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What Supply Chain Transparency Really Means

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. 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. For example, food companies are facing more demand for supply-chain-related information about ingredients, food fraud, animal welfare, and child labor. Less clear, however, is how to define transparency in a supply chain context and the extent to which companies should pursue it: an MIT study that mapped definitions of supply chain transparency related to labor practices in the apparel industry found vastly differing definitions across organizations.

Defining Transparency

Supply chain transparency requires companies to know what is happening upstream in the supply chain and to communicate this knowledge both internally and externally.

One reason the process has become increasingly important is that more consumers are demanding it. For instance, researchers at the MIT Sloan School of Management found that consumers may be willing to pay 2% to 10% more for products from companies that provide greater supply chain transparency. In this study, consumers valued information about the treatment of workers in a product supply chain and the seller’s efforts to improve working conditions. Across industries, this growing segment of discerning consumers seeks information on product ingredients and materials, where products come from, and the conditions in which they were produced.

As these demands have increased, so has the reputational risk for companies from media and NGO campaigns. 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.

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. U.S. Customs and Border Protection has turned away shipments originating or related to North Korea, given recent federal regulation that stipulates all North Korean labor should be considered to be forced labor.

[Written by Alexis Bateman. Originally Published on Harvard Business Review. Read the full article here.]