Importance of the Circular Economy for Manufacturing

Importance of the Circular Economy for Manufacturing
  • Blog post
  • December 14, 2021

Dr. Hans-Jörg Kutschera, Simon Treis, Georg Krubasik, and Dr. Daniel Haag

A cross-industry perspective on the circular economy

The circular economy (hereafter: CE) can serve as an important building block for the sustainability targets of manufacturing companies. Although the term itself has long been established, we see that proper implementation of CE across entire manufacturing value chains is still lacking and remains a key challenge for companies. However, there are clearly visible and good examples of CE which have already been implemented, generating sustainable and economic value among multiple layers.

Various benefits can potentially be achieved simultaneously by implementing CE. First, the European Union (EU) aims to develop the concept of CE as one of its six strategic objectives in the EU Taxonomy, which will resolutely promote the financing of CE solutions. Second, by minimizing resource consumption, CE will automatically help to reduce costs. Third, as sustainability becomes more and more important, new customer segments can be reached. Fourth, CE will increase supply security as dependency on global raw material suppliers will be reduced. These are just a few examples of how CE significantly contributes to a company’s operational resilience in the New Normal (learn more about it). Finally, CE has the potential to create new business models such as the renting and leasing of used machines.

Introducing the 4 Rs

When introducing CE to manufacturing, the consideration of four cornerstones, which we call the four Rs, is crucial: Reduce, Refurbish/Reuse, Recycle and Recover. Each of the four Rs contributes to sustainable manufacturing. However, their relevance for CE, impact on the current manufacturing strategy and ease of implementation vary. Moreover, the level of impact and applicability is industry-specific.

Industry specifics

Challenges and opportunities are likely to vary significantly from one industry to another. Individual assessments and concepts are necessary as there is no one-size-fits-all solution to CE across the manufacturing industry. The graph below shows the different impact of CE in selected industries. In the following the 4 Rs will be explained and visualized by some examples.  


A first and often simple step towards sustainability is to reduce the quantity of resources and raw materials required to manufacture the same product with the same level of quality. This is a very decisive step towards CE because everything that is avoided upstream does not have to be refurbished, reused, recycled, or recovered later. In turn, this reduces costs and complexity.

The focus of the pillar “Reduce” in CE is on material usage, which comprises up to 45 percent of the production costs in Germany at the present time. Energy costs also play a role but are at less than five percent of the average production costs. There are multiple examples on how to “reduce” in order to operate in a more sustainable manner.

Successful industry examples

There is a huge trend within the packaging industry to reduce the amount of packaging material and to replace less environmentally friendly packaging materials with new more sustainable solutions. Körber, for example, reduces the plastic consumption of its customers by offering machinery which uses alternative materials such as wood, bamboo or fungi.

pulp-based refinery plant (such as the Stora Enso Sunila Mill in Finland) is another example. This facility enables renewable products derived from industrial processes for which biomass acts as a source of energy to replace products made with fossil fuels. Lignin can serve as a replacement for resins found in adhesives used for plywood as well as veneer applications. The Finnish mill is actually the world’s very first integrated lignin extraction plant manufacturing dry kraft lignin and subsequently feeding it directly into the lime kiln as a substitute for fossil fuels. Or else the lignin is packed and sold to external customers.


Used products can be refurbished and/or reused as a whole or in part to generate new products as a means of reducing raw material consumption. In turn, this not only contributes to sustainable manufacturing but is highly relevant for CE. Refurbishing and reusing are among the most complex aspects to implement considering the CE’s industry-specific features and will therefore have a high impact on manufacturing strategies.

Successful industry examples

The simplest example is the commonly-known second-hand business which is promoted nowadays as refurbishment, e.g., IKEA for refurbished furniture or Apple with refurbished electronics. Refurbishment can go far beyond that and can be leveraged in other industries as well which not only operate in the B2C but in the B2B segment as well.

Power tools featuring extremely durable components provide yet another example. Although they are not technologically upgraded, these parts are frequently discarded alongside the tool if sensitive parts no longer work properly. The DIY retail company Kingfisher entered into a cooperation with Brunel University to develop a cordless drill enabling disassembly to take place in less than one minute. Defective parts can be completely recovered and thus kept within the closed loop when removed and shipped back to the producer.

