Supply Chain Transformative Capabilities for Circular Economy Transition

Introduction

The rapid evolution of global markets, fueled by climate change, technological advancements, and socio-economic transformations, has made it imperative for businesses to rethink their supply chain configurations. Traditional supply chain models are proving inadequate in addressing the growing need for sustainability, pushing companies towards new transformative paradigms, such as the circular economy. This article, written by Raffaele Nacchiero, Giovanni Francesco Massari and Ilaria Giannoccaro, introduces and explores the transformative capabilities of supply chains that facilitate this transition, focusing on key strategic and operational microfoundations that drive sustainable and circular change.

The Need for Supply Chain Transformations

To succeed in the contemporary context of profound uncertainty and increasing disruptions, modern supply chains need to initiate and effectively govern radical transformations leading to new configurations like circular ones. Such transition from linear to circular supply chains requires a fundamental shift in how resources are managed, products are designed, and waste is minimized. Conventional supply chains operate in a “take-make-dispose” framework, leading to environmental degradation and inefficiencies. In contrast, circular supply chains emphasize resource regeneration, waste reduction, and extended product life cycles. Companies that fail to adapt risk falling behind in a world increasingly driven by sustainability regulations and consumer expectations.

Theoretical Framework: Social-Ecological Supply Chains

Supply chains can be viewed as social-ecological systems (SESs), which integrate economic, environmental, and social priorities. Supply chains as SESs consist of open, interconnected, and dynamic systems consisting of social and ecological subsystems fully integrated with each other and with the external environment. Transformative capabilities within these systems enable companies to navigate disruptions, implement sustainable practices, and systematically transform their supply chains for long-term viability. This new framework highlights the transformative nature of supply chains and the necessity for companies to embrace radical changes towards new resilient configurations.

Key Transformative Capabilities for Circular Economy

To successfully transform towards new configurations, such as those of the circular economy, supply chains need to develop four core transformative capabilities:

1. Triggering Capability

This capability involves recognizing the need for transformation and initiating the process. Companies must analyze their existing supply chain configurations, identify inefficiencies, and scan for external drivers such as regulatory changes, technological innovations, and shifts in consumer behavior.

Triggering capability is particularly crucial in industries with high environmental impact, such as textiles and manufacturing. Companies must assess material flows, energy consumption, and waste generation to pinpoint areas where circular practices can be introduced. By leveraging advanced analytics and real-time monitoring, businesses can proactively detect inefficiencies and set the stage for sustainable change.

2. Envisioning Capability

Once the need for transformation is identified, companies must envision alternative supply chain models that align, for example, with circular principles. This involves exploring innovative production techniques, sustainable sourcing strategies, and waste reduction methodologies.

Many firms begin by testing small-scale circular economy initiatives, such as pilot projects using recycled materials or alternative energy sources. These experiments provide valuable insights into feasibility and scalability. Collaboration with external stakeholders, including research institutions and regulatory bodies, can further enhance the envisioning process, ensuring that proposed solutions align with industry standards and sustainability goals.

3. Navigating Capability

Navigating capability refers to the ability to implement and scale up circular supply chain configurations. Companies must transition from experimental projects to full-scale operational changes, integrating sustainability into their core business strategies.

This phase often requires significant investment in new technologies, infrastructure, and stakeholder engagement. Companies may need to restructure their supplier networks, invest in digital traceability systems, and adopt circular business models such as product-as-a-service or remanufacturing. Strong leadership and cross-functional collaboration are essential in overcoming resistance to change and ensuring a smooth transition.

4. Stabilizing Capability

The final stage of transformation involves embedding circular practices into the company’s long-term strategy. Stabilizing capability ensures that the new supply chain configuration remains resilient and continues to deliver economic and environmental benefits over time.

This requires the standardization of new processes, the establishment of long-term partnerships with sustainable suppliers, and continuous monitoring of performance metrics. Companies must also engage with consumers, educating them on the benefits of circular products and fostering a culture of sustainability.

Microfoundations of Transformative Capabilities for Circular Economy

Based on the transformative undertaken, transformative capabilities are made up of various microfoundations, namely lower-order characteristics at individual, process, and structural levels. These microfoundations provide the necessary skills, processes, and organizational structures to facilitate transformative change. Below, are those that have been found to be essential for the circular economy transition.

Individual-Level Microfoundations

At the individual level, successful transformation relies on managers’ and employees’ problem-solving abilities, technical expertise, soft-skills (e.g., altruism, emotional intelligence, or open-mindedness), and a strong circular economy mindset. Companies must invest in training programs to equip their workforce with knowledge of sustainable practices, material science, and circular business models.

Process-Level Microfoundations

Process-level microfoundations include co-creation, continuous improvement, traceability and visibility, flexibility, and circular economy experimentation.

Co-creation involves collaboration with suppliers, customers, and research institutions to develop innovative circular solutions.
Continuous improvement ensures that sustainability efforts are refined over time through data analysis and feedback loops.
Traceability and visibility are crucial for monitoring resource flows and ensuring compliance with sustainability standards.
Flexibility allows companies to adapt to emerging sustainability trends and regulatory requirements.
Circular economy experimentation which involves systematically conducting research and development activities, as well as pilot tests, to create new knowledge and develop circular innovations and practices for implementation at various stages of the supply chain.

Structure-Level Microfoundations

Structural microfoundations include, for example, business model innovation, integration and collaboration, risk management, transparency, and leadership.

Business model innovation involves shifting from traditional product sales to circular models such as leasing, refurbishment, and recycling.
Integration and collaboration strengthen relationships across the supply chain, ensuring that all stakeholders are aligned with sustainability goals.
Risk management helps companies anticipate and mitigate potential disruptions associated with supply chain transformation.
Transparency builds trust with consumers and regulatory bodies, reinforcing the company’s commitment to sustainability.
Leadership also plays a crucial role in fostering a culture of innovation and sustainability. Transformational leaders inspire employees to embrace change and actively participate in the company’s sustainability initiatives.

Case Study: Circular Supply Chains in Made-in-Italy Sectors

A qualitative study on Italian textile and furniture industries provides valuable insights into the practical application of transformative capabilities. These industries, known for their high environmental footprint, have been actively pursuing circular economy initiatives to align with global sustainability goals.

Companies in these sectors have leveraged co-creation strategies by collaborating with universities and research institutions to develop sustainable materials and production processes. Traceability systems have been implemented to ensure ethical sourcing and transparency in supply chains. Business model innovations, such as product take-back schemes and second-life marketplaces, have helped companies reduce waste and enhance resource efficiency.

The study highlights the importance of a holistic approach to supply chain transformation, where individual, process, and structural microfoundations interact synergistically to drive circular change.

Conclusion

The transition to circular supply chains is no longer an option but a necessity for companies seeking long-term resilience and competitiveness. By developing and strengthening transformative capabilities, namely triggering, envisioning, navigating, and stabilizing, businesses can successfully navigate the shift towards circularity.

Microfoundations at the individual, process, and structural levels provide the foundation for these capabilities, ensuring that companies are equipped to handle the complexities of circular transformation. As regulatory pressures and consumer expectations continue to evolve, companies that proactively embrace circular economy principles will be better positioned to thrive in the future marketplace.

This text is an excerpt from an article published under the following reference: Raffaele Nacchiero & Giovanni Francesco Massari & Ilaria Giannoccaro, 2024. “Supply chain transformative capabilities and their microfoundations for circular economy transition: A qualitative study in Made in Italy sectors,” Business Strategy and the Environment, Wiley Blackwell, vol. 33(8), pages 8695-8715, December. Want to learn more about the circular economy and its issues? Visit Tondo’s blog!