending it further upstream and faster than we ever thought we would. We want that upstream visibility because it gives us the opportunity to make different decisions early enough in the cycle to impact the outcome that we're looking for.

Daniel Swan: One of the big changes in consumer behavior during the pandemic has been a dramatic acceleration of the shift to e-commerce. Is that something you are experiencing at Kimberly-Clark?

Shane Azzi: Yes, it's real. In certain categories, we are seeing much more volume moving through e-commerce channels. So we need to be able to meet the expectations of the consumer for short lead times.

And that creates challenges. Lead times are increasing on the upstream side, while consumers want shorter lead times. That calls for a focus on fulfillment strategy. It's about being able to position inventories in our network closer to the point of demand and then get the throughput required from our distribution networks.

All CPG companies came through the school of full pallets, full truck loads, and at-scale operations. While there is an element of our operations for which that will always hold true, we also need the ability to flex down to the individual case or the individual product and be able to ship that to the consumer.

That poses some interesting challenges around the flexibility you need in the fulfillment center. You need to rethink your packaging architecture to make sure you have a suitable product that you can put through the network. You need multirole facilities or, in some cases, dedicated and focused facilities.

Those challenges will actually help to reinvent our supply chains. Automation is also going to play a role because once we get into high-volume manual tasks, we need to look at how we incorporate automation to increase velocity. This part of our business is continuing to grow and evolve, and I don't see it moving back.

Daniel Swan: All this ongoing change in the supply chain is having a big impact on the capabilities you need within the supply-chain team. How is Kimberly-Clark responding to that challenge?

Shane Azzi: There's a real shift happening now between the art and science of the supply chain, and it's definitely rebalancing more toward the science. That's clear just from the volume of data we are required to assess and base decisions upon on a pretty frequent basis. And because of the dynamic nature of the environment, optimizing the supply chain today looks a lot a different from 20, ten, or even five years ago. By necessity, we need to become more systems driven-no human can process the sheer amount of data in the time available.

What we are learning in this situation is that we can make decisions much faster when we become more data driven. That's an area we're continuing to focus on-getting the right data, then moving quickly to draw insights from that data. There's a whole subset of activities that you need to let the system drive. Our ability to accelerate and improve the quality of our decision making relies on the ability to systematize the work and then apply the right understanding to draw insights from the data.

We're continuing to put the focus on developing our people in that space. It's a lot of learning by doing, and we've had the perfect laboratory over the past 18 months to do just that. By necessity, we've really brought some of these solutions through sooner than we would have expected. I'm really pleased with our team's ability to respond to what has been a pretty significant digital transformation on a large scale.

Daniel Swan: Another thing that has become a big topic of conversation recently is worker shortages and the problems associated with finding the right talent, whether that's in distribution centers, manufacturing, or transportation. How do you ensure that Kimberly-Clark keeps winning the talent battle?

Shane Azzi: It has certainly been an unprecedented time in terms of the labor challenges we're facing across numerous industries. That has forced me to think about the real core of our work. We need to be clear about the core value pieces of our operation and then work out how we maintain a workforce that's capable and ready.

Ultimately, you need a little bit more depth in your organization. Again, I'll come back to the word "resilience." It's challenging in our operations right now because it's not the smoothest road every day. We need to create the right value proposition so that people want to come into our operations. They've got to see the value they can create in these roles-the significance of providing essential products to one-quarter of the world's population on a daily basis.

Our supply-chain teams played an incredible role through the pandemic, and supply chain came to the front a little bit more. That hasn't always been our style, because supply-chain teams tend to fly a bit below the radar. But this is forcing us to be more visible. It's an exciting place to work, and we must make people see the opportunity they have to impact business performance and deliver on our purpose.

That said, we also need to focus on how we define various roles. We need to use automation smartly and put people in the roles where they are going to add the most value and be the most engaged. There's still a lot of routine work in the supply chain that has the potential to be handled in different ways. With fewer workers available, we need to find the optimal mix of technology, automation, and the ability of our people to make the ultimate decisions and operate the system.

Daniel Swan: Sustainability is another one of the most important topics of the day. Can you tell us a little about your historical approach to environmental sustainability and how that may have changed as we've gone through the pandemic?

Shane Azzi: Maybe some people think that supply-chain practitioners have forgotten about sustainability because we've been consumed by the pandemic. In fact, it's absolutely at the forefront for us because every day is about operating with the smallest environmental footprint possible. There's real value in that, and our people believe in it passionately and want to move even faster. Keeping people safe while also safeguarding our natural resources is paramount for us.

There's an opportunity as we come out of the pandemic to increase the focus on digital and sustainability. Those are the two biggest things that are going to influence the supply chain as we move beyond the current situation.

You can see how digital and sustainability complement each other by looking at energy. That's an area where we've done a lot of work, exploring alternative energy sources and also making our energy consumption more transparent to our operators through our manufacturing-execution system. That really helps to bring to life the whole energy equation in our decision making and identify opportunities to reduce our footprint even further.

We've made steady progress over the last number of years, but now we really feel the urgency to move forward with a different level of intensity. We announced some ambitious sustainability goals for 2030, which include cutting our environmental footprint in half in the areas where we can make the biggest difference: plastics, climate, water, and forests. This is part of our global ambition to improve the lives of one billion people in underserved communities around the world by 2030 with the smallest environmental footprint, and our teams are committed to making the right decisions to get us there.

Daniel Swan: Last question: Where do you think the supply chain is going? Are today's issues here to stay, or will you be thinking about different challenges in two or three years?

Shane Azzi: For the supply chain, there has been an awakening. We have a bigger role to play than perhaps we once thought. That role involves the ability to plan and define which scenarios will meet the challenges of the day. Adjusting on the fly isn't going to be easy when you have big operations and significant infrastructure. It's going to be about how we respond when we see a signal or a pattern that's not normal. How do we adjust? It's paramount that we get deep into the data to understand supply-chain performance and the factors that affect it.

There's also going to be a lot of work around physical automation. With ongoing labor shortages, using more automation to do the routine work is a given. But at the end of the day, we can all have similar kinds of systems, similar robotics, and similar engineering infrastructure. The biggest differentiator in supply-chain performance is going to be the ability to see the situation, anticipate, and respond. Our people will make the difference.

I've been really impressed with all of our operational teams across Kimberly-Clark. We've demonstrated our ability to meet the moment and work through the ambiguity that sometimes comes in the world of operations. Now, I'm excited to capture that learning, enhance that mindset, and bring it into how we design and operate going forward to deliver on our purpose of better care for a better world.

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Supply chain steps up: An interview with Kimberly-Clark’s Shane Azzi

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The COVID-19 crisis put every organization under pressure. But when your products are used every day by a quarter of the world's population, your supply chain needs to keep running regardless.

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Innovation Center for Operations

Our Innovation Center for Operations (ICOs) is a network of capabilities and offerings that features 11 model factories in China, France, Germany, Ireland, Singapore, and the United States. At each of these locations, our experts conduct workshops, followed by assessments, that enable business leaders to learn about and experiment with every aspect of supply chain management. The curriculum covers everything from supply chain risk management to blockchain supply chain management. The centers feature iLAB, BCG's proprietary method for demonstrating the tangible value of supply chain optimization.

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Our Innovation Center for Operations (ICOs) is a network of capabilities and offerings that features 11 model factories in China, France, Germany, Ireland, Singapore, and the United States. At each of these locations, our experts conduct workshops, followed by assessments, that enable business leaders to learn about and experiment with every aspect of supply chain management.

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To read the full version of this content please select one of the options below:

Abstract

Purpose

Using insights from the supply chain resilience perspective and the international business literature, this study aims to investigate the determinants of firms' decisions to reshore manufacturing under the high levels of uncertainty brought about by the ongoing US-China trade war and COVID-19 pandemic.

Design/methodology/approach

The proposed conceptual framework is tested using survey data collected from 702 Taiwanese firms with manufacturing in China. The firms were drawn from a database compiled by Taiwan's Ministry of Economic Affairs.

Findings

The results show that two supply chain factors (tariffs and supply chain completeness) and two non-location-bound factors (labor cost and material cost) are critical determinants of the decision to reshore under uncertainty.

Originality/value

This research elucidates and empirically validates several factors that influence the reshoring decision in uncertain environments. The findings provide valuable theoretical, practical and strategic insights into how firms should manage their value chains in the post-COVID-19 era.

Keywords

Acknowledgements

The authors thank Professor Mele Cristina and two anonymous reviewers for their insightful and constructive comments. This research was supported by grants from the Ministry of Science and Technology in Taiwan (MOST 108-2410-H-002-125-SS3 and MOST 109-2410-H-194-034-SS2).

Citation

Chen, H., Hsu, C.-W., Shih, Y.-Y. and Caskey, D. (2022), "The reshoring decision under uncertainty in the post-COVID-19 era", Journal of Business & Industrial Marketing, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JBIM-01-2021-0066

Publisher
:
Emerald Publishing Limited

Copyright

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The reshoring decision under uncertainty in the post-COVID-19 era

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To read the full version of this content please select one of the options below: Using insights from the supply chain resilience perspective and the international business literature, this study aims to investigate the determinants of firms' decisions to reshore manufacturing under the high levels of uncertainty brought about by the ongoing US-China trade war and COVID-19 pandemic.

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WASHINGTON, UT: Trailers wait to be transported at a large Walmart regional distribution center in ... [+]
Getty Images

A study released today by NTT Data on the current state of the global supply chain offers clues into how the logistics industry is managing through the worst crisis in decades. The 2022 26th Annual Third-Party Logistics Study, which included data gathered this spring from surveys and one-on-one interviews with almost 350 companies, illuminates critical issues faced by logistics managers worldwide.

The pandemic placed a spotlight on supply chains, illuminating the downsides of just-in-time inventory management and vulnerabilities in sourcing strategies. The report highlights several ways the industry plans to change to limit future disruptions: advancements in technology, reshoring of production, growth of the supply chain as-a-service business model.

Increased use of technology will make more intelligent, more agile supply chains

Technological advancements have the potential to relieve some of the stress in the industry. Promising technologies such as 5G, real-time data transmission, robotics, Internet of Things and data analytics will help logistics managers with better visibility into the different areas of the supply chain and improve maneuverability when issues occur.

Just over half of third-party logistics managers (56%) said they feel it is moderately or critically important to provide 5G-enabled services to their clients. "5G reduces the amount of latency, so it is much more real-time, which is important because there is a large amount of data that has to travel back and forth", says Dave Bushee, Senior VP of information technology for Penske Logistics, one of the main sponsors of the study.

Smart factories and warehouses can increase square footage capacity and autonomous processes could address labor shortages - to an extent. "Tech-driven productivity improvements can only help so much," according to Sylvie Thompson, a supply chain consultant with NTT Data Services. "No amount of technology is going to resolve some of the capacity issues, but it will give us more agility to adjust to maintain production," says Thompson. Yet, many processes in the chain still require human intervention, and as such, demand for labor will still be an issue.

Logistics managers plan to pivot towards regional/domestic supply chains

For years, supply chains have focused on reducing inventory levels and cutting costs by embracing lean, just-in-time management in their logistics plans. These efforts negatively impacted the resilience and agility of the supply chain.

The pandemic exposed weaknesses in contingency planning and risk mitigation strategies across the world. From the initial scarcity in personal protective equipment to the shortage in microprocessors, challenges emerged in linking suppliers of goods on one side of the planet to sources of demand on the other. As a result, companies are growing more risk-averse with their global manufacturing footprint.

Cracks in the supply chain were growing even before the pandemic took root thanks to increased geopolitical risk between China and the U.S., causing firms to rethink their logistics strategies. "Nearshoring and restoring absolutely is going to happen. It has been happening quietly for last few years," says Kevin Smith, CEO of Sustainable Supply Chain Consulting.

Almost two-thirds of shippers in the survey (68%) believe supply chains have become too global and must be balanced towards more regional and local/domestic ecosystems.

Factors contributing to a global rebalancing include:

more restrictive trade policies

changes in tax implications

changes in government regulations

increased awareness of supply chain vulnerabilities

increased need for supply chain resilience

new sources of raw materials and supplies

Nearly 70% of companies in the survey said supply chains have become too global
Annual Third Party Logistics Study

Risks associated with a single source of supply jumped during the pandemic. A single outbreak of COVID-19 at a manufacturing plant in Thailand, for example, can have reverberations thousands of miles away. A new definition of single source of supply now includes a single country or region, not just exposure to one company. The result is a pivot towards more regional or local networks rather than the traditional global ones.

"When a global link breaks, regional links need to be self-sustainable," Thompson says when describing the impetus behind the shift. Until these links can be established, risks associated with raw material shortages, rising transportation costs and delays will likely continue. "Whether we like it or not, all supply chains are related. Until the world gets the virus under control, supply chains are going to continue to be disrupted," Thompson adds.

According to the study, 83% of shippers reported disruption in the supply of key materials this year compared to 49% of respondents in the 2021 survey, and 83% of shippers said they plan to adjust sources of supply as a direct result of efforts to rebalance towards regional and local/domestic sources. Furthermore, 68% said supply chains have become too global and 45% of the companies surveyed anticipate adjusting production locations over the next three years. Such adjustments will hopefully minimize the ripple effects of a single breakdown in the global supply chain.

More companies will move to monetize excess capacity in their own supply chain

As it currently stands, the logistics industry is not blessed with lots of spare capacity. Cargo ships, containers, truck drivers, and warehouse space are all in short supply. Individual companies, though, often do have spare capacity at various points along their supply chains.

Logistics giants like Amazon and Walmart , who have invested heavily over the last decade in developing their networks, are beginning to let other companies piggyback on their investments. These integrated conglomerates are starting to change the way they view their supply chain.

The new business model is called Supply Chain as-a-Service, or "SCaaS." For example, having a proprietary truck fleet, once seen as a competitive advantage, is now seen as a way to generate additional revenue. Companies are looking at spare capacity as an alternative source of profit rather than cost centers, the way they have traditionally been viewed. SCaaS services can include inventory management, reverse logistics, logistics consulting, sourcing and customer service.

In August, Walmart announced a new line of business, Walmart GoLocal, which will provide last-mile deliveries to other merchants. "Walmart has spent years building and scaling commerce capabilities that support our network of more than 4,700 stores, and we look forward to helping other businesses have access to the same reliable, quality and low-cost services," says John Furner, President and CEO of Walmart U.S.

Amazon has invested billions of dollars in building out its massive network of trucks, warehouses and planes. As a leader in technology, we should expect Amazon to be keen to find ways to use its advanced data analytics and end-to-end visibility of the supply chain to monetize any spare capacity in its system.

It's not just the giants that are considering adapting to a new business model. The study released today shows that 35% of companies involved in logistics either currently offer SCaaS or plan to explore it over the next year. These efforts should help alleviate some of the capacity constraints and help prevent the creation of future bottlenecks.

Roughly 30% of logistics companies are investigating a supply chain as-a-service business model
Annual Third Party Logistics Study

When will things get back to normal?

Nobody knows for sure. When asked this question, before the recent surge of the delta variant, 37% of companies in the study believed it would take more than six months for the global supply chain to return to normal. Some felt it would take much longer.

The good news is that the industry appears to recognize its shortfalls and is embracing a variety of tactics to correct them. Unfortunately, some of these changes will take time. As long as demand remains unpredictable and the multi-legged supply chain is vulnerable to COVID outbreaks on the other side of the world, no magic bullet is available.

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Logistics Study Reveals Three Potential Cures To Global Supply Chain Problems

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A study released today by NTT Data on the current state of the global supply chain offers clues into how the logistics industry is managing through the worst crisis in decades. The 2022 26th Annual Third-Party Logistics Study, which included data gathered this spring from surveys and one-on-one interviews with almost 350 companies, illuminates critical issues faced by logistics managers worldwide.

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Fashion has been eyeing blockchain to trace its notoriously opaque supply chain for years. The technology has yet to be widely adopted, in part because it isn't easy to implement. It requires information and participation from all the suppliers along the chain, from cut-and-sew factories to fabric weavers, yarn spinners, ginning mills, and even farmers.

Lately, though, disruptions from the pandemic to geopolitical events have made visibility all the way down the supply chain a top priority for brands and retailers, adding to pressure they already faced from consumers and watchdogs to be more transparent. It's helped drive momentum around blockchain projects. In recent months, groups such as the UK Fashion & Textile Association (UKFT) and companies such as H&M have launched new pilot programmes to track their supply chains with blockchain.

"To be totally frank, it was the dual onslaughts of Brexit and Covid, and the impact that had on supply chains," said Adam Mansell, chief executive of UKFT, which announced a tracing pilot with IBM and others including Next and H&M's COS brand in August.

Government regulations are contributing too. This year, the US banned imports of products made with cotton from China's Xinjiang region, where researchers and authorities say Uighurs and other Muslim groups have been pressed into forced labour. (China denies the claims.) Germany adopted a law scheduled to take effect in 2023 mandating large companies perform due diligence to ensure their supply chains comply with social and environmental standards.

To be totally frank, it was the dual onslaughts of Brexit and Covid, and the impact that had on supply chains.

These sorts of developments have drawn "attention at the very highest level around, 'How do I manage the risk in my supply chain?' - the material risk - and that immediately brings you into the traceability topic," said Amit Gautam, founder and CEO of TextileGenesis, a blockchain-based tracing platform for fashion.

The company is H&M's partner for its new tracing efforts, and has teamed on separate pilots with the US Cotton Trust Protocol, a cotton sustainability group that counts Gap and Levi's as members, and with Kering and Bestseller on a viscose tracing project.

For brands and retailers feeling pressure to be more transparent about where they get their goods, the appeal of blockchain is clear: In theory, it provides a verified record of a garment's history at each step of its production, something companies haven't historically had much visibility into, and because of its decentralised architecture, that record would be tamper-proof.

But blockchain isn't a silver-bullet solution. Companies still face the challenge of making sure the data they're getting from suppliers is accurate.

"The issue is still that first part: How do you get the information and verify the information that's coming into that blockchain system?" said Nate Herman, senior vice president of policy at the American Apparel & Footwear Association. "In the last two years there's been a dramatic increase in efforts to do that."
Pressure To Know the Chain
UKFT's traceability project is funded by a research grant from the UK government. Other partners include Future Fashion Factory, which supports innovation in the UK garment sector, and Tech Data, a technology firm.

"There is definitely an economic driver to this," Mansell said.

After Brexit, sourcing from Europe immediately became more challenging, and then the pandemic threw global supply chains into disarray. Companies realised they needed a much sharper understanding of where their materials came from.

The aim of IBM's and other blockchain projects is to capture information around each step as it happens, as opposed to fashion's historical method of tracing, which has been to start with a finished item and try to follow it backward. But "fibre-forward" tracking is tricky. Companies often only have contact with the factories that sew their garments and maybe fabric suppliers.

Keric Morris, who heads up standards for IBM's strategy business and is involved in the UKFT project, said they're collecting data from invoices created at each step of the chain and other information, stretching back to the farm level. They can't always identify the specific farm the cotton in a product originated from, since batches of cotton are often mixed together when they're processed, but they can identify the area or even group of farms it came from.

To start, the pilot is focusing solely on cotton products, which entails onboarding suppliers in countries including Bangladesh, India, Turkey, and Portugal.

"What makes it slightly different from other projects is that we are very much trying to build it so that the platform is available for everyone," Mansell said.

The scope of TextileGenesis's work is narrower. It focuses specifically on tracing what Gautam calls sustainable, differentiated materials, such as organic cotton as opposed to commodity cotton, or recycled polyester versus virgin polyester. It does it using a digital token it calls a Fibercoin.

"It's a digitisation of the physical volume, so if 100 kilograms of Tencel are shipped to a spinner, then the spinner's account on our system receives 100 kilograms of inventory," Gautam said. "When that fibre is converted into yarn, yarn to fabric, fabric to garment, we transfer those tokens along the chain at article level."

H&M has " several scaled pilots " set to launch with the company throughout the year. An H&M spokesperson said in an email its partnership with TextileGenesis enabled it to improve its supply chain's traceability and transparency.
Cost-Benefit Analysis
One challenge for companies is ensuring the information logged on the blockchain is accurate. Many are having to use other tools, such as forensic verifications that test genetic or chemical markers in material fibres, to confirm suppliers are entering data truthfully.

Another is cost. There's a reason TextileGenesis focuses on fibres such as organic cotton.

"Commodity material has very little value, and very little value from a traceability perspective," Gautam said. "There's always a certain amount of effort, investment required to deliver traceability, and if it's commodity product, how do you capture that value across the supply chain?"

There's always a certain amount of effort, investment required to deliver traceability.

Commodity material describes the vast majority of fabric used to make clothing, and its supply chain tends to be more fragmented, making it more difficult to trace. Some of the costs involved would likely have to be passed onto shoppers.

"The first and foremost resistance I see is from the consumer," said Tarun Kumar Agrawal, a production logistics researcher at KTH Royal Institute of Technology in Sweden who has studied blockchain's use to trace the apparel supply chain. "Are consumers really interested in paying a premium if they get to know about all the history of the product? There is a major segment of consumers who still believe in price over sustainability."

He predicted many big brands will adopt blockchain, but how it develops further could depend on what return they see on their spending. Brands could release tracked-and-traced product lines, much like the "sustainable" collections that exist.

Gautam forecast an even greater split. In his view, the top 100 or so fashion brands will trace most of their products in the coming years. "The rest of the apparel retail market, which is a lot of domestic retailers, let's say in parts of Asia or parts even of Europe, which is lower value retail, would continue to be generic, would continue to be commodity product, and largely not traceable," he said.
Related Articles: Is Forced Uighur Labour in Your Supply Chain? How Fashion Can Tackle Its Supply Chain Crisis How Luxury Fashion Learned to Love the Blockchain

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Is Fashion Ready to Put Its Supply Chain on the Blockchain?

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Fashion has been eyeing blockchain to trace its notoriously opaque supply chain for years. The technology has yet to be widely adopted, in part because it isn't easy to implement. It requires information and participation from all the suppliers along the chain, from cut-and-sew factories to fabric weavers, yarn spinners, ginning mills, and even farmers.

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PARIS - Chanel may be most closely associated with its birthplace on glitzy Rue Cambon and the neighbouring Ritz Hotel where founder Coco used to live. But for the 20th edition of its annual "Métiers d'Art" show, which is dedicated to showcasing top-end suppliers the brand has been steadily acquiring since the 1980s, the luxury megabrand invited guests to Paris' scruffy northern edge, where it is set to inaugurate a 25,000 square-metre craftsmanship hub early next year.

Dubbed the 19M, the campus brings together 11 of Chanel's most notable subsidiaries including embroiderer Lesage, feather-and-flower specialist Lemarié and hat maker Maison Michel (which has grown into a brand in its own right). Six hundred employees are being transferred to the new facility with plans to hire an additional 100 per year, Chanel said.

Their work was deployed in designer Virginie Viard 's latest Métiers d'Art collection, which featured graffiti motifs embroidered from coloured beads and multi-coloured ostrich feathers woven to resemble the house's signature tweeds. If the couture-level craft was the stuff of another era, many of the silhouettes were decidedly of today, with relaxed tweed trench coats layered over midriff-baring tops and flowing, wide-legged trousers.

"Virginie is a woman of products and style," said Bruno Pavlovsky, Chanel's president of fashion. "She wants to design collections for the women of today."

But producing those designs at the scale of a $12 billion-per-year brand is no easy feat, as the company juggles rising demand with increased pressure on the fashion industry to curb its environmental impact and guarantee better labour conditions.

