Reciclix: recycling and production of plastic packaging in the context of the circular economy

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Reciclix: recycling and production of plastic packaging in the context of the circular economy

Authors : Pedro Guerra Benedetti, Helena Araújo Costa, Patrícia Guarnieri

Summary
This case study addresses the strategic and managerial decision-making process of Reciclix, a plastic recycling industry that has garbage bags as its main product. The discussion is relevant because it portrays the context of a small company, with its characteristics and limitations, which needs to position itself in the face of global trends. The case highlights the company's current scenario, with important information such as the production process, market, competitors, among other information. In addition, it contemplates the importance of sustainability within the business vision, as well as the contemporary discussion about circularity in the economy.
Keywords: Recycling, input chain, circular economy, plastic, production & logistics.

Abstract
This teaching case addresses the strategic and managerial decision-making process at Reciclix, a plastic recycling industry which focus on garbage bags as its main product. The discussion is relevant because it portrays the context of a small company, with its characteristics and limitations, which needs to position itself in the face of global trends. The case highlights the company's current scenario, with important information such as the production process, market, competitors, among other information. In addition, it presents the importance of sustainability within the business vision, as well as the contemporary discussion about circularity in the economy.
Keywords : Recycling, supply chain, circular economy, plastic; production & logistics.

Contextualization

Reciclix, formerly AP Plásticos, is a company with more than 13 years of history in the Federal District - DF, being one of the pioneers in the plastic recycling segment, and production of garbage bags. Its operation began between 2007 and 2008, with the purchase of raw materials from suppliers and the production of plastic garbage bags, a model maintained until 2021.

The company, among comings and goings in its history, has worked with different products. Currently, it works only with the commercialization of plastic packaging, with garbage bags standing out as its flagship (Figure 1). They are produced with LDPE (Low Density Polyethylene), a flexible, easy-to-bend and lightweight plastic material. This plastic is classified with the number 4 on a scale from 1 to 7, which identifies the possibility of its recycling (1 being the most recyclable and circular, and 7 the least recyclable)1. The products are differentiated by colors, volumes and varied destinations, being delivered in a personalized way, as the customer demands.

There are specifications for the production of garbage bags, in the ABNT cubing standards2 and also in customization on demand. The company follows these processes strictly, although many customers complain that they would like different specifications, with a smaller thickness and a larger bag opening mouth, for example.

Currently, the partners have been looking for alternatives to increase their share of the recycling market, in addition to increasing their profitability. Recently, the company acquired plastic recovery machinery, consisting of washing, extrusion and recovery units, enabling Reciclix to acquire plastic waste from recyclable material cooperatives or companies that separate the material. This logic both helps to reduce some costs of purchasing inputs and expand the factory's production model (with more personnel and production), and enables a new position on environmental issues. As it advances in the reuse of plastic, the industry positions itself as an ally in the reuse of plastic already available, using plastic resins that have previously gone through the recovery or extrusion process.

This step by Reciclix allows it to expand its work on the issue of plastic pollution, which is urgent and consists of a growing global problem due to the environmental damage it generates, especially in marine ecosystems. Annually, about eight tons of plastics are released into the sea in the world (World Wide Fund for Nature - WWF, 2019), of which most are single-use utensils - such as bags, lids, straws, bottles, cups, packaging, cutlery and disposables in general (United Nations Environment Programme - UNEP, 2018a).

Of all the waste generated globally, 12% is represented by plastics, according to the World Bank (World Bank, 2008). In addition, the global production of plastics is growing and reached 396 million tons in 2019, which totals about 53 kilograms/year per inhabitant of the planet (WWF, 2019). Of the total 9 billion tons of plastic produced in the world to date, only 9% is recycled (UNEP, 2018b). In addition, it should be noted that most of the plastics used in packaging and products in general come from petroleum, which is a non-renewable resource. For these reasons, the issue of reducing the use of plastic in packaging and products in general and its reuse, within a circular logic, are crucial aspects to face this problem.

On the global stage, companies have been called upon to contribute to mitigating and tackling the problem, through agreements and protocols such as the New Plastics Economy Global Commitment (NPEC), led by the Ellen MacArthur Foundation (2019) (Figure 2).

