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Life cycle assessment (LCA) has been an important issue in the development of a circular economy. LCA is used to identify environmental impacts and hotspots associated with plywood manufacturing. Based on our results and a literature review of LCA studies involving plywood, a sustainable and environmentally friendly scenario was proposed for the plywood processing industry to improve environmental performance and sustainability. This study covers the life cycle of plywood production from a cradle-to-gate perspective, including raw material preparation and plywood manufacturing and processing to analysis of environment impacts and hotspots. Analysis of abiotic depletion (ADP), acidification effect (AP), primary energy depletion (PED), freshwater eutrophication (EP), global warming potential (GWP), and particulate matter (RI) were selected as major impact categories in this study. All data were obtained from on-site measurements (plywood production) and investigations of the Eco-invent database and CLCD database (upstream data of materials and energy). These data can be ignored when environmental contributions comprise less than 0.001% of environmental impact and auxiliary material quality is less than 0.01% of total raw material consumption. An eco-design strategy with eco-alternatives was proposed: pyrolysis bio-oil can be used to produce green resin to replace traditional phenolic formaldehyde (PF) resin to decrease the impacts of GWP, PED, AP, PM, and especially ADP and EP. A new technology of gluing green wood was used to replace conventional plywood production technology; wood waste could undergo a gasification process to produce resultant gas rather than combusting. Plywood was also compared with other wood-based panels in China to identify additional scenarios to improve environmental sustainability.