That many of the artisans on which Chanel depends are reaching retirement age and may prove difficult to replace has added another dimension to the challenge. Brands including Hermès, Louis Vuitton, and Prada have also been adding sparkling manufacturing facilities in recent years to attract younger employees and ramp up in-house production.

"Our industry is undergoing a complete transformation," Pavlovsky said. "It's not just about using the best quality materials, but also about the provenance, the traceability and the conditions in which they are produced."

Chanel's Métiers d'Art programme is critical to helping the brand navigate the shift, as it ramps up the pace of supplier acquisitions and directs its focus further upstream.

What started with a focus on image-generating embellishments - the company used to mostly acquire prestigious suppliers who could lend their expertise to visible details, like intricate lace, or furnish accessories like brass jewellery, gloves and hats to complete a look - has become a more strategic play as the brand aims to control more elements of its supply chain. Chanel has snapped up seven manufacturers over the past two years, including threadmaker Vimar, tannery Gaiera and knitwear factory Paima.

Chanel's supply chain acquisitions now total 41, up from only a dozen a decade ago, and employ 6,600 people. While these suppliers have a key role in helping Chanel flex its craftsmanship muscle at runway shows, they also increasingly play a part in producing commercial products.

Around one-third of Chanel's manufacturing now takes place in house, Pavlovsky said. This is higher than at most Italian luxury brands, which depend heavily on the country's dense network of thousands of sub-contractors, but lower than top-end rival Hermès, which has said it produces 85 percent of products in its own French workshops.
Future-Proofing the Supply Chain
Raising the share of products made in-house is not a goal in itself, but rather the result of a series of moves aimed at future-proofing the brand's supply chain. Having its own tanneries and threadmakers not only helps ensure Chanel's supply of materials, it also provides a laboratory for innovation both on products and on processes to improve sustainability, Pavlovsky said.

"If Chanel wants to exist in 10 or 15 years, all of the actors in our supply chain need to transform," he added.

Still, even as the brand exerts greater control over its production, Chanel does not trade in raw materials, limiting its visibility of the most important driver of its environmental impact. Traceability "is the top priority" for Chanel's supply chain, Pavlovsky said, but it remains elusive.

"We'll still need some more months - I wouldn't say years - to be able to assure this," he said. "It's a mindset change for houses like Chanel, and for all of the players upstream."

Communicating on sustainability and ethics to the traditional heritage, craftsmanship and creativity credentials that luxury brands communicate may help to justify higher prices.

Chanel raised prices on key items three times this year on top of hefty increases the year before, attributing these hikes to the rising cost of materials and exchange rate fluctuations.

"Chanel embodies ultimate luxury," explained Pavlovsky. "That means procuring the best materials, and it's the reality that producing these items has become more costly in recent years. Covid undoubtedly accelerated that increase."

He said clients understand why Chanel's products are so expensive. Still, rising prices raise the stakes for Chanel to deliver value for money, making it more vulnerable to public opprobrium when it slips. A slew of viral TikTok videos dragging the brand for including trinkets like refrigerator magnets in its $825 advent calendar spotlighted that risk.

Pavlovksy called that incident a "regrettable misunderstanding," saying some clients were expecting higher-value items inside the advent calendar, whereas he saw value in the box itself. "The calendar was a best-in-class example of eco-design, which we wanted to offer at an accessible price," he said.

Price hikes and social media backlash aside, consumers are still flocking to the brand. Chanel took a heavy hit from the pandemic, which sent annual revenues down 18 percent to $10.1 billion last year as the collapse in travel retail punished its beauty division, and as its choice not to sell fashion and accessories online damaged sales. But in the first half of this year, the brand bounced back, growing revenue by double digits over 2019 levels.

Viard's designs are playing a key role in that rebound, according to Pavlovsky. "We have never sold as much ready-to-wear as in the past two years," he said. "It's the emblematic category where clients really connect with the brand."

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How Chanel Is Strengthening Its Supply Chain

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Over the past two years, Chanel has acquired seven new manufacturers. At the house's 'Métiers d'Art' showcase in Paris, president of fashion Bruno Pavlovsky broke down his strategy for future-proofing the French brand's supply chain.

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This article appeared first in The State of Fashion 2021, an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here Disruptions Are Growing More Frequent and Severe .
Much has been written about how to make supply chains more resilient. But many companies, wary of eroding efficiency, have spent recent years putting off the preventive measures that could minimise the impact of future disruptions.

Today, the pandemic has once again driven home the urgency of managing operational and supply-chain risk. While every goods-producing sector is confronting this challenge, the apparel industry stands out as one of the most heavily exposed. Factories are not only coping with workplace health and safety issues. They also face financial distress from orders drying up as falling consumer demand hits fashion brands and retailers worldwide.

The current crisis underscores the fact that the unexpected now has to be considered probable. To cope with eventualities, companies need to embed at least a baseline level of losses from disruption into their financial planning. This information can help global apparel brands and retailers make better decisions about how to invest in supply-chain stability and prepare themselves to better withstand future disruptions.

It's not just a figment of our collective anxiety: the world really has become riskier. Changes in the environment and in the global economy are increasing the frequency and magnitude of supply-chain shocks. Dozens of weather disasters each year cause damages exceeding a billion dollars each - and the economic toll caused by the most extreme events has been escalating. A world of shifting geopolitics is producing more trade disputes, tariffs and uncertainty. Interconnected supply chains and global flows of data, finance and people offer more "surface area" for risk to penetrate. Ripple effects can travel rapidly across these network structures - and across national borders.

McKinsey surveyed dozens of supply chain experts in mid-2020 to gauge just how frequently things go wrong. Their responses were surprising: Manufacturers can expect disruptions lasting one to two months to occur every 3.7 years on average, and those dragging on for two months or longer happen roughly every five years. Lean global supply chains deliver real margin improvements, but frequent disruptions have to be fully accounted for as a real cost of doing business with this kind of structure.
Over the Course of a Decade, Companies Can Expect Disruptions to Erase Half a Year's Worth of Profits at a Minimum
Companies are attuned to some types of risk simply because they encounter them more often. Data breaches, theft and industrial accidents happen. Trade disputes dominate the headlines. Most multinationals have systems and functions in place to try to prevent these types of incidents or to respond to them quickly.

But some types of shocks are not on the typical company's radar. They may be rare occurrences, but they can inflict much bigger losses. These include extreme weather, earthquakes, financial crises, major terrorist attacks and, yes, pandemics. If 2020 has taught us anything, it's the folly of assuming that extreme scenarios will never come to pass.

Will Value Chains Shift Across Countries?
We analysed a wide range of industries to assess their exposure to specific types of shocks. Out of the 23 value chains analysed, apparel emerged with the second-highest level of exposure (topped only by communication equipment; see Exhibit 11). The labour-intensive nature of the apparel value chain, as well as its geographic footprint, makes it particularly exposed. In the current pandemic (as well as any that might occur in the future), apparel manufacturing is susceptible to shutdowns because of this and unpredictable drops in consumer demand. Furthermore, a large share of apparel exports come from Bangladesh and Vietnam, which are subject to heat stress and flooding. The industry as a whole is also exposed to workplace risks - a painful reality brought home by the 2013 Rana Plaza collapse in Bangladesh, which killed more than 1,100 garment factory workers and injured thousands more. This tragic disaster spurred the industry toward more active supply chain management and transparency about working conditions. But more can be done.

Supply-chain shocks can have significant financial consequences. We built representative income statements and balance sheets for hypothetical companies in 13 different industries, using actual data from the 25 largest public companies in each. We then put them through a stress-test to see what kind of financial losses a 100-day shutdown would produce.

Our scenarios show that, over the course of a decade, companies in most industries can expect a single production shock lasting 100 days to wipe out between 30 and 50 percent of one year's EBITDA. For the average textiles and apparel company, that number is about 40 percent. An event that also disrupts distribution channels would push the losses sharply higher in some industries. The magnitude of financial loss depends on whether a company holds enough inventory to get it through the period of interrupted production, as well as whether it has the ability to ramp costs up and down. Most inventory of finished goods in the apparel industry is held by retailers, which means that production shutdowns could significantly impact manufacturers' profits.
Will a New-Found Appreciation For Risk Prod Companies to Act?
These are the hidden and recurring costs of doing business with complex supply chains in a riskier world - and they are only the baseline. Estimating these costs allows companies to better understand how much they can expect to invest in resilience and still see a long-term pay-off.

Today, much of the discussion about resilience involves questioning where things are made, considering lower-risk locations and reducing the geographic breadth of supply chains to make them easier to manage. But the interconnected nature of value chains limits the economic case for making large-scale changes in their physical location. We estimated what share of global exports could move to different countries based on the business case and how much might move due to policy interventions. To consider whether economic factors would support a geography shift, we looked at whether movement is already underway, how knowledge- and capital-intensive the value chain is, how tied it is to geology and natural resources, and the degree to which it is already regionalised. We also considered non-economic factors, such as importance to natural security, competitiveness and self-sufficiency.

Lean global supply chains deliver real margin improvements, but frequent disruptions have to be fully accounted for as a real cost of doing business with this kind of structure.

Apparel stands out as one of the industries with the largest share of total exports that could potentially move to different countries (36 to 57 percent in apparel, as well as 23 to 45 percent in textiles). Supply chains are already evolving in these highly traded, labour-intensive industries. China has long been the world's dominant maker, and it still accounts for some 29 percent of apparel sold globally. But the country's wages are rising, and Chinese producers can now focus on meeting domestic demand. In 2005, China exported 71 percent of the finished apparel goods it produced. By 2018, that share was just 29 percent. While some apparel production may nearshore to US and EU markets, most would likely shift to Southeast Asian countries due to their comparative advantage in labour and overhead costs. As China's exports have plateaued, more apparel manufacturing for export has moved to places such as Bangladesh and Vietnam. Turkey has become a major producer of clothing that is exported to Europe. Newer hubs such as Cambodia, Ethiopia and Honduras are also beginning to emerge. But companies that begin sourcing from these and other developing economies will need to understand and safeguard against a wide range of risk, from natural disasters to future pandemics.

The need to make supply chains more transparent and resilient has been widely discussed for years. But most strategies for doing so require making long-term investments or accepting a slightly higher cost of goods. For that reason, only a small group of leading companies have taken decisive action.

However, this time really might be different. Companies are considering a range of resilience measures - and most of them do not involve finding new suppliers in different locations. They can opt to hold more inventory, build redundancies into transportation and logistics, reconfigure factories and warehouses to withstand natural disasters and develop the ability to flex production across multiple sites. For example, Esquel, a supplier to brands such as Hugo Boss and Nike, found itself unable to export fabric from Mainland China to its factories in Vietnam during the initial Covid-19 outbreak. But the company activated its back-up plan and pivoted to shipping through Hong Kong to keep production going.

As China's exports have plateaued, more apparel manufacturing for export has moved to places such as Bangladesh and Vietnam.

This article draws on a larger body of research on trade and global flows from the McKinsey Global Institute, the business and economics research arm of McKinsey & Company. The latest report in this series is Risk, Resilience and Rebalancing in Global Value Chains. The authors would like to thank Kyle Hutzler and Dhiraj Kumar for their contribution to this article.
Companies not only have a renewed sense of urgency about addressing risk; they also have a new way forward. The pandemic has occurred at a moment when manufacturing technologies are leapfrogging forward. Particularly when compared to other manufacturing industries, apparel production has a great deal of room to digitise and reap the benefits.

In our experience, creating supply chain transparency through digitisation can boost both productivity and resilience. It is critical to gain visibility into who supplies your suppliers and spot any vulnerabilities hidden deep in the lower tiers of the network. When the Covid-19 pandemic broke out, Nike's digitised supply chain enabled the company to quickly shift products headed for brick-and-mortar stores to e-commerce fulfilment centres in China. As a result, it minimised the hit to revenue.

Some companies have made it a point to model prioritised risks, but they have often done so by looking at these shocks as discrete rather than cascading events. Now, analytics tools enable a more sophisticated approach that quantifies broader and more integrated scenarios. This makes it possible to look not only at extreme one-off events but also at their knock-on effects and the ongoing business cycle, taking correlations into account. Scenarios can also incorporate a range of risk-mitigation strategies to test which would be most effective. The results can then inform strategic planning and capital allocation decisions.

Preparing for future hypotheticals has a present-day cost. But if those investments focus on digitally connecting the entire value chain from end to end, they can pay off over time - not only minimising future losses but boosting productivity and strengthening entire industry ecosystems today.

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Risk, Resilience and Rebalancing in the Apparel Supply Chain

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This article appeared first in The State of Fashion 2021 , an in-depth report on the global fashion industry, co-published by BoF and McKinsey & Company. To learn more and download a copy of the report, click here Disruptions Are Growing More Frequent and Severe .

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What do you think of the metaverse in the next few years?

25 years: according to it will become more and more widespread and "normality" for people

35 years: in my experience in the future the metaverse will be increasingly followed by various generations that are to say it will embrace every generation because it offers remarkable services

50 years: the metaverse is very famous right now and in the future, it will become as fundamental as the internet

Do you think the circular economy will be increasingly present in the future?

25 years: in my opinion in the future the circular economy will make great strides both from the point of view of advanced technology but also in the origin of the product.

35 years: in my opinion, it will be even more necessary, in the future there will be more and more talk of sustainability and the values ​​of consumers will come first

50 years: currently it is fundamental for brands, especially for generations such as the Millenials and Genz but in the future, it will be required by most the generations

Are you familiar with the supply chain disruption and what do you think?

25 years: We talk about it a lot and after the pandemic, we are talking about it more, in my opinion, it is all due to the idea of ​​the sector to keep up with trends and the consumer's need to always have new things

35 years: I am aware of it, in my opinion, it is a situation that affects most of the markets and is linked to overproduction but also to want to offer competitive prices

50 years: in my opinion, the supply chain disruption broke out after the covid but it was already present as well as horrible events, in my opinion, it is a very big problem and difficult to manage and it will take years to solve it

In the future do you think the topic of supply chain disruption will still be present?

25 years: in my opinion, yes, because the situation is very complex, it takes a lot of investments but also companies with values

35 years: most likely it will decrease but in my opinion, it will still be present in a smaller percentage, however

50 years: The world is talking about it a lot and the institutions are proposing aid, but it is very complex

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Teunissen. Eds. J., 2014, The future of Fashion is Now. 

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"Most designers show their ‘innovative’ vision not by means of a single garmentor product but by inviting the observer to accompany them throughout the entire design and thought process, whichis presented by means of storytelling and future scenarios."

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"Most designers show their ‘innovative’ vision not by means of a single garmentor product but by inviting the observer to accompany them throughout the entire design and thought process, whichis presented by means of storytelling and future scenarios."

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"Everything is Local: Landscape Part 1 (2012-2013), thereby transforming his own fashion history into a fantasy world of recycled stu. He used ceramics as a new expressive material and made all kinds of structures with it. In doing so he visualised how in the design process he could literally escape the restrictions and demands of the fashion system."

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"Everything is Local: Landscape Part 1 (2012-2013), thereby transforming his own fashion history into a fantasy world of recycled stu. He used ceramics as a new expressive material and made all kinds of structures with it. In doing so he visualised how in the design process he could literally escape the restrictions and demands of the fashion system."

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"old crafts and local traditions could have on the future of the fashion system. He engaged local craftsmen from Wales to make a woollen spacesuit, thereby drawing attention to the importance and power of local and traditional craftsmanship for the future."

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"old crafts and local traditions could have on the future of the fashion system. He engaged local craftsmen from Wales to make a woollen spacesuit, thereby drawing attention to the importance and power of local and traditional craftsmanship for the future."

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While fashion brands have contended with a seemingly endless series of challenges in the past year, looking ahead there is plenty of cause for optimism - except maybe when it comes to cyber threats.

At VOICES, BoF's annual gathering for big thinkers, innovators and industry leaders discussed technologies with the potential to reshape fashion for the better, as well as the need to bolster cyber security as e-commerce continues its growth and companies collect more sensitive customer data.
Mycology and the Mushroom Movement
Mycelium is the branching network of tubular structures that makes up a fungus. It's what mushrooms are made of and it possesses an array of abilities companies are only just starting to harness. Merlin Sheldrake, biologist and author of "Entangled Life: How Fungi Make Our Worlds, Change Our Minds and Shape Our Futures," spoke of the ways mycelia are woven throughout the natural world and how they often defy conventional notions of what we consider animal or plant life. Their properties also make them surprisingly versatile.

Mycelium can be engineered to replicate leather, for one. Matthew Scullin was on hand to discuss how MycoWorks, where he serves as chief executive, convinced Hermès to partner with it on a version of the leather-goods powerhouse's Victoria travel bag. The company says it is able to alter mycelium's cell structure to produce different characteristics in the final material, allowing it to simulate hides such as sheep or calf if they want. "With Hermès it was all about quality," Scullin said. Demand for mycelium-based leather continues to grow, he added, and MycoWorks is expecting multiple products with different brand partners to reach the market in 2022.

Mycelium isn't just useful as a material. Simon and Andrew Salter, brothers and co-founders of Dirtea, a mushroom coffee and tea company, elaborated on the effects different varieties of mushrooms have when ingested. They are said to be calming, energising or may boost the immune system, for example.

One point all agreed on: Mushrooms and mycelia remain largely misunderstood, but a tipping point is arriving that will see them become much more widely used in the future.
Thinking Like the (Cyber) Enemy
Gentry Lane, chief executive of Anova Intelligence, a cyber-security software provider, had a stark message for VOICES attendees: "Cyberspace is a dangerous place," she said. A digital war is waging, and although cyber weapons aren't lethal in the traditional sense, they are still extremely harmful. Lane would know. She consults governments, intelligence agencies and companies that maintain critical infrastructure on their security. She also understands the needs of fashion brands: Though her background is in software, she ran a lingerie label in the mid-2000s.

Lane's guidance to brands was to prepare for an attack because one is almost certain to come at some point. To get ready, "think like a hacker," she advised. Whatever is valuable to you is also a target for them to attack through methods such as ransomware, where they lock up the computer system until a ransom is paid. As brands do more e-commerce and establish presences in the metaverse, these attacks are set to escalate, meaning companies should build their virtual spaces with security in mind from the start. Another bit of advice she gave: this is one area where the fashion industry is better off working together rather than competing.
Merging Digital and Physical Craftsmanship
As the digital and physical worlds increasingly merge, fashion is bound to follow. Alissa Aulbekova and Paula Sello, co-founders of Auroboros, have positioned themselves right at that intersection. Their brand creates both real and virtual clothing that seeks to add new forms of craftsmanship into the design process. They produce physical garments that grow on the body through a crystallisation process lasting six to 12 hours, adding time into the design. "For the first time you get to experience a garment's performance of life and death," Aulbekova said. Their digital clothing, free of real-world constraints, incorporates elements from plants or biological structures.

Aulbekova and Sello said they intend their work as a statement of positive change. Fashion produces mountainous volumes of waste annually, while shoppers may buy an item to wear once on social media and then discard it. They see digital clothing as a way to give shoppers the novelty they want from fashion with a smaller environmental footprint.
Should the Metaverse Be Open or Closed?
As more money pours into metaverse projects, one open question is whether these emerging virtual environments will be controlled by large corporations such as Meta, formerly known as Facebook, or if they will be governed collectively by the communities that inhabit them. Lady Phe0nix, a leading figure in digital art and culture, said aside from exceptions such as private events, the metaverse should be open and not have gatekeepers to create a closed society. "We have enough of that historically and we should be looking toward how we can do the complete opposite in our brand new world," she said.

Joe Hage, founder of Heni Group, an international art services business, agreed. He noted that non-fungible tokens, or NFTs, will be vital in making the metaverse a reality by enabling verifiable ownership of digital assets, and being blockchain-based, they're decentralised by nature. He had a prediction as well. NFTs for art and sports have exploded in the past year. "I think the next huge wave of NFTs will be fashion," he said.

Ian Rogers, chief experience officer at Ledger, which produces crypto hardware and software for consumers, said NFTs are still primitive and would eventually unlock different abilities. It was inevitable worlds such as fashion and finance would be increasingly digitised, he said, encouraging the audience to dive into the NFT space and start exploring.
Future Selves: Remaking Creative Minds Through Movement
Wayne McGregor, an award-winning choreographer and director, opened his talk by choreographing a short piece for two dancers live. Afterward, he explained to BoF's Tim Blanks how dance is a form of wordless communication that also lets us "think physically." He also described a project he's working on with Google that includes a "living archive" of his work.

The point, though, isn't to preserve the past. "One of the pleasures of dance is its transience," he acknowledged. Instead, the value is in using Google's AI is able to create novel pieces from the archive. McGregor said training the AI on any dancer's work would allow it to generate new dances bearing their physical signature and style.

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VOICES 2021: Innovations Changing Fashion

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While fashion brands have contended with a seemingly endless series of challenges in the past year, looking ahead there is plenty of cause for optimism - except maybe when it comes to cyber threats.

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Advertising in the Metaverse: Research Agenda

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(2021). Advertising in the Metaverse: Research Agenda. Journal of Interactive Advertising: Vol. 21, No. 3, pp. 141-144.

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Supply chain language in our industry is designed to make the unglamorous, hidden world of making and shipping fashion sound benign, neutral and efficient. Anyone who has worked in the business of fashion long enough is familiar with phrases like just-in-time, lean manufacturing, outsourcing, compliance and enterprise systems. What do these terms have in common? All betray embedded bias to control, reduce and enforce costs. Lean management, for all of its claims to virtues of efficiency, is at its heart about producing and moving goods at the lowest possible cost.

And that philosophy in textiles and apparel became a kind of school for globalisation. But the limits of lean are evident in the post-Covid world: shipping costs have spiked amid scarce capacity, material prices and wages are rising in Asia, and so are costs of compliance and transparency. These pandemic pressures are now intensified because of end-to-end under-investment in sustainable practices and products. Lean techniques cannot counter these relentless demands which, together, continue to undermine standard contracts, terms and trust between Western retailers and global suppliers.

We have reached the limits of lean to lower or control costs. The language of lean is just as important. The famed philosopher of language Ludwig Wittgenstein said, "The limits of my language are the limits of my world. All I know is what I have words for."

In other words, if the terminology of cost (and legacy systems, metrics and incentives) is the narrow basis of contracts and executive wisdom, how is change possible? Countless PowerPoints have circled this question, but the tipping point to transition a cost culture is now upon us.
An Unequal Playing Field
In the rough passage of 2021, the supply shock of Covid evolved to a demand shock. The uncomfortable, lasting effect is that the balance and burden of risk were shared unequally by retailers and suppliers.

The old arbitrage of lowest cost sourcing was to cushion volatile and uncertain demand, permitting retailers to absorb high unplanned markdowns year after year. That one-sided "system" is discredited as overly reliant on an unfair burden of financial risk by suppliers. In 2020, that imbalance was demonstrated in painful retailer cancellations, denials of delivery, revised terms and deferred payments. In cases of retail bankruptcy, inventory was accepted to generate cash and never paid. Even if motivated by survival, these buyer behaviours complicated recovery by factories once orders and demand began to return.

Is there a formula - and language - to replace the systemic stranglehold of cost?

This concern is industry-wide regarding an adversarial bargaining culture, now challenged by generational demands to become more sustainable and transparent. What is a new relational formula to establish consumer and investor confidence that fashion can live up to its pledges for sustainability, humane and responsible supply chains, and worker well-being and living wages? The answer is both financial and non-financial standards, which together are required to create market and social value.