The European Community has been leading the initiatives for the transition to the circular economy and has proposed to abolish single-use and non-recyclable plastic by 2030, based on the Green Deal (European Commission, 2021)3. There is also a call to implement innovations and facilitate access to products that use recycled raw materials, that commit to the circular vision of the economy and to an Integrated Management of Solid Waste (UNEP, 2018c). This perspective moves away from thinking from 'disposal' to 'management' and from 'waste' to 'resources'. A new way of looking at the economy in a circular way is stimulated. Within this logic, the starting point is the integration from the supply chain and acquisition of raw materials to the final disposal with minimal waste, including actions in product design, logistics flow, repair of products that can be reused, and regeneration of natural systems (Reike, Vermeulen & Witjesb, 2017). In other words, the circular economy does not provide for zero waste, but "zero waste", which assumes that everything can be reused or recycled at the end of the process becoming a new product. The life cycle of a good or service, represented by the stages of the production and marketing process, from the extraction of raw materials to the final disposal of waste, is also known by the expression 'from cradle to grave', the circular economy is adept at the concept of McDonough and Braungart (2002) who proposed the "cradle to cradle', which means 'from cradle to cradle', including waste again in the production cycle.

Reciclix, even though it is a small company with local operations in the market of Brasília and the Federal District, advanced as an actor in facing this problem when it decided to recycle plastic and offer garbage bags that are not only recyclable, but recycled. However, the company needs to be alert to the fact that, at the same time, there is a stimulus for more circular solutions for plastic, which is central to its business. Thus, their managers are faced with a situation that can be controversial in the long term and that deserves attention.

In 2021, Reciclix started the year with about 12 employees, and the factory is divided into its administrative tasks and its production functions. Approximately 82% of the staff (9 people) are allocated to production, operating machines and doing material quality control. The administrative staff is now responsible for all information registration, financial and customer service.

The company has some internal limitations for its expansion. Among them, it is worth mentioning that it does not yet have any consolidated market strategy. It does not have anyone responsible for the commercial, in addition to depending a lot on referrals and some main customers. Therefore, marketing is basically defined by the referral model, without any active capture model, or strategy on social networks, including email marketing, a website, strategies on Google, or on social networks. In addition, it does not have a team focused on commercial performance, having recently hired a person on the staff with experience in telemarketing and passive sales, who will guide the commercial process within the factory.

Regarding its main product, the average profit margin per garbage bag sold is around R$ 10% to 15%. The garbage bag has a diversification of prices, taking into account its type, which can vary between R$ 5.00 (package of 100 bags with lower resistance and standardized in black) and R$ 18.00 (package of 100 bags with greater resistance and with different colors).

One of Reciclix's differentials is to offer the market a recycled garbage bag, which tends to attract a portion of the market concerned with environmental issues, and which, above all, tends to cost even less than garbage bags manufactured from virgin raw material for the final consumer. This set of aspects reveals an advantage of investing in this market. Despite this, if the process is not carried out properly, there is a possibility that recycled garbage bags have a lower quality than new products.

Among its main costs, energy consumption stands out, which makes up about 35% of the total expenses incurred in a month, and personnel expenses, which represent about 35% of costs. In addition, the machinery acquired by the company is already very old, therefore, not very efficient and requires high maintenance costs and part changes, which end up incurring unforeseen costs during the year.

The company would be able to produce an average of 20 tons of garbage bags per month, but currently does not have demand for such production. This impacts on sticking to running the operation in a day shift only. Thus, managers come up against the issue of an installed productive capacity that has not yet found entry into the market, generating productive idleness and, consequently, costs.

Reciclix's production process: from raw material to garbage bag

The specifications of the garbage bag are defined in the planning stage, after the confirmation of the budget by the customer. After that, the garbage bag is produced in several stages. Below you can understand a little better the process of recycling and producing films (which will become garbage bags) for sale:

Although Reciclix only works with the sale of garbage bags, one possibility is the sale of the grain input (plastic pellets), which is the way out of the recovery process mentioned in the diagram above. This material can be used by various industries for the production of various products, such as the garbage bag itself, hoses, plastic chairs, among others.

At the end of 2020, the market for this product ended up growing significantly, according to Reciclix's partners, enabling an increase in profit margin, in addition to the increase in demand that will cover the factory's production potential. In addition, it would be possible to allocate part of the energy spent on the production of the film only to the production of grain, and part of the machinery could be sold to finance the acquisition and modernization of machinery in this sector.

