Circular Procurement Guide

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This guide is intended for procurement staff and gives specific pointers to set you on the right path to introduce circular procurement in your organisation. This instrument took shape in the summer of 2013 and has been further supplemented since then. If you have additions or tips, please mail them to m.schuurman@mvonederland.nl.
 

The guide was created thanks to cooperation between a large number of parties from the public and private sectors, with input from experts in procurement and fields such as sales and product development. The participating organisations are: CRH, InterfaceFlor, Kirkman Company, Ministry of the Interior (BZK), NEVI, Deloitte, TurnToo, Convent Capital, Corvers, Triodos Bank,  De Lage Landen, Alliander, OVG, Bureau Toonbank, Gemeente Almere, Rendemint, Polre advisory, Van Gansewinkel, MWH Global, Ministry of Infrastructure and the Environment, PIANOo and MVO Nederland.
 

What?

Circular procurement in brief

In circular procurement, as the staff responsible for procurement, you make agreements to ensure that the products that you procure for your organisation are produced in accordance with the principles of the circular economy and will be further processed after use. Such products are, for example, repairable and at the end of their life cycle can be broken down into components, materials or raw materials, which can then be re-used in the production chain. Circular procurement can form part of sustainable or socially responsible procurement.

 

Cooperation in the chain

Cooperation is required throughout the chain to achieve a circular economy and close raw material loops. That means that everyone within the chain or circle must extend their field of vision beyond their own organisation. This type of cooperative relationship also requires different competences and skills to those needed for a hierarchical, task-setting relationship with suppliers. Suppliers take on more of a partnership role, entering into dialogue and setting more common goals. Finally, chain management should be promoted to achieve a circular result. This enables you to organise integrated centralised management and assign ultimate overall responsibility to a single party. 

Concepts

Circular Economy

The circular economy is an economic and industrial system based on the principle of re-use of products and raw materials at the highest possible value (technical cycle) and the restorative capacity of natural resources (biological cycle). This minimises destruction of economic and ecological value throughout the system.


The principles of the circular economy are:

•    to counter the depletion of natural resources
•    to prevent waste and harmful emissions to water and air
•    to place ownership of – and so also responsibility for – a product or service where it can best be borne, in order to achieve a circular economy.

 

For this to happen, you must consider right at the design stage of products and services how waste can be prevented, residual flows can be reduced and exploited so that adverse effects are not passed on to man and the environment.  See also the website of the Ellen MacArthur Foundation for further information on matters such as the technical and biological cycles.

High-value reusability in the technosphere

Maximising the useful life of products through various forms of re-use  (in descending order of value):

•    maintenance or repair at the premises of the original user
•    re-use  in the same form by another user, with minimal repair and cosmetic cleaning
•    restoration work to replace non-functioning or poorly-functioning components of a product, while the product retains the same form and function
•    remanufacturing using components that are still working in new products
•    recycling, in which materials are recovered and re-used as materials in new products. This can often be associated with loss of quality, sometimes referred to as downcycling.

High-value reusability in the biosphere

Making optimal use of products from the biosphere through various forms of re-use  (in descending order of value):

•    Re-use of natural products as long as the quality is adequate
•    Extraction of biochemical components from natural products for chemical products or fuel for transport
•    The remaining substances are transformed by the composting process into compost or by anaerobic digestion into part biogas and part compost
•    The compost can be used to enrich agricultural soils, the biogas can serve as biofuel

Raw materials, materials and components

•    Raw material: a processed substance which can no longer be distinguished in parts of the end product. For example: iron ore.
•    Material: a processed substance which can still be distinguished in parts of the end product. For example: metal.
•    Component: an individual element intended to fulfil one or more specific functions. For example: a cog.

Critical raw materials

It is important for the production process that the necessary raw materials are always available. There are 14 raw materials that are essential to the economy but the security of supply is very low. These have been included in a list by the EU, comprising rare earth metals, platinum, germanium, magnesium, gallium, antimony, beryllium, indium, cobalt, tantalum, fluorite, graphite, tungsten, niobium.

Why?