The recent COP26 gathering in Glasgow, where fashion finally arrived to participate alongside other industries in UN Goals for 2030, also shone a bright light on laggard status. High profile commitments to sustainability targets abound in a CEO chorus of forums, agreements and acronyms, but how will common business logic, data and metrics unite famously fragmented designers and brands? The answer is arising in the global supplier community.

The conclusion of worldwide textile manufacturers is that they cannot rely on retailer initiatives to transition the fashion system. Indeed, post-COVID terms have tightened in pricing and definitions (such as expanded triggers for force majeure). In the case of a major athletic brand, a cost formula is being readied across key factories regardless of their track record. Apple's practices in electronics often influence a large brand's drive to control profit margins and are a shadow over its best suppliers.

How will the global supplier voice be heard? In 2020, six nations in Asia that normally compete for production volume banded together over a common experience, coordinated by the International Apparel Federation in Amsterdam. Six (China, Vietnam, Cambodia, Myanmar, Bangladesh and Pakistan) became nine (Indonesia, Turkey and Morocco), and now it is a consortium of twelve (India, Egypt and Korea) that represents 75 percent of global apparel production. The result of their cooperation is a report called, "The Sustainable Terms of Trade Initiative (STTI)," recommending minimum standard behaviour in supplier-buyer negotiations. Just as significant as new expectations is the ambition of the alliance to align and amplify the pre-competitive interests of global apparel manufacturers.

Others have taken note to encourage this emerging community as a force for good in fashion transformation, such as the ILO, EuraTex (The EU's Textile and Clothing Industry), and the EU's Ministry for Internal trade. The International Trade Center, the UN's trade agency in Geneva, is attentive to the potential for productivity in the world's most globalised industry. (Full disclosure: I am the lead consultant for the UN/ITC to analyse process innovation and to recommend new approaches toward a systemic shift in total value chain profitability).
Untying the Knot
With limits of lean management as a system now evident, declarations for partnership have a new and more meaningful two-way dimension. The formula for supplier-buyer productivity is shared risk equals shared purpose. The shared purpose is to reduce and share risk over cost alone. It is collaboration to create value beyond transactional, seasonal negotiations, beginning in these ways:

1. Levers to reduce excess production and inventory are upstream. Supply flexibility is joint management of raw materials, capacity, production and transportation. Together, these components of the first mile reduce risks of finished goods inventory, long lead times and high volumes. This transfer of risk, time and cost across all tiers of the supply chain is substantial.

2. Inventory and sustainability compete for scarce capital. With 96 percent of a fashion brand's footprint in its manufacturing supply chain (according to the World Resource Institute), suppliers must have incentives and access to capital for mutual investment in sustainability. Internal capital, via productivity, is the most accessible and promising source to accelerate investment where product and social impact is greatest.

3. Inventory can be considered a lack of prediction; it is the uncertainty of demand. The capability to quantify risk projects new metrics for end-to-end performance: production closer to and in season (lead times), forecast accuracy, lower finished goods levels, neutral or negative working capital and lower markdowns and lost sales. Data science is the advanced technology that captures and links options for profitability to both retailer and supplier.

The good news for fashion is that the global supplier community is an emerging engine of process and data innovation for a broken supply chain. Supplier-led capabilities exist to supersede cost-driven practices for inflexible lean practices and lowest prices. The real essence of partnership is equal commitment to create a more productive, profitable and sustainable industry. The key to these imperatives to de-risk a needlessly high-risk business resides upstream in global manufacturing, regardless of geography. The high cost of low-cost fashion is no longer affordable or sustainable - and too costly to continue.

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Supply chain language in our industry is designed to make the unglamorous, hidden world of making and shipping fashion sound benign, neutral and efficient. Anyone who has worked in the business of fashion long enough is familiar with phrases like just-in-time, lean manufacturing, outsourcing, compliance and enterprise systems. What do these terms have in common?

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"Oftentimes in the past supply chain was what I would call a necessary evil. You needed your supply chain there to get product to your customer. And now, I think we see it more and more as a real differentiator for companies."

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McKinsey partner Dan Swan, in "Diagnosing the pain in your supply chain," a new episode of The McKinsey Podcast

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Most apparel companies have participated in e-commerce for almost two decades, and online sales represented 35 percent of apparel sales in 2019. Many retailers have adopted an "omnipresent" model in which product and inspiration are always available. Mobile and digital technology has enabled location-specific offers and product availability. The customer is winning, but can a retailer's supply chain keep up?

Going digital has required retailers to offer speedy delivery options for customers who increasingly demand faster delivery of their purchases. In a recent McKinsey customer survey, more than 50 percent of customers surveyed expect their apparel orders to arrive within two or three days of purchase. Moreover, e-commerce is evolving from a self-service model to a full-service model. This may be great for customers, but it often proves expensive and capital-intensive for retailers.

Retailers need a new operating model to break the cycle of selling more at lower margins. American Eagle Outfitters (AEO) is executing an aggressive strategy to overcome this hurdle in the race to successful digitization. The company is reinventing its supply chain by pulling inventory from its stores and reducing in-store fulfillment. The strategy may sound counterintuitive given the direction most retailers have been heading. Insightfully, the company realized that it creates the ability to tap into dynamic demand, increases flexibility and efficiency, and minimizes friction, meeting customers where and how they want to be met.

We sat down with Shekar Natarajan, head of global inventory, supply chain, and logistics at AEO, to see how the company has accomplished this paradigm shift in thinking and operations.

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McKinsey: How did you envision your recent "supply chain of the future" evolution?

AEO: Heading into 2019, we saw the retail industry on the verge of significant, fundamental change, reflected in evolving customer needs, rising delivery expenses, and growing labor-market expectations. We recognized that our distribution center capacity was challenged, especially during peak weeks. We took some steps to expand capacity. We added extra racking, introduced automation, and used stores as fulfillment centers. All this had some impact, but we knew the costs of this extended capacity would never scale. We had done a great job keeping up with the times, but we wanted to augment our supply chain to handle changing customer needs-not just keep up but continue to lead the industry.

McKinsey: Many retailers accelerated their plans during COVID-19 but became more conservative with inventory. What did you do?

AEO: COVID-19 has accelerated the shift to digital shopping by three to five years. Logistics disruption and cracks in the supply line have surfaced, and capacity constraints for air, ocean, and delivery agents have been completely upended. These challenges aren't going away.

We already had a blueprint for addressing the challenges, which helped us turn this crisis into an opportunity. We completely diversified our operations and reconfigured our network in just four months. We stood up four fulfillment locations across the country, each handling 5-10 percent of our e-commerce volume and replenishing 100-150 retail stores. These facilities let us pull inventory upstream and reduce our reliance on stores for fulfillment-down from 17 percent of shipments to just 4 percent. We set up a national reverse-logistics hub to manage all e-commerce returns, which really relieved the burden on our distribution centers.

We also introduced redundancy into our delivery network by onboarding regional carriers. By diverting more than 20 percent of our volume to these new partners, we gained slack capacity to tap into when needed-at lower overall cost-while increasing our speed to the customer.

McKinsey: Nobody in the apparel sector has implemented a model like this due to the unpredictability of new items. Why did you think this would work?

AEO: We thought that driving the highest inventory productivity and cutting our cash-to-cash cycle times would require moving more inventory upstream-especially our fast-fashion items-and building an infrastructure that could capture the true demand signal.

At AEO, we love to solve complex problems. So, faced with this challenge, we reviewed our assortment, dissected the problem, and decided to take a fresh approach. We created very scientific, intelligent algorithms to identify what assortment to put where and send inventory to the right locations in our multitier network. We built advanced models and systems to manage inventory transfers and overlaid them on our inventory-planning systems.

McKinsey: What have you learned about inventory from deploying this model?

AEO: We learned that our assumptions were right. Deploying this model let us validate the two ultimate drivers of inventory performance and productivity-flexibility in flow and speed in response. Getting the right inventory in the right place at the right time may sound like a cliché, but we proved our theory that consolidating inventory upstream and delaying decision making helped us better translate true demand signals into a fast, dynamic, and efficient network.

Our business model is omnichannel, meaning that we have to be close to both the end customer and our store network. Our in-market fulfillment facilities meet both needs very well. We can respond quickly to the customer and quickly replenish our stores as inventory gets sold. We've reduced our in-store inventory 23 percent (from four weeks of coverage to one week), while still meeting sales demand. Our infrastructure can service 95 percent of the fleet within two days-from allocation to in-store.

McKinsey: What had to change internally for you to implement this model?

AEO: Even though we had sophisticated tools, capabilities, and thinking, we still had to make a lot of changes, as most retailers would. We needed to try new things: break paradigms; understand the real drivers of inventory, cash, and sales performance; and act on all those learnings. Turbocharging our operations almost felt like flying a plane and building a new engine while in the air.

The most important moves we made were in how we allocate and deploy inventory, how fast we read sell-through and demand (hourly versus weekly), and what system changes we needed to manage complete e-commerce shipments, faster handling times, and more frequent (daily) deliveries to our stores. We had to integrate our supply chain operations with inventory management. We had to bring scientific rigor to everything we looked at, apply a start-up mentality to our operations, and make process excellence part of our everyday culture.

We saw the looming needs clearly. We just had to prepare with focus and urgency to handle whatever challenges emerged-while working remotely, of course. Having passionate associates who believed in the vision and worked tirelessly to make it happen went a long way toward simplifying the complexities and making the transition fast, focused, and rewarding.

The courageous moves we made as an enterprise, coupled with our supply chain transformation, produced a 400 percent growth in our stock valuation. We're collectively proud to deliver these results during a raging pandemic with so much uncertainty around labor, global logistics disruption, e-commerce acceleration, and unstable operating conditions.

McKinsey: What has the impact on your business been?

AEO: We've seen tremendous impact. Our total markdowns dropped more than 25 percent, compared with 2019, even as e-commerce grew more than 30 percent during that time. The new supply chain structure helped us reduce network inventories and maintain digital delivery costs, compared with revenue.

Even during the busiest time of the year, we saw inventory productivity increase 600 basis points. We had the latest shipping cutoffs in the industry, allowing us to meet industry-best customer promise. Our customers just might be the biggest winners of all. Most received their orders within two days of shipping, even at the highest peak, while many of our peers struggled to keep up with fulfillment and shipping capacity needs.

As a supply chain team, we learned just how much we can deliver when we prioritize our performance and customer service goals. That's the spirit we have to maintain as we continue to build a more flexible and productive supply chain.

Even the greatest ideas are just ideas if you cannot properly execute them. And it takes a village. At AEO, we're extremely fortunate to have the support of Jay Schottenstein, our inspiring and visionary CEO, and Michael Rempell, our forward-looking COO. We're lucky to be surrounded by a tenacious group of cross-functional partners who are always willing to join forces with us to solve big problems. Personally, I am immensely grateful to have such strong supply chain leadership teams ready, willing, and able to lead their teams through the toughest times.

The many ambitious targets ahead will require investments to enhance our brands and products as well as our digital and store experiences. As a supply chain team, we must and will be ready to deliver.

McKinsey: You are a futurist! How do you see the future evolving in this space?

AEO: Despite the challenges, it is the midsize retailers and mom-and-pop shops that truly embody the entrepreneurial spirit of who we are as a country and a society. They provide the essential diversity of choice, product options, and vibrancy in local communities. Lacking deep pockets, many of these retailers face seemingly insurmountable disruption in their value chains, driven by a number of forces, from carrier capacity to COVID-19.

We can create and offer a tech-enabled operations platform to help them. We have slack capacity in the market today, but helping smaller retailers tap into that unused capacity requires joining forces. Hyper-localization will be the key to meeting customer needs. We have to tap liquid labor pools, regional carriers who have excess capacity during some of their runs, and fulfillment center capacity to move goods quickly.

We will see a separation happen over time-between the successful and profitable brands and those who don't make it. We feel this model is not only the way of the future, but it's also the only way for small and medium-sized retailers to survive and thrive.

Partnering with others facing similar problems provides the scalability required for sustainable solutions. We have seen parallels in other industries, including music, data management and storage, digital content distribution, hotels, and ride-hailing. Now is the time to revolutionize global trade. In this new world, brands can focus on what they do best: product, brand-building, and experience development. The intersection of disruption and creation of the new normal is an exciting time and place for supply chain professionals. We believe in this environment and in our vision, and we have a dedicated team to bring it all to life.

Uncharted waters require a new model

The past year forced a lot of change on many apparel businesses, mostly to mitigate the uncertainty and shed costs. Some apparel players did not let the pandemic slow down plans to make their businesses more convenient, productive, and successful. American Eagle Outfitters implemented a new network model, Lululemon made a major acquisition, and Nike began fulfilling orders from its wholesale and DTC inventory. Similarly, new service providers like Returnly, CaaStle, Mirakl, and thredUP expanded their reach.

As we look ahead, the overall apparel market seems likely to recover slowly, but the winners will be those who can "bend the cost curve" in supply chain. They will focus their energy on capturing fragmented customer traffic while moving inventory and fulfilling orders efficiently and profitably.

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Navigating the retail storm through supply chain agility

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Most apparel companies have participated in e-commerce for almost two decades, and online sales represented 35 percent of apparel sales in 2019. Many retailers have adopted an "omnipresent" model in which product and inspiration are always available. Mobile and digital technology has enabled location-specific offers and product availability.

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Active supply-chain decarbonization is becoming a license to operate for businesses, but companies aiming to be role models in the fight against climate change must overcome roadblocks along the way.

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Retail supply-chain strategies for the holidays and beyond

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How can retailers ensure strong sales this holiday season amid continuing supply-chain problems? Two McKinsey experts share their insights.

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In this episode of the McKinsey on Government podcast, McKinsey partner Ed Barriball and Bob Kolasky, director of the National Risk Management Center at the Cybersecurity and Infrastructure Security Agency (CISA), discuss the need for supply-chain resilience. But why are supply chains such a hot topic for government right now? What's driving this laser-like focus? And how is the role of government in understanding and improving supply-chain resilience changing? An edited transcript of their conversation follows.

Francis Rose: Welcome to McKinsey on Government. Each episode examines one of the hardest problems facing government today, along with solutions from McKinsey experts and other leaders. I'm the host of McKinsey on Government, Francis Rose. A number of high-profile incidents in the past few months have highlighted the fragility of the supply chain, both in the cyber realm and in hard goods.

Bob Kolasky is director of the National Risk Management Center at the Cybersecurity and Infrastructure Security Agency. McKinsey partner Ed Barriball works with public- and private-sector organizations that manage manufacturing and supply-chain operations.

Gentlemen, thanks for joining me today. Bob, let's start with you. What has happened over the past several years to generate such an interest in the supply chain?

Bob Kolasky: Supply-chain security and resilience are a focus of attention for the US government because the risk demands it. The increase in digitization and use of information and communications technology to deliver critical functions-which has inevitably been a great thing for the country in terms of efficiency and effectiveness-has introduced new aspects of risk that need to be managed. It's also caught the attention of our adversaries. Nation-states that are interested in causing harm via cyber methods are looking at supply chains as a mechanism for those attacks.

And when I say, "supply chains as a mechanism for attacks," I'm largely talking about software attacks and the fact that software runs everything. How software is deployed creates new vulnerabilities. Adversaries have gone after those vulnerabilities. As national- and corporate-security professionals, we need to be prepared to understand and address those vulnerabilities.

At the same time, the fact that supply chains have become so global has created new risk in terms of the reliability and the availability of certain things, and we want to make sure that those supply chains are properly managed. So, it's a question of going where the risk is, getting ahead of it, and anticipating security needs and addressing them before they become problems.

The public-sector data challenge

Francis Rose: Ed, welcome. Thanks for joining the conversation. What are the biggest challenges facing organizations across the public sector in managing and assessing risk in their supply chains?

Ed Barriball: The first challenge is the data that you need to do this type of assessment. Most companies and governments know who they buy from directly, but our research finds that more risk emerges from tier two, tier three, and tier four of the supply chain, which would be your supplier's suppliers or your supplier's supplier's supplier.

Most companies and governments know who they buy from directly, but our research finds that more risk emerges from tier two, tier three, and tier four of the supply chain, which would be your supplier's suppliers.
Ed Barriball

For most industries, most folks don't have those data. And if you ask your supplier, a lot of times they might say that's proprietary information. So even knowing who to assess is a challenge. Once you know who to assess, there are all sorts of different vectors for attack. Making sure you conduct a truly comprehensive assessment of those suppliers requires stitching together a lot of different data and information. And doing that at scale for thousands or tens of thousands of suppliers-which is what it is for complex products like information technology or weapons systems-becomes a real challenge. And that's why this is hard.

Francis Rose: What have organizations done, Ed, to try to fill that gap themselves? Are there assessments? Are there tools? Are there processes that organizations can put in place to try to figure out some of that on their own?

Ed Barriball: This is a space that is rapidly innovating right now. The coronavirus crisis has shined a spotlight across industries on what a problem this is for the United States and Europe and other places in the world, so there's a lot of venture-capital funding flowing into this space. A lot of established companies are getting into it, and a lot of start-ups are trying to build solutions. Companies and government agencies are sorting through how much of this they can do on their own. Do they just go buy the data, get the information, and stitch it together on their own? And how much is actually going to become a product or a service that we just go out and buy? That's still a pretty uncertain question, I think.

And there is a lot of testing of different methods, both in the government and in the private sector. At the end of the day, I think it's a mix of having the data so one can do outside assessments and ask, "Who do I think my supplier's supplier might be?"

But it's also about ramping up supplier collaboration. One of the companies that's doing quite well right now in the semiconductor shortage is Toyota. Toyota actually invested heavily after the tsunami in 2011 in Japan, which put a big squeeze on their supply chain. There was much better supplier cooperation, a much better understanding of their supply chain, and an understanding of where they needed to keep more stock-which particular components they were vulnerable without. And given that, when you look at their performance during the coronavirus crisis versus others, it's been better. I think there's a lot of lessons of that type of preparedness that others are trying to adopt right now.

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Making a better supply chain together

Francis Rose: I want to come back to those concepts because I think there's an important analogy and maybe an important difference for a public-sector organization. Bob, one of the elements that you and your colleagues at CISA have undertaken is an information and communications technology supply-chain risk-management task force. Tell me what that task force is trying to accomplish when it comes to this supply-chain challenge.

Bob Kolasky: The task force is one of these examples of public-private collaboration and the authority we have within the department to bring industry to the table to help deal with national-security priorities. The task force includes 20 federal agencies-that have a lot to say about how we're going to make the federal government more secure-as well as big IT companies, big communications companies, and some associations representing some of the small organizations. And we work, industry and government together, to solve some of those problems or make progress against problems in order to make a better supply chain.

Are we able to share information between government and industry to understand supply-chain risk? Can we knit that information together as a task force to then ask, "What are the priority threats that supply-chain risk managers within government and industry should be looking at?"

We've identified more than 100 threat scenarios that can form the basis for supply-chain risk-management programs. There are also other tools out there: the task force is working on developing tools to help small or medium-sized businesses implement supply-chain risk-management programs.

At the same time, at the policy level, we're working on things that will drive incentives, taking into account supply-chain risk as part of acquisitions processes-ways to do that effectively. The task force sits around and tries to understand the risk collectively. And then we prioritize things that will help advance the overall approach to national supply-chain security.

Francis Rose: Are the risks in the supply chain of those private-sector companies similar to the risks in a public-sector organization like a federal agency? Are they close enough-analogous enough-that the lessons learned make sense? Is it just a matter of those companies being able to share something with the public sector, or am I looking at it all wrong?

Bob Kolasky: No. First of all, it's shared risk. These are companies that the government is buying technology from. We're not making up our own software and hardware. We're getting the technology from these companies. If they have risk in their suppliers, that's our risk, too. A lot of these are tier-one suppliers to the defense industrial base, tier-one suppliers to the banks, and so on.

We've got to manage our own ICT [information and communications technology] risk through supplies in the government. But we want these companies to be doing that further on, as Ed was talking about-down to their tier-two, tier-three, or tier-four suppliers. Then, it is shared risk.

Regarding the availability of the commercial technologies that Ed mentioned: for companies in this space to understand their risk and translate some of that information to the government and the information that we have through intelligence processes-that will help us get a better understanding of that shared risk so that we're making consistent risk-management decisions.

Francis Rose: Ed, you used that Toyota example, and it's a good one because it's something that a lot of regular citizens who don't necessarily care about how the government works or don't think about supply chain understand; they understand that it's harder now to find a new car on the lot because of the computer-chip problem.

What did Toyota do that could apply to an organization in the public sector that can't necessarily go out and buy from those tier-two, tier-three, or tier-four organizations but that needs to work with them to be able to deliver on its mission?

Ed Barriball: That's a great question. I think the first step is understanding what we do and don't know. And I find that even in the private and public sector right now-if you walk into an organization that's trying to deal with this problem and you ask, "Where do you know who's in your supply chain, and where don't you?" it's actually uncommon for someone to have quantified that. They might say, "Here's where we think we're blind; here's where we think we actually might know." That is really the first step-to say, "What do we know?" and "What don't we know?"

In the Toyota example, they actually have quite a bit of market leverage over their suppliers. They were able to go and say, "We'd like you to start providing this information." They were able to get compliance over time and get better visibility.

I think the challenge for the government is that there are some markets where the government has that type of leverage, but there are a lot of markets-like Bob mentioned about ICT-where, frankly, the government may not have the leverage to be able to say, "Look, if you want to do business with us, you're going to have to give us this information."

There are some companies that might say, "OK, then we're just not going to do business with you." I think the government, in this case, needs to understand where they have that power. Where can they use acquisition practices like Bob mentioned to help companies get their arms around this and make sure that the government's getting the information that it needs?

And for the sectors where there may be less market influence, less ability to do that-they must leverage some of the techniques that are becoming commercially available. What do they think they're exposed to, and what kind of risk are they bearing?

Risk-management fundamentals: Critical functions and the big picture

Francis Rose: Bob, does the risk-management framework in a supply-chain environment work the same way? Are the techniques the same in assessing and prioritizing risk as in other types of risk management, or is there something unique to the supply-chain concept that requires somebody to look at it differently?

Bob Kolasky: Ultimately, I think the answer is more, "It's the same" rather than "It's unique." Obviously, there are elements of inquiry. The risk-management framework that we advocate is, "Think about the critical functions that you present." So, if you are the government, what are the critical things that the Department of Homeland Security does?

What are the essential functions? What are the critical functions that would contribute to [those essential functions]? And how are supply-chain attacks or failures linked to the risk of lack of functionality? A lot of this functionality is not just about delivering functionality but the integrity around those things.

So, the end state I'm trying to manage risk against is continued-functionally safe with information professionals. That's the same whether I'm in government or whether my continued business functionality and supply chains present a new attack vector-a new vulnerability to that functionality. Prioritize based on risk: Where is the likelihood of loss of functionality? Loss of safety is going to be the highest. Take steps to reduce that risk.

Francis Rose: Ed, do you find that to be the way people are thinking about it when you sit down with them for the first time? Is that how they're analyzing their supply-chain risk and how they're thinking about trying to prioritize it?

Ed Barriball: I think folks are getting there. A lot of times, organizations are initially thinking about whatever is the most recent event, be it a cyberattack, or a flood, or an earthquake. But then they step back and say, "If we want to be more resilient as a business or as an agency, what are all the elements we need to look at?"