In addition, the managers analyze the possibility of portfolio diversification, for the production of other products, not just the garbage bag. The factory manager, Genivaldo, has been reflecting on the possibility of expanding to the production of other products such as plastic hoses, which had an increase in demand, due to the increase in agricultural production in 2020 (with the increase in the dollar), among other products. Also, as it is a brand that intends to act on several recycling fronts, it considers as another possibility to start expanding to recycle other materials such as glass and paper, for example.

Genivaldo is concerned about the fact that Reciclix has a concentration of around eight customers, responsible for 70% of the company's revenue. Another 200 customers correspond to the other 30% billed by the company. The largest customers are distribution companies, which buy the product directly from the factory, for wholesale resale, or directly to companies such as schools, hospitals, among others. The company also sells to individuals and smaller stores, who buy for resale, in establishments, or even on the street, as is the case of signal sellers, who correspond to a significant clientele of the factory.

The key input for the factory's production process is LDPE (Low-Density Polyethylene), distributed by cooperatives and companies specializing in material separation. Today Reciclix needs to buy inputs from outside Brasília, as the city does not meet the demand. One of the specific factors of the local reality is the existence of a middleman who buys plastic from cooperatives in the region, leading to the problem of lack of input. In addition, the material needs to be well separated, otherwise the machinery ends up wearing out, with materials other than the plastic itself. An example of this is that when metal is thrown into the washing process, the machinery can end up overheating and breaking.

With few options, and with a low purchase volume, Reciclix has little bargaining power, when compared to large industries in São Paulo, or to the regions of the South, making it hostage to the price established by the supplier. These locations experience a different situation, since industries tend to buy directly from cooperatives in the region, reducing transportation costs, which are the highest in the logistics process. With recurrent and recent readjustments, this has become a relevant problem perceived by managers.

The Reciclix market: working today with an eye to the future

In Brasilia, there are some direct competitors of the company. In the view of the company's managers, all of them have a quality control process inferior to that practiced by Reciclix, in addition to having a more competitive operating price. Geographically, they are very far from Reciclix, which ends up opening up the possibility of better exploring the region in which the factory is located. However, all of them have a larger production, more efficient and new machinery, and a more consolidated customer base.

The recycling market has gained strength in recent years, especially in developed countries. Data show that the recycling market today already moves around 400 million dollars worldwide in the world, and can leverage even more, according to the United Nations - UN (2020). In addition, the production of garbage has increased in Brazil, opening up a market possibility for Reciclix and other businesses interested in investing in recycling.

Especially after the pandemic, plastic waste and packaging have increased considerably, especially due to the growth in food deliveries and the increase in the use of disposable items such as masks, gloves, etc.  For Mara Gama, "2020 was the year we embraced plastic"4. In the city of São Paulo, for example, the volume of disposable plastics from selective collection rose 35% during the period of social isolation, according to the United Nations Environment Program (UNEP). Called "Delivre de Plástico", the campaign started in 2021, focused on the largest delivery companies operating in Brazil (Ifood and Uber Eats) to stop using disposable plastic packaging (Figure 3).

In Brazil, the issue of waste, including plastic, in terms of federal public policies, is covered by the National Solid Waste Policy (PNRS, Law No. 12,305/10), which provides for the prevention and reduction of waste generation, proposing the practice of sustainable consumption habits and a set of instruments to promote increased recycling and reuse of solid waste. in addition to the environmentally appropriate disposal of the tailings.

This law, which took 20 years to be sanctioned in the National Congress, is a milestone for the packaging recycling sector in general, especially plastic. It establishes the shared responsibility of waste generators: manufacturers, importers, distributors, traders, citizens and holders of urban solid waste management services in the reverse logistics of post-consumption waste and packaging. It also establishes important goals that will contribute to the elimination of dumps and establishes planning instruments at the national, state, micro-regional, intermunicipal, metropolitan and municipal levels; and requires enterprises to prepare their Solid Waste Management Plans.

In the specific case of plastic, it is covered in the Sectoral Agreement for the Implementation of the Reverse Logistics System for Packaging in General, signed on 11/25/2015, with the purpose of ensuring the environmentally appropriate final destination of packaging in general, which can be composed of paper and cardboard, plastic, aluminum, steel, glass, or even by a combination of these materials, such as long-life carton packages, for example (which are a combination of plastic, aluminum and paper) (National Information System on Solid Waste Management - SINIR, 2021). This set of regulations on waste can open opportunities for Reciclix, although it is not yet clear how this can happen and reflect on the company's daily performance, that is, how this small industry can take advantage of this environment to strengthen itself.

