The Four Challenges of Supply Chain Transparency

July 20, 2011 • OPERATION, Business Process, Supply Chain

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By Steve New and Dana Brown
In this article we examine a key business question: how much should
organizations know about their extended supply base, and what should they do
with this information? This question has become of urgent practical significance
for firms across industry sectors, as they square up to the complex inter-
connectedness of the modern world. We present a series of challenges that firms
can use to frame an initial review of their own practices.

The 11th March 2011 was a day when the earth moved. The
massive earthquake that hit Japan – the fifth largest since 1900 –
generated a tsunami which roared across the ocean at the speed
of a jet plane; the devastation and human tragedy that followed
caused the whole world to pause and gaze in horror. Soon after,
media reports of the incident were dominated by the crisis caused
at the Fukushima nuclear plant – a crisis which is still being
played out. But the aftershocks of the disaster were not limited to
Japan, as the devastation of industry in the region has had
consequences for the world as whole. The disruption of global
supply chains has been significant, even if less than originally
feared in the first few days after the event.

Hewlett Packard predicted a loss of sales of $700m due to the

earthquake. Honda’s production of Civics in Indiana and Ontario
is expected to be disrupted until the autumn of 2011. UK set-top
box manufacturer Pace blamed substantial drops in profits on
shortages caused by the disaster; Nokia issued similar warnings.
The nuclear crisis prompted by the disaster also resulted in
temporary bans on food imports from Japan. Suddenly, the
complex interconnections of the world economy are more than
theoretical propositions, and the question “where does this stuff
come from?” is a board-level concern. What is striking is that firms
often find this question difficult to answer.

But catastrophic natural disasters are not the only reason why
firms have had to address the issue of product provenance in
recent years. Iconic firms such as Wal-Mart and Apple confront
reputational firestorms when ethical and environmental problems
within the supply chain capture the attention of journalists and
activists. It would be easy to shrug these worries off with the
(entirely correct) observation that these firms’ customers are
mostly indifferent to these concerns when it comes down to the
purchasing decision, but to do so misses some important points.
Firstly, firms need to guard their reputations not just with regard to
their immediate customer base and short term bottom line, but
because continued reputational problems often lead to slow
erosion of market position. Secondly, firms are finding that
reputational damage affects not only their ability to hire the best
staff, but also to attract investors and to be considered a
trustworthy and legitimate business partner. Finally, governments
and consumers are increasingly concerned with product safety
and quality, an issue that is impossible to manage without good
information about the supply base.
To understand the increased urgency of these issues, it is useful
to reflect on the factors that have changed the game over the last
twenty years. While the global interconnectedness of economies
is not unique to the modern period, there are features of this
globalization that are profoundly different from the past. Above all,
high bandwidth global communication technologies have radically
changed the nature and timeliness of information, and who has
access to it.
The volume and immediacy of information flow today means that
global trade operates in a completely new way. Basic written
information can be translated for free, and instantaneously; multi-
party, face-to-face discussion can be organized and executed in
minutes. Complex documents can be shared, and co-written, in
real-time across continents.

Today global trade operates in a completely new way. The new

informational capabilities have given rise to complex webs of transactions
and new logistical and commercial structures.
These new informational capabilities have given rise to complex
webs of transactions and new logistical and commercial
structures. In the past, international trade could be epitomized by
two iconic artifacts of trade: the impersonal commodity market,
and the warehouse. Both of these served as buffers to decouple
the stages of the global supply chains, meaning the players on
either side could operate in relative isolation and in relative
ignorance of one another. Now, the game is different; information
and traceability technology allows us to see beyond the
commodity market and work out the specific origin of goods,
maybe to form a relationship with a producer to eliminate the
middleman altogether. Using sophisticated low-inventory systems
for transportation and replenishment, I can couple my logistical
systems to that of the supplier to achieve just-in-time flow.
Whereas once my supply was a faceless market, now I find
myself at the end of fragile pipeline; I used to buy stuff, now I
forge relationships.

