Laws to mitigate the impacts of the industries and responsible consumption trends have been pushing manufacturers to integrate sustainability in their business models. In this context, circular economy and sustainable manufacturing have become key interests for manufacturers, and thus should be included in higher education curricula for industrial engineering students. However, tools and sources for these new subjects are scarce. Such multidisciplinary topics require practical innovative teaching approaches with suitable evaluation approaches. Such a proposal is presented in this paper to define a set of pedagogical specifications for both hard and soft skills required to design sustainable and circular proposals for urban factories. First, the students are required to define the scope of impact mitigation through the interpretation of life cycle assessment (LCA) results for a case study. Then, a roleplay has been developed with the objective of improving sustainability using sustainable manufacturing practices and circular economy strategies. The design phase is supported by a package of databases and instructions, alongside tools and templates for expected deliverables including LCA and sustainable business model canvas. To enable innovation and design thinking, feedbacks have been given to students on a regular basis with the aim to improve outcomes prior to the final deliverable. Evaluation has been conducted through an oral presentation in front of academic and specialized external experts, followed by a discussion and a deliberation. This proposal has been tested in a class of 40 industrial engineering students during a semester for a course dedicated to urban factories. All groups have successfully achieved the specifications of the course, and have demonstrated additional soft skills such as teamwork, time management, and effective presentation.