How Supply Chain Transparency Boosts Business Value

Increasing visibility into suppliers’ practices takes work but can lead to new market opportunities.

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In November 2020, executives from Amazon, Ikea, Nike, and other high-profile companies were called before the U.K. Parliament to address claims that their suppliers might be using forced labor.1 Members of the House of Commons’ Business, Energy and Industrial Strategy Committee were investigating the potential exploitation of Uyghur Muslims from the Xinjiang region of China.2 They directly challenged company representatives on how their organizations maintain visibility into and combat modern slavery within their supply chains.

With businesses’ sourcing practices under such scrutiny, supply chain transparency has become an imperative in many industries. Emerging regulations such as the U.K. Modern Slavery Act and the California Transparency in Supply Chains Act are not the only drivers of this trend, however. In industries such as apparel, consumer electronics, and food and beverage, companies are facing pressures from all sides to demonstrate better environmental and social practices in their supply chains.

Consumers increasingly want to know more about where and how the products they purchase are being made. They are actively rewarding companies that provide visibility into their supply chains and punishing companies that do not. Meanwhile, advocates for reform, such as Fashion Revolution and the Clean Clothes Campaign, are pressuring brands to be more transparent by grading and publicizing their levels of transparency. Investors are also increasingly critical of incidents that violate acceptable environmental, social, and corporate governance practices: In the U.S., it is estimated that such incidents erased almost half a trillion dollars’ worth of value from public companies from 2015 to 2019.3

In practice, creating a transparent supply chain is not simply a matter of determining what information to disclose to consumers; businesses must first gain visibility into their own supply chains. However, the level of effort and resources needed to monitor first-tier suppliers, let alone upper-tier ones, can be very costly and time consuming. Furthermore, such efforts are often not required by regulation and thus are viewed as necessary only if “something bad” has happened, so getting management buy-in to proactively commit the necessary resources can be difficult.

Companies must find efficient and effective ways to gain visibility into their supply chains, given the increasing demands for greater transparency from regulators, consumers, activists, and investors, and the vast amount of resources such a commitment entails. In this article, we present innovative methods for making such improvements and provide evidence of the business value that greater transparency can enable.

Audits Are Only a Starting Point

Traditionally, companies have relied on audits to monitor their immediate suppliers and ensure that responsible practices are being followed in their supply chains. However, audits alone are not sufficient for truly gaining visibility into one’s supply chain. To begin with, audits are only snapshots of supplier practices at the time the audits occur. There is evidence that suppliers often find ways to game audits and hide what they don’t want an auditor to see.4 Furthermore, audits require a significant commitment of time and resources, the cost of which often limits their frequency and narrows their scope to only first-tier or key suppliers. But the reality is that the more severe social and environmental incidents typically occur in the upper tiers of a supply chain. For example, a recent study of 3,922 supplier relationships found that second-tier suppliers committed, on average, 18% more instances of noncompliance per audit than first-tier suppliers, and the third tier committed 27% more.5

To increase the effectiveness of audits, companies must find ways to expand their reach for greater impact. For example, to increase oversight of its suppliers, Patagonia reduced its supplier count by 50% in the late 2000s. As a result, the company is able to annually audit 100% of its first-tier suppliers as well as a subset of second-tier suppliers that accounts for 80% of its total material costs. These changes have resulted in stronger and more collaborative relationships with suppliers, which helped the company increase its visibility into its supply chain and enhance its reputation among consumers.

Although many brands and manufacturers may not have the resources or capabilities of a company like Patagonia to extend their auditing influence beyond first-tier suppliers, they can increase their reach in other ways. One approach is to partner with independent auditors, local trade unions, or nongovernmental organizations that work within a supplier’s region. For example, as a collaboration between the United Nations’ International Labor Organization and the World Bank Group’s International Finance Corporation, the Better Work program is actively performing independent, external assessments of 1,700 garment factories employing over 2.4 million workers in nine countries. In addition, it works closely with local governments to improve labor laws and advise unions on how to strengthen workers’ voices. Through frequent, unannounced audits and on-the-ground actions such as working with local unions and governments, these efforts can often uncover region-specific issues that overseas brands cannot.