Just as the financial crisis has shown us how the notion of the
‘local’ in financial industries is now almost invalid, events like the
Japanese earthquake show us how consequentially entangled our
lives have become. Not only have the business dynamics
changed, but increased connections mean that I find myself in
complex commercial interdependencies and ethical
entanglements. Information is not only a tool for me, but for others
who can hold me accountable. Just think about the activist who
discovers a child worker in one of my factories and can share the
discovery with my customers and the public within hours. In the
old days, I could mount a plausible defense that what happened
further down the supply chain was nothing really to do with me;
this has become increasingly unacceptable.
It is salutary to observe that this pace of change means that
anyone old enough to be leading a global company now began
their career in another industrial era. Senior managers cut their
teeth in a business environment which worked on rules and
assumptions that no longer really apply. The new age brings a
series of daunting challenges: what can firms do to face up to
them?

Challenge One: Do you have supply

chain visibility?
An obvious question to ask with regard to the new reality of global
business is how much information firms really have about their
supply chains. Our research indicates a vast range of answers to
this question. Some firms have chosen to undertake meticulous
analysis of their sources of supply, stretching back five or six tiers
of supply or more. Others settle for no more than a passing
knowledge of the first tier; in some cases, where firms make use
of agents, they have almost no reliable knowledge of the details of
their supply base. This wide disparity of approach is in part
explained by structural features, but also reflects firms’ choices
about how they handle risk.

T=The structural issues include the complexity of the product, the nature of
the technology, and the degree of commoditization at each point in the
supply network.
The structural issues include the complexity of the product, the
nature of the technology, and the degree of commoditization at
each point in the supply network. In many cases, firms are dealing
with many thousands of first-tier suppliers, and thousands of
items being procured. In turn, each of these items may
themselves have hundreds of components or ingredients, with
concomitant numbers of suppliers. So even the issue of data
handling is not straight-forward, and firms which lack systematic
approaches to the problem are likely to be substantially exposed
to risk. This challenge is exacerbated in those industries where
the rate of technological change is high; the supply network is not
just complex, but also fluid. Assumptions and rules-of-thumb that
apply now may be redundant in only a few years’ time. Firms also
are faced with the difficulty of handling the points in the chain in
which products and items are standardized across companies (for
example, products produced to international standards) and the
points in which production is bespoke to the next link’s
specification. Broadly, where a buying firm defines the product,
the greater its ability to harvest information, to impose standards,
and to affect change; this power, however, also brings a greater
degree of culpability in the event of some kind of problem.
Firms facing up to this challenge need to think in terms of the
separate elements of this problem: how and what data to collect;
how it is verified; and, how to enable the data to be stored and
handled. In some cases, the rational decision is to operate a
delegated, post hoc approach where, rather than centralized
holding of data, firms work on the principle that if they needed to
know about provenance for a particular purpose, they could find it
out, because the tiers in the chain could be followed through. This
approach takes the least effort, but means it is impossible to
achieve any proactive, pre-crisis risk mitigation. If instead data is
sought that describes several levels down in the chain,
appropriate rational rules are needed to avoid being swamped in
data, or adding counter-productive cost burdens on suppliers and
their suppliers. These rules also need to come to a clear view of
what standards of evidence are to be demanded of suppliers (for
example, if a supplier says that none of their suppliers use child
labour). Finally, firms need to face up to the fact that the new
supply challenges are not well handled by most existing
Enterprise Resource Planning systems; holding data on suppliers
beyond the first tier presents substantial information management
issues which require thought and investment.

