Will a Circular Economy Work with Leakage?

Sustainability is one of the big buzzwords, and the biggest verbal pushes, in today’s Procurement. (In practicality, most organizations won’t put their money where their mouth is and if the more sustainable solution is more than a point or two more cost-wise, environmentally damaging sweat-shop production, here we come!) We need to get there, because only an idiot would deny global warming (the last 13 years have seen 10 of the hottest year on record), and no one can deny the correlation between carbon emission, atmospheric carbon increase, and global warming. (You can argue just how much is due to carbon emission and how much due to other factors, many of which are indirectly caused by warming, but not that carbon is a problem.) Thus, even though we don’t know how much carbon reduction will help, we know it will, so we need to get there.

One big way to reduce carbon is to reduce production, which can done by reducing waste, which can be done through more refurbishment, repair, re-use, recycling, and reclamation — which are all part of the circular economy. Which is where we really need to get to (because waste is a problem — in addition to overflowing landfills that can pollute nearby water suppliers and make nearby land unfarmable, and even uninhabitable, think of the great pacific garbage patch and the containers of e-waste being sent to India, which has been a problem for well over a decade, see this 2010 article on the Times of India, and you start to get a grip on the magnitude of the problem).

But how efficient does the circular economy have to be to be effective? Theoretically, anything more that we do is one step better than what we are doing today, but, given that most products weren’t designed for recycle and reclamation, technologies for recycling and reclamation are immature and possibly carbon/generating themselves (especially if the answer is extract what we can, bury or burn the rest), and that there are breaks in the chain, is this leading to new waste that could possibly offset (or exceed) the expected (carbon) savings?

It’s a question Karolina Safarzynska, Lorenzo Di Domenico, and Marco Raberto recently tackled in an open-access paper on how the leakage effect may undermine the circular economy efforts available on nature.com. In the paper, the authors examine the impact of the circular economy on global resource extraction by way of an input-output analysis using an agent-based model of the capital sector. Through a detailed analysis they find that an appropriately structured circular economy economy can significantly reduce the extraction of iron, aluminum, and nonferrous metals if
implemented globally but the leakage effect may also cause some metal-intensive industries to relocate outside the EU, offsetting the circular economy efforts because an overlooked requirement for the circular economy is not just a reduction of waste, but a reduction of transport as transportation (air, rail, truck, and ship) contributes a significant amount of global carbon. In fact, if you go to Our World in Data, in the United States, the transportation sector accounts, like the energy (electricity and heat) sector, for approximately 30% of transportation emissions. The statistics right now are similar for the EU (24% for transportation and 28% for energy). So, if all of a sudden products need to be shipped halfway around the world to be recycled and reclaimed and the core materials shipped back, transportation-based emissions would increase significantly and possibly even overtake the extraction and raw material processing emissions!

In all fairness, we should note that the paper is pretty technical and metric heavy, and this is a bit of a simplification, but it’s the core idea we need to be aware of. It’s not an improvement if the carbon you take out of one segment is exceeded by changes in another. Just like we need to home/near-source for anything we can grow/mine/make at/near home, we also need to home/near reduce/reuse/refurbish/remanufacture/recycle whatever we can. It might be that the rare earths can only be mined in certain areas, but that doesn’t mean they have to be reclaimed and re-used there.

Gartner Inadvertently Makes the Case for NO AI in Supply Chains (which includes Source to Pay)

Gartner, which promotes the use of Generative AI in customer service, even though it did place Generative AI on the Peak of Inflated Expectations on the Hype Cycle for Emerging Technologies, just inadvertently made the best case for never, ever, ever using AI anywhere in the supply chain, including Source-to-Pay, and we love it!

In a press release on their newsroom in late September, where Gartner Says 80% of Supply Chain Not Accounted for in Current Digital Decision Models, the subheading clearly stated that Digital-to-Reality Gap Shows Current Technology Use Fails to Improve Outcomes for Supply Chain Decision Makers.

As a result of this “digital-to-reality” gap, Gartner’s research, based on an analysis of 600 survey responses of supply chain decision makers, not only found that current use of digital models to analyze trade-offs made no meaningful impact on the rate of good decision outcomes but actually found that slightly more bad decisions were made with the use of digital tradeoff analysis than without and marginally increased the percentage of bad decision outcomes. Moreover, More than half of supply chain leaders reliant on digital technology to make a recent strategic decision told us that they felt they would have landed on better decision outcomes without the use of their models, and our analysis suggests that they are correct.

