This article is written by Victoria Kent, Investment Specialist at Elevate Super
Covid-19 demonstrated the world is more connected than ever before. That SARS Cov- 2 was able to travel the breadth of the globe in a matter of weeks was in part facilitated by international logistics networks.
It’s estimated 80% of global trade flows through supply chains annually. Most production is global, so one kink in the chain (like a global pandemic) can wreak havoc.
But did you know that supply chains continue to be one of the most important levers for businesses to positively impact the world?
Globalisation versus hyper localisation
Anti-globalisation sentiment can be found on both the left and right of politics.
Recent tensions between Australia/the U.S. and China could see globalisation rolled back, with ‘hyperlocalisation’ emerging as a result.
This new phenomenon of strictly buying local and a curated, more personal shopping experience can be healthy to a degree, but does not reflect how many supply chains currently operate.
Arguably, the COVID-19 pandemic showed we are interconnected –whether or notwe want to be.
Harvard Business School’s Willy Shih says the complex, global, and just-in-time manufacturing processes we’ve developed in recent decades are highly susceptible to breakdowns, especially during a global pandemic.
You only need to be short on one part to jeopardise product assembly, Shih explains.
As a consumer, this means supply shortages and extensive delays – a far cry from the immediacy we have become accustomed to.
What is the solution to protecting global supply chains? What have we learned from the pandemic?
The answer to that is another question: who will ultimately wear the disruption cost?
If a company wants to mitigate some of their supply risk by either carrying more inventory or sourcing from a location closer to home, this would come at an increased cost (obsolescence or loss to inventory, or higher labour or raw material).
In a post-pandemic world, which has sent many developed economies into a recession, it seems unlikely consumers would be prepared to pay more.
Does this mean companyprofits will just have to take a hit? Maybe.
But of course, this in turn has consequences; internal cost cutting could result in further employee redundancies among other things.
Another way to build a more resilient supply chain would be to identify vulnerabilities.
The first step isto examine supply chains and understand where these vulnerabilities exist. Easier said than done.
Mapping supply chainscan be difficult due to the many tiers involved.
For example, you may source your materials from ten suppliers (Tier 1), but in turn, those suppliers have suppliers of their own (Tier 2) and so on and so forth.
Mapping beyond Tier 2 is often not straightforward, as some suppliers may refuse to supplythis information on competition grounds, and others may not be aware of what lies beyond Tier 2.
Professor Shih believes most companies don’t know who their suppliers are beyond Tier 2 of the supply chain
The dangers of supply chain unknowns
Aside from a sudden disruption to supply, there are other more sinister dangers which arise from supply chain unknowns.
Suppliers may, intentionally or unintentionally, engage in illegal practices. Modern slavery and environmental risks constantly pop up in supply chains, causing reputation and legal challenges for buyers (as well as being just plain wrong).
When you buy your cup of coffee, how do you know whether you’ve contributed to child labour, deforestation or loss of species abundance?
You can visit https://slaveryfootprint.org/ and take a survey to find out how many slaves work for you (yep, you read that right).
Currently, companies aren’t legally responsible for their ‘upstream suppliers’ (Tier 2 onwards).
Jeffrey Sachs, Director of the Centre for Sustainable Development at Columbia University, believes this is why we have faceless shell corporationsdoing great damage
around the world in the form of environmentaldegradation, tax evasion and appropriating indigenous land for example.
He calls on investors and big superfundsto push companies to be more transparent.
Change is in the air
Last year in Australia, the Modern Slavery Act 2018 (Cth) (Commonwealth Act) commenced, heralding a new statutory modern slavery reporting requirement for larger companies operating in Australia.
Companies will need a greater understanding of their supply chains as part of complying with these reporting obligations.
And the rest of the world is following suit.
Germany will soon be passing global supply chain legislation, requiring mandatory human rights due diligence for German companies and their supply chains
A legal framework is one part of the equation, and we applaud Germany for taking this first step.
Fairtrade has been looking at end-to-end supply chains since 1992, or in their words:
“changing lives by changing trade”.
Fairtrade sets social, economic and environmental standards that progressively raise the bar in various sectors. The promotion of sustainable production with farmers and workers is central to their model.
How do they do this?
Currently Fairtrade uses independent certifier FLOCERT to assess businesses seeking to become fair traders.
Part of this process includes ‘traceability‘, which even Fairtrade admits is not always possible in some products – cocoa, tea, sugar and fruit juices.
As a consumer, look out for the FAIRTRADEMark to know that producers and companies are meeting international includes set standards for their products.
Source: Tobias Arhelger / Shutterstock.com
CEO of Fairtrade Australia, Molly Harris Olsen, believes we need to structurally change how we do things.
Jeffrey Sachs agrees, going further to suggest we have the means to do this systematic analysis using technology like QRcoding, blockchain and satellite imaging.
It comes down to identifying the technical requirements and implementing them in a smart way.
Supply chain management software FRDM is one example. They use spend data analysis and machine learning to heat map the entire supply chain.
Supply chains and the SDGs
Whether it’s by using structural or technological innovations to make supply chains more resilient, companies should not forget the power of the software Sustainable Development Goals (SDGs) as a framework to measure progress.
Companies play a crucial role in achieving SDG8: Decent Work &Economic Growth. By sourcing products from responsible suppliers, businesses can leverage their purchasing power to create positive impacts for workers in the global supply chain.
SDG1: No Poverty
Respect for human and labour rights are critical to achieving the SDGs. Indeed, work is a major route for many to escape poverty. However, working is not a guarantee for ending poverty if working conditions are not decent.
Poor working conditions, insufficient income and informal work make it difficult for workers to meet their families’ basic needs.
Any form of child labour and forced labour must be prohibited, and workers should expect a living wage.
SDG12: Responsible Consumption & Production
World wide consumption and production — a driving force of the global economy — rests on the use of the natural environment and resources in a way that continues to have destructive impacts on the planet
SDG12 is about doing more and better with less. It’s also about decoupling economic growth from environmental degradation, increasing resource efficiency and promoting sustainable lifestyles.
Hopefullycompanies can proactively manage their supply vulnerabilities and be more resilient to future disruptions by using data analytics and technology to map their supply chains beyond the second tier.
When this is combined with the SDGs, companies have a vehicle for coming out of this humanitarian and health crisis, to build back even better than before.
About Elevate Super
Elevate Super is a retail super fund, powered by successful fintech AtlasTrend. AtlasTrend was created in 2015 to build a new investment service to help our customers learn and invest with purpose in long term world trends. At Elevate Super, we believe you shouldn’t have to give up competitive financial returns to do good.
We assess and measure investments based on their long-term growth fundamentals plus positive contribution to the UN Sustainable Development Goals (SDGs) – a global blueprint for balancing our economic, social and environmental needs.
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