Challenge Two: How much supply chain

visibility do you share?
Historically, firms have generally been circumspect about
revealing detailed data on their supply chains; such data is
generally perceived to be strategically important, and in some
cases there are genuine risks of industrial espionage or even
sabotage. Furthermore, firms have worried about the scope for
credibility damage if something embarrassing in the chain comes
to public attention. However, increasingly firms are figuring that
the new information age means that any competitor or activist
group who seriously wanted to know the identity of suppliers
could easily find the information for themselves, so that there may
be limited value in seeking to keep things secret. Indeed, there
may be some commercial logic for pursuing a degree of openness
about the supply chain, not least because it may help establish
trust in the minds of consumers and investors. Moreover, there
are a number of ancillary benefits. These include the fact that – in
the event of some kind of supply chain failure – it may be easier
to deflect credibility damage to other parts of the chain.
Additionally, some suppliers may be keen to be identified as
suppliers to a given firm as a way of establishing their credentials
in the broader marketplace. In some cases, the origin of goods
becomes an important feature of the goods themselves (for
example, in organic or cruelty-free farming), and the greater
degree of disclosure may itself become a marketing benefit.
These decisions, however, are not at all straight-forward; offering
greater visibility in the supply chain means in some cases that
there is a heightened chance of competition arising from your
suppliers establishing direct links with your customers, which may
threaten your own business, or at the very least diminish
bargaining power over the supplier. For these reasons, decisions
about the extent to which firms make their supply chain network
transparent to outsiders is a question of strategic significance,
and which needs to be addressed at board level.


Challenge Three: How do you face risk
when you find it?
Having addressed the previous two challenges, the next problem
is what to do with the information collated. For example, the
analysis may have thrown up that one or two layers down in the
chain lies a firm on whom your operations are surprisingly reliant.
Or it may become clear that a supplier whose own processes are
unimpeachable may sometimes contract out to firms that present
substantial credibility risk. In these cases, firms have a series of
choices to make, ranging from restructuring the chain itself (for
example, dropping a supplier) proactively and directly working
with the point of vulnerability, or seeking to ensure that any
consequence of failure is trapped at another point in the chain. An
example of this last strategy could be to increase the brand
visibility of the supplier, so that credibility damage gets them
rather than you. For example, by naming the suppliers of own-
label food products on packaging, retailers may be able partially
to deflect blame in the event of a problem of quality or safety.
In all of these aspects, firms who can develop clear and
consistent policies for applying these various approaches are
likely to reap substantial rewards. We have observed that firms’
efforts in supplier audit are frequently not driven by coherent
business objectives, nor targeted carefully. These firms risk a
waste of resources on their efforts, as well as credibility damage.
When a problem arises, firms that have taken coherent action will
have the most ability to react and rebound.

Challenge Four: What do you need to

organize for the new era?
Squaring up to the issue of supply chain provenance and
transparency requires that firms look closely at how they
fundamentally organize procurement. For example, we observe
that it is not uncommon for firms to separate work on supplier
environmental and ethical auditing, and supplier compliance with
international standards, from the mainstream procurement
process. This can lead to suppliers being faced with contradictory
demands from the buying organization. For example, a
compliance officer may be keen to insist that a supplier is
investing appropriately in systems to monitor its own suppliers; a
buyer may simultaneously be focused on driving down price. The
supplier, understandably, may sense that the customer is really
saying, give us the best deal, and say some things we want to
hear but not make substantive changes to their practice.

Firms need to respond to the new challenges of the supply chain

by realizing that procurement personnel need a much broader
skill set than traditional buyers. Previous steps in the professional
evolution of purchasing has meant that it has long been accepted
that buyers need to be well versed in the production technologies
of their suppliers, and to have a sound understanding of the
markets in which they operate. The new agenda adds a further
layer of competencies: buyers need to be able to map out supply
chains and manage risks. They require knowledge of product,
ethical and environmental standards, of rules and regulations and
particularities of the contexts in which their suppliers operate.
Firms need to revisit the training, management and professional
identity of procurement staff.


Conclusions
These challenges point to firms progressively facing up to the
need to collate, handle and deploy information that previously was
considered remote from day-to-day business concerns. This is not
to say that all firms will map their supply chains in the same way,
and some may settle on having highly focused and narrow
approaches. Certainly, there are costs involved in getting a
clearer view of the organization’s supply base; firms will differ in
the way they trade off depth versus breadth. But the new age will
be harsh on those organizations that do not develop coherent
strategies to address these questions.