The conversion of cars into electric vehicles provides another example for remanufacturing the bulk of the product and not only individual parts. To this end, the Dutch start-up COCO Automotive replaces the combustion engine with an electric drive system. As a result, the vehicle fleet can be electrified more cost-effectively and in a more environmentally friendly way compared to producing new electric vehicles and scrapping old combustion vehicles.

Various electrical machinery manufacturers are starting to implement refurbishment and reuse cases. For example Quadient is a company which produces and sells or rents out franking machines. The firm has implemented a return program for equipment and consumables. The equipment is first disassembled before the retrieved components, parts and modules are re-used in new machines. The customer still benefits from full performance while receiving a new machine which includes used components.


Recycling means converting (parts of) products at the end of their useful lives into new raw materials and feeding them back into the manufacturing value chain of the original product. This not only reduces the amount of waste but also creates additional valuable products. Although less complex than the refurbish/ reuse aspect, recycling is a crucial pillar of CE, especially when the same manufacturing value chain is involved. Similar to refurbishing/ reusing, the possibilities for recycling are industry-specific and will require an adaptation of manufacturing approaches.

Successful industry examples

One example from the pharmaceutical industry is the recycling of active ingredients from unused, expired medicines in the form of tablets and capsules. In this process, they are isolated from the excipients, allowing more than 70% of the active ingredients to be recovered at a high level of purity. In turn, these ingredients can be later combined to produce new drugs. This recycling of active ingredients is less costly and less expensive (i.e., more economically attractive) than the new synthesis of active ingredients. Furthermore, a positive side effect is preventing environmental damage such as the pollution of drinking water caused by the improper disposal of expired medicines.

For one thing, companies can recycle the waste materials generated in the production process. Moreover, the finished products themselves can also be recycled later on. For example, this is common practice in the production of rails. At the end of their useful lives, they comprise the highest-quality steel scrap. The metal is melted down to produce new rails with very tight alloy tolerance specifications. Besides saving resources and money, this approach also reduces CO₂ emissions compared to steel production from primary resources (i.e., iron ore, coking coal, etc.).

To provide yet another example: Porsche and Circularize collaborate with Borealis, Covestro and Domo Chemicals to enable the traceability of plastics in the automotive sector. This serves as the basis for increasing the volume of recycled plastics.


When the reuse or recycling of materials or products is not possible, it is essential to at least recover energy directly from the manufacturing process or by incinerating the products.

Successful industry examples

One example of recovery is the production of biofuel from waste products. McDonald’s in France collects food waste and used cooking oil from its restaurants to generate biofuel. Nine tons of waste is converted into two tons of biogas. In turn, this biofuel is sufficient to power a McDonalds vehicle which delivers food to restaurants and picks up organic wastes afterwards over a distance of 7,500 km.

A similar approach is taken by Maple Leaf, which has diverted over 11k metric tons of organics from their facilities to an external provider, which, in turn, generates green electricity out of it.

The industrial sector accounts for more than 40% of total energy consumption globally, which includes a large proportion wasted as heat. Material waste is clearly visible. In contrast, waste heat can be tricky to identify and evaluate both in terms of quantity and quality. Hence, by being able to understand the availability of waste heat and the ability to recover it, there is an opportunity to reduce industrial energy costs and related environmental impacts.

Implementation of CE along the manufacturing value chain requires new capabilities

Bringing the concept of the CE to life within the manufacturing value chain involves substantial changes in core production and supply chain processes. An effective reverse logistics process to get the used products back into the cycle is essential for the success of CE. This may be done by increasing customer interaction after the initial sale. Gathering data on volume forecasts for the return of used products is necessary in order to fully apply the concept in manufacturing industries

1. Additional inbound logistics

In addition to establishing reverse logistics for used products, other processes are also necessary for the incoming used products. During the initial quality check, operators need to make an assessment and reach a decision based on the following questions: Can the product (or parts) be refurbished/reused? Or is the quality insufficient and thus recycling and recovering need to be considered? Based on this quality check, the following processes need to be aligned with the rest of the manufacturing value chain.

New quality management concepts are required to ensure that products match quality standards in the case of refurbishing or reusing. The upskilling of operators is necessary to ensure proper disassembly and functional testing of the equipment. The focus should be on valuable components, subsystems, and parts so that additional costs are reduced to a minimum.