Another approach is to conduct joint audits, where multiple companies pool their resources to audit common suppliers. After the 2013 Rana Plaza collapse in Bangladesh, in which over 1,100 workers died, it became evident that many brands and retailers in the apparel industry lacked visibility into their supply chains. The resulting pressure placed on the industry to improve working conditions helped shift European retailers’ compliance focus from self-certification to more collaborative certification efforts. As a result, retailers and brands signed on to the Accord on Fire and Building Safety in Bangladesh, a legally binding five-year agreement that aimed to improve and better monitor the country’s working conditions.6 As part of the accord, retailers collaborated on conducting audits and shared the cost.

Also gaining traction is the practice of sharing audit information through trustworthy third parties. Service providers such as Sedex and nonprofit organizations such as the Fair Factories Clearinghouse are offering online tools and platforms to help buyers and suppliers share audit results more easily and efficiently. Such data sharing can help minimize duplicative efforts and reduce potential audit fatigue for suppliers, which often must satisfy multiple, similar audit requests from their buyers. The ability to demonstrate such efficiency gains is key to motivating brands and suppliers to participate in these innovative platforms.

There are still hurdles to making collaborative efforts such as these work. Manufacturers and brands may be hesitant to fully share audit information due to potential intellectual property (IP) risks and the fear of leaking commercially sensitive information to competitors. Many companies believe that their suppliers give them a competitive advantage and should remain undisclosed. In our conversations with Sedex leaders, they acknowledged that overcoming such resistance remains a challenge and ultimately requires building trust among the participating companies. Having large buyers on board can help demonstrate to others the credibility of collaboration around audits.

Another challenge to collaboration is the fact that audit information is often interpreted and measured differently across companies. To address the lack of a common audit language for assessing social and labor conditions in the apparel industry, brands, government organizations, and nonprofits have come together to form the Social and Labor Convergence Program (SLCP). This multistakeholder initiative is aimed at creating a common framework and language for assessing social and labor conditions. Uniquely, the SLCP’s emphasis is on data collection and information sharing, not on interpretation of the data, which is still in each brand’s hands. By creating a way to generate and share comparable data at the industry level, the initiative has the potential to move the conversation forward from monitoring and compliance toward factory improvements.

While these new approaches to auditing can provide better insights into supply chain compliance, we believe they are only part of the solution.

Overcoming Barriers to Supply Chain Visibility

Many would argue that technologies like the internet of things and blockchain are key to improving visibility into supply chains. IoT devices and sensors provide a way to collect granular, high-frequency environmental and social performance data throughout a supply chain to monitor key considerations, such as a product’s carbon footprint, during each stage of production. Blockchain protects the integrity of data with immutable ledgers so that users of the data can trust it (such as confirming that fair trade certification requirements have been met).

The enhanced collection and sharing of data enabled by these technologies has the potential to offer unprecedented supply chain insights compared with those afforded by infrequent audits. But they cannot ensure transparency on their own. Other obstacles — namely, infrastructure limitations and stakeholder misalignment — must first be addressed.

Infrastructure barriers. Many supply chains originate in underdeveloped regions where technical infrastructure, good management practices, and even awareness of environmental and social issues are lacking or nonexistent. Trying to gain visibility into these regions and improve production practices is a major hurdle for many companies.

Consider Goodio Chocolate, a Finnish craft chocolatier that aims to provide “radical transparency” into the supply chain behind its products. The company experimented with using blockchain technology to trace raw materials and wages in its cacao supply chain but failed for two main reasons. First, the smallholder cacao farmers from whom Goodio sources do not have the knowledge and capabilities to operate a technology as advanced as blockchain. Second, trade deals with these farmers are often on the basis of verbal agreements rather than formal contracts that could be tracked through the blockchain.

Given such constraints, companies are finding innovative ways to extend their supply chain visibility using existing, common technologies such as cellphones. For example, Sedex (in partnership with IT provider &Wider) and Elevate (through its Laborlink mobile platform) are creating solutions to crowdsource insights into potential labor and safety issues on the factory floor by building safe communication channels for workers to call or text to report incidents. These platforms provide workers with a voice while providing suppliers and downstream buyers with a means to quickly gain extensive insights into their supply chains without having to rely solely on resource-intensive audits.

