The Importance of Transparency in Supply Chains

Stephen DeAngelis

September 16, 2019

In the information age, it’s difficult to hide things you would prefer to remain undiscovered. This is as true for businesses as it is for individuals. Consumers, activists, and investors increasingly want to know the products they buy are sourced sustainably and ethically. They are demanding more supply chain transparency. Alexis Bateman (@hickmana), Director of MIT Sustainable Supply Chains, and Leonardo Bonanni (@amerigo), founder and CEO of Sourcemap, write, “The concept of supply chain transparency was virtually unknown 15 years ago, yet today it commands the attention of mid- and senior-level managers across a broad spectrum of companies and industries.”[1] They add, “The reasons for this increased interest are clear: Companies are under pressure from governments, consumers, NGOs, and other stakeholders to divulge more information about their supply chains, and the reputational cost of failing to meet these demands can be high.” The demand for transparency is not a passing fad. Millennials have demonstrated keen interest in social issues like climate change and human trafficking. They are also poised to command the consumer/investor space. Jennifer Furey and Rebecca Harris, attorneys at Goulston & Storrs, report, “Millennials are expected to inherit approximately $30 trillion in assets over the next 30 to 40 years. This transition of wealth will bring widespread changes in investing and consumer behaviors. When it comes to investing, millennials are ‘twice as likely as members of older generations both to invest in companies and funds that seek specific social or environmental outcomes and to shun investments in businesses that engage in unethical activity.’ With respect to their consumer behavior, 73 percent of global millennials are willing to pay extra for sustainable products, an increase from 50 percent in 2014.”[2]

What is supply chain transparency?

Although transparency sounds like a straight-forward subject, Bateman and Bonanni note, “Less clear is how to define transparency in a supply chain context and the extent to which companies should pursue it.” They note an MIT survey of apparel companies found vastly differing definitions of supply chain transparency across organizations. “Supply chain transparency,” they write, “requires companies to know what is happening upstream in the supply chain and to communicate this knowledge both internally and externally.” You might be thinking, “That sounds like supply chain visibility. What’s the difference between transparency and visibility?” The staff at Supply Chain Link notes, “The terms ‘visibility’ and ‘transparency’ are often used interchangeably in the logistics world. Logistics providers market benefits of visibility and transparency, but it has many customers wondering what exactly the difference is between the two terms. While both phrases are used to reference many of the same things, there are differences in their connotations in both the eyes of customers and logistics partners.”[3]

The article cites Dr. Darren Prokop, of the University of Anchorage Alaska, who explains supply chain visibility involves seeing “a particular activity with access to information at selected nodes.” In other words, the article states, “Visibility tends to refer to insight based on activities or certain locations that the product is at throughout a supply chain. Origin activities can be unclear due to cultural and technological differences between countries. Having visibility into elements such as origin operations and factory conditions can be make-or-break for shippers in the eyes of customers. The more visibility shippers have regarding their products at each stage, the more control they have over their overall business, what they communicate to their customers, and how they are perceived as a brand.” On the hand, transparency, according to Prokop, is seeing “through all the nodes and evaluat[ing] the entire supply chain.” In other words, the article explains, “Visibility can be achieved at certain nodes, but achieving transparency can refer to having deep insights at all points in a supply chain. In retail, buyers want to understand where the products they are purchasing are coming from and how they were created.” Still confused? In my mind, supply chain visibility involves knowing, on the supply side, who suppliers are and where parts or products are located. Transparency, on the other hand, involves moral and ethical dimensions of activities associated with sourcing and manufacturing.

Bateman and Bonanni suggest transparency can be measured along two dimensions: supply chain scope (the depth of your interaction in the supply chain) and transparency milestones. They suggest supply chain scope has four levels of visibility. Visibility into:

  • internal operations
  • direct suppliers
  • indirect suppliers; and
  • sources of raw materials.