It's getting more and more common that people are starting to think across the range of potential effects. This [way of thinking about supply-chain risk] is also starting to get more attention, like Bob was saying, in the C-suite. We released some research last year that the average company can expect to lose about 45 percent of one year's earnings over the next decade due to supply-chain disruption.

And if you're sitting in the CEO's seat, that's pretty material. It's essentially 5 percent of your earnings in the next decade, if you're simple about it. It might not materialize. And the implication for the government on that is the same as it is for companies: they can expect the production to stop for one to two months due to supply-chain disruption every three and a half years.

And depending on what kinds of goods there are and how much stockpile you have, one to two months can be a long time to have production shut down. So I think this is an industry that people are starting to look at much more comprehensively. It might start with, "What hit me most recently?" But as people start to understand the breadth of the potential effects they could experience, they're really starting to look at it more broadly.

Francis Rose: How do you move somebody, Ed, from a situation where they're thinking about what just broke to getting in front of the issue and thinking about, as you said earlier, how to know what you know?

Ed Barriball: I think the best thing that you can do when something happens is to go back and do an initial root-cause assessment. But also ask, "What does this tell us about the broader context we're now operating in?" I think, frankly, that's where a lot of leaders have been caught flat-footed.

But I think the reason this has become such a hot topic so quickly is that I don't think people appreciate how much the context that we were operating in as a global economy had changed over the past decade. You had some kind of warning indicators, but then you had trade agreements start to change that people thought were stable. You had climate events happening that hadn't happened before. And all these things started stacking up. You can write one off and write another off as, "Wow, I couldn't believe that happened."

But eventually, you start to have to say, "OK, maybe something is going on here." I think what is most important for organizations is to look not just at the thing that happened but to step back and say, "Has the context that we're operating in changed?" and "Is the thing that just happened not a one-off but more of a sign that we're operating in a different environment than we were before?"

Looking ahead: Assess vulnerabilities and brace for change

Francis Rose: We've talked a lot about where we are today and how we got there. Bob, what's coming next? How does one anticipate risks that we might not know are risks yet? For example, how do we sit in November of 2019 or January of 2020 and anticipate risks from a pandemic that may or may not be coming at some point in time-but that we might have to deal with? How do we put something like that on to the matrix to understand what we have to plan for-what we have to think about?

Bob Kolasky: McKinsey does some good strategic thinking about what the future is going to look like. So do other consulting companies and other folks. I look at drivers that we use at the National Risk Management Center: physical, cyber, convergent, digitalization of convergence, where geopolitics are headed, emerging technologies, artificial intelligence, biotech, quantum computing, societal trends, and market forces and governance; all of those are changing so quickly.

Let's not predict the future; let's consider the future and look for things that will indicate we're heading one way or the other toward the future-and have plans as those things change. In the best organizations, it takes an investment in planning; it takes an investment in thinking; it takes an investment in redundancy, and capacity, and things that aren't quite all about efficiency and earnings quarter by quarter. Then do the planning and exercise and stress test it against the scenarios.

Let's not predict the future; let's consider the future and look for things that will indicate we're heading one way or the other toward the future-and have plans as those things change.
Bob Kolasky

The only thing that's certain is that things are going to change pretty dramatically in the next 15 years. I don't know exactly how they're going to change, but if you're not preparing for change with some backup capability, you're likely to be left behind.

Francis Rose: And the challenge I suppose, Bob, is that you can plan for ten or 15 contingencies and not know when number 16 is going to be the one that you actually get, right?

Bob Kolasky: Hopefully in planning for that many, they share enough characteristics that you might get the specifics wrong but the capabilities that you need to deal with a problem are the same.

Francis Rose: And that's the same concept as you laid out a couple of minutes ago in talking about the potential change elements of trade agreements in climate and so on-things that we saw in the past. What do the most successful organizations that you've worked with do to think about the possibilities of what they might be up against at some point in the future? How do they successfully strategize the potential contingencies, understanding they won't be able to get them all?

Ed Barriball: That's a good question. So the way we think about a supply-chain risk that manifests itself in the news-it's the product of a shock and a vulnerability. And shocks are things like the flooding, unexpected earthquakes, or a cyberattack.

You probably shouldn't spend a ton of time trying to predict when exactly those are going to happen, because if you could, you should go get a different career. Be a stock trader, and you'll make a lot of money. But the thing that you can really understand is vulnerability. I think part of this is just stepping back and saying, "What is the conference of assessment or vulnerabilities, and where are they today?"

For the operational context we're in-if you're a company, for your production lines; if you're a government agency, for the mission you're trying to achieve-what are the different things that we really need? And where are we vulnerable? As Bob was saying, I think what we're seeing a lot of companies actually do now is get their boards and their executives in a room together and do some scenario planning. Not just, "Let's all get together for two days and talk about what could happen" but doing the real prep work: doing the analysis ahead of time, getting the understanding of where these vulnerabilities are, and actually putting together some structured scenarios on, "If this happened, what would we do?" The board might play the competitors; the C-suite might play themselves. And let's actually see what decisions we make and what would happen.

It's not that you're trying to predict the future and say, "That is what's going to happen." But as Bob was saying, hopefully that gives you the practice, so when something does happen, you've all thought about it-you're on the same page about what types of moves you would make. And it gets the executive team more ready. I think government agencies can do the same thing.

Francis Rose: As you were describing that vision, I was thinking about some C-suites inside federal agencies; I wonder if they're doing that kind of contingency planning. It sounds to me like one of the greatest benefits of what you just laid out there, Ed, is the level of engagement-is the awareness of all of those people around the table.

Maybe they didn't think of the possibility that this is something that-whatever "this" may be at the moment-their organization has to deal with. But it raises that level of awareness and makes conversations about other subjects more useful and more productive. Do you think that is a fair observation, Ed?

Ed Barriball: That is totally right. The one thing I'd say for folks who are either doing this or thinking about it-and I know that's DHS [Department of Homeland Security], so Cyber Storm [DHS's cybersecurity exercise] and things like that; this isn't a foreign concept in government-is that the preparation is key: high-quality preparation in terms of actually understanding the context, the facts of what you're operating on, the thing that you're stress-testing. Otherwise, it just becomes a fun conversation that you could have over red wine. It really has to be something that's based in facts and information to make it a useful exercise.

The future of risk management

Francis Rose: Bob, I asked you earlier in our conversation whether there was a difference between supply-chain risk management and other types of risk management. What's the trajectory of risk management as a practice moving forward? Do you expect to see different techniques, different concerns? Or is risk management, in your view, kind of a mature specialty or practice that will continue along the trajectory that it's on today?

Bob Kolasky: One of the things that will change, and is changing, is the proliferation of available data and translating data into risk models. And so much of risk management of complex things was data that are poor or dominated by uncertainty early on. I think if you can build risk models that take advantage of all the information that's out there more quickly, that's going to give you a more real-time understanding of risk.

The other thing that I think is happening in risk-and we advocate this around cyber all the time-is to make risk management and cyberrisk management part of your overall enterprise risk governance. And think seriously about risk governance.

This means communicating all this data into a way that a board or a C-suite can make decisions in a translatable way that does that. I've seen great improvement in the last five to ten years in data-driven models being moved into sort of a risk-governance practice. And that's going to help with this practice. Managing risk doesn't mean getting everything right, but it means thinking through contingencies, making investments. So that's my optimism.

Francis Rose: We're almost out of time. Ed, one final question for you. What does the future, in your view, look like for public-private partnerships in risk management? Bob talked about how important the public-private piece is of the task force that he's running. What does that look like more broadly in your view in the next year, three years, or five years?

Ed Barriball: The biggest thing, I think, is obviously that risk management is an end to a means. You want to identify the risks and then figure out how to mitigate them to the extent that you can. A lot of folks are talking about domestic sourcing-revitalizing domestic sourcing as a way to do that.

We just released a report last week on revitalizing US manufacturing. One of the big things I thought was interesting in that report is that we looked at scale-based industry-things like auto, chemicals, production-and the returns on investment that US investors or North American investors expected versus Asian investors.

North American investors expected about a 12 to 14 percent return on their investments in those industries, versus about 7 percent in Asia. That naturally results in CEOs and leaders, to satisfy those demands, squeezing their supply chains.

That is not a problem that the public sector or the private sector is going to solve on their own. They're going to have to solve it together. So, I think the future and the way ahead on this is going to be great once we all work together to understand where the risks sit.

But the really hard work and collaboration is going to be actually figuring out how to resolve some of these issues because it's not as easy as snapping a finger, and there are a lot of market and structural barriers that are going to need to be worked through together-in the public and private sector-to get there.

Francis Rose: Very quickly, what are some of those barriers? What do you anticipate them being?

Ed Barriball: I think first is actually just questioning our own fundamental assumptions. You look at a lot of countries, and I think people typically say, "Oh, well, the labor's just so much cheaper there." That's not true anymore. A lot of countries that were formerly low-cost countries-if you look at their fully loaded labor costs, they're not that different than the United States.

So I think we just need to question some of the fundamental assumptions that folks might hold and make sure that the information and the facts that we're operating off of are current. The world's changing pretty fast, so that's a foundation for good policy making and any good decisions.

But from there, I think it's about figuring out how we take advantage of-the buzzword is "Industry 4.0"-basically all the new, advanced manufacturing techniques, from additive technology to much better end-to-end supply-chain management tools, which people are finding, in this pandemic, let you have more visibility about what's going on and be more reactive when things happen. Investing in those [tools] can help drive productivity and really help the United States be a more competitive place to do business from a manufacturing perspective. I think it's about figuring out how we invest in this technology as a country-how we reestablish some of our manufacturing capabilities here, the barriers and the things that we can cross over; we just need to get together between government and industry.

Francis Rose: Ed Barriball of McKinsey and Bob Kolasky of CISA at the Department of Homeland Security, thanks very much for the conversation. I appreciate your time today.

Bob Kolasky: Thanks, Francis.

Ed Barriball: Thanks, Francis; thanks, Bob.

Francis Rose: You've been listening to McKinsey on Government, a presentation of McKinsey and Company. Our next episode is in two weeks. I'm the host of McKinsey on Government, Francis Rose. Thanks very much for listening.

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In this episode of the McKinsey on Government podcast, McKinsey partner Ed Barriball and Bob Kolasky, director of the National Risk Management Center at the Cybersecurity and Infrastructure Security Agency (CISA), discuss the need for supply-chain resilience. But why are supply chains such a hot topic for government right now?

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In the McKinsey Operations Practice's first podcast, Sebastian Peters, senior vice president and head of logistics, planning, and digital value stream for Airbus, speaks with McKinsey's Daphne Luchtenberg and Knut Alicke on what it really means to have a risk-averse and resilient supply chain. An edited transcript of their conversation follows. Subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, Stitcher, or wherever you get your podcasts.

Daphne Luchtenberg: We're here today to look at how the COVID-19 pandemic has rewritten the playbook for business and for life. It's affected everything from how we go about our day to how we work and how businesses operate. The term supply chain has become such a mainstream concept these days, considering that five years ago the average consumer paid it no mind.

Today, it's both a boardroom topic and a dinner-table conversation. Let's sketch out what has driven all this attention. I'm joined today by McKinsey's Knut Alicke and Sebastian Peters of Airbus, to talk about the future of supply-chain management and the opportunities available. Knut, tell us a bit about yourself and your role at McKinsey.

Knut Alicke: Thanks a lot, Daphne, for having me. I'm a true supply-chain enthusiast, and I've spent the past 25 years working in the field. Last year, I started to colead our work on supply-chain risk and resilience, and during the COVID-19 crisis I've helped a lot of clients master the disruption.

Daphne Luchtenberg: Can you talk about why supply chains have come so strongly into focus this year? What's driving all this attention?

Knut Alicke: If we look back, it was a function that was only recognized if something went wrong. For example, if you had a product availability problem, you'd next have a customer calling, saying, "Where's my stuff?" Then, they'd look at the supply chain and ask, "Why did you not deliver on time?" Now, in the pandemic and other supply-chain disruptions, a lot of things went wrong, and companies had to manage this massive disruption.

If you think about what happened over the past one-and-a-half years, we had a pretty good supply of food and other goods, right? So the supply chain did work, but for a lot of companies it meant struggling with in-bound logistics, their own sites, and distribution. They really needed to step up and make sure that the supply chain is flowing so we can deliver to our customers, and to your point earlier, the conversation made it to the boardroom. For example, we helped a couple of clients implement the business continuity management, and one CEO, who never talked about the supply chain before, even addressed it in his last two investor presentations.

The attention has shifted from it not only being a function that is valuable when something goes wrong but can really help us to be better. That client I mentioned, they increased their market share, because they did much better than their competition and could even sell more. And in a pandemic situation, that was an amazing result.

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Daphne Luchtenberg: It does seem like we're having this conversation about supply-chain resilience, and you can't have that conversation without talking about supply-chain risk. I'd like to dig into what these two words, risk and resilience, really mean in practice. And Sebastian, you've experienced, I'm sure, your fair share of supply-chain disruptions at Airbus, even before the COVID-19 pandemic. Has the pandemic changed the way your organization views supply-chain risk and resilience?

Sebastian Peters: Our industry was one of the most affected, coming directly with the slump down in air traffic, and then the big question became: What is the right level of reduction of production and deliveries? In our case, it's a pretty complex thing, because you need really to simulate and to scatter. How do you cope with it? It's not only your internal network of factories, which you need to produce an aircraft, but it's also the ecosystem of your suppliers to anticipate, and to quickly react.

This capability was obviously not new for us. And one of the reasons we started a bigger supply transformation before the crisis is because we were already anticipating that we need this capability.

Almost 80 percent of [surveyed supply-chain executives] said they need to improve, and to invest in digital planning to increase supply-chain visibility.
Knut Alicke

But the question for our supply chain remains similar: how to simulate, how to anticipate, and how to make the right decision-not only from a pure operations and supply-chain perspective but also taking into account the financial reserves of the company. Inventory, especially in our business, plays a decisive role, and it's where you need to be cautious not to have an overrunning of inventory excess in your company.

Daphne Luchtenberg: Knut, you're speaking to many leaders in organizations, who were trying to navigate this. What are you seeing in other industries and other organizations as they try to chart their course through these risks?

Knut Alicke: We did run a survey among supply-chain executives and wanted to understand what they did during the last one-and-a-half years and what they want to do going forward. One topic that Sebastian just mentioned was really high on the agenda. They want to have transparency, and want to be able to decide fast, and decide to do the right thing. What do we need for that? We need to invest in digital planning. Almost 80 percent of the participants said they need to improve, and to invest in digital planning to increase supply-chain visibility to make sure they have the ability to plan and to decide.

They also said they need to be more agile and plan more often. This means it's not the monthly or quarterly planning cycles; it's going from a monthly cycle to biweekly or even weekly cycles. What we also heard is that they need to increase resilience in terms of footprint. How do you create resilience from this? You need to increase inventory for the critical parts but also for everything. Because as Sebastian said, things can then die in inventory, and that's not really helping your cash flow. So you need to increase the inventory for the critical stuff and you need to make sure that you are less dependent on critical suppliers; therefore, multisourcing and dual sourcing is very important. To do that, you need to invest in digital talent to be able to do the planning, understand all of the algorithms, and with this, come to a fast decision.

Would you like to learn more about our Operations Practice?

And the holy grail of supply-chain risk management is multitier transparency. What does that mean? It basically means that a lot of companies have visibility into their first-tier suppliers-their direct suppliers-because they have a contract with them. Often the problem is not with the first tier but with the first, fourth, and fifth tiers. And what everyone is now looking into is how to create this visibility when something is going wrong and have an early-warning system so they can do something about it. From a tech perspective, this is possible to solve today. You also need to create trust amongst the partners, and the ecosystem of the supply chain-this is still something to work on.

Daphne Luchtenberg: We see a lot of headlines, for a number of years, around the digital revolution. Time and again people are forecasting that the adoption of Industry 4.0 will accelerate all of that. Sebastian, I'd be quite interested to hear what's really happening. How are you taking advantage of some of these advanced technologies for Airbus?

Sebastian Peters: I think nowadays it's also a bit dangerous to use those kinds of buzzwords because, like Knut said, the problem is not so much that the technology is not available, the questions are always-what would you like to do better and how do you design the better way of acting? This is why I personally have a strong belief that you need to invest in having your processes clear.

We can talk about digital twins as an example. What is it? It's a mock up, for example, of your industrial system, your inventories, your industrial constraints, your assets. We believe that this simulation is where we can have a very interesting capability because you are able to have a closeness to planning, and especially in those disruptive events, it can help to answer the real question: What if?

The problem is not so much that the technology is not available, the questions are always-what would you like to do better and how do you design the better way of acting?
Sebastian Peters

What if consumption is now going up again soon? What is our reaction? What kind of possibilities do we have internally? And then also look at the reaction of our suppliers. This is where we need quick decisions and the capabilities to go from a simulation idea-or from different versions of simulations-to planning and then execution. A digital-twin perspective is really helping and enabling us to do better.

Daphne Luchtenberg: I'm sure that that also means that you're asking different things from your teams in terms of the skills and capabilities that they have. Can all of these skills be learned, Sebastian? Or will the shape of your teams also change? What do you anticipate will happen?

Sebastian Peters: There's obviously a shift of new skills needed. Before, the supply-chain capability was connecting the dots in the company to understand the sales perspective, as well as the production perspective because at the core of any kind of supply chain is the S&OP, sales and operations planning.

But obviously nowadays, with the high input of digital needs, you need to understand coding. If you would like to know what's the right tool and translate it through the needed process perspective, software coding is a skill which is needed.

Knut Alicke: That is what we see in terms of the future of work in supply chain. We have the demand planner. Now in the future, we will probably have a combination of someone who knows the business very well, and then we also need to have a data scientist who is able to come up with an algorithm. But this data scientist also needs to have some kind of translator skills to understand the business. If you think about an order manager, for example, we now have someone who is architecting the part that entails robotic process automation. This means there are new roles and a lot of new skills necessary to define the future of the supply-chain planners and the future of the supply-chain organization.

Sebastian Peters: And I also still believe that enriching those skills for a successful supply-chain organization is really a kind of ambassador in translation between the two worlds-sales engineering on one end, and the production and operations world on the other. At the end, supply chain is about the best plan for the company, and not for a specific function within the company.

Daphne Luchtenberg: That's a really great perspective, Sebastian, and sounds like a really interesting role. Also for new people coming into the industry, supply chain is getting even more interesting than it ever has been in the past. Looking at the future. Sebastian, how is Airbus going to anticipate demand spikes and dips going forward? Do you feel you're in a better place now to respond to those?

Getting ahead of supply-chain risks

Sebastian Peters: We are confident that we already have increased our capabilities on planning. That really helped us a lot through the crisis last year. The starting point for us was a complete, new strategy within operations. In 2019, we implemented what we call a value-stream strategy combined within the value-stream organization to really make sure that we have this end-to-end view on our operations, and the necessity to try to think more toward the capabilities of a serious manufacturer. This means not investing so much in the workshop perspective but also thinking about flow principles, flow production.

And again, to make it really successful, I strictly believe this process perspective is having it clear internally what the new process is, what it brings, and what is the added value. Then, go into the IT implementation. And that takes time to make it really sustainable. And that is our strategy, to go forth with sustainable change.

Daphne Luchtenberg: It sounds like you guys have been through a huge transformation and you're now seeing the benefits already emerge, Sebastian.

Sebastian Peters: You saw it last year, and the question was how quickly can we adapt our production rates? How can we quickly create the needed transparency to make the right decision and also to not harm the ramp-up? Now, we are all surprised positively that air traffic is coming back much quicker than some of us thought. And the value-stream approach, having an end-to-end perspective and a clear view on what is needed to anticipate the ramp-up and then mitigate, is really helping us.

When we talked before about supply-chain resilience, that is also now at stake in the ramp-up. So how can you ensure proactively production increases, not only internally but especially in our huge ecosystem, with thousands of tier-one suppliers, which need this visibility to know what they should prepare for? It's also important to anticipate where we have problems and where we have constraints to be aware of them now and not when we are already ramping up.

Daphne Luchtenberg: Knut, Airbus has been through a huge transformation, and the practice of supply chain has really matured, also through necessity as we've had to navigate through the pandemic. Do you think we're in a position to broadly claim that organizations now have the tools to be more resilient in their supply chain? And are we resilient enough?

Knut Alicke: We are better. We are not yet there. We increased resiliency and started to implement the backbone, the processes and capabilities, so we see a lot of our clients improving, and with this, being more resilient. There will be some disruption around the corner, and the story is not yet over.

Daphne Luchtenberg: What do you think some of the bottlenecks are going to be going forward?

Knut Alicke: We currently see a lot of bottlenecks, and to resolve them will take some time. We see that some commodities are short, semiconductors are short, even containers themselves are short and vessels do not have enough capacity. Basically, everything is in short supply, and it will take a couple of months to get out of this. Then hopefully we will not go back to the super-efficient, just-in-time supply chain but more to a resilient one. There will be probably another natural disaster, which is what global warming tells us, and with this we could have a heat wave or flooding. We have the next disruption around the corner.

Daphne Luchtenberg: There are still more challenges that we need to attack as we move forward. Thank you, Sebastian, thank you, Knut, for making the time to talk to us today and shedding some more light on how to create operational change that sticks.

For our listeners, this is a program in the series of podcasts looking at separating the rhetoric from reality when it comes to achieving operational excellence. We invite you to join us for some other short, sharp discussions with McKinsey experts and industry leaders to expand on the art of the possible and how to create real change today. Thank you for listening, and we'll be back soon.

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Supply-chain resilience: Is there a holy grail?

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In the McKinsey Operations Practice's first podcast, Sebastian Peters, senior vice president and head of logistics, planning, and digital value stream for Airbus, speaks with McKinsey's Daphne Luchtenberg and Knut Alicke on what it really means to have a risk-averse and resilient supply chain. An edited transcript of their conversation follows.

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Circular business models for fashion, which allow companies to make revenue without making new clothes, represent a significant opportunity for new and better growth in the fashion industry. These business models, which include resale, rental, repairs and remaking, can provide considerable greenhouse gas savings, and could be worth USD 700 billion by 2030, making up 23% of the global fashion market. However, there are four key actions businesses must take to achieve this.

Now is the time to explore a new way of doing business in fashion

In recent decades, the amount of clothes the fashion industry produces has grown and grown, while at the same time, profit margins have shrunk and the impact on the environment has increased. Between 2000 and 2015, clothing production doubled, while over the same period utilisation - the number of times an item of clothing is worn before it is thrown away - decreased by 36%.

This trend led to the global fashion industry producing around 2.1 billion tonnes of greenhouse gas (GHG) emissions in 2018 - 4% of the global total. On top of this, due to ever lower prices and lost revenues - from overstock, stockouts, and returns - profit margins of the world's leading apparel retailers decreased by an average of 40% from 2016 to 2019. This was exacerbated in 2020 by the impacts of the Covid-19 pandemic, which highlighted the fragility of fashion's supply chains and saw the industry suffer a staggering 90% profit decline compared to 2019.

Growth of clothing sales and decline in clothing utilisation since 2000

Circular business models decouple revenue from production and resource use

By decoupling revenues from raw material production - through business models such as resale, rental, repair and remaking - greenhouse gas emissions, pollution, and biodiversity impacts can all be reduced.