Every time there is to be a change in the normal course of events in your organisation you must present sound arguments to obtain support for the changes. Arguments to get your (internal) organisation on board for circular procurement are:

Strategic reasons

•    Your organisation becomes future-proof. This is due in part to lower costs, greater security of supply, more cohesive cooperation in the chain and so a more robust supply chain.
•    It reduces risk: the (economic) risk should ideally be placed with the party best able to bear it.
•    It provides greater insight into your future costs
•    It enhances your reputation and gives your brand greater distinction

Financial reasons

•    It reduces costs (in the short and long term), in terms of Total Cost of Use or Total Cost of Ownership
•    It can lift some of the burden from your organisation. There are no service costs for the organisation in a pay per use set-up
•    Procurements can be made less often thanks to the extended life of products
•    Less waste management is required (if any), so those costs will also decrease
•    It will counter price fluctuations

Societal reasons

•    It prevents waste and minimises the use of dangerous substances

•    It helps to counter the depletion of scarce raw materials and the associated geopolitical and environmental problems

•    It leads to greater transparency in the chain

•    A number of businesses in the chain can maintain or increase their revenues by modernising their business models

How?

Circular procurement is carried through each stage of procurement. It is really important to determine the exact functional requirement within your own organisation. You also discuss with your suppliers how they can satisfy all your requirements, both during and after the lifetime of the product.

Preparatory phase

Internal

It is of foremost importance that, as the person responsible for procurement, you ask the right questions within your own organisation. For example:
•    What does the (internal) user actually want, what is our functional requirement? Do we need a product for this purpose, or would a service suffice?
•    Which of the objectives of the organisation must the product or service serve? Is there a hierarchy in those objectives?
•    Is there internal support at administrative/management level for promoting the circular economy through procurement?
•    Is the internal client convinced that circular procurement will not compromise the quality of the purchase? In other words, is the internal client sufficiently reassured and is there also support from his camp?
•    Is our organisation capable of basing the pricing on Total Cost of Ownership/Total Cost of Use? Is there a single budget, or are there separate budgets for acquisition, maintenance and ‘disposal’?
•    Does our organisation require sole ownership of the products, or could ownership be shared?
•    To what extent do I wish to be unburdened of responsibility?
•    Do I ask for a commodity or a tailor-made product?
•    How long are we likely to need this product or service in this form?
•    Is this period of use equal to, or longer or shorter than the technical lifespan?
•    Is a new product required, or would a second-hand or recycled product with the same guaranteed performance also be acceptable?

Supplier

Once you have matters in order internally, you can go on to specify your procurement requirements to your suppliers. A different approach to the procurement process also requires a different attitude among suppliers. To achieve a good match between your requirements and the options available on the market, and so as not to make unreasonable demands of the market, it is advisable to hold a market consultation (http://www.pianoo.nl/sites/default/files/documents/documents/handreikingmarktconsultatie.pdf). This can provide an opportunity to ask the following questions, for example:

Questions about circular procurement, addressed directly to a supplier
•    What is the current status of circular applications within your sector and within your company? What is your vision of the impact of these applications within your sector?
•    Further to the previous question: Can you illustrate how you contribute to the circular economy in terms of:
o    the product design of your offering
o    the production process of your offering
o    extending of the lifespan or useful life of your offering (e.g. maintenance/repair)
o    highest-value re-use of your offering, in relation to both technical and biological materials.
•    It is a principle of the circular economy that products have a residual value after their initial phase of use, thanks to recycling of the product and/or the used components or materials. What opportunities do you envisage to extend the benefit of this residual value (in part) to the user?
•    What forms of contract can you offer to apply circular models in our procurement project? Do you have any examples?
•    Do you have any suggestions as to how we can formulate specifications in this invitation to tender or procurement process to achieve as circular an offering as possible?
•    Do you have any suggestions as to what evaluation criteria we should use to make an objective assessment and comparison of your offering with those of others (how can we avoid comparing apples with pears)?
•    What risks do you envisage, and how do you respond to them? What financial or legal risks can you/ would you wish to run: how great can the risks be?

 

General
•    Is the contract practically and financially feasible, and are the imposed conditions realistic?
•    Do private sector parties have the interest and ability to implement or complete the contract?
•    What are the predicted future trends - active products and active parties - in the market?
•    Will the requirement as formulated lead to the best possible solution for our own organisation?
•    Does the contract need to be functionally or technically specified, and which standards are relevant in this case?
•    Is there sufficient capacity in the market?
•    Does the market have a solution to the functional requirement as formulated?
•    What chances do market players see to meet the minimum requirements despite a smaller available budget?
•    Are there alternative routes to circular solutions?
•    Can the market satisfy the requirements set, and if not, why not?
•    To what extent can the chosen procurement strategy be optimised?
•    What other parties are essential to cooperation?