Transparency milestones demonstrate how knowledgeable companies are about how activities in each of those areas are conducted. Transparency milestones include:

  • codes of conduct
  • standards and certifications
  • performance-based metrics
  • traceability; and
  • full disclosure.

When measured against these two dimensions, Bateman and Bonanni assert companies fall into one of four stages: Majority; Early Majority; Early Adopter; or Innovator. They write, “Most companies are either at the Majority stage, where they have proper oversight over their facilities, or occupy the Early Majority stage, where they audit and monitor direct suppliers for compliance. Fewer companies can be considered Early Adopters that engage with indirect suppliers (suppliers beyond their direct suppliers) and trace individual transactions. Only Innovators are ready to share information about raw materials suppliers.”

Why transparency matters

Analysts from Rootstock Software note, “When a supply chain is transparent, it is visible to management, and the operation can be more proactive in avoiding anything that will impact the brand. Because the supply chain is a network between the company and its suppliers to produce and distribute a product, any bad news weighs hardest on the brand itself.”[4] A lack of transparency always holds the possibility of reputational risks. Rootstock analysts explain, “Manufacturing supply chains need transparency throughout the process to avoid bad press outcomes from failures in the chain.” Bateman and Bonanni add, “Over the last decade, numerous scandals have inflicted considerable damage on the reputations of companies. Notable examples include the Rana Plaza factory collapse in the fast fashion industry, slave labor in the Thai seafood industry, and deforestation in Malaysia and Indonesia. The fallout has resulted in a raft of new laws pertaining to transparency. These include the policing of conflict minerals (Dodd-Frank), forced labor (Australian and UK modern slavery acts, and California Transparency in Supply Chains Act), and food safety (U.S. Food Safety Modernization Act) with further regulation on the horizon in the Netherlands and Switzerland, among others.”

Avoiding bad press isn’t the only reason a lack of transparency is bad. Bateman and Bonanni explain, “A lack of supply chain transparency can now stop businesses cold. For example, shipments that are missing origin documents are being held up and turned away at ports, causing costly disruptions that ripple through supply chains.”

Concluding thoughts

Supply chain transparency helps ensure a company is doing the right thing — or at least trying to do the right thing. Achieving transparency, however, is neither easy nor cheap. Rootstock analysts note, “Creating transparency in the supply chain can be an overwhelming task for a manufacturing enterprise. The number of global locations from which materials travel can be numerous. Add in countless labor laws and regulations, and the product’s multifaceted route to market becomes a complicated process — far beyond a simple transportation issue.” Another challenge, according to Bateman and Bonanni is, “Supply chains were not designed to be transparent. Companies and suppliers have feared that divulging too much information would undermine their competitive advantage or expose them to criticism.” Nevertheless, they assert there are benefits. “Perhaps the most obvious benefit,” they write, “is compliance with increasingly stringent regulation. Transparent supply chains also reduce reputational risk and enhance the company’s standing as a trustworthy enterprise. A third benefit is attracting and retaining employees who are keen to work for responsible companies. … Finally, there are important operational benefits too. Gathering more detailed information on supply chain performance helps companies identify opportunities for improvement such as unnecessary middlemen and to plan more effectively over the long term.” Doing the right thing is always a good policy and, according to Bateman and Bonanni, doing the right thing makes your company an innovator as well.

Footnotes
[1] Alexis Bateman and Leonardo Bonanni, “What Supply Chain Transparency Really Means,” Harvard Business Review, 20 August 2019.
[2] Jennifer Furey and Rebecca Harris, “Reaching Millennials: The Need for True Transparency in Supply Chains,” The New York Law Journal, 24 August 2018.
[3] Staff, “The Difference Between Visibility and Transparency Within Your Supply Chain,” Supply Chain Link, 13 March 2018.
[4] Staff, “Supply Chain Transparency; a manufacturing ‘must do’ Part 1,” Rootstock Software, 21 August 2017.