Resale, rental, repair repair Operation by which a faulty or broken product or component is returned back to a usable state to fulfil its intended use. and remaking are already worth more than USD 73 billion - and growing. Since 2019, and despite the global Covid-19 pandemic, seven resale and rental platforms - Depop, Rent the Runway, The Real Real, Vinted, Poshmark, Vestiaire Collective, and ThredUP - have reached billion-dollar valuations. These business models have the potential to grow from 3.5% of the global fashion market today to 23% by 2030, becoming a USD 700 billion opportunity, while providing significant environmental savings from increased use and reduced production.

Categories of circular business models

Circular business models can be created by considering and combining the following three categories

More use per user

Flip

Enabling a user to wear a product more and for longer. This could include designing products to be physically and emotionally durable, providing services to support long-term use, and empowering users to use their products more and for longer.

More users per product

Flip

Designing and providing platforms and/or services that facilitate the movement of products from user-to-user so the products can be used more. Products can pass from one user to another after any period of time and on a 'one-off' or periodical basis.

Beyond physical products

Flip

Designing and developing non-physical, digital products and/or services that replace, enhance and complement users' fashion needs and aspirations.

Today, there are four main business models that circulate products and materials in the economy

This includes one-off rentals peer to peer by private owners, as well as large scale rental and subscription models by multi-brand platforms or individual brands.

This includes peer-to-peer sale of second-hand items (online and offline), third-party marketplaces (online and offline), and own-brand re-commerce.

This is the operation by which a faulty or broken product or component is returned back to a usable state.

This is the operation by which a product is created from existing products or components. This operation can include disassembling, re-dyeing, and repurposing.

Circular business models can provide better product margins and competitiveness

Circular business models offer both revenue and cost benefits. They provide multiple revenue streams by enabling businesses to offer new services, such as restoration, customisation and tailoring. Revenue benefits include increased loyalty, access to customer and product use data and increased customer base. At the same time, costs can be reduced due to savings from better resource productivity and risk reduction (e.g. improved inventory management).

Currently, booming models like resale and rental do not always result in environmental benefits

To successfully develop circular business models, their revenue must be decoupled from production and resource use. Currently, while they have great potential, these business models do not always achieve this decoupling and the environmental benefits that come with it.

There are many barriers to this decoupling. Firstly, the way the industry measures success is often based on sales volumes. So, for example, a business measuring its success this way might incentivise product take-back for resale, remaking or recycling by offering vouchers for new products, which results in growth of the linear business. Secondly, products are not always designed to withstand the level of use circular business models require. For example, an occasion dress offered via a rental model that looks faded or out of shape after it is cleaned twice will not provide a viable option, economically or environmentally. Thirdly, current supply chains are optimised for predictable, one-way production and distribution, whereas circular business models require local and global networks that facilitate services such as cleaning, repair and remaking. In addition to these, businesses in the fashion industry miss out on further economic and environmental opportunities by not combining or exploring other, perhaps new, business models that could decouple revenue streams from production and resource use.

Four key actions for businesses

To make sure their business models are circular, and to maximise the positive outcomes, businesses, supported by policymakers, can take four key actions.

Download

Circular business models is available in: English

To quote this study, please use the following reference: Ellen MacArthur Foundation, Circular business models: redefining growth for a thriving fashion industry (2021).

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Rethinking business models for a thriving fashion industry

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Circular business models for fashion, which are designed to make revenue without making new clothes...

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Yudi Fernando (Department of Business Engineering, Faculty of Industrial Management, Universiti Malaysia Pahang , Gambang, Malaysia) (Department of Management, BINUS Online Learning, Bina Nusantara University , Jakarta Barat, Indonesia)

Ahmed Zainul Abideen (Department of Business Engineering, Faculty of Industrial Management, Universiti Malaysia Pahang , Gambang, Malaysia)

Abstract

Purpose

The study aims to propose a circular economy-based reverse logistics (CERL) that emphasises the mediation effect of reverse logistics (RL) on sustainable resource commitment and financial performance.

Design/methodology/approach

The structural equation modelling (SEM) approach has been applied to analyse the data acquired through the survey method that included 113 vendors of automotive supplies of the 1st and 2nd levels.

Findings

The results confirm that CERL acts as an essential intervening entity between resources and financial performance. The findings of the study have provided research and development (R&D) opportunities for the industries to find alternative revenue streams and generate profit from resource investment whilst upholding environmental standards through reverse logistic practices.

Practical implications

Reverse logistic practices are the key components of a circular business model and a sustainable supply chain. The manufacturing companies need to explore critical enablers that can contribute to business productivity and financial growth.

Originality/value

The study has validated a CERL model that portrays the circular economy's resilient relationship with RL practices.

Keywords

Citation

Fernando, Y., Shaharudin, M.S. and Abideen, A.Z. (2022), "Circular economy-based reverse logistics: dynamic interplay between sustainable resource commitment and financial performance", European Journal of Management and Business Economics, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/EJMBE-08-2020-0254

Publisher
:
Emerald Publishing Limited

Copyright

License

Published in European Journal of Management and Business Economics. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and noncommercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction

The automotive industry is one of the leading contributors to industrial waste, affecting environmental and financial efficiency ( Fernando et al., 2018). The rising demand for automotive products has led to the rapid accumulation of vehicle waste and issues with recycling that eventually created environmental violations ( Saraiva et al., 2020). Hence, RL, a sustainable business practice, is needed to assist a company in enhancing material utilisation and reducing cost ( Chan et al., 2020). Further, it helps establish practices with lower-environmental impact ( CRR, 2015). The environmental performance can be improved by reducing environmental degradation and improving operational performance by eliminating surplus raw materials and scraps for recycling ( Fernando et al., 2019).

RL is the part of firms' competency to effectively utilise the resources to handle product returns ( Autry et al., 2001). Although RL is not a new concept, there is a need to create a collaborative mechanism to accommodate a circular economy based on RL activities. The firms need to have sufficient capacity to respond to the demand for returnable products and avoid waste and pollution generation ( de Campos et al., 2020).

In the automotive sector, RL offers companies an option to improve financial performance by receiving new market segments revenue such as retrofitting and remanufacturing ( Chan et al., 2020). Therefore, the favourable constructs of RL and the resource allotment in achieving better performance are given lesser attention. Moreover, previous studies have shown that companies are not fully motivated to follow RL programs, since they demanded additional investment and commitment ( Abbas and Farooquie, 2020). After re-fabrication, the market growth contributed 10% to the overall automotive sector with less contribution from the Malaysian-based automotive industry ( US ITC, 2012). Furthermore, reverse supply chain networks are also challenging to manage because of the volatile return rate ( Tosarkani et al., 2020). In-depth research is now underway in companies to visualise how RL affects financial performance indirectly ( Govindan and Soleimani, 2017).

In terms of profitability, the current economic situation, the pandemic and global competition have struck the non-resilient automotive companies ( Pirttilä et al., 2020). Declining sales, increased competition and manufacturing costs directly pressure the industry ( Sanni et al., 2020). The challenges can be managed through efficient inventory with integration of the forward logistics ( Fernando et al., 2020).

As described in the Sustainable Development Policy of the EU, encouraging sustainable consumption and production is the best option for continuously improving well-being ( Jonkutė and Staniškis, 2016). However, the automotive industry contributes to greenhouse gas (GHG) emissions and cannot cope with automotive waste ( Passarini et al., 2012). Globally, the number of new cars tends to grow annually. Because of its complexity and increasing quantity, the waste produced by end-of-life vehicles (ELVs) is another issue. European ELVs rose by 40% and exceeded 14 million tonnes from 2010 to 2015 ( Passarini et al., 2012).

Most logistic activities are from producers to customers and significantly less attention has been paid to product return and recall ( Hofmann and Visagie, 2020). Hence, businesses need to merge their potential logistics process with RL protocol for better revenue prospects ( Fernando et al., 2017). However, there is little guidance on how they can attain sustainability and enhance financial performance via RL. Although the literature has widely discussed resource commitment and RL, only a very few empirical studies connect this success to financial performance ( Niţă and Ştefea, 2014). The indirect path is not well covered in the literature. Scanty evidence is present to justify that sustainable resource commitment plays a critical role to leverage financial performance. Besides, RL is not often covered as a core competence in automotive businesses. New business models demand more green-oriented production activities that comply with recycling and restructuring architecture. Material reusability, energy quality and recyclability need to be carefully managed. It will assist the decision-makers, can keep track of them and ensure that they meet operational specifications ( Giampieri et al., 2020).

However, ignoring the RL outcomes of today's supply chain frameworks is inconsistent with previous findings. Kirchoff et al. (2018) argued that RL implementation rubrics and procedures are still unclear. It calls for scholars to further strengthen the theory of circular-based supply chain management, particularly RL as the drivers and the existing supply chain framework ( Julianelli et al., 2020). However, the development of a supply chain framework that meets the requirements of today's manufacturing industry needs to have a mediation model that helps to clarify its performance between companies' sustainable resource allocation and RL ( Kirchoff et al., 2018).

Automotive sectors strictly require a sustainable circular chain of a commendable business value that can withstand customer refusals, recall, transformation and safe disposal. RL helps directly to develop, enable and improve a circular supply chain model based on eco-innovation policies ( Geissdoerfer et al., 2018). Moreover, due to the growing concern on environmental sustainability and cost saving, manufacturing companies have started to produce new products through circular business models ( Prieto-Sandoval et al., 2018). The idea of RL has driven proper solid management systems and set up a transitional platform driven towards the circular economy activity ( Guarnieri et al., 2020). Batista et al. (2018) postulated that the circularity concept had given potential returns to companies and society.

Furthermore, RL has been technically associated with the circular economy and sustainability ( Merli et al., 2018). Despite having a similar concept, the circular economy and RL are discussed separately. It was neglected how the circular economy works well, mimicking the concepts of RL.

This paper aims to examine the emerging concept of CERL and evaluate it as the mediating effect of sustainable resource commitment and financial performance through the mediation of RL practices. This study provides empirical data on CERL practices that lack evidence from the literature, particularly in developing countries such as Malaysia. Although previous literature on RL is precise, CERL is still in the development stage and financial interventions and related practical implications are still not explored. This study thus provides empirical evidence of the CERL model, which predicts the impact of sustainable resource commitment on financial performance.

In practical terms, this paper will help an automotive company to wisely utilise sustainable resources and invest in suitable green technology. In addition, companies can use this study to further develop and improve CERL for business sustainability. At first, this paper discusses the past studies that are related to the main variables, the theoretical model and the hypotheses. Then, the method employed in this study is presented, followed by findings, discussion-based conclusions and importance performance map analysis (IPMA). Last is the conclusion of this study, including limitations and directions for future research.

2. Theoretical framework

Companies must comprehend how environmental management can help them attain financial success. Companies have long recognised the need to effectively manage their resources to gain a competitive advantage and improve performance. According to Barney (1991), the resource-based view theory (RBV) has underpinning theory to predict enablers of adequate resources management to achieve performance. The RBV theory sheds light on the importance of resource commitment and how organisations that manage their resources can be crafted as distinctive, having a competitive advantage through improved performance.

It is challenging to retain competitive advantage or consistently achieve performance when environmental and technological advancements are the centre of attention in the current business environment. Thus, Davcik and Sharma (2016) suggested that companies' decisions on resource management start with how many resources companies are willing to commit for their product or supply chain process. As a result, resource commitment severely impacts the overall implementation of the product revenues ( Maiti et al., 2020).

Environmental practice has an impact on business performance and attracts stakeholders' attention. Moreover, previous scholars had previously criticised the RBV theory for not considering the external environment of the companies. Hart (1995) established the natural RBV (NRBV) theory as an effective alternative and a guiding pathway for competitive advantage by closely considering eco-friendly and sustainability factors. This argument was exacerbated further by stakeholder pressure on firms to take a proactive approach to environmental protection. The adoption of NRBV theory is also motivated by the concept of social responsibility ( Lopez-Becerra and Alcon, 2021).

Thus, it is no longer acceptable for companies to rely on resource commitment practice alone to achieve performance and competitive advantage. RBV theory's limitation cannot provide better guidance for companies to adapt to the dynamic and complex stakeholders' environmental-based requirements. Michalisin and Stinchfield (2010) suggested the limitation of RBV can be solved using NRBV, where it explains the heterogeneity of constraints imposed by natural resources, which considers environmental practices as primary drivers to achieve performance. Hart (1995) recommends three strategies for companies to achieve performance. The first strategy is the pollution prevention strategy where it helps companies reduce operational cost by reducing emissions and improve other operations. The second strategy is product stewardship where it helps companies gain a competitive advantage financially by reducing life-cycle cost through supply chain integration. The third strategy is sustainable development to position the organisation as one of the industry leaders by minimising environmental hazards through a shared vision with other players in the sector.

Although NRBV theory explains how organisations can retain competitive advantage and performance by implementing environmental management, the knowledge extension is one-sided. It fails to differentiate itself from RBV theory and the idea of resource commitment explained by NRBV theory. The limitations can be presented through the work of Hart (1995), where the three strategies had been specifically mentioned. Thus, scholars have been investigating the performance of companies through the lenses of these three strategies. Whilst pollution prevention and product stewardship are more specific, the sustainable development strategy is used by scholars to include other critical environmental practices that are specific to the industry or context of research, such as supply chain and operations ( McDougall et al., 2019). However, this paper revamped all three strategies by linking pollution prevention strategy to resource commitment, product stewardship and sustainable development strategies to circular economy RL product return and product recovery. To better understand the linkage, Figure 1 shows the theoretical framework that this study proposes for automotive companies to achieve financial performance:

Figure 1 shows that automotive companies can achieve financial performance when sustainable resource commitment is being practised. Sustainable resource commitment allows companies to achieve financial performance when companies allocate resources efficiently and commit resources to retain competitive advantage. On the other hand, the CERL is divided based on RL practices of product return and product recovery that add resources back to the companies' supply chain. When RL practices are combined with the circular economy concept, it prolongs the life cycle by limiting wastage of resources such as materials, products and wastage to reduce cost and achieve better financial performance. In addition, companies' sustainable resource commitment practice will further be improved when CERL is practiced as resources, stays in the life cycle longer and when wastage is reduced. As a result, companies can allocate resources efficiently and use resources to strengthen the company's position in the industry.

3. Literature review and hypothesis development

3.1 Financial performance

The critical criterion for business strategy is financial sustainability. Financial performance is the tangible outcome that maximises sales, improves profits/rising production costs and improves equity contribution and cash flow. Within the literature, revenue generated by the company's profits includes the sale of goods, or dividends, together with the sale of properties. In comparison, returns on equity combine the shareholder's net profit and cash flow that represents the transfer of equities to or from a company over a specified period. To study how financial performance is affected, scholars have considered disposal cost, reseller income, recovery of goods returned, cost of returned products and RL inventory storage and carrying expenditure in their previous studies ( Maiti et al., 2020).

3.2 Sustainable resource commitment

Resource commitment focusses on managing and recovering essential resources ( Liu et al., 2020). The contribution to resource management can be split into multiple clusters. The first cluster consists of knowledge-based resources, whilst the second cluster consists of property-based resources ( Kitano, 2020). Knowledge in inventory information ( Fernando et al., 2020), technology and expert human intelligence on resource utilisation are vital inputs for organisational change ( Mousa and Othman, 2020).

As per the RBV theory, Fernando et al. (2019) found that greater attention to resources improves resource commitment. Due to limited access to natural resources, companies should be highly committed to manage the resources efficiently and handle CERL-product return and recovery accordingly ( Mahindroo et al., 2018). Consequently, it will contribute to the firms' financial performance. Sustainable resource commitment can help companies to reduce emissions and pollution when companies manage the resources efficiently. Hart (1995) suggested that companies practice quality improvement in the supply chain and operations to achieve sustainability goals. However, continuous improvement in the supply chain and operations alone is insufficient, as companies need to sustainably manage their resources. Therefore, it can be hypothesised as follows:

H1a.

Sustainable resource commitment has a positive and significant effect on a CERL-product return.

H1b.

Sustainable resource commitment has a positive and significant effect on a CERL-product recovery.

H2.

Sustainable resource commitment has a positive and significant effect on a company's financial performance.

3.3 Reverse logistics - a cornerstone for sustainable supply chain management

RL can be characterised as an excellent production, implementation and monitoring process that enables the cost-effective flow of raw materials, ongoing inventory and semi-finished goods from the customer to the point of origin ( Rogers and Tibben-Lembke, 1999). As a result, additional value or appropriate waste disposal is made easy and required inventory for the consequent cycle is replenished ( Fernando and Saththasivam, 2017). RL aims to revive interest to increase economic output and increase customer revenues and market share ( Guarnieri et al., 2020).

Companies circumvent profit margin angles and align logistics in their supply chains for reduced energy usage and lower emissions under financial, socio-economic, legal and political pressures ( Hopkins, 2012). Eco-friendly consumers favour brands engaged in sustainable RL activities that contribute to profitability and efficient usage of assets to meet existing requirements for mitigating environmental impacts ( Marić and Opazo-Basáez, 2019). The balance between cost savings and environmental conservation has become a productive effort to boost the sustainable competitiveness of firms ( Ngu et al., 2020).

RL also provides economic benefits in terms of less raw material procurement, inventory control and landfill by setting strategic locations for collection centres, reprocessing centres, remanufacturing and transportation ( Ali et al., 2020). RL is becoming a critical strategic differentiator amongst organisations promoting cleaner production ( Dutta et al., 2021). However, several firms face difficulties to add the recovered used goods into their current forward logistics networks. In this situation, a modern, sustainable RL supply chain network needs to be redesigned by reconstructing existing infrastructure integrated processing facilities ( Gao and Cao, 2020). The CERL concept proposed in this paper directly supports these interventions.

3.4 Circular economy

The synthesis of circular economy and RL has importance in constructing social and economic value. Manufacturing sectors tend to pursue eco-friendly production and consumption of goods ( Guarnieri et al., 2020). Companies now aim to facilitate the development and recycling of a versatile circular supply chain to reduce waste and positively impact the whole business model ( Campos et al., 2017). The circular economy enables this type of business activity ( Makarova et al., 2018). However, business disruptions and government policies often affect the model's performance ( Shen et al., 2020).

Resource scarcity is thoroughly addressed by the industry. On that note, a CERL-based model is conceptualised in this paper that provides insights for businesses to adopt sustainability-oriented activities that can guide them to utilise the circularity of materials and manage resources efficiently. It will assist the company in reducing unnecessary costs, pollution and initiate sustainable business green growth. The concept of CERL comes from two essential notions of circular economy and RL. The circular economy and RL are different but support each other. Therefore, the circular economy can contribute to sustainable development by applying RL models related to waste recycling, value creation and customer loyalty ( Dev et al., 2020). The details of the discussion are as follows:

3.5 Circular economy-based reverse logistics

The CERL is extended to the current circular economy literature based on several criteria. The first criteria shall fit well to improve the business sustainability that focusses more on supply chain operations. The second criterion combines the complex sustainability concepts such as closed-loop supply chain and RL. The third criterion, the CERL, needs to offer better values and practical solutions to achieve sustainable competitive advantage. One of the realised ideas of sustainability incorporated in a business is RL. RL involves the management of product return and product recovery. The domains of CERL will be further discussed in the next section of this paper. Given that as justification, the circular economy's definition is still new, and scholars have called to improve the notion of circular economy ( Pieroni et al., 2021).

The CERL has conceptualised the circular economy's features, including an increased life cycle, RL and a closed-loop supply chain ( Figure 2). The life cycle stops at the end of the product's life, but a closed-loop supply chain will prolong the product or materials in the life cycle. At the same time, RL focusses on processing those products or materials for reintroduction in the supply chain or secondary market.

Figure 2 shows the business life cycle of a supply chain network. Nowadays, supply chain network capability is the primary criterion of comparison. Thus, Figure 2 shows the company's complete supply chain process from the supplier to the end-user. Figure 2 shows the responsibility of each supply chain process. For example, the supply process involves acquiring energy and raw material, whilst manufacturing involves designing a product and determining the production process. The distribution process involves storing products in a warehouse, monitoring product movement and the supply chain network. The logistics process is about transporting the product to the end-user.

Disposal is not a supply chain process but an outcome of product usage. If a product can be reintroduced to the supply chain, it can be reused, recycled or repaired, whilst the unusable products will be disposed of as waste. RL also enables the reintroduction of waste and creates a secondary market where companies can resell useable products. Even converted wastes and emissions captured through technology can be resold in another market to provide additional income. Companies can rethink their process, product design and product and eventually cut down resources in few production processes. Therefore, combining the features of a business life cycle, closed-loop supply chain and RL can improve companies' sustainable performance.

The domains of CERL are as follows:

3.5.1 CERL-product return

Product returns are detrimental financial strategies in customer sales. Most businesses project uncertain values based on product return fees and transportation charges. Product returns can lead to a loss in revenue for the company if the product is not accurately transported from the customer to the manufacturer. Hence, a company's profits and environmental efficiency can be increased through a controlled return cycle ( Zaid et al., 2018) and operational performance ( Fernando and Tew, 2016). Effective product returns protocols are strongly related to the concept of a circular economy that brings financial profits. This theory is in line with the NRBV principle, as the company's expertise would directly contribute to improving financial performance and competitive advantage ( Baah et al., 2021).

According to NRBV theory, companies need to prolong the product life cycle and reuse materials to reduce cost. Therefore, it needs proper adoption of CERL - product return to manage and remanufacture the recycled materials for more value-added products. The companies need to design an adequate product return mechanism that makes a smooth sailing effort of repair and reuse with system integration. It will bring back the recovered product or material and save resources into the supply chain processes. This paper argued that a properly managed CERL - product return would benefit the company financially. Our argument aligns with Fernando et al. (2018) that managing product return can impact resources efficiency and financial performance. Therefore, managing product returns has a direct impact on the company's competitiveness. It is also aligned with NRBV, especially in articulating sustainable development and product stewardship strategies in environmental oriented supply chains.

NRBV has postulated that the company will gain a sustainable competitive advantage when resources are shared amongst supply chain networks to handle product returns using technology partnerships. However, it will be hard to copy the company strategy when it has integrated internal capabilities with external support from the suppliers and business partners. This justification underlies the application of product return management in the supply chain. The company needs to be committed and willing to support the efficient product return that involved sustainable internal and external resources. The stringent ELVs policy amongst the global automotive industry has driven the company to commit and optimise the sustainable resources to handle recycling and remanufacturing. Using mediating variables, Mao et al. (2016) argued that the supportive attitude of the company could be observed from the allocation level of resource commitment.

Despite the resource commitment found as a critical construct in RL, the variations in the commitment and willingness to allocate the resource across organisations and industries have inconsistent impacts on the performance ( Mahindroo et al., 2018). According to Fernando et al. (2021a, b), incorporating RBV and circular economy principles into the research model can improve the impact of environmental innovation on recycled product performance. Daugherty et al. (2005) argued that little guidance was provided on RL resource allocation. The inconsistent findings and various levels of commitment in handling product return in sustainable manners will, directly and indirectly, impact the total cost supply chain. The NRBV does not satisfactorily explain the guideline allocation of resources sharing. We argue that sustainable resource commitment is essential to drive efficient product returns and avoid fraudulent returns. The commitment to efficient resource utilisation can strengthen the relationship between the product return process and financial performance.

The company's commitment to allocate the resources for recovery operations in reuse and remanufacturing return products can impact financial gain. The effectiveness of product return can improve the company's commitment to allocate more resources to enhance financial performance. This study argues that effective product return management as an intervening variable can improve company commitment to using the resource wisely, which lead to financial gain. Sustainable resource commitment can drive innovativeness, cost reduction and firm longevity. In this regard, the study contends that the company can improve their commitment to utilise sustainable resources through CERL-product return and recovery procedures. Therefore, it can be hypothesised that:

H3a.