Challenges

If you want to introduce circular procurement in your organisation, you may encounter a number of challenges:

  • Inadequate internal support: for example, the internal client wants a new product per se. The solution may be to explain in detail within the organisation why the procurement policy is changing. This is often enough to provide greater understanding and so lead to greater support from the stakeholders (and also from the client).
  • Separate budgets for acquisition, management, maintenance and disposal. Solution: offer real-time overall reporting on the various budgets, linked to the common (major) objective. It is also necessary to make clear agreements about the authorisation of budget holders (authorising officers) and the ‘four-eyes’ principle.
  • There is a risk that users take less care of a product that is not owned by their own organisation. Result: higher maintenance costs and lower residual value. The solution may be to have the products regularly checked and to monitor improper use.
  • Certain objectives of the circular economy can conflict with other objectives, for example: non-sustainable biomass. A consistent and integrated strategic approach to the financial and procurement systems may offer the solution. This prevents conflicting goals, or in other words, it prevents inconsistency.
  • The commitments given by suppliers cannot be adequately checked, if at all. Solution: specify the commitments in more detail, set them down in contracts and then monitor compliance (contract management).
  • Offerings are not comparable, are so cannot be evaluated in relation to each other. Solution: unambiguous, SMART parameters, published in advance

Specification phase – formulating the order

Product design

•    The composition of the delivered product is known, for example because there is a raw materials passport or an Environmental Product Declaration (EPD). The cycle for which they are intended is indicated for each material or component.

•    Carrying out a life cycle analysis (LCA) helps you to discover areas where improvements could be made.
•    The product must be suitable for high-value (or equal-value) recycling, whereby the value of the materials and parts is retained or increased as far as possible. The supplier indicates how the used materials and parts can be recycled at the highest level (based on cascading), distinguishing between the biological and technical cycles. The higher in the cascade, the higher the value placed on the tender.
•    The supplier indicates how much use is made of recycled material/components/parts

•    Different materials must not be mixed in the product in such a way that they can no longer be separated after use. NB: some composite materials are well suited to re-use and recycling.
•    If the biomass used is demonstrably sustainable, a higher value is placed on the tender.
•    It must be possible to disassemble the product in as few operations as possible and the environmental impact associated with logistical movements must be as low as possible.
•    If the producer or manufacturer uses critical materials, he must indicate why alternative materials cannot be used. If it would be possible to use alternative materials, an improvement plan is required to achieve this.

•    Ideally no use should be made of toxic substances. If they are used, however, then an improvement plan is required.

Production process

•    The supplier indicates how he evaluates his suppliers and stakeholders (suppliers of machines etc.) in terms of their raw materials and production chain.
•     Renewable energy Renewable energy of Dutch origin must be used in the production process.
•    The tenderer indicates how the materials released during the production process, distribution and delivery can be recycled at the highest level.
•    The supplier indicates which improvement processes are in the pipeline and what the timeframe is.

Operational phase

•    What is the technical lifespan of the product?
•    What is the economic lifespan of the product? Is this still subject to legislation, directives, etc concerning depreciation and valuation?
•    What is the aesthetic lifespan of the product?
•    What is the maintenance programme for optimal extension of lifespan?
•    What agreements have been made about this and how will it be followed up?
•    What options are there for updates to the product?
•    Plan regular inspections of the product by both supplier and user, carry out required maintenance operations, etc.
•    The total costs to the user must be recorded in a budget (statement).
•    What developments are there that might increase the lifespan of the product?

Phase after use

•    What options does the supplier offer for taking the product back?
•    What agreements have been made about that?
•    What is the anticipated residual value of the product?
•    The supplier must draw up a report indicating how the product and/or parts are dealt with. One idea for this is a “back to life” report, but this needs further elaboration.

Challenges

•    Users sometimes take less care of a product if it is not the property of their own organisation. Result: higher maintenance costs and lower residual value. Solution: regular inspections of the product by manufacturer & user, compulsory maintenance operations, establish good stewardship in contract etc.