Another powerful but admittedly less simple approach to improving supply chain visibility that is gaining attention is the use of predictive analytics and data triangulation. For example, by partnering with Elevate and using large-scale worker voice data, the Global Fund to End Modern Slavery is creating predictive tools to help buyers detect unauthorized subcontracting and forced labor in informal garment factories in Bangladesh and India. Similarly, Sedex is developing data triangulation methods that integrate multiple data sources (such as audit reports and worker voice data) to help uncover a truer picture of factory practices. Analytics is one of the ways we see the conversation on supply chain monitoring shifting from reactive to more proactive management.

Stakeholder misalignment. Many companies lack a culture of data sharing, and incentives are not well aligned across stakeholders in their supply chains. When supply chain partners’ objectives don’t align, it creates another major roadblock to supply chain visibility. Large supply chains or ones where the flow of information is poor are particularly susceptible to misalignment. While downstream retailers and brands may feel the need to be more transparent about what is occurring in their supply chains due to regulatory, consumer, activist, and investor pressures, upstream suppliers may not have the same sense of urgency. Many upstream suppliers view their sourcing practices and own supply chains as part of the value proposition that they offer to downstream buyers. From their perspective, being more transparent could decrease their leverage and lead to them being squeezed out of the supply chain. Furthermore, providing the necessary data is often seen as extra work solely for the purpose of fulfilling their buyers’ compliance requirements.

A variety of carrots and sticks can be used to encourage supplier transparency. This is especially true for small, informal suppliers that historically may not have paid attention to environmental and social issues. For example, Sourcemap, a provider of supply chain mapping and traceability tools, often relies on the market power of its large, corporate customers (including Hershey and H&M) to influence suppliers to share information. Similarly, many suppliers initially joined the Sedex platform based on requests from their buyers. While such incentives represent important first steps to attaining supplier buy-in, we contend that solely relying on such “sticks” is not a sustainable approach.

To gain suppliers’ trust, it’s important to show them the “carrots.” These can be in the form of granting preferred-supplier status, offering more attractive contract terms, or jointly investing in capacity building. But it’s even more effective to educate suppliers to see the long-term benefit of transparency. As Simon McCalla, CEO of Sedex, notes, “Our theory of change is to empower suppliers to change their mentality from seeing transparency as yet another requirement for compliance to viewing it as a way to achieve cost savings and, eventually, an opportunity to create business values,” such as winning more contracts and attracting new buyers. While the education process can take time due to suppliers’ lack of resources and procedures, the long-term benefit is a shift in mindset throughout the supply chain, from risk mitigation to proactive improvement. It’s important to note that there is often a need for education on the buyer’s side as well, particularly among upper management, given that some intangible and long-term benefits of investments in transparency may not immediately translate to the bottom line.

Interestingly, transparency can sometimes be the carrot itself to improve performance. Studies in health care and energy usage have shown that revealing relative performance against a peer group can be a powerful tool to drive positive behavior change.7 Relatedly, in our discussions with Sedex leaders, they commented that they are investigating how relative performance transparency may be used to nudge suppliers on its platform to further share information and improve practices. An important consideration in the design of such relative performance schemes is to ensure that the introduction of competition does not lead to unethical practices, with suppliers taking shortcuts to demonstrate certification and win business.

Misalignment can also be caused by IP concerns. Consider GreenBlue, an environmental nonprofit dedicated to increasing visibility into the chemicals and substances used in products and supply chains. Suppliers are often reluctant to disclose their products’ chemical and material makeup to buyers, worrying that they will reveal trade secrets and lose their competitive advantage. To overcome such concerns, GreenBlue built an innovative platform called Material IQ (MiQ) that allows upstream suppliers and downstream buyers to share sensitive chemical-toxicity information without divulging closely guarded information. Suppliers submit sample products to Scivera, a GreenBlue partner and third-party chemical safety assessment provider, which then evaluates and scores a product’s chemical makeup and the associated risks. This information becomes part of MiQ, so buyers that subscribe to the platform can view the potential hazards of the product but not enough information to reverse engineer it.

