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Ideas Made to Matter
Supply chain transparency, explained
Understanding your supply chain is more important than ever.
In the wake of reports about slave labor, food contamination, and human rights abuses, consumers are concerned about how their purchases impact their health, their communities, and the world at large.
And governments have created new regulations requiring companies to examine their suppliers more closely. For example, the United Kingdom and the state of California were among the first requiring companies to investigate whether there is human slavery in their supply chains, while the Dodd–Frank Act called for companies to identify whether they were sourcing certain materials deemed “conflict minerals” from war-torn regions.
Beyond these consumer concerns and regulatory requirements, a better understanding of your supply chain means improved governance and compliance with your own corporate policies and values. It can also reveal ways to operate more efficiently and cost-effectively. But the process can be difficult, and the return on investment murky.
Here’s what business leaders need to know about data collection, disclosure, and the promise and peril of a transparent supply chain.
According to Alexis Bateman, research scientist and director of MIT Sustainable Supply Chains at the MIT Center for Transportation and Logistics, there are two elements to supply chain transparency:
- Visibility: Accurately identifying and collecting data from all links in your supply chain.
- Disclosure: Communicating that information, both internally and externally, at the level of detail required or desired.
What kind of data and in how much detail? That can depend on the business you’re in. And how much disclosure? That can depend on your corporate culture and corporate values. Beyond what’s strictly required by regulation, then, supply chain transparency means different things to different companies.
“It’s unrealistic to expect that supply chain players can collect all information all the time,” said Bateman. One grocery store chain that specializes in organic and sustainable food may go to lengths to identify, and disclose, great detail in its supply chain. Another chain, one that focuses on the lowest prices, may not want or need as much detail or disclosure. Then again, if bad news strikes — like E. coli being found in lettuce — both chains had better be able to pinpoint their supply sources well enough to be able to pull the contaminated produce.
Step 1: Find your North Star
The first step in creating a transparent supply chain is deciding what transparency means for your company. Consider your industry, what regulations apply, your code of ethics, your corporate culture, who your suppliers are, who your customers are, your experiences of past supply-chain problems, and level of risk you’re willing to accept. Companies often start with an evaluation of internal and external stakeholder interests called a “materiality assessment,” according to Bateman.
This helps you determine at least basic requirements of information you want from suppliers, and serves as a guide for how to proceed from there. “You want to be able to report on these things at a minimum, and it’s non-negotiable,” Bateman said. “That’s your North Star.”
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Next, make sure you understand the flow of goods, the number of suppliers, and the processes in your supply chain.
“Investigate what systems are already in place that might give you some of the information you want. For example, compliance and risk-management systems might already collect environmental data or be tracking certain statistics to comply with regulations. These systems may have that information but may not be using it in a way that serves transparency,” Bateman said.
The goal is to figure out how you can use the same data to accomplish goals in two areas — reducing risk and increasing transparency, for example. “This kind of paired-risk element is undervalued,” Bateman said.
Once you know what data you already have, and where it is, you’ll have a starting point to determine what investments are needed to fill gaps.
After you have a strategy and data-collection system in place, decide what information you will disclose, to whom, and under what circumstances. Some of this may be dictated by regulations, but much of it is up to the company.
Will you put it all out there? Or will you hold some of the data close, perhaps for proprietary reasons, perhaps for security reasons, but have it ready to disclose if necessary?
While supply chain managers should vouch for data authenticity, the level of disclosure should be approved by executives and the marketing department. “Once this information is live, your company is accountable, so you need to have full confidence in what you are putting out there,” Bateman said.
After all, if there is one lesson to learn from the history of supply chains, it’s that companies need to be ready to ride waves of shifting consumer and stakeholder demands as well as evolving regulations. After Rana Plaza in 2013, when a building collapsed in Dhaka, Bangladesh, killing more than 1,100 garment workers and injuring over 2,000, the world suddenly wanted to know where every clothes brand sourced its garments.