A CERL-product return has a positive and significant effect on the company's financial performance.

H4a.

A CERL-product return mediates the relationship between sustainable resource commitment and the company's financial performance.

3.5.2 CERL-product recovery

In congruence with the rising environmental problems and related costs ( Fernando et al., 2017), the Government stresses the manufacturing sector to recover and reuse materials, especially those at the end of their life span. It is made possible by the industrial revolution and technology development ( Govindan and Soleimani, 2017). Restoration of products also extends the product life cycle by saving money and capital ( Chen et al., 2017). Product recovery services may be described as the manufacturing process flow dedicated to recovering redundant components, parts and products ( Thierry et al., 1995). Thus, product recovery is aimed at increasing environmental values and reducing waste.

Six recovery methods are used, including reuse, repair, refurbishment, renovation, retrofitting and commercialisation ( Vijayaraghavan et al., 2013). Recycling is the best way of recovering the product by acquiring and reselling redundant components, parts or products for use on the market ( Fernando et al., 2017). Recovery activities have the potential to significantly enhance financial performance ( Garg et al., 2015). Product recovery-related constructs are the lifeline of a circular business model. Based on the concept of NRBV, a CERL-product recovery will strengthen the relationship between the company's commitment to using green-based resources and financial performance. NRBV theory posits that a CERL-product recovery is in line with sustainable development and product stewardship strategies. This understanding comes from how companies manage the sustainable resource and less dependency on natural resources. CERL-product recovery will assist the company in keeping the scrap and undamaged materials within the closed-loop supply chain. The product recovery needs to be designed as part of a business strategy compatible with supply chain networks.

The company can improve its financial performance when integrating the CERL-product recovery through supply chain networks. In addition, the company has committed to using environmental-friendly materials and resources obtained efficiently through CERL-product recovery can impact the financial outcomes. It will save more cost and turn waste into valuable products. Li (2014) found that resource commitment has positively mediated the linkage between environmental innovation practices and financial performance.

The CERL drives the company commitment to utilise sustainable resources for competitiveness. This study argues that a company's internal capability can be improved if the company has committed to sustainable resources in the supply chain for operational efficiency. It is argued that RL is hard to achieve when the company is unwilling to utilise sustainable resources. The company needs to commit and modify their supply chain processes to achieve profitability ( Fernando and Tew, 2016). Companies can gain and maintain a competitive advantage when successful collaboration exists amongst business networks.

The product recovery process is complex and fraught with difficulties. The company's commitment to allocating resources is a critical enabler of successful product recovery. Company performance can be determined by co-creating value with adequate collaborative resources ( Sinkovics et al., 2018). To ensure that the product recovery quality is comparable to that of new products, companies must expend significant effort and resources, particularly in the areas of cannibalisation, repair, refurbishment and remanufacture product return ( Zhao et al., 2021). Unfortunately, the product return and recovery process continue to be a critical issue affecting financial performance ( Ambilkar et al., 2021). Sinkovics et al. (2018) found that RBV-based competency mediated RL commitment, innovative abilities and manufacturer performance. However, to the best of our knowledge, there is little evidence in the literature on how resource commitment can improve the relationship between product recovery and financial performance. It is argued that managing a sustainable resource plays a mediating role in fostering a positive effect on product recovery efficiency and financial outcomes.

This paper argued that a company would regain the lost value of scrap when the product recovery was successfully conducted. The company will enhance its commitment to using sustainable resources and be less dependent on natural resources when the financial performance improves. However, if it is not adequately managed, the reuse of materials for product recovery has its own risk, like a product that breaks quickly and impacts its brand image. Typically, the company is unwilling to commit when the sustainable efforts do not affect the financial return. The mediating effect of product recovery will enhance the company committed to utilising the CERL methods of sustainable resources to improve financial performance. Therefore, it can be hypothesised that if the product recovery helps companies to obtain resources efficiently, it improves resource commitment:

H3b.

A CERL-product recovery has a positive and significant effect on financial performance.

H4b.

A CERL-product recovery mediates the relationship between sustainable resource commitment and the company's financial performance.

4. Methods

This study adopted a cross-sectional and survey method that was applicable for the required analysis. In this study, the target population was the companies directly or indirectly involved in the Malaysian automotive supply chain. The study sample was taken from the MATRADE (2020). Specifically, the sample frame was from the automotive parts and components section of the database. A total of 616 companies that were identified seemed relevant for this study. Malaysian automotive companies were chosen as a sample due to the ability to comply with environmental management standard (ISO 14001:2015).

For the selected sample, the research unit was the organisation. The selected respondents held management roles in each organisation with sufficient expertise and information to serve their respective companies. In addition, they were selected for their knowledge in implementing RL practices such as inventory recovery, returns, merchandising approval and international certification (ISO standards). This study uses a stratified sampling approach since the characteristics of the population were heterogeneous.

Some efforts have been conducted to control the risk of biases. The data collection was conducted within three weeks with anonymous feedback from respondents. The cut-off duration between early responses in the survey is a week and the rest were considered late. There is no mean value difference between early and late responses in the survey ( p-value > 0.05) based on non-response bias results ( Table 1). The measurement indicators for the survey have been adapted from existing scholarly work ( Table 2). It ensures that the content is accurate, reliable and correctly structured to avoid inaccurate documentation of responses. The measurement relating to the financial performance was adapted from Lai et al. (2013), whilst resource commitment-based measurement items have been adapted from Richey et al. (2014).

On the other hand, measurement items for RL were adapted from Fernando and Tew (2016). The initial survey was pre-tested with ten manufacturers from the automobile industry. This is to ensure that respondents did not have difficulties in understanding any of the question items. Furthermore, their opinions were not included in the final data collection to avoid any bias. IBM SPSS version 25 and partial least squares structural equation modeling (PLS-SEM) version 3.3.7 have been applied to data processing once the data have been collected.

4.1 Database

A set of 616 questionnaires was propagated through an Internet-based survey based on the list of organisations listed in the repositories. Of the total of 616 questionnaires issued, 113 were returned, for an 18.34% response rate. Many factors affected this response rate, including the respondents were busy with the coronavirus disease-2019 (COVID-19) recovery stage. The survey was distributed through the Internet, which usually has a lower-response rate than hand-delivered instruments. None of the survey questions was unfinished, as the electronic survey has an option to make all questions mandatory to be answered before the respondent can proceed to the next section. Out of the 113 companies that replied, 47.8% (54 companies) were foreign-owned multinational corporations (MNCs). The size of the organisation was determined by the number of employees in the company. Large corporations (500 employees) constituted the largest category of respondents with 67 companies (59.3%). The response rate and the balance distributed in this survey show that this study can represent the Malaysian automotive industry and provide empirical evidence of CERL in Malaysia.

4.2 Variables and method of analysis

Even though respondents' acceptable response rate and demographic profile were achieved, the empirical data must comply with the goodness of measures to prove that the data are valid and reliable. The validity and reliability of data are essential to ensure that the finding aligns with the existing theory. Reliability and convergence validity tests were performed through statistical software SmartPLS version 3.3.3. The reliability indicators to prove that the data are reliable and valid are the composite reliability (CR) value, factor loadings value and average variance value extracted (AVE). Hair et al. (2019) postulated that the cut-off value of CR should be above 0.7.

Thus, the acceptable cut-off value ensures that the data has achieved 70% or more reliability value. Hair et al. (2019) proposed that the cut-off value for factor loading and AVE are above 0.5 or should achieve more than 50% reliability and validity thresholds. Table 2 shows the construct AVE and CR values that are more than the cut-off value whilst the factor loading values for each indicator exceed 0.5 cut-off value.

As a result, the data have been shown to meet the convergence validity criteria. Other than convergence validity, the data have to be tested for discriminant validity. Discriminant validity will prove that the measurement indicators were distinguished in each construct. Hair et al. (2019) recommended heterotrait-monotrait (HTMT) criterion as a test of discriminatory validity. The discriminant validity has examined the consistency of solid connection between reflective construct and its indicators in variance-based structural equations modelling ( Hair et al., 2022). Henseler et al. (2015) postulated that HTMT is a robust test to examine the discriminant validity in composite and factor-based modelling.

The model value was below 0.85, and the discriminatory validity of the two reflective structures was calculated as the results were consistent with Henseler et al.'s (2014) rule of thumb ( Table 1). Although the correlation between product return and product recovery is high (HTMT: 0.837), our results show that the ratio of correlations criterion between product return and product recovery is within the acceptable cut-off value (HTMT: 0.85). The results suggest that the variables comprehended and distinguished each research construct. It is argued that there is not enough evidence to conclude that the correlation across latent constructs and indicators is too high and not distinguishable. As a result, we can conclude that discriminant validity has been established.

5. Results

5.1 Hypothesis testing

This paper has proposed hypotheses based on a theoretical framework ( Figure 1). Based on the Malaysian perspective, the findings of these hypotheses are shown in Table 3. Hypothesis H1a suggests that sustainable resource commitment will have a positive and significant impact on CERL-product return. The H1a results showed that the path was significant at p < 0.001 ( β-path coefficient = 0.764 and t-value = 10.592). As a result, H1a was accepted.

H1b expected that sustainable resource commitment has a positive and significant effect on the CERL-product recovery. The tests showed that H1b was statistically significant at p < 0.001 ( β-path coefficient = 0.600 and t-value = 8.342). Hypothesis H2 stated that sustainable resource commitment has a positive and significant relationship to financial performance. However, the finding shown in H2 was statistically negligible at p > 0.050 ( β-path coefficient = 0.055 and t-value = 1.308); thus, the H2 hypothesis was rejected.

H3a suggested that CERL return on the product would positively and significantly relate to financial performance. The result showed that H3a was statistically significant at p < 0.001 and positively related ( β-path coefficient = 0.729 and t-value = 10.271). Thus, the H3a hypothesis was approved. Hypothesis H3b indicated that CERL-product recovery has a positive and significant relationship to financial performance. The analysis revealed that H3b was statistically significant at p < 0.001, and the recovery of the product was strongly and positively related to financial performance ( β-path coefficient = 0.431 and t-value = 6.519). Hypothesis H3a was then accepted.

Table 3 examined CERL-product return and recovery variables' mediating effect for statistical significance at p < 0.001. H4a was established as the CERL-product's return substantially mediates the path from sustainable resource commitment to financial performance ( β-path coefficient = 0.557 and t-value = 7.276). Additionally, H4b of CERL-product recovery was accepted as a mediating variable between sustainable resource commitment and its financial performance as the t-value was 2.781 and 0.140 for the β-path coefficient. The R ² value is analysed to determine the scale of the effect ( f ²). The R ² value for financial results is 0.925, the product recovery is 0.584 and the product return is 0.360.

The R ² value shows that the sustainable resource commitment construct explained 92% of companies' financial performance whilst achieving 58 and 36%, respectively, for CERL-product recovery and CERL-product return. Thus, there was sufficient evidence that the hypotheses developed represented companies' sustainable resource commitment towards financial performance, CERL-product recovery and CERL-product return.

Furthermore, this paper also reported the effect size of the R ². Whilst R ² explained the effect of independent variables on explaining the dependent variable, f ² on the other hand, measured the strength of the relationship provided by R ². This study followed Cohen (1988) guideline on the size of the effect. The results showed that the effect size values ( f ²) were sufficient to support the hypotheses strength. Table 3 demonstrates the predictive relevance ( Q ²) of the structural model using the blindfolding technique. The Q ² analysis was provided by SmartPLS statistical software to determine the relevancy of the proposed theoretical framework. According to Hair et al. (2019), the cut-off value of Q ² is predicted to exceed zero. The cut-off value was found to be more than zero. Therefore, the results suggest that all three predictive relevance values provide ample evidence to claim that the model has adequate predictive relevance.

5.2 Importance-performance map analysis

This study was guided by Ringle and Sarstedt (2016) in examining the output level of latent and dependant variables in the PLS-SEM review. IPMA is useful for corporate decisions, as it offers a deeper understanding of market domain prioritisation. This is because IPMA can recognise the most critical practices for improving financial results; both scholars and practitioners can establish business strategies to improve their performance. Table 4 shows that financial performance has a latent variable index value of 4,068 and a score of 69,796 for resource commitment. Table 5 and Figure 3 show the importance-performance of the indicators. The IPMA result could be divided into four quadrants. The top left quadrant is of high importance but low performance, whilst the bottom left quadrant denotes low importance and low performance. On the other hand, the top right quadrant denotes high importance and high performance, whilst the bottom right quadrant has low importance but high performance. Thus, Figure 3 shows that RCR3 and PR1 have high importance and high performance.

Due to limited access to natural resources, companies should be highly committed to manage the resources efficiently and handle CERL-product return and recovery accordingly ( Mahindroo et al., 2018).

6. Discussion

The impact of a sustainable resource commitment on CERL has been significant in achieving financial performance. Using CERL, automotive companies can optimise the use of materials by restoration activities and meet the environmental objectives. In addition, resource commitment can drive efficient and productive product return and recovery management. This study showed that CERL has a significant impact on financial performance ( Saxena et al., 2018). The finding further suggests that the automotive industry can increase its financial performance by investing further in remanufacturing, refurbishment or recycling, creating new opportunities and niche markets maintaining the same environmental quality standards ( Fernando et al., 2018).

Furthermore, this study found that the greater the resource commitment, the greater are the financial performance. Our finding is in line with Mahindroo et al. (2018). On the other hand, our result found not enough evidence to prove that resource commitment directly affects financial performance. The finding is in contrast with Sinkovics et al. (2018). Overall, our results show that the circular economy helps businesses improve efficiency, especially with RL. Hence, the proposed theoretical model is embraced with the use of CERL. In regard to mediating role in the research model, we found that sustainable resource commitment has mediated the relationship between CERL and financial performance. Our findings are consistent with those of Daugherty et al. (2005).

The CERL concept proposed in this study would help gain insights into the process management of market players and help design supply chains of great value achieved through waste reduction ( Marić and Opazo-Basáez, 2019). Awareness of the circular economy has also seen a rising trend amongst the industry. However, given the significant changes in our natural habitat and ecosystems, stakeholders and government bodies should expand their operations to include circular economy-based concepts that target the right infrastructure, services, and skills in logistics, procurement, distribution and training. The Malaysian automotive sector and related public bodies and stakeholders should derive insights from these ideas and put them into practice. This study opens several pathways with the help of the proposed CERL model.

7. Implications

Nowadays, it is challenging to retain competitive advantage or consistently achieve performance when environmental and technological advancements are the centre of attention in the current business environment. Therefore, we discussed both the theoretical and practical implications of our findings separately.

7.1 Theoretical implications

This study has also expanded NRBV theory to improve financial sustainability with a commitment to internal resources. The circularity concept in RL has led to an increase a strategic advantage for the automobile industry. In other words, a company should optimise the use of resources for sustainable growth. The adoption of the CERL program, in particular, reduces energy use, scraps and raw material used in the automotive industry and indirectly improves the overall environment efficiency, which benefits all stakeholders. Work using NRBV theory shows that it is possible to extend the theory since NRBV states that sustainable resource commitment and sustainability practices can improve financial performance.

7.2 Practical implications

The dynamic market, especially in the automotive industry, means that companies concentrating on assets without stressing the value of environmental concerns have no competitive edge. From the company's point of view, additional revenue would be created if CERL activities were to meet the requirements to accomplish the social responsibilities. Government officials should use a win-win of CE to build and manage a more green and sleek production market that promotes political legislation ( Korhonen et al., 2018). Resource and production based on waste management and life-cycle policies can be framed according to demographic parameters. Even though current policies depend too heavily on government subsidies, they should benefit from production and market governance ( Zhu et al., 2019).

Industrial wastes, especially in developed countries, are severely controlled. New options for controlling demand have been created for zero-waste initiatives to eliminate waste creation and manage trash ( Das et al., 2019). This study portrays thoughtful, practical implications from which policymakers and government organisations can derive insights, especially in governing the automotive sector. Therefore, the CERL model proposed by the product return and recovery protocol positively and significantly affects the company's financial performance and significantly mediates the relationship between sustainable resource commitment and its financial performance.

8. Conclusion

To conclude, most companies' financial performance is affected by economic downturns, but RL offers a solution by generating additional revenues to support the company. This is the benefit of the inclusion of a circular economy and its processes that can create value. Therefore, the circular economy permits the development of the circular supply chain and is responsible for environmentally friendly practices. During the economic recession and COVID-19 pandemic, the operations of automobile manufacturing companies are reduced because of lower demand or technological disruption due to lower competition for replaced parts or components.

In this case, better understanding and proper management on how to use existing infrastructure, machinery and equipment to increase production through the use of RL or to extend business lines to a specific segment of the market, such as the resale to the secondary market of used replacement parts and components, would surely allow a company to cope with any downturns. A closer look into other returns and recovery management approaches that are related to remanufacturing in the automotive industry is required. The study only deals with the global product return and recovery in the automotive sector. In future research, this CERL model as proposed has good scope to be explored in automation systems and new sustainable metrics of sustainable supply chains. Further work on the development of strategic circular business models based on concepts of circular economy and Industry 4.0 should be undertaken swiftly. The company is suggested to adopt Blockchain technology to monitor the traceability of carbon emission and integrity of green practices in the supply chain ( Fernando et al., 2021a, b). Value creation through a circular economy that runs through all directions into a winning business model should be tested empirically in all business sectors.

Figures

Figure 1

Theoretical model

Figure 2

Circular economy RL framework

Figure 3

Importance-performance map

References

Acknowledgements

The authors convey their appreciation to the Division of Research and Innovation, Universiti Malaysia Pahang for funding this study (PGRS190366; PGRS190365 and PGRS190364).

Corresponding author

© 2022 Emerald Publishing Limited

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Circular economy-based reverse logistics: dynamic interplay between sustainable resource commitment and financial performance

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Yudi Fernando (Department of Business Engineering, Faculty of Industrial Management, Universiti Malaysia Pahang , Gambang, Malaysia) (Department of Management, BINUS Online Learning, Bina Nusantara University , Jakarta Barat, Indonesia) Ahmed Zainul Abideen (Department of Business Engineering, Faculty of Industrial Management, Universiti Malaysia Pahang , Gambang, Malaysia) The study aims to propose a circular economy-based reverse logistics (CERL) that emphasises the mediation effect of reverse logistics (RL) on sustainable resource commitment and financial performance.

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To read the full version of this content please select one of the options below:

Abstract

Purpose

Products that espouse environmental ethical principles have received increasing attention in recent years. However, one key barrier against sustainable consumption is that green attributes could result in consumer's expectation of decreased product physical performance. This study aims to investigate how green attributes existing in different product categories affect consumer purchase intention.

Design/methodology/approach

Two experimental studies were conducted to test the hypotheses. Study 1 provides initial evidence of the interaction effects between green attributes and product category on consumer purchase intention. Study 2 replicates the findings of Study 1 and further tests a benefits-based mechanism in the relationship between green attributes and consumer purchase intention.

Findings

The findings show that in the utilitarian product category, products with green peripheral attributes result in a higher purchase intention than those with green core attributes, whereas, in the hedonic product category, products with green core attributes result in a higher purchase intention than those with green peripheral attributes. Furthermore, the authors demonstrate that green attributes, as universal sustainability cues predominantly affect consumers' perceptions of utilitarian environmental benefits and self-expression benefits, which further enhance their purchase intention towards utilitarian products and hedonic products, respectively.

Originality/value

This study responds to the calls for more empirical studies into discussing the role of green attributes in consumer purchase intention. Furthermore, it uncovers a benefits-based mechanism that explains how green attributes existing in utilitarian product categories and hedonic product categories trigger consumers' analysis of benefits, leading to positive consumer purchase intention.

Keywords

Acknowledgements

Funding: This research has been funded by the Major Project of National Social Science Foundation of China (No. 19ZDA107).

Citation

Gong, S., Wang, L., Peverelli, P. and Suo, D. (2022), "When is sustainability an asset? The interaction effects between the green attributes and product category", Journal of Product & Brand Management, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JPBM-06-2021-3534

Publisher
:
Emerald Publishing Limited

Copyright

© 2022 Emerald Publishing Limited

# data[].attributes.attachment_link.title
When is sustainability an asset? The interaction effects between the green attributes and product category

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To read the full version of this content please select one of the options below: Products that espouse environmental ethical principles have received increasing attention in recent years. However, one key barrier against sustainable consumption is that green attributes could result in consumer's expectation of decreased product physical performance.

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Related Expertise: Climate and Environment, Digital, Technology, and Data, Social Impact and Sustainability

By Kanika Chandaria, Marco Duso, Michel Frédeau, Jesper Nielsen, Dennis Pamlin, and Cornelius Pieper

Climate Solution Innovation

Global momentum is building to achieve net zero in greenhouse gas (GHG) emissions-and to do so more quickly than previously envisioned. Getting there will require unprecedented levels of innovation. While a fast-rising number of companies and governments are committing themselves to ambitious net-zero goals, most focus the strategy exclusively on emissions and expect the necessary technologies and solutions to become available as needed.

Annual global emissions of carbon dioxide equivalents now amount to about 51 gigatons. Some estimates, such as the P4 pathway defined by the Intergovernmental Panel on Climate Change (IPCC), show that today's technologies have the potential to reduce global emissions by about two-thirds. More innovation-driven projections-such as IPCC's low-energy demand pathway, P1-do not bank on any new technologies but instead assume radical business model and policy innovation. It is clear that reaching climate change goals requires new technologies and novel business models and markets. Fortunately, there's momentum building for a new generation of innovative solutions.

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A big reason for optimism is that within the solutions lie major opportunities for businesses, investors, and governments. They should start with a shift in mindset-looking at companies as providers of solutions rather than only sources of emissions, focusing on new sources of revenue over rising costs, and seeking transformative models rather than incremental improvements. Companies can create business advantage and value while accelerating climate action and helping to meet the 1.5°C target envisioned in the Paris Agreement. Governments can boost economic growth with support for what we call climate solution innovation. (See Exhibit 1.)

Major companies are already on the move. General Motors, among others, has said that it wants to end the production of gasoline- and diesel-powered vehicles by 2035. In February, the chairman of Fortescue Metals Group told the Financial Times, "In 15 years' time, the world energy scene will look nothing like what it does now. Any country which does not take green energy very seriously, but clings to polluting energy, will eventually get left behind."

Here's how we can have our climate cake and eat it, too.

The First Wave of Climate Champions Shows the Way

Seismic shifts are beginning to occur in government policies and public- and private-sector initiatives. Consider a few examples.

In September 2020, the president of China committed the country to achieving carbon neutrality by 2060-an enormous challenge for the world's biggest annual carbon emitter-but a recent BCG analysis found that China has economically attractive and socially viable pathways to achieve its decarbonization goals. The total cost will be substantial-about $13.5 trillion to $15 trillion through 2050, but the investments will have a material benefit for GDP, contributing 2% to 3% during the first half of the century. Green technology investments alone will account for more than 2% of China's GDP by 2050. Far from hindering economic growth, decarbonization could in fact stimulate the economy.

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As part of South Korea's Green Growth strategy, the government provided early support for battery storage projects. Investment in R&D enabled breakthroughs in stable multicycle charging and support for early integrated battery deployment. Lithium-ion battery costs declined nearly 90% from 2010 to 2019, and South Korean battery producers captured a leading market share by 2013.