Transparency Can Create New Business Opportunities

Gaining visibility into your supply chain enhances your ability to monitor and improve suppliers’ environmental and social practices, but the potential benefits don’t stop there. Improved visibility can also create new market opportunities. Consider, for example, the number of small businesses and startups whose business models are based on the concept of transparency. In the chocolate and coffee industries, where poor labor practices and low wages in the upper tiers of supply chains are common, companies such as Goodio Chocolate and Moyee Coffee are creating value propositions centered on the idea of end-to-end visibility. Similarly, in the cosmetics industry, which has long been criticized for a lack of transparency regarding products’ potential health risks, companies such as Beautycounter are building their brands on the idea of “clean beauty.”

For companies such as these, one way to capture the market value of improved supply chain visibility is to better communicate the environmental and social performance of their supply chains to the public. As consumers increasingly consider sustainability to be an integral part of their purchase criteria, better communication can lead to market advantages. Take, for example, Alta Gracia Apparel, a manufacturer of officially licensed collegiate apparel whose products are sold in university bookstores and by online retailers. Alta Gracia guarantees that the workers making its apparel in the Dominican Republic receive wages and benefits to cover the cost of a family’s needs — wages that are 340% higher than what is required by law. To test the value of transparency in the market, Alta Gracia and its research partners ran a field experiment at a university bookstore. They found that when video clips describing Alta Gracia’s practice of paying living wages to workers were displayed, the company’s product sales increased significantly.8

In our own research, we consistently observe that companies benefit from providing increased visibility into the social responsibility practices of their supply chains. For example, improved visibility strengthens customers’ trust in a company and can result in revenue benefits, especially when customers are generally skeptical of businesses’ corporate social responsibility (CSR) claims. Furthermore, greater visibility can induce consumers who are less socially minded to increase their valuations of a company’s social responsibility efforts. Companies serving a global market can positively influence consumer preferences by tailoring their CSR communications in a way that best aligns with the cultural values in different market regions. For example, a culture that values competition and personal achievement (such as that in the U.S.) may be more readily persuaded by fact-based statements, whereas a culture that emphasizes caring for others and quality of life (such as Finland) may be more strongly affected by stories from beneficiaries.9

A second business opportunity comes from enhanced efficiency. Improved visibility helps companies to target their environmental and social responsibility efforts more efficiently and to accurately evaluate the associated outcomes. That is, companies can now direct resources where they are needed most to address environmental and social issues in their expansive supply chains, as well as identify the right set of suppliers with which to forge collaborative relationships. This can then support capacity building, which is important for improving practices, particularly in developing countries. For example, Goodio sources cacao for its chocolates directly from a small number of cacao cooperatives in Peru. By leveraging its close relationships with these cooperatives, Goodio gains visibility into its supply chain and works with these farmers to ensure both the quality of the cacao beans and the responsible treatment of the farmers, including fair pricing. In the long run, strengthening these cooperatives can help improve the farmers’ practices and provide them with leverage in the marketplace to receive better prices and access a wider range of buyers.

A third potential benefit arises from creating opportunities to take a leadership position within an industry. Consider, for example, Taylor Guitars. In the early 2010s, high demand and low supply of ebony wood led to widespread illegal logging, which exposed many guitar manufacturers to compliance and reputation risks. Taylor sourced its ebony from the Crelicam mill in Cameroon, which in turn sourced its raw wood from several small suppliers in the region. During a 2011 trip to Cameroon, Taylor executives discovered some disturbing facts about the ebony sourcing process. For example, wood suppliers, on average, had to cut down 10 trees to find one tree with the desired pure black color. Furthermore, they observed poor labor practices at the Crelicam mill. These discoveries motivated Taylor to purchase the mill and vertically integrate its ebony supply chain. The company also established labor practice standards at the mill comparable with those found in the U.S. The mill began to accept wood with stripes of color from the wood suppliers at prices equal to those for pure black wood, and Taylor started to sell wood to its competitors. Using its position as both a supplier and a producer, the company helped reeducate the market — both consumers and competitors — to accept guitars made with striped ebony wood, thus significantly improving the sustainability of ebony forests.