In other words, if source-to-pay and supply-chain decision makers cannot even make decisions when relying on traditional, focussed, machine learning and modelling technology, there’s no chance an unpredictable probabilistic incarnation of Artificial Idiocy that randomly changes its output by the millisecond is going to make good decisions. And the reason is the same — just like traditional (guided) (machine learning) models require good data and a digital representation that covers the majority (if not the entirety) of the process and relevant variables, so do Generative AI models and, in just about every organization on the planet, this necessary digital representation DOES NOT EXIST!

As a result, applying AI without the data it needs to have even a snowball’s chance in h3ll to make a decision is pretty much guaranteed to lead you to worse decisions than you, or any other intelligent human with a decent understanding of the situation, will make without the use of any technology whatsoever.

You don’t need AI, you need end to end process modelling, data collection, data enrichment, data validation, and the ability to use those end-to-end digital tools, interpret the data and recommendations, and make good decisions off of that. And since, with the current rate of digitization, it’s unlikely the majority of organizations will go from 20% supply chain digitization to 80% supply chain digitization (which is the minimum level of digitization you should have before even considering any AI, even for inconsequential decisions) by the end of the next decade, you should not even have AI for decision making on your future roadmap before the next decade rolls around.

the doctor doesn’t say this often, but thank you, Gartner. (Because it really is the case that stupid is as stupid does.)

ERP at the Center of Sustainability and Human Impact?

ERP Today recently ran a brief editorial insight entitled ERP at the Center of Sustainability and Human Impact which caught my eye because ERP is generally not at the center of anything that is not manufacturing but yet should be at the center of sustainability data because it’s the ONE system that should be accessed, or at least be accessible, organization wide. However, in most organizations, all it stores is the manufacturing / order data, purchase orders, and invoices.

The article states that, within some organizations, they are providing the financial clarity to drive meaningful environmental and human impacts, however it only lists TWO (2) (Blue Marine Foundation and Oracle), and the doctor‘s experience, which is similar to other analysts he’s worked with, is that, for the vast majority of companies, this is JUST not happening.

Why? A few reasons, but the main ones are:

  • most ERPs don’t store complete financials; they’ll store POs and Inventory, but the complete financials will be in the organization’s AP/I2P/P2P systems
  • most ERP’s don’t store/calculate ANY sustainability data and
  • most ERP’s weren’t/aren’t configured to store ANY sustainability data

This means that, for an ERP system to provide financial clarity around meaningful environmental and human impacts, an organization needs to

  • integrate it’s accounting systems with the ERP and push all invoices and payments into the ERP
  • get subscriptions to third parties with the sustainability data and push that into the ERP after
  • updating the ERP configuration to store all of the relevant data around sustainability and responsibility that the organization wants to track

And while this will be doable with most modern ERPs, it could be expensive and force an organization to use another platform, such as a modern SRM (Supplier Relationship Management) platform as its core sustainability and responsibility platform instead. But it would be nice if the ERP could be the one platform that at least stores all of the organization’s golden records, because data warehouse, lakes, and lakehouses aren’t the answer (as all they do is duplicate data and make it harder to find the single source of truth) — the answer is a central source of sustainability and responsibility data that is, or could be, accessible organization wide so everyone can know the impacts of their (financial/supply) decisions. And while it could be the ERP, given the sheer cost of any customization work on any of the big ERPs, the doctor doesn’t think it’s very likely.

Procurement Performance is Relative …

… and, specifically, good Procurement performance is relative to how bad you’d be doing without a good Procurement department.

A recent article on the Supply Chain Management Review on how Procurement Costs Increase, But Top Performers See Increased Advantage which quoted a recent study from The Hackett Group, really drives the point home.

The recent Hackett study, which found that Procurement costs did increase in 2023 and now comprise 74% of total spend, as compared to 69% in 2022, for Digital World Class organizations, also found that these organizations did much better compared to peer organizations where costs increased from 89% of total spend in 2022 to 93% of total spend in 2023. In other words, Hackett found that world class organizations spend less overall while also operating at 21% lower cost than their peers and 32% less staff.

