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.

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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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