Taylor Guitars is not an isolated example of a company playing a positive role in shaping industry standards and behavior around supply chain transparency. For example, in the apparel industry, Patagonia and Nike have helped set the expectation that large brands should disclose their supplier lists and share public maps of where their products are sourced and made. Similarly, Starbucks launched the Coffee and Farmer Equity (CAFE) Practices in 2004, establishing one of the first sets of ethical sourcing standards in the coffee industry. A central component of CAFE Practices is transparency, requiring suppliers to provide information on where coffee beans are sourced and the prices paid to farmers. CAFE Practices allow Starbucks to develop deep working relationships with coffee suppliers and promote ethical sourcing practices in the industry. While the company sources only about 3% of the world’s coffee, over 18% is now grown under CAFE Practices.

The Path Forward

Supply chain transparency has become a critical component in consumers’ purchasing criteria, and companies now must decide how transparent they want to be. But they must gain visibility into their own supply chains before they can make them more transparent to consumers and partners. This increased visibility can help mitigate supply chain risks — to workers, the environment, consumers, and a company’s production capabilities and reputation — and ensure compliance with social and environmental standards. It’s also crucial to the next stages in the evolution of sustainable supply chains, which include increased knowledge sharing, deeper collaboration with partners and competitors, and greater ownership by downstream retailers and brands regarding what occurs in their supply chains.

Although audits are a necessary tool for managing compliance, truly increasing supply chain transparency requires companies to both innovate and expand their toolboxes by introducing new methods for gaining visibility into suppliers’ practices. They must also bear in mind that the process is not just about making technology investments — it also requires business innovation that addresses infrastructure and incentive alignment barriers. To realize the true benefits of transparency, however, a change in mindset is needed. By educating supply chain partners on the value of transparency, companies throughout the supply chain can benefit from both improved efficiency and more collaborative relationships and capture potential revenue opportunities. And by leading transparency efforts in their respective industries, companies can place themselves in an advantageous position to proactively address regulatory and activist requirements, shape new market trends, and create new business opportunities for themselves.

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References

1. H. Abdulla, “U.K. Holds Hearing on Exploitation of Forced Labour in Xinjiang,” Just-Style, Nov. 5, 2020, www.just-style.com.

2. V.X. Xu, D. Cave, J. Leibold, et al., “Uyghurs for Sale,” Australian Strategic Policy Institute, March 1, 2020, www.aspi.org.au.

3. C. Flood, “ESG Controversies Wipe $500bn Off Value of U.S. Companies,” Financial Times, Dec. 14, 2019, www.ft.com.

4. J. Webb, “Do Supply Chain Audits Work? Dealing With Deviant Suppliers Like a Journalist,” Forbes, Oct. 26, 2016, www.forbes.com.

5.Going Deep: The Case for Multi-Tier Transparency,” Sedex, November 2013, www.sedex.com.

6. In 2018, two landmark cases brought against multinational fashion brands under the accord resulted in settlement payments totaling more than $2.3 million for the remediation of unsafe conditions in Bangladesh factories.

7. H. Song, A.L. Tucker, K.L. Murrell, et al., “Closing the Productivity Gap: Improving Worker Productivity Through Public Relative Performance Feedback and Validation of Best Practices,” Management Science 64, no. 6 (June 2018): 2628-2649; and R.W. Buell, S. Mariadassou, and Y. Zheng, “Relative Performance Transparency: Effects on Sustainable Choices,” working paper 19-079, Harvard Business School, Boston, January 2019.

8. R.W. Buell and B. Kalkanci, “How Transparency Into Internal and External Responsibility Initiatives Influences Consumer Choice,” Management Science 67, no. 2 (February 2021): 932-950.

9. T. Kraft, L. Valdés, and Y. Zheng, “Supply Chain Visibility and Social Responsibility: Investigating Consumers’ Behaviors and Motives,” Manufacturing and Service Operations Management 20, no. 4 (fall 2018): 617-636; T. Kraft, L. Valdés, and Y. Zheng, “Consumer Trust in Social Responsibility Communications: The Role of Supply Chain Visibility,” SSRN Electronic Journal, Oct. 27, 2020, https://papers.ssrn.com; and M. Hämäläinen, T. Kraft, D. Thomas, et al., “Supply Chain Transparency at Goodio Chocolate,” in “Responsible Business Operations: Challenges and Opportunities,” eds. J.M. Swaminathan and V. Deshpande (Cham, Switzerland: Springer, 2021), 225-241.

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