Quality standards are not the only criteria for recycling and recovering. For this reason, new capabilities are required to identify the various options. There is extensive potential for outsourcing recycling/ recovering capabilities due to the high degree of standardization and low level of required product know-how. In-house recycling and potentially the need to develop capabilities are more beneficial in case of high volumes. Outsourcing is a strategic decision based on whether companies want to own the CE process end-to-end or whether they prefer to create (new) partnerships to continuing focusing on their core capabilities.

This first step is not only relevant for manufacturing but also requires close collaboration among the different departments. Quality gates for functional testing must be defined jointly by the R&D and Quality departments. These departments will have to approve the equipment used to test incoming goods. The R&D department can also be leveraged to increase the percentage of refurbished products and the ease of disassembly by implementing the concept of “Design to Sustainability”. This means that products should be designed to be modular from the ground up enabling their easy and quick disassembly.

2. Separate storage

After passing the quality gate, refurbished modules and products are stored in distant locations or storage sites to avoid mix-ups later. For quality purposes, it is essential that distinct labeling is applied to these modules and/or products. This applies both internally, i.e., within the ERP system (especially with the PLM) and externally, i.e., with a green label for customer awareness. Introducing a second product code is imperative as a means of monitoring the extended life cycle of a refurbished module and/or product. In turn, this enables the tracking of component history and the number of cycles on the market as well as traceability as the basis for quality analyses in response to any market complaints. Before market release, conformity assessments may be necessary to determine whether the new processes impair product design, function or safety. Substantial changes may also require a reevaluation of CE marketing/certification.

The second step also needs to be aligned with other departments e.g., the Supply Chain and the R&D department. Both departments have a considerable interest in the traceability of used products. Supply Chain wants to know how many refurbished products or used parts are moving within the system, thus resulting in a reduced demand for inbound materials. R&D can leverage data on the number of product returns and cycles of each product or product component to better understand the durability of their developed products.

3. New production concept

When fully implementing the concept of the CE in a manufacturing environment, COOs and site managers may have to rethink their production concept holistically. Reconsidering sourcing strategies and aligning the inbound process for both used and new components is essential. Separate production lines might be necessary, depending on the industry. Managers need to rethink production planning and shop floor layouts. They also need to re-evaluate the takt time of used components and run processes for synchronization purposes. Ultimately, the continuous tracking of (re)assembled used components must be ensured throughout all processes.

This last step within manufacturing will also need to be coordinated with other departments. R&D would like to know how they can further enhance “Design to Sustainability” on the basis of feedback from other departments involved in CE. R&D might also want to think about how to refurbish older generations of products to increase the impact of CE. Procurement would like to know about the reduced material demand as a result of increasing refurbished products, and Supply Chain is interested in the volume and demand forecasts.

Monetary impact – CE creates value

In any case, the introduction of a CE is worthwhile because, in addition to sustainable value, it also generates considerable monetary value for the company. For example, a machinery producer may be able to save up to 60% of the total material costs of the individual products by refurbishing machines and reusing components. Furthermore, the introduction of a green label results in additional sales potential. Moreover, the positive CO₂ impact of reuse, which at first glance seems to mainly involve the aspect of sustainability, results in monetary savings as well if even higher CO2 prices be introduced in the future. The graphics below visualizes a possible CE case including the resulting monetary benefits.

Our approach

Our simple five-step approach is designed to deliver an implementation-oriented roadmap and leverage the maximum potential:

  1. Product portfolio analysis to identify possible circularity potential incl. classification of the 4R’s
  2. Justification of a CE implementation by means of
    • an environmental impact calculation to identify GHG emission reduction potential and
    • a high-level business case evaluation to calculate the monetary impact
  3. Definition of a CE strategy as the basis for deciding on whether to own the CE process end-to-end or leverage partnerships for this purpose
  4. Roadmap creation to define implementation measures
  5. Joint implementation of selected measures

Please reach out to our dedicated ESG (in) Manufacturing team to learn more about the circular production strategy.

Eva Nguyen, Katharina Heisig, Tim Biskup, and Sebastian Geibig have also contributed to this article.

Contact us

Dr. Hans-Jörg Kutschera

Dr. Hans-Jörg Kutschera

Partner, Strategy& Germany

Simon Treis

Simon Treis

Partner, Strategy& Switzerland

Georg Krubasik

Georg Krubasik

Director, Strategy& Germany

Dr. Daniel Haag

Dr. Daniel Haag

Director, Strategy& Germany