Curing supply chain pains with certified gains

A changed agenda

Concern for the environment, equitable pay for suppliers and welfare of employees are no longer afterthoughts to doing business; they are becoming integral to doing business across the public, not for profit and corporate worlds. Surprisingly, recent investigations of the Dark Net have revealed that even the world of hard drugs has taken to ethical and fair trade to satisfy customers!¹

A growing number of social movements have recognised certifiers (such as Fairtrade), each with their own emphasis on reducing a particular negative externality by setting auditable product standards. Although the clout carried by these movements has grown considerably over the last decade, resistance to attaining fair and sustainable manufacturing and product standards still exists.

The main objection? Increased production costs.

Enabling supply network resilience

A well-known known example is a small fire in a Philips semiconductor lab in Albuquerque in March 2000. What seemed an immaterial event at first, turned out to have wiped out a critical supply of next generation chips and eventually lead to Ericsson’s demise after they did not respond to the crisis as well as its competitor Nokia². Another is Mattel’s toy recall following the discovery of accessible lead in the paint in August 2007³. Whether these disruptions were the result intentional actions or honest mistakes, both problems came to light long after the root cause event.

Not guarding the supply network against potential disruption does not always have immediate consequences. However, lack of resilience will undoubtedly come home to roost in the future. Whenever that happens, the costs of restoring the business to normal operations may well be insurmountable. Furthermore, the potential for disruption is often concentrated among low-cost commodity suppliers that are easy to oversee⁴. Only by knowing the supply chain inside-out, a business may stand prepared to swiftly respond to crisis. This benefit extends beyond the focal firm to the networks it is part of, enabling supply network resilience.

One and one make three

The solution seems to lie in a push for change through existing certifications to do with fair trade and sustainability, rather than a direct call for supply chain transparency. The audits that companies have to pass regularly to maintain certification provide a strong incentive to scrutinise activity throughout the supply network. The finance industry has acknowledged this unintended consequence of certification by taking certification as a proxy for stability: not knowing your supply chain suggests you are not optimising your supply chain.

“Many firms have made bold assertions about how seriously they manage their supply chains. Transparency, at a granular level, gives credibility to those claims”, says Steve New in Harvard Business Review⁵.

In the long run, lack of awareness of activities along the supply chain may hurt competitiveness. On the flipside: control over the supply chain is reflected in valuations by analysts, as demonstrated by the performance of the firms in the Climate Performance Leadership Index⁶. Signaling resilience through adherence to product standards may therefore shield a business against future ramifications as well as yield investor confidence. Together, these offset the increase in production costs that may follow certification.

Trailblazers allowed

Not all companies need the impulse of a certification of any kind. Illy Café says it does not want to follow any standard, but raise the bar itself working toward “full sustainability”⁷. This of course works best in sectors where the bill of materials is short; in complex manufacturing and service settings the number of parties to oversee necessitates external control. Rather than retrofitting existing processes to new standards, a company like Method raised the bar by building their product and brand on the basis of “doing business for social and environmental good”⁸. The point remains for most other businesses: in attempt to reduce negative externalities, encouraging product certification may craft resilience in supply networks.

Fertile grounds for social innovation

According to MIT Technology Review, the factory is the furnace of innovation: 70 per cent of US R&D spending happens in manufacturing⁹. Therefore, the supply network may be fertile ground for social innovation, particularly when tied to the need for more resilience.

Certification enables transparency throughout supply networks in response to a call for sustainable and ethical practices. Reversing the argument means that as the need for resilience in supply networks will only increase in years to come, social innovation may follow.

References

¹ “‘Fair trade’ cocaine and ‘conflict-free’ opium: the future of online drug marketing”, The Conversation, August 2014
² Sheffi, Y. (2007). The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage. The MIT Press. 3-10.
³ “Lead Paint Prompts Mattel to Recall 967,000 Toys”, The New York Times, August 2007
⁴ Simchi-Levi, D. W. Schmidt, Y. Wei. (2014). From Superstorms to Factory Fires. Harvard Business Review
⁵ New, S. (2010). The Transparent Supply Chain. Harvard Business Review
⁶ “This is the Fortune 500 of companies taking the lead to fight climate change”, Quartz, October 2014
⁷ “Why Illy will never sell fair trade coffee”, Quartz, January 2014
⁸ Method products
⁹ “MIT Technology Review (2014): Breakthrough Factories”. MIT Technology Review 117(6).