Contract phase

•    Plan reviews in advance with the supplier, to evaluate agreements on high-value recycling. New developments should also be discussed during these reviews.
•    Make the improvement plan SMART, make agreements with the supplier about improvements in performance, preferably at regular intervals. Back the agreements up with financial consequences in the form of a bonus or penalty applied to the payment.
•    Look for opportunities to help each other to reach each other’s goals. Seek cooperation and think things over with the other party. Share the benefits. Make agreements about this.
•    When evaluating performance during the contract phase, refer back to the evaluation system used for awarding the contract. This can often serve as way of monitoring improvement, with the tender as the baseline.

Usual routes

Your potential supplier will have several ways of making an offer.  Three common circular routes are considered in further detail below, with their pros and cons, and points for consideration. Click on  “Further information” for an explanation of a specific route.

Route 1: Pay per use

This is also referred to as performance-based purchasing. It is based on the idea that as a user you are mainly interested in the service a product can provide, and for that you do not have to be the owner per se. A typical example is the “pay per lux” concept, used by Rau architects to buy a certain number of hours of light from Philips each year. Producer and supplier Philips retains ownership of the lights themselves, and is responsible for maintenance and the agreed performance levels. At the end of the lifecycle Philips can simply take its lights back and re-use or recycle them. See the Case Study for further information. (http://www.mvonederland.nl/sites/default/files/case_study_philips_-_rau.pdf)

Pros

•    There are fiscal advantages in relation to VAT
•    Promotes innovation during the life of the contact, the product remains state of the art
•    Requires less investment from the user, less pressure on your cash flow
•    The risk of an under-performing product does not lie with you, but with the supplier
•    Supplier and user have common interests
•    There is a fixed price for use
•    It removes the onus from your organisation
•    There is an incentive for the supplier to minimise material and energy consumption within the existing contract

Cons

•    The user has less sense of ownership, which can lead to careless use
•    There is greater dependency on the supplier
•    It is a more complex process than a purchase
•    The contract offers less flexibility

Points for consideration

•    Contract terms will be different
•    Shift between operating and investment budgets
•    There is restrictive privacy legislation concerning usage data
•    If the lease amounts equal the depreciation amounts, ownership passes to the user
•    The waste status of used products can form a barrier to their re-use
•    Adjustments have to be made to business rules and depreciation periods
•    Competition law can inhibit the necessary formation of alliances
•    Extra chain financing is required
•    Professionalisation and training is required for procurement staff to equip them to work with this methodology
•    Suppliers cannot cope with the drop in cash flow all in one go. As the person responsible for procurement, you must take this into account in your planning.
•    Investment models must be adjusted to reflect different kinds of capital valuation
•    Promote long-term thinking by eliminating short-term bonuses
•    It is possible under accession law that products fixed in the ground or to a building have become part of it, and have thus been transferred in ownership to the user.

Other remarks/questions

•    How does the supplier guarantee a subsequent life cycle for products, materials or raw materials?
•    How do you ensure “due care”?
•    What level of service are you seeking as a user?
•    Non-core assets are better suited to pay per use
•    How does the supplier guarantee that the required level of service is achieved?

Route 2: Buy/Sell back

Under this system the supplier agrees to buy back the product at the end of its lifecycle on terms agreed in advance. It is therefore a bit like paying a deposit. The risks associated with use lie with the buyer/user. This was the route followed by Rendemint when designing the Povinsjehûs Fryslân (Provincial House of Friesland)

Pros

•    Incentive for careful use, as ownership resides with the user/owner
•    Less legal complexity than pay per use
•    You can determine the lifespan yourself
•    Accumulated VAT is a consideration for those not entitled to VAT deduction
•    Can be applied in current business models/procurement systems

Cons

•    Uncertainty about sell-back value
•    Risk of unexpected costs, such as repairs
•    Risk of bankruptcy of the supplier
•    Dependency on supplier for subsequent sale (“fixed client discount”)
•    No particular incentive for the supplier to deliver an energy-efficient product
•    Opportunity to innovate only after sell-back

