Technology and Supply Chain Transparency

Today, Justin Picard (Chief Scientist at France’s Advanaced Track and Trace) and I submitted a paper for the World Economic Forum’s Global Enabling Trade Report 2012. The focus of the piece is the emergence of product-level supply chain risk management and the use of technology to address this emerging problem. Some highlights from the paper:

Today, for any business that manufactures or sells globally, part of the price of success is usually becoming a magnet for counterfeiters, as well as the risk that counterfeits infiltrate legitimate supply chains.  The complexity and inter-connectivity of supply chains mean that it is often very difficult to know what is going on beyond first tier suppliers. Nonetheless in the public’s mind, a global company is expected to control that every one of its suppliers respects labor rights and safety standards, uses environmentally friendly practices, and provides safe and reliable components and raw materials.  But the brands are not the only ones with issues. Shipping and logistics companies may not consider themselves responsible for the illegal acts of producers and importers, yet they are increasingly held accountable in case of fraud or illegal transshipment. And although retailers have limited abilities to monitor the origin of all of their incoming goods — and thus guarantee their customers genuine, safe and ethically produced goods — their reputation is at stake each time the quality of products is compromised by one of their suppliers.

As if product integrity were not challenge enough, the events of 9/11/2001 had a global effect on supply chain security, and businesses had to integrate a whole set of new requirements related to cargo security and  inspections. However, as extensive as these efforts were, they often ignored a major, and growing, concern: the origin and integrity of the product itself. For example, according to ISO 28000  (Specification for security management systems for the supply chain), “a supply chain is secure when it can resist, fend off, or withstand unauthorized acts that are designed to cause intentional harm or damage”, a definition which ignores issues of origin and integrity. Supply chain integrity is in fact not focused on the risk to the supply chain or its products in a vacuum, but on the wider implications of illicit activities that may occur in the supply chain….

In developed markets, supply chain integrity might still be seen, often wrongly so, as a manageable risk and compliance issue. However, in emerging markets tampered supply chains are a daily reality for the multinationals that see these markets as their main engine of growth in the coming years.   As consumers become increasingly aware that the high level of corruption on emerging markets can strongly affect supply chain integrity at all levels from production to retail, they will expect manufacturers and retailers to be accountable for   what they sell.  

Incentives for illicit trade will continue to increase. While production of goods continues to be commoditized, there will be a continuous switch towards industries and markets that capture higher profit margins. High margins are captured through innovation, brand development and ethical business practices.  But in most cases, consumers cannot or do not make the difference between products and their lower-end substitute, yet they still care enormously about origin.  Many aspects of provenance are not visible in the finished product  and provide free-riding opportunities for infringing parties.

It is likely that terrorist attacks that either use or aim at global supply chains would disrupt global supply chains on a large scale. The illicit trading of weapons of mass destruction through a legitimate distribution channel, not mentioning its use to destroy critical infrastructure such as major port of entry, would probably force the temporary freezing and long term reevaluation of security and monitoring processes in the global supply chain. But a subtler risk is that one major catastrophic supply chain integrity event would engender fears that “global supply chains are out of control’ and this reaction would lead to sudden changes in regulations, which would place an increased burden on several industries.  The Consumer Product Safety Improvement Act mentioned above is a United States law which was passed hastily in the wake of several high profile recalls in 2007 and 2008 of toys manufactured in China. If the public realizes that it is as much exposed to threats coming from poorly monitored global supply chains, as it was exposed to terrorists attacks on planes before 9/11, authorities might react by taking security measures akin to those that slowed down the flow of people through airport security following the terrorist attacks…

The problem of supply chain integrity is an old one in society but a relatively new one in global supply chain management. Its importance has risen because of the increasing global reach of brands and the lack of accountability in supply chains that operate in many parts of the world. Combined with the new supply chain security risks that use products as vehicles — malicious embedded software, bombs in ink cartridges — there is a need for a new sub-discipline within supply chain risk which might be called “chain of custody” management or “supply chain integrity management.” Basically, the focus of this new aspect of supply chain risk management is to ensure what one can call the “4 Is” of product-level supply chain integrity:

  • Integrity of source: “Did this come from where I think it did?”
  • Integrity of content: “Is this made the way I think it is?”
  • Integrity of purpose: “Is this going to do only what I think it will?”
  • Integrity of channel: “Did this travel the way I think it did?”

The strategic shift is that the integrity of the product in the future will be provided not by the supply chain but by the product itself. In the future, a consumer will have to be able to trust a product coming from the back of a pickup truck in an unregulated nation with the same confidence as if she were taking it off a shelf of a reputable retailer. That may sound far-fetched, but there is now an ecosystem of tracking and communication technologies that has an incredible potential to provide more transparency into supply chains, easier access to information, richer and more granular traceability, enriched communication with consumers, and the ability throughout the supply chain to discern the licit from the illicit. The technology is here now. It just needs to be put to work.

The full report will be available later in 2012.

Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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