Steve Vaughan-Jones, Principal Consultant at SLR Consulting and a Chartered Waste Manager, questions whether the risk we inherit as a sector is inherent, suggesting that the reapportionment of this risk could be the waste and resource sector’s very own disruptive opportunity.
As a sector we inherit risk, specifically price risk of secondary materials, and we subsequently spend significant time debating the merits of where this risk should be attributed and how it should be shared within the sector, but should we be accepting this risk at all?
Traditional supply chain transactions, circular or otherwise, are built upon three basic interactions: goods or services, information and payment. Where possible, the cost of risk is typically passed on to the customer.
Historically, secondary disposal costs could be estimated at the point of purchase, simply by weight, due to a ‘take-make-dispose’ culture and limited secondary resource management options. With the emergence of further secondary resource management options, the waste and resource sector has developed a somewhat different model of supply chain relationships; providing valuable services to what would typically be considered the ‘supplier’ and valuable materials (or energy) to what would typically be the ‘customer’, both of which we are potentially able to receive payment for.
Historically, secondary disposal costs could be estimated at the point of purchase, simply by weight, due to a ‘take-make-dispose’ culture and limited secondary resource management options
With this seemingly enviable opportunity of multi-directional payments we inherit risk, this risk is further compounded by the value of secondary resources often being restricted by external markets; e.g, virgin resources. This risk is not necessarily inherent to our sector.
Upstream risks, and more specifically their associated costs, have the opportunity to be passed down through the supply chain to the product or service user. For example, a product or service provider may absorb risk associated with the purchasing of resources but will subsequently have the opportunity to amend their products’ and/or services’ price; subject to other competitive drivers within their respective industry.
The waste and resource sector, particularly the public-facing arm of the sector, currently has much less dynamic pricing mechanisms. Local authorities provide a fixed price service on an annual basis to their residents and in-turn a service is provided (either internally or through the private sector) at a relatively fixed price for a number of years; dependent on the risk position agreed during the related procurement(s), which is often a key component of dialogue or negotiation. This structure negates the opportunity to recover variable costs from the product or service user, based on short to medium term market conditions; instead the local authority, contractor and/or reprocessor inherit the associated risk.
Inefficiencies Equal A Waste Of Resources
In its simplest form the circular economy is the application of the waste/resource hierarchy to the earlier stages of the supply chain, the earlier the better. Some may wish to challenge that statement, but waste need not be a physical manifestation, as inefficiencies are in essence a waste of resource. The circular economy concept also brings with it a search for disruptive opportunities, where a similar or improved service is provided through a different (often more sustainable) operating model; not to be confused with Clayton Christensen’s theory of ‘disruptive innovation’ involving lower value market entrants, published in 1995 – but also worth a read. Would the waste and resource sector’s very own disruptive opportunity reapportion secondary resource (price) risk?
A disruptive opportunity (notwithstanding digital innovation opportunities) would likely require Government intervention or even retraction, due to an existing regulatory framework. A new operating model would have the potential to adopt various forms, from an incremental retrofit to outright disruption, largely dependent on the aforementioned Government positioning.
One possibility could be pay-as-you-throw (PAYT), but this model does not appear to be palatable, based on recent announcements.
One possibility could be pay-as-you-throw (PAYT), but this model does not appear to be palatable, based on recent announcements. However this aversion may ensure that alternative models (that could otherwise be deployed in parallel to, or in place of, PAYT) are given their due consideration. Even though PAYT passes costs directly to the product user it does not necessarily inform the user of secondary resource management costs at the point of purchase, only retrospectively.
Extended producer responsibilities for example, where producers retain responsibility for secondary resources following the use of a product, have the potential to better inform users’ purchasing decisions through incorporating secondary cost considerations at the point of purchase. Producers would have the opportunity to recover secondary resource (price) variations through the subsequent use (or more specifically the subsequent sale) of the resource. Interestingly, informing users of secondary resource management costs at the point of purchase/agreement is fundamentally inherent within leasing models, a business model promoted within circular economy literature, as the producer manages this risk and passes on the associated costs to the user.
I’m sure there are many plausible models to be considered, albeit not all involving the transfer of risk, and hybrids therein each with fundamental advantages and disadvantages, which we may get to explore over the coming months.
For any adopted model(s) robust mechanisms will be required to ensure users segregate/return secondary resources accordingly, e.g. incentives, public awareness or even much debated deposit schemes – or should that be ‘save-as-you-don’t-throw’!? Any adopted model, disruptive or otherwise, would also need to be considered in conjunction with a review of our weight-based metrics, as these are also a reflection of the historical take-make-dispose culture; thereby neglecting the intrinsic value of materials and the opportunity loss.
As suggested, the reapportionment of risk could be the waste and resource sector’s disruptive opportunity or at the very least a key factor in future policy discussions.