Tracking and transparency of suppliers has never been more important
By Annalise Durante
Globalization has resulted in highly complex supply chains. Several recent events, such as the COVID-19 pandemic, the effects of climate change and the Uyghur humanitarian crisis, have brought to light how impactful a company’s supply chain truly is. For example, how can you know whether the Made in China T-shirt you purchased was produced using forced labor? Without companies tracing and disclosing their supply chains, it’s impossible for consumers to understand the inherent environmental and social impacts of the goods they buy. Consumer sentiment and impending regulations are trending in favor of demystifying the supply chain.
What is mapping, traceability and transparency?
Mapping, traceability and transparency are terms commonly used to describe different processes of assessing a company’s supply chain.
Mapping creates a full picture of a company’s supply chain. This includes direct and indirect suppliers and encompasses each production tier — all of the potential businesses and organizations integral to the production of goods and services. Mapping can help illustrate which partners play more important roles. Stonyfield Farm, for example, maps the ingredients sourced for its products.
Whereas mapping is more high-level, traceability is more granular and data-focused. It tracks the journey of individual purchase orders or components throughout the supply chain. Traceability “requires information for each commercial transaction in the supply chain for that particular product or batch.” This real-time data allows a company to view where a product or component is in the supply chain at any point in time.
Developing a system to enable traceability is arduous. Technology can assist a company with the design and implementation. Traceability can help a company identify inefficiencies, mitigate supply chain risks, meet regulatory requirements, and verify compliance with claims (such as organic certification). Because of these advantages, traceability will become more prevalent in the future of supply chain management. One fascinating example can be seen by a company called Provenance, which is applying blockchain technology to track tuna caught in Indonesia to verify sustainability claims.
Transparency is the process of disclosing information such as supplier lists, associated certifications, and facility locations. Transparency should also disclose environmental and social impacts of the supply chain, which is ultimately the information that stakeholders and regulators are seeking. Transparency information may be communicated on a company’s website or in sustainability reports. For example, Hershey discloses a list of its cocoa suppliers on its site.
Moving towards increased supply chain regulations
So far, there is no comprehensive legal requirement for companies in the U.S. to be transparent about supply chain risks or impacts. California’s 2010 Transparency in Supply Chain Act does require large manufactures and retailers to provide consumers with information regarding their efforts to eradicate slavery and human trafficking from their supply chains. However, the Act only mandates disclosures, not standards for action, and studies have largely found non-compliance.
As part of an ESG strategy, many companies voluntarily disclose some information, such as a supplier code of conduct, or human rights policies. Although better than nothing, disclosures are inconsistent across companies, and it’s near impossible to hold a corporation accountable. Fortunately, there have been several recent legislative developments in the U.S. that will push companies towards more accountability for their supply chains.
New York’s Fashion Act
The fashion industry contributes up to 8% of global carbon emissions. Textile dyeing is the second largest polluter of water globally. Exploitative labor practices have persisted in the fashion industry’s supply chain. In this context, the Fashion Sustainability and Social Accountability Act (the Fashion Act) is currently pending before the New York state legislature, aiming to address the industry’s many ESG issues. If passed, the legislation would require fashion retailers and manufacturers to map at least 50% of their supply chain. Additionally, public disclosures of due diligence of environmental and social risks, target setting to reduce environmental and social impacts, and reporting on these impacts would be required. The Fashion Act would apply to fashion retailers and manufacturers doing business in New York with annual gross revenues of over $100 million. Failure to comply will result in fines of up to 2% of annual revenues over $450MM, deposited in a community fund used to support environmental justice projects.
Uyghur Forced Labor Prevention Act
At the end of 2021, President Biden signed into law the Uyghur Forced Labor Prevention Act (UFLPA). Effective June 2022, the law assumes any goods wholly or partly produced, manufactured or mined in Xinjiang Uyghur Autonomous Region (XUAR) of China, or by certain entities within the region, are produced with forced labor and therefore prohibited from importation. Enforcement will likely scrutinize the entire supply chain, which could have a large impact on goods imported from China.
SEC’s proposed climate-related disclosure rule
SEC’s proposed climate-related disclosure rule will require many companies to begin including Scope 3 emissions in their public filings. Scope 3, or indirect emissions, include those upstream and downstream in the chain. In other words, companies will soon be forced to map their supply chains and disclose specific information on environmental impacts.
Getting ahead of the trend
Supply chain transparency and traceability is an ESG best practice that soon may be required. To prepare, companies should start designing and implementing the framework for collecting data needed for compliance with impending regulations. This may also help to mitigate both reputational and supply chain risks. Companies can also start thinking about their communication strategy as it relates to sustainability reports and public filings. It all adds up to a holistic strategic plan for sustaining healthy growth.