The company's situation has several layers that add challenges to management. Genivaldo has faced some difficulties. Some points offer positive perspectives, while others are worrying. In addition, the company has little working capital on hand, as it went through a period of reduced demand, caused by the pandemic. Now one of the possibilities raised is the commercial expansion and strengthening of the Reciclix brand in the region.

Based on this context, managers have been faced with some reflections: how to use current trends on the use of plastics, recycling, and circular economy in favor of company consolidation? How to position the product they sell, which tends to be seen as low added value and has received low demand? How to build a positioning for the company, looking to the future?

Questions for the discussion

1. Conduct a SWOT analysis for Reciclix, identifying threats and opportunities the company is currently facing, as well as its strengths and weaknesses.
2. Based on your perception, how could the company add more value to its main product?
3. Analyze the current products and indicate which ones should be prioritized so that the company achieves the commercial expansion desired by the management. Should the company keep its focus on producing garbage bags or would recycled plastic pellets have a better output?
4. How do you suggest that the company should act in the face of dependence on a few customers, responsible for most of the company's revenue?
5. How could Reciclix equate the purchase of raw materials (plastic waste) locally to increase its production capacity and reduce logistics costs with transportation?
6. How could Reciclix incorporate principles of circularity of the plastics economy into its business model?

References

Brazil. SINIR - National Information System on Solid Waste Management. Available at https://sinir.gov.br . Accessed in July 2021.
BRAUNGART, Michael; MCDONOUGH, William. Cradle to cradle. Random House, 2009.

Ellen MacArthur Foundation: New Plastics Economy. Available at: Available at: www.ellenmacarthurfoundation.org/pt/programas/systemic-initiative/nova-economia-do-pl%C3%A1stico

Reike, D., Vermeulen, W. J., & Witjes, S. (2018). The circular economy: New or Refurbished as CE 3.0?—Exploring Controversies in the Conceptualization of the Circular Economy through a Focus on History and Resource Value Retention Options. Resources, Conservation and Recycling, 135, 246-264.

UNEP (2018). Legal Limits on Single-Use Plastics and Microplastics: A Global Review of National Laws and Regulations. Available at: http://wedocs.unep.org/handle/20.500.11822/27113

UNEP (2018b). Single-use Plastics: A Roadmap for Sustainability Global Commitment. Available at: https://wedocs.unep.org/bitstream/handle/20.500.11822/30609/plastics_eco.pdf?sequence=1&isAllowed=y

UNEP (2018c). Global Waste Management Outlook. Available at: www.unenvironment.org/resources/report/global-waste-management-outlook

World Bank (2018). What a Waste 2.0: A Global Snapshot of Solid Waste Management to 2050. Available at: http://datatopics.worldbank.org/what-a-waste/

WWF (2019). Solving Plastic Pollution: Transparency and Accountability. Available at: https://promo.wwf.org.br/solucionar-a-poluicao-plastica-transparencia-e-responsabilizacao?_ga=2.61890990.340487679.1578051946-1802114202.15777287

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About The Authors

1. Pedro Guerra Benedetti is a Business Administration student at the University of Brasília and a member of the ADM Casoteca Team. pedroguerrabenedetti@gmail.com
2. Helena Araújo Costa is an Associate Professor II at the Department of Administration (ADM/FACE) at the University of Brasília (UnB). She is the coordinator of Casoteca ADM. She has a doctorate in Sustainable Development (CDS/UnB), a master's degree in Tourism and Hospitality and a bachelor's degree in Administration. He teaches Contemporary Topics in ADM 1 and 2, and Introduction to ADM at UnB. Email: helenacosta@unb.br
3. Patricia Guarnieri is an Associate Professor at the Department of Administration (ADM/FACE) at the University of Brasília (UnB) and in the graduate programs in Administration (PPGA) and Agribusiness. She has a degree in Accounting from Unioeste, a master's degree from UTFPR in Production Engineering and a doctorate in the same area from UFPE. His areas of expertise are: Logistics, Supply Chain Management, Decision Analysis and Circular Economy. Email: pguarnieri@unb.br

This case was written based on information provided by the company and based on other references cited. It is not the authors' intention to evaluate or judge the company in question. This text is intended exclusively for academic study and discussion, and its use or reproduction in any other form is prohibited. Copyright infringement will subject the offender to the penalties of Law No. 9,610/1998.