The company's value chain vs. closed loop

What is the difference between a supply chain and a value chain?

The supply chain is part of the value chain. In the supply chain, we study everything that is involved in the acquisition of raw material, material, components, production, sale and distribution of the product. In this case, the goal is to deliver goods efficiently and effectively, while keeping costs low, ensuring rapid turnover of goods and the ability to respond flexibly to customer demand.

Value chain is a broader concept from the field of strategic management and refers to a set of activities in different areas of a company's operations that lead to the creation of value for the buyer and thus achieve competitive advantage.

How do you define a value chain?

First of all, it is necessary to answer the question for what purpose we will identify the value chain. In the context of non-financial issues, we will be interested in CO2e emissions, climate change, circularity. We identify the chain to assess risks, threats and opportunities in these areas.

We can start this work by analyzing the company's business model based on Porter's classic value chain model. We then analyze what processes run in the company in the full cycle of product manufacturing and customer service, starting with the acquisition of production resources, through production, distribution, marketing, sales and service of the product. We also look at processes related to the management of the company, the existing organizational culture, relations with the social environment, human resources management, procurement, as well as processes in the area of research and development, implementation of new technologies, information systems. These are the elements of the chain that ultimately affect the value of the product. The ESG context makes it necessary for us to broaden our perspective to include processes happening outside the company's borders, but which affect the creation of product value, both in the upstream area, i.e. in before they hit the company's area of operation, and in the downstream area, i.e. processes that happen after the product is serviced at the customer's site. Such a broader view will help us diagnose to what extent the processes involved in sourcing raw materials or manufacturing the components of our product have an impact on the final value of the product for the customer.

What benefits can a company achieve when it makes the effort to identify the value chain?

The company can learn about the risks, threats and opportunities that lie within this expanded area. In the course of analyzing the value chain, it is possible to obtain information previously unknown, for example, whether products are not manufactured in violation of human rights or whether they have a negative impact on the functioning of the local community. Looking at the other end, we can see whether a product retains its value over time, and whether its use does not cause negative effects on the social environment or the environment. What we learn can also translate into the company's bottom line. For example, adapting processes to the requirements of a closed-loop economy will allow us to avoid a significant increase in fees related to materials put into circulation, which will increase significantly for most companies in Poland in the coming years.

Are there any standards to guide such a process?

In the near future, most companies will be mapping their value chain for Scope 3 emissions reporting, so for their purposes, a good standard will be the Greenhouse Gas Protocol - the „Scope 3 Standard,” which was created precisely to help companies map emissions that occur along the full value chain.

This mapping applies to both upstream and downstream processes, i.e., on the one hand, the greenhouse gas emissions associated with the acquisition of raw materials, their transportation, processing, the treatment of production waste, the processing of the product and its delivery to the company, as well as business travel, purchased goods and services, and on the other hand, the emissions associated with the further processing of the product (component), its use and disposal. Identifying the sources of emissions in Scope 1, 2 and 3 leads to information on where the greatest costs associated with fuel consumption and negative environmental impacts are incurred. This, in turn, gives us the opportunity to introduce corrective processes that ultimately lead to an increase in the value of the product for the customer.

Are there any regulations that require value chain identification?

The supplement to the European Commission's guidelines on reporting climate-related non-financial information says explicitly that companies should consider the entire value chain, both upstream and downstream (that is, according to the Polish translation - upstream and downstream), in assessing the materiality of climate-related information.

The slogan „value chain” appears in the supplement very often. According to its provisions, the value chain should be taken into account in assessing the relevance of climate-related information, in the company's policies on climate change impacts and mitigation, in assessing climate-related risks and opportunities in the short, medium and long term, in assessing the climate impact of a product or service throughout its life cycle, and in activities related to the company's or group's support of smaller entities in providing necessary non-financial data. So it's worth leaning into value chain identification now, as there are many indications that it will be an obligation in the near future.

How does the idea of a closed loop relate to the value chain of companies?

The idea of closed loop introduces a revolution in the hitherto linear economic model of obtaining raw materials, processing, using and discarding. When you think about it for a moment, it seems like a completely irrational activity, yet one that is widely sanctioned. In the linear model, we exploit non-renewable resources irretrievably, a moment later we throw them away without fully utilizing the value that is in them all the time, while destroying and polluting the environment in the process. The concept of circular economy is based on three main principles: designing products so that they do not generate waste and pollution, keeping products and materials in constant use and regenerating natural systems.

The circular approach significantly changes the way business is conducted at much earlier stages than waste management. First, how a product is designed becomes important. If we want to avoid waste and keep the product in long-term use, it must be durable, of good quality, and easy to service. It must be easy to disassemble so that it can be moved to another location. It must be produced in a process where there is no waste - that is, it must be designed to use only as much material or raw material as is needed to produce it, perhaps using prefabrication. Second, virtualization - moving from the material world to the virtual world - is gaining importance. We only need to look at our phones to realize how many objects have disappeared from our lives - calendars, atlases, watches, books, newspapers, tape recorders, paper documents or bank windows. Thirdly, the realization of the principals of circular economy is fostered by the shift from production to the provision of services under the „product-as-a-service” model. Instead of owning things, we can rent them - like cars for minutes or lighting. Fourth, a regenerative approach to natural systems means that we are beginning to use and actively regenerate renewable resources, for example, by recovering valuable organic material and restoring it to nature.

When mapping a company's value chain, it's worth keeping in mind the principles of circular economics, since in closing or turning back the circuits lies the opportunity to add or recover the value inherent in the product. A good example is the apparel industry, where more and more products made from recycled plastic materials, such as PET bottles, are appearing. Today, a bottle waste with little value can be transformed into a fashionable jacket for 180 euros, filled with purified feathers recycled from old garments.

What closed-loop and value chain regulations are there in the European Union arena?

The European Union has adopted two regulatory packages moving toward a circular economy. The first of these packages was introduced in 2015 with the announcement of the Circular Economy Action Plan and addressed five priority sectors where changes would accelerate the transition to a circular economy. The changes and new regulations addressed plastics, food waste, critical raw materials, construction and demolition waste, biomass and semi-finished products.

2018 saw the introduction of a new waste package, consisting of 6 directives and 4 reports, which sets targets spread out to 2030, including recycling of municipal waste and reducing landfill, recycling of plastic, metal, wood, glass, paper and cardboard packaging materials, banning the use of plastics in single-use products, limiting the use of plastic containers, reducing the use of virgin raw materials for plastics and replacing with recycled plastics. However, the most severe change for companies will be the introduction of extended producer responsibility from 2021, meaning that the polluter pays. The increase in fees for businesses will be a significant financial burden, so it is already worth considering how to reduce the amount of waste resulting from our company's operations. However, this is not the end of the expected changes. In December 2019, the new European Commission announced the European Green Deal, a strategy for the development of the European Union. One of its main objectives is to accelerate the transition to a closed-loop economy. In the following months of 2020, the Commission plans to present a series of draft regulations and directives that will intensify this process.