From linear to circular: how product-service systems affect the circularity in the supply chain

In order to understand the impact of these different business models on supply chain operations, the interviewees were asked to describe the supply chains of each business model. Figure 35.1 shows the supply chains architectures of different business models.

The circularity of the supply chain operations of each business model is analysed.

Traditional product-based model

As shown in (a) of Figure 35.1, the supply chain of the traditional product-based model mainly includes design, procurement, production, distribution, consumption, and disposal processes. It follows a linear ‘take, make and dispose’ pattern. The company purchases materials and parts from suppliers, produces the products, and sells them to the customers all over China, who then discard the products when they no longer function. There are no materials and information flowing back to the company. The rate of remanufacturing and reuse is very low. Sometimes whole products are discarded only because small parts are broken.

Product-oriented product-service system

In this business model, the company provides technical services for the products during the usage phase. Compared to the supply chain of product-based business model, product-oriented PSS extend the product life through regular maintenance and repair, as shown in (b) of Figure 35.1. Both the company and customers have a high motivation to have technical services because this increases the service revenue for the company and also reduces the cost for customers compared to building their own service teams. The advantage of the manufacturer providing technical services is that the company understands its own products better and can provide more professional services than customers or other third-party companies.

Use-oriented product-service system

For use-oriented 1’SS, the company leases products to the customers and provides technical services. Compared to the previous two business models, the leasing projects have more cycles to reuse, recover, remanufacture, and recycle the used gas generators, as shown in (c) of Figure 35.1. The reason is that the company retains ownership of the products and is incentivised to extend the product longevity and capture value from end-of-life products as much as possible. The longer the customers use a product, the more revenue the company could get from leasing.

Supply chain architectures of different business models

Figure 35.1 Supply chain architectures of different business models

Result-oriented product-service system

In this business model, the company sells industrial gases rather than gas generators. Instead of making and distributing gas generators to customers, the company built its own gas centres in industrial parks which are close to customers. The company became the actual consumer of gas generators, and the produced gases were distributed to various customers in the industrial parks. As shown in (d) of Figure 35.1, the power of maintenance, repair, reuse, recover, remanufacture, and recycle is much stronger than in the previous three business models, because the company is the actual user and can control the usage phase. In addition, the company created value from by- or co-products (e.g., N, is regarded as a by-product of production for O,). The potential value from gases, which was previously ignored by customers (since customers did not have the expertise to fully use gases), is now captured by the manufacturer in the result-oriented PSS business model. In this way, the manufacturer internalises the potential value of the products' products and is incentivised to maximise value from them. This also applies to co-products. In this business model, the company has greater incentive to increase the use of gases. It has utilised different gases for different customers, coordinated use of gases among customers during peak and off-peak times, and therefore reduced gas emissions. Therefore, in this business model, the company not only establishes an inner circle of reuse of the products (i.e., gas generators) but also the reuse of the products’products (i.e., gases).

The case study shows that the closer to result-oriented PSS, the tighter and more efficient the cycle is, which means the repair, reuse, and remanufacturing system is faster, the rate is higher, and the product has to be changed less to come back to the cycle again. The more efficient the cycles, the higher the potential savings on the material, energy, labour, and operations and the lower the waste of emissions. The result-oriented PSS also extends the reuse of products to the reuse of products' products. The main reason for this is that the manufacturer has ownership and is the actual user of the products, so it can control the usage and end-of-life phases of the products.

Circularity as a source of value creation of product-service systems

Circularity through increasing the inner cycle, cycling longer, cascaded use, and pure circles are regarded as the four main sources of value creation (Ellen MacArthur Foundation, 2015). In order to compare the circularity of different business models, we use these four sources (explained in the subsection on product service systems) as the criteria to analyse the product-based business model and the three types of PSS business models in Figure 35.2.

Figure 35.2 shows that the product-based business model in the company adheres closely to linearity in its supply chain. Each of the PSS business models has inherent circularity to varying degrees. Both the product-oriented PSS and use-oriented PSS predominantly create value through increased use of inner circles and circling longer, whereas the use-oriented PSS has a stronger impact on the two sources. It means that use-oriented PSS has more frequent inner circles and circling longer than product-oriented PSS.

In addition to the inner circle and circling longer, the result-oriented PSS could also create value from cascaded use through a symbiosis approach of co-products and by-products in other value chains, for example, the application of co-produced gases in new fields.

This type of circularity only happens in result-oriented PSS in this case because only in this business model can the manufacturer control the co-products and by-products of its original products and create value through cascaded use of the co-products.

Sources of value creation for circularity of different business models in the company

Figure 35.2 Sources of value creation for circularity of different business models in the company

Figure 35.2 also shows that pure circles seem to be irrelevant to the PSS business models in these cases, but the interviewees showed higher motivation to achieve pure reuse of materials under the result-oriented business models.

Underlying the phenomenon, the fundamental reason for the difference of circularity of the business models seems to be related to ownership of products. The company retains the ownership in use-oriented PSS and result-oriented PSS and has strong control of products over the life cycle and therefore is more incentivised to create value from the whole product life cycle (air separation units) and even the products’ products (e.g., O,, H , Ar, He, Xe, and Ke). The company therefore has the responsibility' and incentive to reduce the environmental impact of the products in use, especially when these affect the economic value. For other PSS business models, these issues are the responsibility of customers; for example, in the product-based model, the company' does not have a detailed level of information of the used products because the information is controlled by' the customers. Therefore, use-oriented and result-oriented PSS business models are more appropriate for circular supply chain development because of product ownership characteristics.

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