Bain & Company Report: Manufacturing's Circular Future

Circularity refers to systems that are self-regenerating and continuous. A circular manufacturing economy is one without wasted products or materials, with refurbishment, reuse and recycling built into supply chain labour. Circularity creates more sustainable and efficient manufacturing operations, and is by 2023, set to revolutionise the ways the manufacturing sector operates. 

Bain & Company is a global consultancy firm. Its ‘Machinery And Equipment Report 2024’ specifically focuses on original equipment manufacturers (OEMs) while exploring the long-term impacts of circularity. It foresees a near future where profit pools shift to address rising numbers of companies practising circularity to extend the lifespan of their machinery and preserve vital materials. In this future, value chains will be reconfigured, to match the success of companies that pursue growth through sustainable means. 

This vision of the future is shared by machinery executives. An earlier study by the consultancy reported that 60% of them envisioned their industry’s future as circular. In Bain & Company’s most recent report, executives recognise that circularity promotes closer, long-term customer relationships and lowers the cost of equipment ownership. They have conviction in the future of circular business models, with a majority agreeing that they will significantly reduce costs, enhance operational capabilities and increase customer satisfaction. 

Some companies are already embracing this, with the same study highlighting that 47% of machinery companies had made circularity commitments. However, the majority of initiatives have a narrow scope focused on waste reduction, recycling and reduction of inputs. The report warns against the mentality, prominent among leadership teams, that circularity is a sustainability topic linked to regulation. In reality, circulation is a value-creation opportunity, providing enhanced customer relationships and access, supply chain resiliency and new profit opportunities. 

The success of supply chain circularity is strongly connected to OEMs' effective use of digital solutions. Circular business models depend on interconnected machines and data to reduce the use of raw materials. The Internet of Things (IoT) provides meaningful data that helps manufacturers enhance their energy efficiency and reduce their reliance on harmful resources. Without it, circularity is less effective as a business model, meaning OEMs' approach to digital transformation is crucial in this area. 

This vision of the future is shared by machinery executives. An earlier study by the consultancy reported that 60% of them envisioned their industry’s future as circular. In Bain & Company’s most recent report, executives recognise that circularity promotes closer, long-term customer relationships and lowers the cost of equipment ownership. They have conviction in the future of circular business models, with a majority agreeing that they will significantly reduce costs, enhance operational capabilities and increase customer satisfaction. 

Some companies are already embracing this, with the same study highlighting that 47% of machinery companies had made circularity commitments. However, the majority of initiatives have a narrow scope focused on waste reduction, recycling and reduction of inputs. The report warns against the mentality, prominent among leadership teams, that circularity is a sustainability topic linked to regulation. In reality, circulation is a value-creation opportunity, providing enhanced customer relationships and access, supply chain resiliency and new profit opportunities. 

The success of supply chain circularity is strongly connected to OEMs' effective use of digital solutions. Circular business models depend on interconnected machines and data to reduce the use of raw materials. The Internet of Things (IoT) provides meaningful data that helps manufacturers enhance their energy efficiency and reduce their reliance on harmful resources. Without it, circularity is less effective as a business model, meaning OEMs' approach to digital transformation is crucial in this area. 

The report outlines how circularity is going to require an evolution in the mindsets and systems within supply chain manufacturing. Established business models aren’t going to disappear, but they will need to make room for and complement the new models created by circularity. Part of this process will be understanding the new sources of value created and the specificities of circularity as a business model.

New sources of value

The report explains that leading machinery companies will create business value by combining service contracts and machinery sales with circular material models, reducing wasted resources. Some machinery companies are even selling products as a service through formal circular business models.

Senior executives recognise the benefits of circular operations, which improve efficiency, increase material self-sufficiency and provide new revenue streams. For these firms, secondary markets take on a strategic role, elevating the operational importance of remanufacturing.

An example of this strategic approach discussed in the report is Caterpillar, which operates nine remanufacturing locations globally. The OEM sells machines rebuilt with used or manufacturing parts and offers more than 7,000 remanufactured components priced 40% to 50% lower than new parts. The company seeks to grow its remanufacturing business by 15% per year, which is significantly faster than its overall business. 

Through regeneration, product repair and repurposing machinery executives expect manufacturing to reduce costs by 20% to 60% according to Bain & Company. Many are already reporting a material use reduction of 28% and 39% elimination of greenhouse gas emissions through utilising circular supply chains. Executives also reported that the value created by new material models could make up to 20% of their revenue over the next five to ten years. 

The report highlights German Pump Maker Wilo as a prime example of an OEM that has seen major benefits from circularity. Recently they suffered supply chain disruptions, resulting in shortages of magnets and rare earth materials they typically source from China. Rather than ordering more and incurring further costs, Wildo’s leadership team launched an initiative to collect and harvest old pumps from the field for their raw materials. This practice led to higher margins and a reduction of their waste and material consumption. The company intends to use circular operations to reduce its annual raw material consumption by 250 tons by 2025. 

New business models

Selling products as a service, navigating circular marketplaces and designing products for enhanced longevity are all strategies identified by the report as being key to a circular business model. 

Digital transformation and circularity are changing the way companies sell products as a service. Now this business model is more profitable and feasible, with technology allowing companies to charge customers for upgrades, retrofits, end-of-life decommissioning, extending product life and remaking used equipment. 

This is especially important when, as the report highlights, machinery and equipment are being commoditised. This increases their impact on revenue, which service-based business models can decrease by enhancing customer loyalty and resource resilience, allowing companies to offer clients a lower cost of ownership.

The service-based models gaining traction with OEMs aim to achieve sustainability benefits whilst creating value, giving companies the ability to extend a product’s life span and reduce material consumption.

The report discusses the German machinery company Trumpf, and its introduction of a pay-per-part business model. In this system, Trumpf remains the legal owner of a machine, while the customer pays a fee per part produced. Trumpf handles repairs, production planning, programming and maintenance. This gives the customer financial flexibility and avoids significant spending on machinery for the company.

Under the company's pay-per-part model, they have reduced their need for qualified workers, allowing engineers and mechanics to be rented to customers when needed. This provides Trumpf with valuable data on the performance of its machines, allowing it to manage material use more efficiently and reduce carbon dioxide emissions up to 65% 

The report finishes by advising OEMs on how they can develop an effective circular strategy. It identifies three key steps followed by emerging leaders in the field.

"The mindset is switching from the upfront economics of the selling of the machine and service contract to thinking across the entire life cycle,” Josh Hinkel, partner at Bain & Company said in a 2024 webinar on the report. “ Through its first life and its second life, and thinking how can different material models unlock new sources of value. And that’s where the innovation happens.” 

As circular business models become a core element of OEM's supply chain manufacturing operations, the report highlights the need to approach them strategically. Service-based business models offer attractive opportunities to companies and clients alike, giving manufacturers a competitive edge as they embrace new sustainable value sources.

“It’s the intersection of both the material model and the business model where we have seen companies gain traction.” said Josh.

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