Points for consideration

•    Tax: transition needed in current legislation. VAT on second lifespan, VAT on service rather than sale. See also 'Useful documents'.
•    The right of ownership currently offers such a level of protection of the owner’s rights that this can act as a restraint.
•    Legislation on waste flows and recycling can form a barrier.
•    Procurement staff also need to be trained to take the sale and re-sale aspects into account.
•    Budget-based procurement can be at odds with the Total Cost of Ownership approach
•    How does the producer/manufacturer ensure that the raw materials are returned to the chain in an efficient and environmentally-friendly way?
•    How can agreements be made about the residual value of raw materials and materials in the case of a long-term contract?
•    Who organises the return logistics, and how?
•    Investment models have to be adapted to different forms of capital valuation
•    A different system of valuation will be required (also check the accountancy rules)

Other remarks/questions

•    The supplier cannot account for the profit under sales while there is still a buy-back obligation. He will have to set aside reserves in accounts payable.
•    The scale on which products are bought in and taken back is important if the entity collecting the goods is not the producer/manufacturer.
•    What is the residual value? What agreements do you make about the buy-back price?
•    Who bears the risk of retention or loss of value? Is a 50/50 distribution the answer?
•    How flexible is the buy-back time?

Route 3: Collection of consumables

This is the route for consumable products whose per item value is too low for individual agreements. The concepts of reduce, re-use and recycle take high priority here. Think, for example, of office paper, disposable coffee cups, tissues, chemical waste or packaging. The more homogenous the products, the easier they are for the collecting company to process and offer back to manufacturers as new raw materials (possibly in other chains).

Pros

•    Opportunities to obtain revenue from large waste flows rather than incurring costs for disposal.
•    Homogenous flows lend themselves to recycling.
•    Most potential waste flows are already well separated by the companies concerned.

Cons

•    Only relevant to a few product groups.
•    Only profitable in large quantities, i.e. for high-volume consumers.
•    Relatively low revenues

Points for consideration

•    Extra waste bins are needed to separate waste flows properly.
•    Give employees encouragement and guidance in waste separation.
•    The bigger the company the more worthwhile it is to separate waste.
•    Particularly metal, but also paper and plastic can bring in revenue – but of course, only if the quality if good.
•    Paper is subject to price fluctuations.
•    Look at the chain from the supplier, but also look at your own waste chain. What materials could the supplier replace or which could he use to make the waste collection in your organisation more cost-effective? Give the supplier a share of the benefit.
•    Ask you waste processor what options he can offer.
•    Look for opportunities to up-cycle your waste products - ask the waste collection company for information.
•    Combine the waste flows of different suppliers. This can deliver a bulk benefit compared with just sending waste back to the supplier.
•    Assign tasks to the party that can carry them out most efficiently. Seek partnerships/collaboration, for example in the business park.

Case Studies

Turntoo and Philips

This example shows how you can influence a supplier to start supplying a circular product or service. Turntoo asked for light to be provided as a service, and decided to forego ownership of the lighting, so Philips developed its new pay per lux service. With this approach Turntoo began a movement within Philips, which has pushed circular models high up the agenda.

Provincial House of Friesland

In this example the supplier himself developed a method to ensure that the raw materials would remain wholly transferable. The PRP method includes identification of raw materials, specification, drawings and circular engineering. This simplifies the process of bringing the raw materials back into a new cycle.

Sustainability factory, Dordrecht

The client was inspired by Turntoo’s approach and focused on the service required in the design of the building. This construction not only lowered the costs, the client was also relieved of the burden of maintenance and management.  

Headquarters Alliander

In 2013 Network company Alliander carried out a circular renovation of its East-Netherlands headquarters in Duiven. Recycled materials were used wherever possible, so for example, the gables included recycled timber. Sustainability also came to the fore in other parts of the project. The building will be energy positive. What set this process apart was that the company had set out its ambitions openly at the outset. Market partners were invited to join in its deliberations on the basis of trust. The consortia that were formed all shared in the accumulated knowledge and experience gained in innovative design and construction. If it had followed the normal route, the company could have saved 10% on the costs, but it would never have been able to achieve these innovations. And the innovations will go on to bear fruit in the long term.

Traffic Control Centre

Prorail is building a new rail traffic control centre by the railway in Utrecht. At the request of central government this is being used as a pilot project to gain experience in circular procurement. The building is furnished partly with floor coverings and furniture obtained through circular procurement. The option chosen was a model in which products are taken back at the end of the lifecycle. The lease-construction model proved less financially attractive because the main concern in this case was the initial purchase costs