Using life cycle costing (LCC) to select circular measures: A discussion and practical approach

Abstract

The implementation of circular measures in businesses constitutes a solution to future resource scarcity, which has yet to gain momentum. To select and implement such measures, companies, with limited resources need practical and easy-to-use guides that help them understand the financial outcomes while leading them towards more circular solutions. To this end, a guideline based on Life Cycle Costing (LCC), which fulfils the aforementioned criteria, has been created. The guideline directs the companies towards measures at the top of the CE hierarchy and LCC is used to assess profitability and provide information on material circularity. Its development follows the Design Research Methodology (DRM) and is based on using LCC at three case companies when selecting circular measures and on literature. Insights on the companies’ processes and decision criteria as well as the LCC results are presented. One identified critical criterion is the profitability of a circular measure, but comparing the LCC of alternatives is only an adequate measure of profitability, if the alternatives are functionally equivalent and of equal value for the customer, otherwise revenue and customer costs need to be compared as well. In addition, because labour is included in LCC, by categorizing the costs companies can be guided towards exchanging material costs with labour costs. Concerning circularity, in this comparative context, the difference in material cost between the alternatives can be used to measure circularity performance without additional effort. Finally, customization of products was also identified in the company research as a barrier to the implementation of various circular measures.