Economic and Social Implications

The principal of stock management is caring (stewardship) to maintain the quantity and quality of stock. This applies to most stocks, including natural, human and manufactured capital, and is radically different from the bigger-better-faster-safer (fashion) thinking underpinning the industrial economy. The throughput (flow) optimisation of production in global supply chains is replaced by asset (stock) management in the circular economy; the economic concept of value added is replaced by the objective of value preservation. What is of interest to investors is the fact that the return on investment (ROI) of a remanufacturing plant is usually many times that of a plant manufacturing the same goods from scratch, due to lower capital cost. On the other hand, the operating costs, notably labour, are typically much higher. These differences have a number of important implications.

Business Models in the Performance Economy

The essence of the performance economy lies in producing, selling and managing performance over time (Stahel 2010). Stock management lies at the heart of the business model because each flow (repair or stock loss) represents a cost. The three essential components and actors in the performance economy are shown schematically in Fig. 7.4:

1. Retained ownership of goods and their embodied resources by a manufacturer or fleet manager; this supports objectives (1) and (2) of the priority list developed in Sect. 3;

2. The skills and powers of an original equipment manufacturer (OEM), to support

objectives (3) to (8);

Fig. 7.4 The business models of the performance economy

3. The skills of an economic actor responsible for the operation and maintenance (O & M) of a fleet of goods, to support objectives (3) and (7).

Successful operation in the performance economy incorporates all three components. Selling performance (or “servicisation”) entails internalising the costs of risk and waste over the full service life of the manufactured capital. As a result, different ways have emerged to combine the roles of the three different types of actor to increase stock life, quality and performance and reduce transaction costs. They are illustrated by the specific examples shown in Fig. 7.4 and itemised in the text box. Manufacturers exercising the O & M of their goods through service contracts give their customers a function guarantee; this provides reassurance of quality and encourages users to retain the stock. This also encourages modular design to facilitate upgrading rather than complete replacement; for example, some lift manufacturers adapt existing elevators by replacing single doors with modern double door sets; devices with electric motors can be equipped with electronic speed control to improve energy efficiency; office equipment companies (e.g. Xerox) use modular system design with standardised components across different product lines. Retaining ownership encourages management of end-of-life goods. Performance monitoring of stock in use and preventive maintenance to guarantee uninterrupted performance are essential, where possible using maintenance strategies which minimise or eliminate the need to stock spares.

As indicated in Fig. 7.1, the performance economy entails intelligent decentralisation, with generally more localisation of economic activity than in the industrial economy. This provides further opportunities for the development of industrial symbioses (see Chap. 5). Re-use is inherently local. The geographic scale of Loop 1 activities (remanufacturing) is determined by the mobility of goods, the extent of standardisation of goods and the batch size necessary to reach a competitive remanufacturing volume. For immobile goods, such as infrastructure and buildings, service-life extension activities require mobile labour and mobile workshops. For stand-alone goods, such as engines of tractors, buses, ambulances and vintage vehicles, local remanufacturing workshops may be optimal because the remanufacturing costs are secondary to the clients' wish to continue operating the vehicle. In textile leasing (hotel or hospital textiles, which have to be washed or sterilised daily), the optimal transport distance is about 100 km (Stahel 1995: 249); franchising can therefore be a better business model than centralised treatment. The geographic scale of Loop 2 activities (reprocessing) is determined by the technology used; many metallurgical processes, associated with high capital cost, need to be operated at large scale to be competitive with primary production. However, the dominance of labour and logistic costs, rather than capital, in re-use and remanufacturing reduce the economies of scale and are therefore consistent with smaller scale, decentralised operations.

Examples of Business Activities in the Performance Economy (Figure 7.4)

(1) RETAINED OWNERSHIP + (2) OEM + (3) O&M

Selling Performance

– tyre use by the mile (e.g. Michelin)

– power by the hour (e.g. Rolls-Royce turbines)

– illumination: “pay per lux” ( e.g. Philips)

– office equipment: “pay per copy” (e.g. Xerox)

(1) RETAINED OWNERSHIP + (2) OEM

Molecules as Services

– chemical leasing: “rent a molecule” (e.g. lubricants, cleaning solvents)

– mining: nation state grants “licence to operate” but retains ownership of

the output (WEF 2015)

(2) OEM + (3) O&M

Function Guarantee

– commercial and service equipment (e.g. freezers, elevators)

– chemical management systems

– integrated crop management

(3) O&M + (1) RETAINED OWNERSHIP

Goods as Services

– transport (e.g. shipping, buses, containers)

– “wet” leasing of aircraft: aircraft plus crew plus fuel

– real estate (e.g. hotels, time-shares)

– short-term equipment rental (e.g. vehicles, tools)

 
< Prev   CONTENTS   Next >