Combating climate change has entered the mainstream, and corporate and venture capital investment in climate technologies is on the rise. In 2020, US investors doubled the money they put into exchange-traded funds focused on environmental, social, and governance (ESG) criteria-rising to $25 billion. Industry groups, such as the influential Business Roundtable in the US, are emphasizing the need to embrace sustainable practices and lead the way through investment and innovation. A January 2020 Bloomberg News article spotlighted ten multibillionaires around the world whose fortunes come substantially from early forms of climate innovation.

The most exciting action is taking place at the leading edge. The first generation of "green champion" companies is generating shareholder returns at levels similar to those of such high-flying tech firms as Amazon, Apple, Facebook, and Google. From October 2017 to October 2020, some companies-including Enel Group, Iberdrola, Neste, NextEra Energy, and Ørsted-generated annual total shareholder returns on the order of 30%. The returns for an emerging wave of second-generation green champs, including Beyond Meat and Tesla, ranged from almost 70% to 80%. (See Exhibit 2.) The value of Tesla alone far outstrips that of any other car maker.

These and other forward-looking companies are demonstrating that climate solution innovation is all about creating value. They are showing how to create new revenue streams by entering new markets or developing offerings that cater to high-priority economic and social needs. They are winning new customers and strengthening their brands through positive environmental and social contribution. Early movers are using scale and market position to create network effects and lower costs. Innovators are building more resilient business models through reinvention in the most critical parts of the value chain, reducing exposure to increasing costs and regulatory constraints.

The Climate Solution Innovation Canvas

Companies can choose from various approaches to climate solution innovation, but they are well advised not to limit their ambitions to one or two options. They can both improve existing models and markets and create brand new ones. Equally, they can scale up existing technological solutions and support the development of more disruptive ones. (See Exhibit 3.) In all instances, though, companies need to move away from looking at themselves only as sources of emissions and see themselves as potential providers of solutions for a fundamental societal need. It's also important to recognize that they don't necessarily need new technology to innovate. While breakthroughs in technology are critical to generate new opportunities, both in terms of value creation and climate impact, not all companies need to play in the breakthrough tech fields. There remains huge potential in deploying and scaling up existing technologies through business model innovation and, especially, digitization.

Below we explore the opportunities in each area and examine what leading companies are already doing.

Reengineer. Climate change is quickly altering the context for most businesses. Those that can successfully innovate will outperform others and secure long-term value by moving quickly toward better, accelerated deployment of existing low-carbon solutions. Customers and investors are embracing companies that demonstrate viable solutions.

Consider the example of Neste, which has leveraged technology able to transform fats into molecules that can replace fossil fuels to help customers reduce GHG emissions. Neste has developed renewable fuels for road, air, and marine transport as well as for chemicals (including base oils and plastics).

Originally the state oil company of Finland (the Finnish government continues to own about 35%), Neste envisioned becoming the world's leading producer of renewable diesel in the early 2000s and has transformed its business to make the transition from oil and gas to renewable fuels. Neste began production of 100% renewable diesel in 2010 and has since expanded to three global production facilities. It owns 1,000 gas stations in four countries, including Finland's first low-emission service stations, which feature renewable diesel and electric-vehicle charging. It also offers GHG emission-reduction services to customers through Neste Engineering Solutions. In 2019, Neste helped customers reduce GHG emissions by 9.6 million tons, the equivalent of removing 3.5 million passenger cars from the roads for a full year. Neste's ambition for a second wave of growth is to become a global leader in renewable and circular solutions.

Neste generated overall revenue growth of 6% to €15.8 billion in 2019 with renewables revenue rising 24%. With more than 25% of its revenue considered "clean," the company has earned high ESG ratings from investors and others.

In a completely different industry, Norwegian crop nutrition company Yara is using satellite technology to help farmers around the world optimize yield and quality while minimizing waste and cost. Established in 1905 as the world's first producer of mineral nitrogen fertilizers to solve the emerging famine in Europe, Yara today offers crop nutrition products, solutions, and knowledge. According to Svein Tore Holsether, the company's president and CEO, "Yara's business model is centered around building a profitable business by solving societal challenges. Over the past decades, Yara has moved from an owner of assets and producer of fertilizer to becoming a complete solutions provider, both for farmers and food companies. We are transitioning from growing volume to growing value. This is a decisive, conscious, and forward-looking development, allowing for improved value creation and answering to stricter regulations and a rightfully stronger public engagement."

Yara's portfolio of digital farming solutions enables farmers to maximize the yield and quality of their harvests while reducing environmental impact. For example, professional market solutions, such as Atfarm, allow farmers to monitor crop growth through satellite images, receive fertilization recommendations tailored to their fields, and make in-season adjustments throughout the year. N-Tester is a handheld precision farming tool that allows farmers to measure crop nitrogen requirements in real time. The Yara Water Solution uses crop-sensing technology to increase nutrient and water use efficiency. Yara also has an entire suite of solutions for small farmers that includes a weather forecast app and a networking app that connects farmers to peers and experts.

From a business point of view, Yara's investment in digital solutions is helping farmers find ways to monetize over a century's worth of agronomic knowledge. Yara focuses on developing scalable and accessible solutions to meet the needs of more than 500 million small farmers and robust platform solutions to meet the needs of large enterprise farmers.

A few lessons on climate-inspired business reengineering can be drawn from Neste and Yara. First, climate action should be firmly embedded in a company's strategy, purpose, and culture. This goes beyond simply signing a pledge. It means having a plan, making climate action part of the business, and regularly reviewing progress against KPIs, just as is done in every function and business unit.

Second, companies can use the transformation to shift perceptions of their external valuations. Management needs to develop a new shareholder value story with clear articulation about the potential for long-term value in low-carbon businesses.

Finally, companies need the right capabilities to succeed, including innovation-oriented talent and an open approach to partnerships and coalitions.

Reboot. Often, existing constraints thwart new technologies from reaching their full potential. An additional innovative solution is required to break through barriers or present a new way of solving a problem. Major technologies for combating climate change, such as battery power and wind-generated electric power, have established their viability in the marketplace but need a technological assist to move to the next level of impact.

In 2011, two former Tesla employees and a professor at Georgia Tech, in Atlanta, recognized that materials developed using nanotechnologies could dramatically increase the energy density of rechargeable lithium-ion batteries and enable smaller, lighter, longer-lasting electronic devices. This advance promised to have a major impact on the range of electric vehicles (EVs) and boost mass adoption of affordable, long-range battery-powered cars. The resulting company, Sila Nanotechologies, has developed a silicon-based anode that replaces graphite in lithium-ion batteries. The new anode improves the energy density of batteries by 20%, meaning that 20% fewer cells are needed in each battery pack, and the battery costs 20% less.

Sila products can be dropped into existing commercial-battery-manufacturing processes. Manufacturing partners can produce higher-performing cells in their existing factories on current production equipment; they do not need to retool. The improved battery technology can be applied to a variety of other applications besides EVs, including consumer electronics, electric power storage and transmission, and electrified flight, all of which have the potential to accelerate the world's transition to renewable energy. On the basis of its latest round of funding, Sila is now valued at $3.3 billion. The company has partnered with BMW, and Daimler is both a partner and investor.

A big constraint on wind-generated power is the construction of wind farms in locations with a steady airstream and a limited number of neighbors. Offshore locations are an attractive solution, but constructing windmills in deep-water settings, where winds blow strongly and more steadily, has been prohibitively expensive-until recently. Enter Equinor, with new technology that enables offshore wind turbines to float, obviating fixed moorings. Motion controllers and sensors regulate the turbine blades in relation to wind speed, intensity, and direction to prevent capsizing. Equinor's Hywind Scotland, the world's first floating wind farm, powers some 20,000 British homes. The company's upcoming 88-megawatt Hywind Tampen floating wind farm will power five oil and gas installations in the North Sea with renewable power. Floating wind farms could power up to 12 million homes in Europe by 2030.

In both of these cases-as in others, such as Form Energy, which has developed long-duration energy storage technology that could be a major missing piece in the clean-energy puzzle-the key to the breakthrough was recognizing a bottleneck or significant constraint to emerging technologies and innovating a technology to remove or get around the barrier.

Reimagine. Satisfying changing customer demands, particularly those rooted in evolving views of climate change, may require reimagining business models and services. Consider mobility, for example. Before the pandemic hit, many consumers were already rethinking the concept of single-car ownership and embracing alternatives, such as renting and ridesharing, as they looked toward a future of autonomous vehicles and robotaxis. Tech giants, including Apple and Google, have been piloting autonomous driving, and major auto OEMs, including GM and Volkswagen, have been exploring autonomous-vehicle manufacturing and mobility models. Upstarts turned unicorns-such as BlaBlaCar, Grab, Lyft, and Uber-were early mobility movers.

Another unicorn, DiDi Chuxing, has pioneered mobility as a service in China. Founded in 2012 as a taxi-hailing service, DiDi rapidly expanded its portfolio of offerings to encompass artificial intelligence (AI), big data, smart city transportation and self-driving technology. It serves more than 550 million users in Asia-Pacific, Latin America, and Russia, and provides more than 10 billion passenger trips a year. Daily trip volume for DiDi's core mobility services exceeded 60 million during the first week of October 2020. Its multimodal mobility-as-a-service platform attracts more active users, who then drive higher utilization rates-which, in turn, attracts more active drivers and vehicles through improved profitability. Ultimately, riders experience a better user experience via reduced wait times and costs.

DiDi offers a full range of app-based transportation and local services including taxi hailing, private-car hailing, peer-to-peer ridesharing, buses, bikes, e-bikes, designated driving, automobile solutions, delivery and logistics, and financial services. Its ecosystem-based approach accelerates adoption (the DiDi miniprogram is available on the WeChat platform, for example) and boosts innovation. The company is laying the foundation for the spread of autonomous and connected EVs as well as smart cities. In 2019, nearly 1 million electric cars operated on DiDi China's platform, accounting for one-fifth of all EV mileage in China. This translates into a reduction of 0.59 million tons of CO ₂ emission every year. From 2018 to 2019, DiDi platform reduced the CO ₂ emission of its carpooling, bike, and EV services by a total of 1.3 million tons. In November 2020, in partnership with BYD, DiDi unveiled D1, the world's first EV custom-built for ride hailing. The most recent round of funding pegged the company's valuation at $57.6 billion.

New models are making an impact on business and climate change in other sectors as well. Indigo Ag offers farmers a package of innovative services that promote more beneficial agricultural practices (such as data-driven recommendations from agronomists and patented microbiome seed treatments) as well as data science, satellite imagery, and analytics for measuring on-farm emissions and global crop productivity. Indigo has also started a carbon offset marketplace that incentivizes farmers to use regenerative farming practices that increase carbon sequestration and reduce emissions. The resulting carbon offsets can then be sold to businesses that need them. The company has established partnerships with other companies, NGOs, and scientists to collect data, measure carbon sequestration, and quantify best practices.

Indigo Carbon, a program launched in June of 2019, helps farmers transition to regenerative growing practices that prioritize soil health and carbon sequestration, and connects them with buyers seeking to offset their carbon emissions through verified agricultural carbon credits. The program offers a unique path for sustainably minded brands to address their climate footprint and diversify their ESG strategy. The company has established partnerships with organizations across the agricultural ecosystem, including two leading GHG registries-the Climate Action Reserve and Verra-to help farmers scale the adoption of farming practices that are more beneficial for people and the planet.

Octopus Energy is an energy tech innovator providing customers with easy access to 100% renewable energy through a cutting-edge digital platform known as Kraken. The platform allows the company to pay customers to use renewable energy during periods when generation is high, thus avoiding paying higher costs when renewable supplies are low. Octopus has grown rapidly and now serves 1.9 million homes and 25,000 businesses in the UK alone. It also has operations in Australia, Germany, Japan, and the US, and it intends to reach 100 million customers in multiple countries by 2025. (It has experienced more than 400% annual growth in its customer base since 2016.) In addition to a novel technology platform, Octopus owes a good part of its success to its customer-centric approach (not always the norm in the utility industry), which delivers best-in-market service and experience. The company makes its software available to competitors in the spirit of advancing development of the climate solution ecosystem.

California-based Pachama was started by two technologists from Argentina with the idea of using the natural strengths of forests to combat climate change. Pachama leverages two key innovations. One is using satellite data, AI, and automation to modernize carbon markets by accurately measuring the carbon store of forests in real time. The company's AI and remote-sensing platform enables independent verification of carbon captured in forests, which allows B2B and B2C customers to measure the impact of their carbon credit investments. The other is a marketplace platform that disintermediates middlemen and makes it much easier for local landowners to certify their results and get paid for their reforestation efforts. Pachama democratizes its technology by allowing customers to access the satellite imagery and sensors that provide information on emissions and carbon captured on reforested land.

Invent. Innovations based on deep tech can generate enormous economic value, but their ultimate impact extends far beyond the financial realm to everyday life. They have the potential to fundamentally change everything from energy, transport, and agriculture to health, education, and entertainment. Deep-tech innovations can satisfy existing needs and create new models and markets, but incumbents that want to play will have to be willing to disrupt themselves before they are disrupted by others.

Consider three examples.

Joyn Bio, an agriculture technology company founded in 2017 as a joint venture between Ginkgo Bioworks and Leaps by Bayer, works to minimize the agriculture industry's environmental footprint, starting with nitrogen. Most plants cannot use atmospheric nitrogen in its natural form, yet it is essential for healthy crop growth. The agriculture industry relies on nitrogen fertilizer to increase crop yield, but the production and use of nitrogen fertilizer generates 3% of worldwide global GHG emissions, which degrade soil, water, and air quality.

Joyn uses synthetic biology to engineer microbes that can enable cereal crops-such as corn, wheat, and rice-to fix nitrogen from the air into a usable nutrient. Joyn is developing a microbial solution that can fix nitrogen efficiently enough to reduce the use of synthetic fertilizer by 30% to 50% without affecting crop yield.

The company's platform for microbe engineering will also be leveraged across other sustainable agriculture applications in pest control, disease management, and potentially even carbon sequestration. The innovation is made possible by exclusive access to Ginkgo Bioworks' genetic code base and manufacturing capabilities, as well as Bayer's industry expertise and proprietary microbial-strain library.

Growing demand for meat and livestock farming accounts for 15% of GHG emissions and 25% of earth's available landmass and fresh water. Memphis Meats produces good-tasting and healthy meat products by harvesting them from cells instead of animals. This results in a direct one-to-one substitution for structurally complex animal meat without added antibiotics, providing healthier and safer food. At scale, eliminating the need to raise and slaughter animals will involve significantly lower caloric input and water, land, and energy use than conventional meat production.

Memphis Meats' latest round of funding will enable the company to open a pilot plant, expected to be operational in the next 12 months. Though cellular cultivation technology is expected to cultivate edible meat while using up to 90% less land and water than conventionally produced protein, the path to commercialization will require collaboration from a full ecosystem of participants, including companies, retailers, regulators, and consumers.

Four characteristics combine to distinguish deep tech from other fields of R&D:

They solve large and fundamental issues. Most deep-tech ventures contribute to at least one of the United Nations' sustainable-development goals.

They play at the convergence of technologies. Most use at least two technologies, and two-thirds use more than one advanced technology.

They mostly develop physical products, rather than software only. More than three-quarters of deep-tech ventures are building physical products.

They are at the center of a deep, interconnected ecosystem. About 1,500 universities and research labs worldwide are involved in deep tech, and deep-tech ventures received some 1,500 grants from governments in 2018 alone.

The biggest challenge for incumbent companies looking to invest in new solutions is developing the capability to reimagine and rethink problems. Innovation systems (whether internal or external, such as labs or incubators) need to turn their focus from executing existing solutions toward fixing new problems. Many companies should further develop their capabilities so that they can adopt scientific innovations. At the moment, for example, Fortune 500 companies devote an average of less than 2% of their revenues to R&D.

It Takes an Ecosystem

The companies pursuing innovative climate solutions will not succeed in a vacuum. Broad and deep ecosystems involving thousands of players are taking shape to combat climate change. They will be crucial for the sustainable application of advanced technologies-such as gene editing, nanotechnology, and quantum computing-that promise solutions to some of our biggest social and economic challenges. (See Exhibit 4.) These ecosystems encompass not only businesses, but investors, governments, universities, research institutions, and others, and each type of participant has a distinct and important role to play. Since ecosystems are collaborative organisms, a big part of the challenge for each player is to find the best way to contribute to the ecosystem-and profit from its participation. Here's a brief look at the priorities for companies, investors, and governments.

Companies
Companies are not confined to one area of innovation: they can-and should-play in multiple areas at once or explore opportunities in the four quadrants of the climate innovation canvas over time. (See Exhibit 5.) From a macro point of view, new technologies and business models can have a much larger impact on achieving the 1.5°C pathway, but these models and technologies are not guaranteed and will not replace existing ones overnight. Individual companies can defend against competition and hedge their bets by playing in multiple areas. They should apply three lenses to identify opportunities.

The first is global need: the acute climate-related threats and the way they affect customer needs and demands. How do they change the competitive environment and drive pressure on the business ecosystem to reduce carbon emissions?

The second is a company's own strength and capabilities. What are its existing assets and expertise? Can it bring the surrounding ecosystem or partnerships to bear? Does it have the entrepreneurial culture and imperative to innovate? Has it developed a climate mission and a vision for a sustainable future?

Third is the company's potential for impact. Can it drive both economic and climate impact? Does it have the ability to change the game?

These are big questions for any company, but the challenges of our time demand that businesses rise to the occasion. Existing frameworks, such as those developed under Mission Innovation's Net-Zero Compatible Innovation Initiative, provide guidance for companies at the forefront. The ones that respond will find ample opportunities to create substantial value in the process-and reap the rewards from appreciative investors and customers.
Investors
Venture capital investment in climate technology is growing five times faster than the average rate of investment across all industries. Climate investment soared from $418 million in 2013 to $16.3 billion in 2019. We identified more than 75 funds that are already taking a variety of approaches to climate investment, including focusing on general climate technology, high-impact technology, vertical technology, and deep tech. But all this money is still a fraction of the $1.4 trillion in private equity and venture capital that was available for investment in 2019.

The various segments of the investment community can do more. Venture capital funds and their limited partners can expand their comfort zones to adopt the kind of problem-focused approach taken by most climate innovation ventures. For example, Flagship Pioneering applies a hypothesis-driven innovation process based on existing technologies to imagine products or reimagine value chains. It helped start or nurture more than 100 scientific ventures, resulting in more than $34 billion in aggregate value.

Deep-tech investors also need to reset their expectations-which does not necessarily mean accepting lower returns. They can extend fund lifetimes to allow sufficient time to de-risk R&D and launch the resulting products. They can recognize the greater complexity of technology and business models involved and spread their investments across technologies and sectors. For example, Breakthrough Energy Ventures, which has raised more than $2 billion, has a 20-year time horizon and is backed by Bill Gates and other notable limited partners, including Jeff Bezos, Michael Bloomberg, Richard Branson, Vinod Khosla, Jack Ma, Xavier Niel, and Masayoshi Son. About 90% of the company's portfolio consists of deep-tech ventures geared toward climate change or sustainability goals, and about 50% of its staff have earned doctorates.

More funds are combining investment with active support and assistance. In 2020, Amazon unveiled its Climate Pledge Fund, a venture capital program directed at sustainable technologies. The company plans to become carbon neutral by 2040. Microsoft has created the $1 billion Climate Innovation Fund and announced that the company will be carbon negative by 2030. SOSV Investments, which invests in about 150 new startups a year, has an accelerator program that includes a network of 1,000 global mentors and an alumni community of more than 2,000 founders around the globe with deep market and technical expertise. The program provides access to an extensive infrastructure of laboratory and maker spaces, and SOSV introduces startups to sector-specific corporate partnerships and later-stage venture firms focused on the same verticals.

For their part, private equity firms can emphasize the impact of climate tech ventures on the UN Sustainable Development Goals (SDGs) to their investors and the companies that they invest in. Sweden's EQT Partners, for example, describes itself as "a purpose-driven global investment organization" that has "decided to align all investment decisions in support of achieving the United Nations Sustainable Development Goals (SDGs) as well as ownership actions to drive the development of the portfolio companies in this direction." Private equity managers can de-risk their portfolios with ventures that will inevitably disrupt incumbents and shift or create new value pools. They can also fill gaps in skills and increase understanding of technology by building in-house expertise and networks. Larry Fink, the CEO of BlackRock, the largest fund manager in the US, wrote in 2021 that "Climate change has become a defining factor in companies' long-term prospects."

Still, most investors approach the climate challenge from the perspective of environmental, social, and corporate governance goals, looking first at risk and how companies can conduct business in a long-term, responsible way. The climate solution perspective focuses first on opportunity-how companies can produce goods and services that contribute to the society we want to build. The financial community needs to focus more intently on actual results and how investors can contribute to financing the transition to new technologies and models.
Governments
Governments have been active in supporting climate solution innovation, albeit to varying degrees and with different approaches. Carbon pricing is a critical lever, but to have maximum impact, prices need to be set at the right level and uniformly applied. (In this regard, the Bank of England recently told companies to prepare for prices of $100 a ton.) At the same time, the transition to a world of low-carbon emissions is about not just individual businesses but entire integrated systems. Carbon pricing alone cannot correct for a system locked in at current emission levels. To achieve 1.5°C compatibility, governments must develop policies to exert pressure on carbon-intensive products, technologies, and practices, as well as enable, incentivize, and scale up innovations that have the potential to completely circumvent system lock-in.

In China, for example, strong government direction and support for science and technology innovation parks have led to the development of technology-focused R&D centers. One such center, Nanopolis Suzhou, hosted more than 200 private-investment firms, including numerous major international venture capital investors, and more than 300 nanotech companies in 2017.

In Europe, both the EU and national governments fund R&D for advanced technologies that contribute to climate solution innovation. The EU's Horizon Europe program involves €26 billion for basic research, €53 billion for applied research, and €14 billion to support innovation and startups from 2021 through 2027. The purpose of the Joint European Disruptive Initiative (JEDI) is "to bring Europe in a leadership position in breakthrough technologies." Germany's government has agreed on a national hydrogen strategy to build up industrial generation facilities with a capacity of 5 gigawatts by 2030. Germany will provide €7 billion to ramp up hydrogen technologies and an additional €2 billion will be invested in setting up large-scale hydrogen production plants in partner countries. The new administration in the US has already signaled its intent to bring increased support for climate change initiatives.

Yet despite the initiatives underway, most governments around the world can do even more to establish policy frameworks that enable and incentivize climate innovation and reposition national economies toward value chains and models that are compatible with a 1.5°C low-energy demand world.
A Pandemic Points the Way
The global response to the COVID-19 pandemic has shown how quickly and forcefully companies, investors, and governments can move when called to effective action. (See Exhibit 6.) Few would have predicted a year ago that discovering, developing, testing, and bringing to market not just one but multiple vaccines in fewer than 12 months was remotely achievable or that the ways of working would change forever with digital collaboration tools-which are now the new default. Yet harnessing the power of science and advanced technology, entrepreneurship, smart policy, investment, and the collaborative efforts of the ecosystem has proven that radical progress is possible.

Climate solution innovation is no less urgent. And it offers an enormous opportunity to build economic models and individual company advantage for the long term. Until now, many companies, investors, and governments have seen climate actions and considerations as a hindrance: meeting targets could limit growth, increase costs, and cause them to fall behind competitors.