In other words, a good Procurement department staffed with educated and experienced buyers will save the organization more than it spends on the Procurement department, while keeping its overall costs below its peers. This means that any organization with a world class Procurement department can not only keep its prices below its peers in a cost conscious consumer environment, but also increase its organizational sales while its peers struggle to hold onto an existing customer base.

It may be hard to see the value of a leading Procurement department when you don’t have one, but these Hackett numbers should make it abundantly clear. 21% lower cost, and spend, on average than peers is substantial. This means that even though your spend will go up year over year in an inflationary environment, the rate of increase will be much less than your peers, giving you a significant advantage. Furthermore, if your organization acquires and installs the right affordable tools, as chronicled in our series on how much should you pay for Source-to-Pay, including our article where we explicitly said Yes Mid-Markets, 120K is More Than Enough for Source-to-Pay!, you can see multi-million ROIs in the 8X to 26X range, depending on your annual spend and Procurement maturity level (that determines how much spend you can push through the platforms).

In other words, while you can never put an absolute value on cost and Procurement value as that depends on constantly changing market conditions, you can put a relative value on best-in-class Procurement operations, and that value is 21% better than peers. Twenty One Percent. Think about that the next time Procurement asks for more senior buyers to put more spend under management or better platforms.

How Do You Sustain Sustainability When True Value is Long Term …

… and the brunt of the cost is short term?

AlixPartners recently published an article over on Mondaq on how The Fourth Dimension In Strategic Sourcing, Sustainability, Can Drive Value which caught our attention because Sustainability can drive value, but most organizations under cost pressures, which are rampant in our current inflationary economy, don’t choose the sustainable option as it’s typically a higher expense in the short-term.

Moreover, the big value is investing in suppliers that invest in new technologies that will be more sustainable in the long run. However, due to the cost of implementing these new technologies, the up-front costs are higher as the suppliers have to stay in business until the new technologies start to deliver returns. For example, the following are major improvements to sustainability:

  • suppliers utilizing, investing in, or building their own renewable energy grids (solar, wind) to avoid using the energy produced by the local coal/oil burning plants
  • suppliers re-designing production lines and methods to minimize waste (through cutting of metal, processing of food, etc.) and to ensure any waste they create can be used as an input to another production line (melting and re-fab of metal scraps, animal feed, etc.)
  • suppliers investing in their own water purification technology to re-use water in the manufacturing process
  • suppliers investing in product redesign research to minimize use of scarce rare earth minerals/metals and to increase use of reclaimed minerals/metals
  • suppliers investing in reclamation technology to maximize recycling of products created with metals/minerals

… and the following, highlighted in the article, are minor improvements …

  • sustainable supplier selection as everyone is going to try and secure the most sustainable supplier of the lowest cost suppliers, leaving less sustainable suppliers or more sustainable suppliers at a higher cost that the CFO/CEO will not let Procurement pay for the majority of organizations (the small, sustainable, suppliers cannot massively scale overnight)
  • eco-friendly packaging and waste reduction as this is not new and many organizations are already be doing this to the extent eco-friendly packaging is available
  • energy-efficient products and services as this is not new either and as companies replace end-of-life products, they have been choosing more energy efficient products for a while now with the increase in energy prices over the last five to ten years, and the truth is that this is usually a small dent on their total energy footprint
  • carbon footprint reduction as that is the goal, not a specific action that can reduce carbon footprint, and. most importantly, significant reduction requires significant investment (reducing travel and forcing the CEO to give up the private jet and fly first class only goes so far)
  • collaboration and reporting because while you need to understand your footprint, and sometimes shaming goes further than incentivizeation, reporting doesn’t actually increase sustainability unless action is taken …

IF PE firms, with billion dollar funds, won’t actually invest in supply chain (which includes sustainability) improvements, because you typically don’t realize the bulk of the value until you (significantly) pass the five (5) year mark, how can you expect short-term thinking CEOs and CFOs, trying to impress Wall Street or attract PE funding, to actually put their money with their big mouths are and invest in true sustainability?

If you have answers, we’d love to hear them — comment on the LinkedIn post.