Supply Chain Resilience and Renewal: Part V
We are pleased to share this piece as part of a series exploring resilient supply chains for a post-COVID-19 world, and welcome readers’ insights and perspective as they conduct business across regions and industries. Mikkel Hippe Brun, a 2019 New Economy Forum delegate, is Co-Founder and Senior Vice President of Greater China at Tradeshift.
Those who can least afford it are paying the price of decades of cost-savings
Analysis by the World Bank suggests as many 60 million people in the developing world could be thrown into extreme poverty as a result of disruption brought about by the coronavirus. Cancelled orders, deferred payments and sluggish demand are forcing our most vulnerable communities to make stark choices in order to survive.
In Bangladesh, garment suppliers have lost out on more than $3 billion in orders affecting more than 2.17 million workers. Almost overnight, an entire industry found itself cast adrift with no safety net to fall back on.
COVID-19 has thrown a damning spotlight on the plight of workers who subsist on poverty-levels at the bottom tier of global supply chains. The pandemic might be the straw that broke the camel’s back, but what we’re seeing is the consequence of a structural breakdown that has been decades in the making.
Understanding how we got to this point means going back to another tragic period in human history, the end of the Second World War. Inspired by military logistics deployed during the conflict, and driven by a raft of treaties and new institutions promoting the expansion of global trade, localised supply chains shifted towards the globalised hub and spoke model we’re familiar with today.
But the pressure for ever more efficient, cheaper goods has also led to longer, more complex supplier ecosystems. A lack of transparency and increased fragility has become an increasingly acceptable trade off in return for expanded profits and shareholder value.
More often than not, it’s those who can least afford it, who end up subsidising these returns.
Counting the cost
From textiles to technology, household brands have been rocked by scandals relating to abusive working practices hidden deep in supply chains. According to the Global Slavery Index, more than 40 million people are victims of ‘modern slavery,’ a figure that many agree will rise due to financial pressures amplified by COVID.
The economics of this race to the bottom is also forcing smaller suppliers into a choice between environmental stewardship and putting food on the table. According to McKinsey, 90% of companies’ impacts on the environment come from supply chains. This is not wilful destruction on the part of suppliers. It is poverty that deprives workers of the financial cushion required to improve their working practices.
Building back better
COVID-19 has ripped the carpet from under our feet, exposing the crumbling foundations. But it also offers an opportunity to rethink and rebuild in a better way. There are three critical areas we need to address to get this right:
- Visibility: According to a study by Deloitte, 65% of organisations have limited or no visibility of their supply chain below tier one suppliers. Today’s supply chains have evolved into highly tuned machines, but the relationship between buyers and their suppliers has barely changed in forty years. Heavily paper-based, it’s often very difficult to track goods and materials directly back to their source. Regulators, consumers and the investor community are putting pressure on large organisations to provide hard evidence that their commitments on ESG performance are matched by best-practice throughout their supply chains. The only way to achieve this is by digitizing the relationships which span these complex ecosystems. Not every business will like what they find, but at least they’ll have a better understanding of the challenges, and a way to show measurable progress.
- Access: When supply chains broke down, many suppliers found they had nowhere to go. At a time of food shortages during lockdown, small-holder farmers in Africa were sowing crops back into fields because their wholesaler couldn’t ship them. The same inflexible model means that suppliers are often forced into a ‘take it or leave it’ negotiation on price. Connecting suppliers to global, digital marketplaces is an opportunity to break this cycle. Organisations at the top of supply chains win too. Ready access to a network of suppliers means businesses have more options available when a sudden shock hits.
- Finance: Most organisations already see the reputational, structural, and commercial benefits of better ESG performance. Identifying and punishing suppliers for poor behaviour might weed out a few bad apples but the long-term impact of this approach is highly debatable. If organisations really want change, they need to give their suppliers access to the tools to make those changes. Some businesses are choosing to invest their own capital directly into supply chains to improve working practices. But not every business will have that luxury. Supplier financing provides an alternative route. By digitizing the relationships between buyers and their supply chains, organisations – through a financier – can offer cheaper lines of credit to suppliers willing to align themselves with sustainability goals. Suppliers get the capital cushion they need to make improvements to their working practices. Buyers get to keep hold of capital they may need to improve their own processes. Everyone wins.
The power of connection
Innovators like the Nobel prize winner Muhammed Yunus saw that giving marginalised communities access to finance and opportunity was the most effective way to help them better their circumstances. Others like Jon Bosak, who pioneered the standardization of computer data languages, saw the power of technology to bring us closer together. Their philosophies had a profound influence on our founding vision at Tradeshift, that by connecting every company in the world digitally, we can create economic opportunity for all.
Now more than ever, digitization is challenging and altering every business process. We’re entering a period of massive change. If we channel this disruption in the right way, then we have a chance to the kind of environment where everyone gets a fair chance to participate.
We’re grateful to our collaborators for this perspective, and welcome readers to learn more about unlocking inclusive trade.