Evidence has demonstrated that climate innovation should be seen as a major opportunity to build long-term success and advantage. As Mark Carney, the former governor of the Bank of England, put it, climate change is "the greatest commercial opportunity of our time."
The authors are grateful to the following for their input and assistance: Ajay Chowdhury, Alex Dewar, Antoine Gourévitch, Megan Moore, and David Young of BCG; Ann Mettler of Breakthrough Energy Ventures; Cilia Indahl of EQT Foundation; Massimo Portincaso of Hello Tomorrow; Edelio Bermejo of LafargeHolcim; Massamba Thioye of the UNFCCC; and Anthony Hobley of the Mission Possible Platform and the World Economic Forum.

Marco Duso

Principal

London

Dennis Pamlin

About Boston Consulting Group

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders-empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.

Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

© Boston Consulting Group 2022. All rights reserved.

For information or permission to reprint, please contact BCG at permissions@bcg.com. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and Twitter.

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# data[].attributes.attachment_link.title
The Next Generation of Climate Innovation

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Related Expertise: Climate and Environment, Digital, Technology, and Data, Social Impact and Sustainability By Kanika Chandaria, Marco Duso, Michel Frédeau, Jesper Nielsen, Dennis Pamlin, and Cornelius Pieper Global momentum is building to achieve net zero in greenhouse gas (GHG) emissions-and to do so more quickly than previously envisioned.

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This article is part of an ongoing series that describes the concept of "Sustainable Business Model Innovation" (SBM-I) and how companies are putting it to use.
The COVID-19 pandemic has been a singular challenge, testing the resilience and viability of many companies. Undoubtedly, there will be more dramatic challenges and opportunities to manage in the coming decade, including climate change and economic inequality. Fortunately, it is possible for business leaders to contribute to solving environmental and societal challenges through their core business, in ways that also generate new opportunities for business value and competitive advantage. This is the essence of sustainable business model innovation (SBM-I), innovations that deliver returns to shareholders and benefits to stakeholders. As companies now build back in the recovery, how can they assess which business model changes and innovations will also create the most environmental and societal value for their stakeholders?

We believe our insights from researching SBM-I can help answer that question. Crossing all industries and geographies, our research analyzed 102 SBM-I initiatives through which companies delivered both business value and environmental and societal benefits. We evaluated each initiative on the basis of its competitiveness and resilience and then tested it against six dimensions of environmental and societal benefits. (See Exhibit 1.) We believe these six dimensions holistically encompass the range of societal value that a business can generate. In fact, in today's business context of increasing concerns about environmental and societal issues, a resilient and competitive business model must optimize for both business and social value. Generally, the traditional thinking on business model innovation has not sufficiently or rigorously incorporated how business models create value for stakeholders and the common good.

The Six Dimensions of Business Model Societal Impact

BCG identifies six dimensions of environmental and societal impact, all with implications for employees and for external stakeholders, including investors, customers, suppliers, and society. Below we discuss each dimension and illustrate how it creates environmental and societal benefit, using examples of companies pursuing sustainable business model innovations. In general, the better the business model scores on the six dimensions shown in the spider diagram of Exhibit 1, the more likely the company is well-positioned to deliver benefits to stakeholders and to remain durable under evolving environmental and societal trends, thus contributing to its resilience, sustainability, and competitive advantage over time.

Companies should assess their business model against the footprint of their total environmental and societal benefits, holistically considering all six of the dimensions. Our own analysis shows that most companies underdevelop their societal benefit (represented by five out of the six dimensions), potentially missing business opportunities that would come from contributing to the common good.

Close to two-thirds of the SBM-I initiatives we studied show a limited footprint across the six dimensions, while only a third create impact on three or more dimensions. Perhaps not surprisingly, the most common dimension of impact found among our sample cases is environmental sustainability (with more than half of cases optimizing for that dimension). Economic vitality ranks second and access and inclusion rank third.

By innovating to expand their scores across all six dimensions, companies can grow their environmental and societal benefit, the basis for new value creation and competitive advantage. They can also future-proof themselves against environmental and societal shocks and shifting trends. For example, a consumer packaged goods company could increase its portfolio of nutritious foods (lifetime well-being) while sourcing closer to its processing centers, thus providing more employment near its customers (economic vitality) and reducing transportation-related emissions (environmental sustainability). Similarly, a fintech that provides microfinance and already facilitates access and inclusion could also mitigate the carbon emissions from its servers or constrain debt-inducing consumption patterns and nudge microloans toward "green" goods and investments, thus boosting ethical capacity and environmental sustainability. Exhibit 2 shows the environmental and societal benefit footprint for two companies seeking to improve their track records.

Resilience Through Sustainability

In the aftermath of the pandemic, as many companies rethink their business models to solve for resilience over efficiency, sustainable business model innovation offers a powerful approach to ensure that business models are robust against future crises. Applying SBM-I requires a frank assessment of the environmental and societal value that your current business model creates for all stakeholders. This assessment should serve as a tool to spur innovation for a more resilient business model. Going forward, a company's ability to generate broad and demonstrable environmental and societal benefits from its core business model will be a key source of sustainable competitive advantage.

The BCG Henderson Institute is Boston Consulting Group's strategy think tank, dedicated to exploring and developing valuable new insights from business, technology, and science by embracing the powerful technology of ideas. The Institute engages leaders in provocative discussion and experimentation to expand the boundaries of business theory and practice and to translate innovative ideas from within and beyond business. For more ideas and inspiration from the Institute, please visit our Latest Thinking page and follow us on LinkedIn and Twitter.

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders-empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.

Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

© Boston Consulting Group 2022. All rights reserved.

For information or permission to reprint, please contact BCG at permissions@bcg.com. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and Twitter.

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# data[].attributes.attachment_link.title
How to Tell If Your Business Model Is Creating Environmental and Societal Benefits

# data[].attributes.attachment_link.description
This article is part of an ongoing series that describes the concept of "Sustainable Business Model Innovation" (SBM-I) and how companies are putting it to use. The COVID-19 pandemic has been a singular challenge, testing the resilience and viability of many companies.

# data[].attributes.attachment_link.readable_text
This article is part of an ongoing series that describes the concept of "Sustainable Business Model Innovation" (SBM-I) and how companies are putting it to use.
Every enterprise is finding that its space for business as usual is increasingly constrained by the planet's environmental limits, by broader social and economic needs, and by rising stakeholder demands. Consequently, in addition to addressing all the traditional factors defining competition, company strategies now need to explicitly confront the dynamic socio-environmental externalities of the business. From their impacts on climate to the communities where they operate, the growing challenge for business leaders is to navigate through wider sustainability constraints while still delivering the financial results on which its employees and shareholders depend. But new opportunity can be found in creating innovative business models that integrate growth and value creation with the generation of broader environmental and societal benefits. And we've seen that some leading companies are fundamentally reimagining their businesses to turn sustainability into core business advantage.

Take the example of Schneider Electric, a digital energy management firm based in Rueil-Malmaison, France. Driven by a vision to be a leader in sustainability, the company has reimagined its business model over time, evolving from initially being a French-based, traditional electric installations player to becoming a truly global leader in digital sustainability solutions. Today, much of this company's business model relies on the EcoStruxure platform. Introduced in 2007 and enabled with sophisticated digital tools, analytics, and the Internet of Things, EcoStruxure manages the data and controls for buildings, infrastructure, data centers, power grids, and industries. By shaping the way its customers manage their energy consumption and sustainability footprint across almost half a million sites, EcoStruxure has helped them collectively save 90 million metric tons of CO 2 per year (equivalent to taking almost 20 million cars off the road for an entire year).

Schneider Electric also actively works on improving environmental and societal impact in other ways. For instance, it has worked on a ground-breaking collaboration with Walmart to provide increased access to renewable energy across the retailer's US-based supply chain. The initiative, called the Gigaton Power Purchase Agreement (GPPA) Program, is designed to educate Walmart suppliers about renewable energy purchases and facilitate adoption through aggregate purchase agreements.

The company also worked with countries around the world to develop fast-track health care facilities throughout the COVID-19 pandemic. In China and Turkey, Schneider helped get new hospitals operational. In the UK and Italy, it helped convert exhibition centers into temporary hospitals. In France, India, and Spain, it helped manufacture respirators, and on a global scale, it worked on rapid deployment of solutions to enable intensive care units to better manage the challenges of the pandemic.

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These efforts are emblematic of Schneider Electric's reimagination of its business model, from being a traditional B2B electrical distribution equipment manufacturer to becoming a recognized global leader in environmental sustainability solutions. Its annual revenues have grown accordingly, from €15 billion ($18 billion) in 2007 to €27 billion ($33 billion) in 2019. In January 2021, the prominent Canadian "clean capitalism" magazine Corporate Knights named Schneider Electric the most sustainable corporation in the world.

Companies face increasing constraints on conducting business as usual. Stakeholder expectations from all sides are demanding accountability to address negative impacts and increasingly demanding that companies go beyond mitigation and demonstrate positive environmental and societal benefits.

And in recent years, businesses have invested in significant initiatives to demonstrate their commitment to creating environmental and societal benefits-or at the very least, mitigating their harmful practices. Many companies have developed sustainability initiatives that aim to reduce greenhouse gas emissions, improve general quality of life, reduce vulnerability to diseases, or lift people out of poverty. But too often these efforts remain fragmented, lacking scale and impact. And too often they are disconnected from underlying drivers of business value. In interviews, executives say their greatest challenge with these initiatives is integrating them into their core business. These initiatives have limited ability to release the tightening constraints on a company's opportunity space. To break through, companies must make sustainability a source of business advantage, and that requires taking a new approach that seeks out innovative ways to address environmental and societal needs through their core business models.

Sustainable business model innovation (SBM-I) brings these two ideas together, addressing the main challenge executives face in making sustainability a source of advantage. Exhibit 1 depicts competitive advantage and business value on the left, environmental and societal benefits on the right, and in the center, the place to focus attention: continued development and improvement of a sustainable business model. Companies like Schneider Electric solve for their business objectives and their environmental and societal commitments together, widening their opportunity space in the process.

The Landscape of Sustainable Business Model Innovation

As part of our BCG Henderson Institute research on SBM-I, we sought to understand how far companies have moved in building out sustainable business models. In a group of approximately 500 sustainability initiatives around the world, we found just 102 cases where companies changed some part or all of their core business model to generate environmental and societal benefits and business value. Even among these companies, few have captured the full potential possible through SBM-I. There are two main reasons for this shortfall.

First, most companies have only begun their SBM-I journey. They still regard corporate social responsibility as a matter of compliance and securing a "license to operate" from regulators and public opinion. They limit themselves by thinking of their environmental and societal benefits primarily in the narrow terms of ESG performance. It takes time and concerted executive attention to develop the necessary attitudes, mental models, strategies, and practices that can leverage the core business and turn sustainability into an advantage.

Second, there has not yet been a holistic, structured approach for designing sustainable business model innovations that generate full value. The intersection of business value and environmental and societal benefits does not occur by chance; it takes a rigorous innovation approach and a set of organizational design choices. In this article, we look at the landscape using SBM-I to build competitive advantage.

To understand the state of sustainable business model innovation, we plotted the 102 case studies against three dimensions to depict the landscape of sustainable business model innovation:

1. The scale and scope on which SBM-I changes the business model

2. The extent to which SBM-I is creating business advantage

3. The magnitude of the environmental and societal benefits SBM-I creates

1. Expanding the Scale and Scope of Innovation
This dimension represents the scale and scope of the company's SBM-I initiatives. It includes how ambitious the effort is-for instance, the extent of its reach across the company's value chain, or how many businesses and product and service lines it involves. How willing are they to use sustainability to reimagine business-as-usual? Could it lead them to a fundamental reimagining of their business model?

Companies tend to fall into one of three stages of maturity on this dimension. In initial stages of SBM-I development, the focus is generally on improving the environmental and societal benefits of a product or process. For instance, the Swedish fintech Doconomy launched "DO", a mobile banking platform and credit card that helps consumers track, limit, and offset the CO ₂ emissions associated with their purchases. This offering directs consumption toward more environmentally friendly products and services.

In the next stage, the SBM-I initiatives focus on enriching the company's value chain -upstream with its suppliers, downstream with distributors and customers. The Brazilian cosmetics company Natura, for example, developed its very popular line of Ekos nature-friendly cosmetics by sourcing products in ways that empower indigenous communities and preserve and replenish biodiversity in the Amazon rainforest. Similarly, PepsiCo's well-established sustainable farming program helps more than 40,000 farmers across 38 countries adopt precision technologies and regenerative agriculture and soil health management techniques. As a result of this program, the potatoes used to make Frito-Lay products sold in the US and Canada are sustainably sourced.

Downstream, Samsung's large-scale e-waste recycling program was active in 54 countries as of 2018; it had collected more than 3.55 million tons of products since 2009. The apparel brand C&A made a similar commitment to "circular fashion," launching a program to take back and donate or recycle garments from consumers. Since 2012, the program has collected one thousand tons of used garments in Europe, Brazil, and Mexico. In addition to managing waste responsibly, the Samsung and C&A programs are also poised to improve resource use as they gain scale. They can potentially serve as a valuable source of input materials to develop more circular models-for example, providing precious metals for electronics manufacture or textile fibers for garments.

Some companies go still further, reimagining the business model to deliver environmental and societal benefits. They unlock new growth opportunities by solving for environmental and societal needs heads-on, often transforming their core business model. Schneider Electric, with its EcoStruxure platform, falls into this category. So does Yara, a pioneering Norwegian agricultural products company, which diversified beyond its traditional fertilizers business to launch a digital "smart" agriculture arm. Using satellite imagery and connected sensors and dispensers, Yara's solutions enhance customers' farming yields while reducing the amount of water and fertilizer dispensed and providing optimal support for crops. A third example is the Dutch social enterprise Fairphone, which is reimagining the consumer electronics business model to produce and sell a more ethical and durable smartphone. The Fairphone is composed of sustainable materials, including responsibly sourced and conflict-free tin and tungsten and recycled copper and plastics; it has a modular design that can be upgraded and repaired by swapping out components.
2. Gaining Business Advantage
The second dimension has to do with the level of business advantage derived from sustainable business model innovation. Here, too, there are three stages of maturity, depending on the way each company builds its brand and competes in the marketplace-or, better yet, changes the nature of competition.

In the initial stages of business advantage, SBM-I enhances and amplifies the brand. Its environmental and societal benefits increase differentiation, competitiveness, and stakeholder value. Natura's sustainable Ekos cosmetics line and Fairphone's ethical phone appeal to consumers who value sustainability and wholeness, attracting their loyalty and willingness to pay premium prices.

In further stages of advantage, SBM-I shapes the business ecosystem and its stakeholders' values and dynamics. On the basis of its capacity for business model innovation, the company influences industry norms, standards, and regulations, along with supplier and consumer demands and behaviors. For example, Dell's Digital LifeCare platform enables early screening of non-communicable diseases and care delivery for hard-to-reach populations in rural India. To deploy the platform, the company works with stakeholders across the ecosystem, including the Government of India and a diverse ecosystem of partners. Digital LifeCare's enrolled population has grown from 58,000 in late 2018 to nearly 60 million as of mid-2020, positioning the company as a critical player in the country's digital health infrastructure. Similarly, the Dutch company Royal DSM is partnering with the Rwandan public sector, international aid agencies, and local NGOs to provide more nutritious, fortified foods in the country. Together, in 2017, they launched Africa Improved Foods, a private-public joint venture that has developed local farming and supply networks, manufacturing capacity, and a pan-African customer base.

The most mature stage of advantage involves creating a new playing field, with reshaped boundaries of competition and stakeholder dynamics enabling new value creation. One example is Yara's foray into digital farming, which unlocks new growth opportunities by shifting from selling crop nutrition products to solving broader agricultural and environmental problems. Another is BIMA, a digital insurance provider that started operations in Ghana in 2010. Thanks to its innovative technology platform and partnership model with telecom providers, mobile money providers, and insurance underwriters, BIMA provides affordable, easy-to-manage life and health insurance to more than 35 million low-income customers across ten emerging economies. BIMA's customers have access to its services through their mobile phones. Many of them are lower-income families who earn less than $10 a day. About 75% of them are obtaining insurance for the first time in their lives.
3. Creating Environmental and Societal Benefits
The third dimension has to do with the magnitude and nature of environmental and societal benefits generated. In our work to holistically define impact, we identify six dimensions of environmental and societal value that companies can create through their products, services, operations, and value chains. These areas include economic vitality, environmental sustainability, lifetime well-being, ethical capacity, societal enablement, and access and inclusion.

In the initial stage, the environmental or societal benefit is still limited in scale and often oriented toward mitigating the negative impacts of the business. SBM-Iaddresses the symptoms of the environmental or societal issue rather than the underlying causes. For instance, collecting and recycling plastics is an excellent first step in reducing the impact of plastic waste. However, it does not achieve true sustainable packaging. That would require fully circular solutions in which all plastics are recycled, or even packaging-free solutions. Similarly, ensuring animal welfare at the food production stage is an essential early-stage activity. Still, it does not address head-on the challenges of emissions-intensive production of cattle for food.

In the next stage, SBM-I delivers meaningful environmental and societal benefits by targeting root causes of the environmental or societal challenge. The company's activity generates net environmental or societal benefits, and there is potential for significant positive impact if it can scale. For instance, IBM's Food Trust blockchain-enabled technology platform establishes transparency around environmental sustainability for products in the grocery supply chain, ensuring product integrity and safety from production to consumption. This platform delivers meaningful environmental and societal surplus just by increasing the integrity or ethical capacity of the supply chain.

Finally, the most mature group of SBM-I efforts on this dimension creates high, at-scale environmental and societal benefits, addressing the root causes of the issue at hand. For instance, M-Pesa-a peer-to-peer mobile money service for people without a bank account-was born as a joint project between Vodafone and Safaricom. Launched in Kenya in 2007, M-Pesa has since increased the financial resilience of 40 million users in Africa, while creating income for 300,000 M-Pesa agents and a healthy business for the telecommunications venture.

By combining these three dimensions, a picture of the current competitive landscape of sustainable business model innovation emerges. Exhibit 2 shows the placement of all 102 SBM-I initiatives according to our three dimensions. It divides these initiatives into three groups, according to how far they have advanced.

Of the case studies, 45% are "initiative leaders" (shown at the lower left of Exhibit 2). These companies are often associated with a strong brand promise based on sustainability. They tend to invent or improve products to address consumer, regulator, or investor demands for more environmentally and socially mindful outcomes. While these SBM-I efforts can enhance and differentiate a company from its competitors, their advantage can fade as competitors replicate their approach or join industry coalitions. For example, most plastics recycling programs are no longer differentiating, because nearly all consumer packaged goods companies have made commitments to tackle that waste issue.

Moving to the center of the matrix, 25% of our cases qualify as "ecosystem leaders." Companies undertaking these SBM-I initiatives seek to provide environmental and societal benefits by reshaping the dynamics of suppliers, distributors, investors, policymakers, and customers. They are often visionary companies, seeking to turn environmental and societal challenges into new business opportunities. Some of them form novel cross-industry or cross-sector partnerships to build their new sustainable business models. For example, Microsoft's Airband initiative works with regulators and develops novel distribution partnerships with local telecommunications companies and internet service providers (including small and medium-size enterprises) to extend broadband voice and data access across low-income and rural areas. Its goal is to reach more than 40 million additional people in the US and abroad by 2022.

The Front-Runners of SBM-I

The final 30% of cases are "front-runners." They pave the way forward for their industries and markets, and they provide insight into what advanced SBM-I could look like. Front-runners have shifted their perspective from incremental "company-out" activities to more radical "societal needs-in" innovation. That is, they reorganize their capabilities, assets, products, services, and ecosystems to proactively solve for the UN Sustainable Development Goals, with close ties to their own business value drivers. Front-runners generate business outcomes (for example, total shareholder return) and environmental and societal outcomes in mutually reinforcing ways. They are closest to turning sustainability into a competitive business advantage.

In analyzing front-runner case studies, we found several factors that characterize them:

They emphasize sustainability as part of their purpose. All of the companies in our sample explicitly mention environmental or societal surplus in their formal purpose, vision, or mission statements.

They build a robust, resilient business model and deploy it for all their goals. The drivers of environmental and societal impact are directly linked to the drivers of business value and competitive advantage. These companies thrive as businesses because of their efforts to tackle the root causes of an environmental or societal issue.

They optimize for holistic environmental and societal outcomes. Rather than focusing on an isolated symptom of a particular issue, they seek a comprehensive solution that addresses its complex, systemic root causes. This differentiates them from competitors. It allows them to shape the stakeholder dynamics of the ecosystem and even reshape the boundaries of competition (the "rules of the game") to their advantage.

They combine several sustainable business model innovations.In "The Quest for Sustainable Business Model Innovation"we introduced common innovation archetypes for sustainable business models: Own the origins; Own the whole cycle; Expand societal content; Energize the brand; Re-localize/regionalize; Expand the value chains; and Build across sectors. By combining and layering these approaches, companies develop holistic strategies and models that increase business value and increase societal and environmental benefits simultaneously.

They deploy advanced technology and digital capabilities. This enables them to develop new solutions, break old economic constraints and tradeoffs, and amplify their reach and scale. Companies that demonstrate sophisticated use of digital tools, analytics, and other advanced technology tend to score higher on the value drivers associated with business value and increase societal and environmental benefits.

They gain leverage from new cross-industry and cross-sector partnerships. Front-runners partner with private, public, and social entities to pool resources, exchange capabilities, unlock new markets, and amplify their reach and scale.

They create value for a wide range of stakeholder groups. They proactively take into account the long-term interests of customers, suppliers, employees, shareholders and investors, government, and all of society, and in so doing they expand their basis of advantage.

They experiment with new ways of capturing value. They look for innovative approaches to securing customer preferences and accessing new markets. They also experiment with novel ways to get returns on the stakeholder value they create-for example, leveraging blended financing to reduce risk and amplify their own investments.

Proficiency in any new field is a moving target, and sustainable business model innovation is no exception. The front-runners of today will be joined by many other companies. Many of them, like Schneider Electric, are finding ingenious solutions to pernicious societal and environmental problems. Along the way, they are demonstrating what a quality company will be like in the future.

The SBM-I landscape provides a quick way to understand just how far your company is leveraging sustainability as advantage. Start by looking closely at your current business model and sustainability initiatives, in light of the three dimensions of the SBM-I landscape. We've explored answers to some related questions in other articles in this series. What is the scale and scope on which you're innovating to drive environmental and societal impact? How much sustainable business advantage are you creating? What kind of environmental and societal surplus are you generating? Where do you start your SBM-I journey?

The BCG Henderson Institute is Boston Consulting Group's strategy think tank, dedicated to exploring and developing valuable new insights from business, technology, and science by embracing the powerful technology of ideas. The Institute engages leaders in provocative discussion and experimentation to expand the boundaries of business theory and practice and to translate innovative ideas from within and beyond business. For more ideas and inspiration from the Institute, please visit our Latest Thinking page and follow us on LinkedIn and Twitter.

David Young

Boston

Martin Reeves

San Francisco - Bay Area

Marine Gerard

San Francisco - Bay Area

About Boston Consulting Group

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders-empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.

Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

© Boston Consulting Group 2022. All rights reserved.

For information or permission to reprint, please contact BCG at permissions@bcg.com. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and Twitter.

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# data[].attributes.attachment_link.description
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# data[].attributes.attachment_link.readable_text
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