More recently, consumers are pressing for details on food supply chains. In 2019, Nestle announced it would disclose supply chain data on 15 commodities that cover 95% of its raw materials sources, including cocoa, dairy, seafood, spices, meat and poultry.
Transparency upsides (and downs)
The most obvious, and usually the primary, reason that companies increase supply chain transparency is to comply with internal governance and external regulations. While there are potential business benefits, they are less straightforward and hard to quantify. That makes the return on investment in transparency murky.
One oft-cited potential benefit is an enhanced reputation as a trustworthy company. A good reputation can help a brand in many ways.
“In some respects, transparency has really become a license to operate,” said Bateman. “If you’re not a transparent company, there is less willingness to work with you.” This applies to potential business partners, regulators, special-interest groups targeting things like exploitation of workers, and even employees.
Companies known for their transparency and liberal disclosure of information, such as Patagonia, attract talent and keep it. Patagonia says its employee turnover is less than 4% a year. And this may be even more important for the next generation. Bateman has noticed more students asking how they can find a job with trustworthy, ethical companies. Until recently, she noted, “I’d never heard that before.”
And a rapidly growing number of firms are committed to impact investing, the practice of investing in companies, organizations, and funds with the intention of generating not just financial returns, but measurable social and environmental impact as well. To attract the attention of such investors, companies need to be mindful of their ESG scores, which purportedly reflect their progress on environmental, social, and governance activities; in most cases, those ratings all but require at least some degree of supply chain transparency.
Investors aside, what about more tangible benefits? Does supply chain transparency actually reduce costs or increase revenue? It can. Bateman points out that many companies are pursuing digital transformation, including digitally transforming their supply chain operations. That enables them to collect more and better data.
By including supply chain transparency in the digital transformation strategy, organizations can collect new types of supply chain information, such as reports of labor abuses or environmental regulation violations. That can show the company where to make improvements, perhaps by changing a supplier. What’s more, “You may see ways to streamline the supply chain, and that produces operational value,” says Bateman.
Nevertheless, hard numbers that show how, or when, or even if, investments in transparency pay off are difficult to come by. “It’s a significant undertaking to understand what your entire supply chain looks like, to figure out how you are going to collect information, how that information is going to move between players, and how to analyze and make sense of it,” said Bateman. “It’s a different type of ROI, and that can be hard for a CFO [to justify].”
Which consumers care, and why
As for whether increased transparency can lead to actual revenue benefits, MIT Sloan researchers and are investigating. Along with Leon Valdes at the University of Pittsburgh, Zheng and Kraft have looked at how transparent supply chains impact consumer buying behavior.
So far, they’ve found that increased visibility into supply chains does bolster consumer trust. But whether this increased trust can translate into a higher likelihood of sale is a more nuanced question.
“It depends on what type of consumers you are dealing with and what kind of context you are in,” said Kraft, a research affiliate in operations management at MIT Sloan and an assistant professor at North Carolina State University.
Improved consumer trust gained from visibility increases the propensity to purchase in two types of consumers: those who naturally care about others’ well-being; and those who are natural skeptics.
In the case of caring consumers, the improved transparency helps to encourage them to act on their natural tendencies and purchase the socially responsible product. For skeptics, “the higher visibility can help to push aside their skepticism and actually get them to purchase the product,” said Zheng, an associate professor of operations management.
As data analytics and algorithms enable companies to target narrower segments of the population, the ramifications of this research could be significant, as companies target both socially responsible and skeptical consumers.
The upshot: While the ROI of creating a transparent supply chain may be vague and long-term, supply chain transparency does hold potential market benefits.
Zheng encourages companies to start now. “A lot of companies don't want to open the black box [of their supply chain], because … they could discover a lot of stuff they don't want to see,” she said. But her research with her colleagues shows that it can have positive impacts if companies are willing to dig deep.