By Sourcing Journal
This article was originally published in Sourcing Journal August 28, 2020. We are sharing because it highlights a new way of thinking about your supply chain.
Just as one-size-fits-all clothing flatters some consumers more than others, blanket supply-chain relationships leave opportunities behind.
Suppliers and retailers have typically had standard policies for operations such as quality control, payments and production timelines, regardless of their partners’ individual track records. But thanks to greater data availability and transparency, this could be giving way to more tailored agreements and incentives.
According to David Klein, president and co-founder of quality and sustainability platform Inspectorio, globalization brought with it a move toward significant oversight and a lack of trust of factories that were further away geographically. “That lack of trust created a behavior of policing, of controlling, of continuously sending teams, internal third parties to make sure that you’re mitigating risks as much as possible,” he said. This desire for control was also fueled by a lack of technology for sharing production status or quality results.
More recently, brands are recognizing the benefit of strategic partnerships, and they are giving their trusted long-term factories more power in areas such as quality assurance. For the factories that have proven to be low risk when it comes to shipment timeframes and quality, buyers are willing to pull back on some of the checks during the production process, allowing factories to self-inspect.
Klein noted that today, the largest suppliers tend to have a high level of transparency and empowerment with at least one of their big client brands, and these large retailers tend to be the most successful. While this practice has not yet been adopted across the board, he sees it growing.
Even with a lower level of oversight, there is still an incentive for factories to produce with good quality, which comes down to cost. Since vendors are typically the ones who would have to pay for inspections, removing some of those outside audits can help cut down on expenses. On the other hand, if quality suddenly slips or reports from a supplier are found to be false, factories could incur additional costs if more inspection is needed. Because of the financial consequence at stake, suppliers have good reason to be transparent and preserve trust.
Companies that established this type of remote reporting have been in a better position during the pandemic, as in-person quality audits became more challenging or impossible due to travel restrictions. As budgets tighten and quality teams shrink, having this level of trust in high-performing factories to self-report can also enable retailers to prioritize resources toward more high-risk producers.
During this time, building trust can also weed out potential quality issues in a timelier manner. “Brands must now rely on their suppliers’ knowledge and trust,” said Isabelle Pilon, co-founder and chief operating officer at supply chain visibility tool Pivot88. “Having the systems in place to be ‘in the know’ allows both parties to be more accountable, as transparency brings accountability. With awareness, they can better collaborate on optimization and resolution of any issues encountered, faster.”
Per Pilon, one of the hurdles of creating tailored agreements for each partner is keeping track of separate policies. “Our system offers the flexibility to define and track the production timelines at the supplier level and product or product type, which helps our clients manage these efficiently,” she said.
It’s also going to take data to support the move toward more case-by-case arrangements. Having a single reliable source of information would give factories, vendors and buyers the opportunity to more accurately calculate risks.
To create a centralized data repository, it will take a system that can connect to various sources, including software that is already being used by the different parties in the supply chain. It will also require supply chain players to be open about sharing their data.
“[Suppliers and factories] recognize that whilst before, the opening of access to your information was something that was unfathomable and they were a lot more restrictive of, I think now they’re starting to understand that that’s actually what’s going to make them a lot more attractive to do business with,” said Klein.
One area that is still a transparency gap is real-time production status. Despite ERPs and other production management software, many times brands are still relying on email updates from their partners. The opacity is also tied to practices such as contracting.
“The focus is now on building supply chain resilience in an environment that has been subject to frequent natural and manmade disruptions,” said Ajay Sharma, regional head of global trade and receivables finance, Asia Pacific at HSBC. “Resilience will require flexible production, better risk oversight, and improved transparency into supplier networks. Firms need to know their suppliers’ suppliers.”
Padmini Ranganathan, global vice president, product strategy at SAP Procurement, sees the potential for more digitized data collection that would ensure the validity of factory-level information. “If you put garbage into that trusted data store, you’re going to get garbage trust,” she said.
Procurement software SAP Ariba processes more than $3 trillion in transactions per year, giving it both a birds eye and granular view of what is happening in the retail market. Through this platform, both buyers and suppliers can glean information on potential partners.
“If we can use technology as that layer of knowledge and transparency, that would allow the suppliers to understand the buyers better,” said Ranganathan. “It would allow the brands to know which retailer is moving what type of merchandise.” Data around returns can also show potential quality issues, while sales information could help inform consignment terms.
The company’s bi-directional platform enables retailers and suppliers to search for new partners and view risk factors and other information in one place.
While elements such as on-time deliveries and quality are expected and will create a better rating for suppliers, Ranganathan sees sustainability as an added key differentiator as companies are looking to calculate risk. Knowing that a certain supplier has a workforce that is paid a living wage and managed under ethical conditions adds operational efficiencies while also raising the value of goods in consumers’ minds.
“A growing number of corporates are driving a sustainability agenda with their supply chain partners that cover environmental, social and governance aspects,” Sharma said. “These arrangements incentivize vendors to improve their production processes in order to meet specific sustainability goals.”
Having transparency into both existing suppliers and potential vendors enables companies to be nimbler during the crisis and beyond. For instance, if one area of the world becomes risky due to the virus, production can more easily be shifted to another location if a brand has information at hand, such as a factory’s capacity.
“The real changes we are going to see will be in the instances of new or less established relationships,” said Vivek Ramachandran, CEO of Serai, HSBC’s sourcing startup. “Establishing the reliability—financial and otherwise—of partners will become a priority. The challenge is how companies can demonstrate their reliability credentials digitally, using data. I don’t think we have a clear answer to this challenge, but that is exactly the problem Serai is focused on solving.”